SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended December 31, 1997
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
incorporation or organization) identification no.)
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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value NASDAQ
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998 was $17,159,191.
The number of shares outstanding of the registrant's common stock as of March
20, 1998 was 5,942,582 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 May 20, 1998,
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 40 - 41
Page 1 of 45
PART I
Item 1 - Business
General
Farrel Corporation (the "Company") designs, manufactures, sells and
services machinery and associated equipment for the rubber and plastics
industries. 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 and manufacturers of rubber goods, such as sheet products, molded
products, automotive components, footwear and wire and cable. In the plastics
processing industry, the Company's equipment is primarily sold to commodity
plastics producers and compounders of plastics. The Company markets its products
through its strategically located domestic and international sales and service
organization.
Company Strategy
The Company's business objectives are to increase market share of a
relatively constant sized market by broadening its product range, to continue
strengthening its market position, particularly in Asia, and to solidify its
position as a low cost producer by manufacturing proprietary components in its
U.K. plant and assembling machines in its U.S. and U.K. facilities. 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.
During 1996 the Company ceased component manufacturing operations in
its Derby, Connecticut facility and consolidated all component manufacturing
activities in its Rochdale, England facility. During 1997, the Company completed
the consolidation of its domestic assembly, repair and spare parts operations in
Ansonia, Connecticut and improvements to its repair facility in Texas.
During 1996 the Company also reorganized its domestic marketing, sales
and engineering efforts along the lines of the two major industries served by
the Company's products, rubber and plastic. Management considers this
realignment of resources to have enabled the Company to better concentrate its
efforts on each industry. The enhanced focus on customer needs in each industry
allows the Company's personnel to specialize in the applications of the
Company's machines needed for each industry and to better service the needs of
the Company's customers.
In continuing the Company's strategy to expand its markets, on
December 19, 1997, the Company acquired selected assets of the Francis Shaw
Rubber Machinery ("Shaw") business in England for the production of INTERMIX
[registered trademark] 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 [registered trademark] 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 market share. The acquisition
included a backlog of $6 million all of which is expected to ship during 1998.
Page 2 of 45
The operations of Shaw are currently conducted in manufacturing and
office facilities located in Manchester, England. The Company intends to
consolidate the operations of Shaw into manufacturing and administrative
facilities in Rochdale, England. The Company intends to shift from highly
integrated manufacturing processes, to increased outsourcing consistent with
current Company operations. The current Rochdale facilities are believed to be
sufficient to absorb the anticipated volume without major disruption.
The Company has developed a preliminary plan to transition and
integrate Shaw operations. The asset purchase agreement provides for an
operating and lease agreement for a two year period ending December 19, 1999 to
complete the transition. The Company is evaluating the impact on production
techniques, physical facilities, employee base, sales force, sales methods,
customer base and terms of the purchase agreement in adopting a plan to
integrate Shaw operations. It is intended that the consolidation will be
accomplished in the first half of 1999. Significant to the purchase price and
short term operations is a guarantee from the Seller that the acquired assets
will generate a pre-tax profit (as defined in the agreement) of at least
[Pounds] 1.0 million for fiscal 1998. The asset purchase agreement provides that
any shortfall in this amount will be paid to the Company by the Seller and
represent a reduction in the purchase price. See Note 2 to the Consolidated
Financial Statements.
Industry Overview
The Company's products are used primarily by manufacturers of rubber
and plastic materials and products. The rubber and plastics processing
industries are global in nature and intensely competitive. Both industries are
cyclical in nature, with capital equipment purchases characterized by long lead
times between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers and manufacturers of rubber goods such as sheet products,
molded products, automotive components, footwear and wire and cable. There are
approximately 50 tire manufacturers in the world, six of which account for a
majority of total worldwide tire production. Demand in the tire and rubber
industry is influenced by, among other things, general economic conditions and
growth in sales of automobiles and trucks as well as overall truck tonnage and
mileage driven. The industry trend is to shift production capacities into low
cost and emerging regions, creating potential opportunities in the future.
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. Industry performance is related to, among other things,
consumer spending and general economic conditions. 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 have been adversely impacted by political and
economic difficulties in Eastern Europe and the Middle East. In 1997, the
Company has been adversely affected by the financial insecurity in the Asia
Pacific Region. Many of the Company's customers have suspended projects for
increased capacity and growth until the region resumes a level of financial
stability. Taiwan and the People's Republic of China continue to experience
growth, albeit at a slower level than in recent months. Business potential in
the Peoples' Republic of China will be extremely competitive and restricted by
credit availability.
New capital and marketing expenditures in the Company's markets depend,
in large part, on an increase in market demand creating the need for additional
capacity.
Page 3 of 45
Products and Services
The Company's products are used to mix and process materials produced
by the Company's rubber and plastics producing customers. The Company's
principal capital equipment product lines are batch and continuous mixers,
single and twin-screw extruders, pelletizers, gear pumps, calenders and mills.
The Company also provides process engineering, pre-installation and
post-installation 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
12/31/97 12/31/96 12/31/95
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New Machines/Related Services........... 57.1% 53.3% 56.5%
Aftermarket............................. 42.9% 46.7 43.5
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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
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastic materials. The Company's customers often
purchase equipment in significant quantities 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. Sales, operating results and export sales by geographic area
for fiscal 1997, 1996 and 1995 are reported in Note 15 to the Consolidated
Financial Statements.
The Company's products are sold primarily by its direct sales and
support staff. The Company's sales organization is headquartered in Ansonia,
Connecticut; Rochdale, England and Singapore. The Company has additional sales
and service offices strategically located in the United States, Europe and
Taiwan. In certain geographic areas outside the United States, sales are
facilitated by independent representatives who are assisted and supported by
employees of the Company.
Process Laboratory Services
The Company maintains its primary process laboratory in Ansonia,
Connecticut and a second laboratory in Rochdale, England. 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 and serves to introduce the
Company's technology to potential customers. An additional process laboratory
exists at the recently acquired leased facilities in Manchester, England. The
equipment located there will ultimately be consolidated into the Company's
laboratories at Rochdale, England and Ansonia, Connecticut. This will enhance
the demonstration capabilities of both laboratories significantly, thereby more
aggressively supporting the sales effort. The Company uses its laboratories to
demonstrate recent developments in processing equipment and to provide customers
with production-size equipment in order to experiment with new processing
techniques and formulations. The
Page 4 of 45
Company considers its process laboratories to be vital contributors to its
continuing technology development and customer service efforts and, as a result,
routinely modernizes its process laboratories and related equipment. The Company
has experienced an increased trend to test its plastics processing machinery,
such as the CP-SERIES II [trademark], twin screw and large pelletizing systems,
as more new materials are developed by the Company's customers which require
testing to determine processing procedures and machine design parameters.
In 1998, demonstration and laboratory capabilities will be increased
further with the installation of the Farrel Twin Screw Extruder (FTX) in two
University laboratories: Akron University, Akron, Ohio, USA and University of
Paderborn, Paderborn, Germany. The Company expects to benefit from the
installation and operation of these machines by providing exposure of Farrel
machinery and technology to new graduates and access to process application
development.
Competition
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in both the
rubber and plastics processing markets. Numerous competitors of varying sizes
compete with the Company in one or more of its product lines. A number of the
Company's competitors are divisions or subsidiaries of larger companies with
financial and other resources greater than those of the Company. The Company has
historically faced, and will continue to face, considerable competitive
pressures, particularly price competition. The Company believes that the
principal competitive factors affecting its business are price, performance,
technology, breadth of product line, product availability, reputation and
customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
Backlog
The Company's backlog of orders considered firm by management at
December 31, 1997, 1996 and 1995 was approximately $47 million, $50 million and
$30 million, respectively. Substantially all of the orders included in the
December 31, 1997 backlog have contractual ship dates in fiscal 1998. Firm
backlog at March 20, 1998 and 1997 was $59 million and $56 million,
respectively.
Manufacturing
The Company's manufacturing facility in Rochdale, England provides the
Company with fully integrated manufacturing processes 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 owns repair and
rebuild facilities in Ansonia, Connecticut, Deer Park, Texas, and Rochdale,
England and contracts for such services in Australia and Singapore.
Early in 1997 the Company announced the consolidation of its domestic
assembly, repair and spare parts operations, performed in its Derby and Ansonia,
Connecticut facilities into available space in Ansonia to reduce annual
operating costs and enhance operating efficiencies. The consolidation was
substantially completed during 1997.
Page 5 of 45
In 1997, the Company acquired assets and leased facilities to produce
INTERMIX [registered trademark] internal mixers and extruders as well as repair
and fabrication facilities in Manchester, England. The Company intends to
consolidate these manufacturing and repair operations with facilities in
Rochdale, England.
Management considers these facilities as giving the Company the
flexibility needed to service its customers.
Components and Raw Materials
The Company purchases most of the components used in manufacturing
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.
Research and Development and Engineering
The Company's research and development and engineering staffs are
located in Ansonia, Connecticut and Rochdale and Manchester, 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 new twin screw sheeter is an example of the collaborative success of
the research and development and product engineering staffs working together to
produce a new product as well as the recent development of a new longer, higher
powered melt pump discharge continuous mixer. Current development activities are
in the batch mixing process. The acquisition of the INTERMIX [registered
trademark] 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
12/31/97 12/31/96 12/31/95
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(Dollars in thousands)
Research and development expense
pertaining to new products or
significant improvements to
existing products $1,567 $1,993 $2,101
All other product development and
engineering expenditures related
to ongoing refinements, improvements
of existing products, and custom
engineering 2,874 3,329 3,444
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Total $4,441 $5,322 $5,545
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Percent of net sales 5.2% 7.0% 6.9%
Patents and Trademarks
The Company possesses rights under a number of domestic and foreign
patents and trademarks relating to its products and business. The Company holds
approximately 200 patents which cover technology utilized in its products and
currently has 42 patent applications pending. The Company's patents have
expiration dates ranging from 1998 through 2015. Although the Company believes
that its patents provide some competitive advantage, the Company also depends
upon trade secrets, unpatented proprietary know-how and continuing technological
innovation to develop and maintain its competitive advantage.
Page 6 of 45
The Company considers the following trademarks to be material to its
business: FARREL [registered trademark]; BANBURY[registered trademark];
INTERMIX[registered trademark]; ST[trademark]; MVX[trademark]; CP-SERIES
II[trademark], FTX[trademark], and TSS[trademark].
Environmental
The Company's operations are subject to normal environmental protection
regulations. Compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, is not expected to
have a material effect upon the capital expenditures, earnings or the
competitive position of the Company. However, environmental requirements are
constantly changing, and it is difficult to predict the effect of future
requirements on the Company.
As described in Part I, Item 3, Legal Proceedings, the Company and The
Black & Decker Corporation entered into a Settlement Agreement pursuant to which
Black & Decker agreed to assume full responsibility for the investigation and
remediation of any pre-May, 1986 environmental contamination at the Company's
Ansonia and Derby facilities as required by the Connecticut Department of
Environmental Protection (DEP). A preliminary environmental assessment of the
Company's properties in Ansonia and Derby, Connecticut has been conducted by The
Black & Decker Corporation. Although this assessment is still being evaluated by
the DEP, on the basis of the preliminary data now 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, earnings or the competitive position of the Company.
Employees
As of December 31, 1997, the Company had 606 full-time employees
(including 218 employees at the acquired Shaw operations) compared to 397 at
December 31, 1996. The Company has collective bargaining agreements in the U.S.
and the U.K. which cover approximately 237 employees (including 121 at the
acquired Shaw operations). The U.S. agreement was renegotiated during fiscal
1997 and expires on June 15, 2000. The Company has three agreements in the U.K.
which expire at various dates from June 1, 1998 through March 31, 1999.
Item 2 - Properties
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company except for
the Manchester, England facilities which are leased.
Approx.
Location Principal Use 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
Manchester, England (Corbett St.) Office, research, laboratory, 99,000
manufacturing, repair
and rebuild, and storage
Manchester, England (Vaughan St.) Office, fabrication 13,000
Derby, Connecticut Available for sale/lease 225,000
Early in 1997 the Company announced the relocation of its domestic
assembly and storage operations from its Derby, Connecticut facility to
available space in its Ansonia, Connecticut facility to reduce operating costs
and to enhance efficiency. This consolidation was substantially complete at
December 31,
Page 7 of 45
1997. The Company's Derby, Connecticut facility is available for sale or lease.
Subsequent to December 31, 1997, the Company signed a conditional letter of
intent to sell the property in Derby, CT. Final assembly, product testing and
quality control activities are performed by Company personnel at both the
Ansonia and Rochdale England facilities.
The Corbett Street facilities are subject to a lease which expires
December 19, 1999. The lease of these facilities was acquired in connection with
the purchase of assets of the Francis Shaw Rubber Machinery business. The lease
effectively provides the Company a two year period of transition in which to
consolidate these operations with the facilities in Rochdale, England. The
Vaughan Street facilities are subject to a lease through March, 2005.
The Company believes that the facilities used in its operations are in
satisfactory condition and adequate for its present and anticipated future
operations. In addition to the facilities listed above, the Company leases space
in various domestic and international locations, primarily for use as sales
offices.
Item 3 - Legal Proceedings
In February 1995, the Company and The Black & Decker Corporation
settled litigation as to the environmental conditions at the Ansonia and Derby
facilities at the time of the Company's purchase of them from USM in May 1986.
Under the Settlement Agreement, Black & Decker has assumed full responsibility
for all investigation and any remediation of pre-May, 1986 contamination at the
Company's Ansonia and Derby facilities in accordance with a Consent Decree
entered into between Black & Decker and the Connecticut Department of
Environmental Protection. In accordance with the Settlement Agreement, a
Withdrawal and Joint Stipulation of and Motion for Dismissal was filed with the
Court. The Court which originally heard this matter has continuing jurisdiction
over it, but no issues are now pending with the court.
As of the date hereof, the Company is not aware of any contamination,
other than any pre-May, 1986 contamination, at any of its facilities which would
require material remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company. 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 8 of 45
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 National Market System under the symbol "FARL". The following chart
sets forth the high and low prices for the Common Stock and dividends declared
for the last two fiscal years:
Fiscal 1997 High Low Dividend
- ----------- ---- --- --------
First Quarter $3.88 $2.38 $0.16
Second Quarter $4.00 $2.63 $0.16
Third Quarter $4.38 $2.63 $0.16
Fourth Quarter $6.00 $3.00 $0.16
Fiscal 1996 High Low Dividend
- ----------- ---- --- --------
First Quarter $4.38 $2.88 $0.06
Second Quarter $4.50 $3.00 --
Third Quarter $4.38 $2.75 --
Fourth Quarter $3.63 $2.38 --
(b) As of March 20, 1998 the approximate number of record holders of
the Company's common stock was 742.
(c) Dividends
The Company intends, from time to time, to pay cash dividends on its
Common Stock, as the Board of Directors, after consideration of the Company's
operating results, financial condition, cash requirements, general business
conditions, compliance with covenants in the credit facility (see Management's
Discussion and Analysis of Liquidity and Capital Resources) and such other
factors as the Board of Directors deems relevant.
(d) There were no sales or issuances of the Company's equity shares
that were not registered under the Securities Act.
Page 9 of 45
Item 6 - Selected Consolidated Financial Data
Year Year Year Year Year
ended ended ended ended ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
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Statement of Operations Data: (In thousands, except per share data)
Net Sales $85,382 $75,836 $80,067 $75,501 $75,750
======= ======= ======= ======= =======
Gross margin $17,711 $18,123 $19,760 $20,008 $20,189
======= ======= ======= ======= =======
As a percent of net sales 20.7% 23.9% 24.7% 26.5% 26.7%
======= ======= ======= ======= =======
Operating income $1,635 $654 $1,591 $2,601 $1,853
Other income (expense), net (2) 449 (174) (135) 1,436 (136)
------- ------- ------- ------- -------
Income before income taxes 2,084 480 1,456 4,037 1,717
Provision for income taxes 727 154 554 1,531 508
------- ------- ------- ------- -------
Net income $1,357 $326 $902 $2,506 $1,209
======= ======= ======= ======= =======
Net income per share - Basic and diluted (1) $0.23 $0.05 $0.15 $0.41 $0.20
======= ======= ======= ======= =======
Dividends per share of Common Stock $0.64 $0.06 $0.20 $0.04 $0.16
======= ======= ======= ======= =======
Weighted Average Shares Outstanding - Basic (000's) (1) 5,950 5,970 6,027 6,076 6,127
======= ======= ======= ======= =======
Weighted Average Shares outstanding - Diluted (000's) (1) 5,951 5,972 6,030 6,097 6,138
======= ======= ======= ======= =======
Balance Sheet Data:
Current Assets $37,104 $40,187 $41,991 $37,697 $40,675
Current Liabilities $23,286 $19,841 $22,878 $16,613 $20,179
Working Capital Ratio 1.6 2.0 1.8 2.3 2.0
Total assets $56,381 $50,731 $53,412 $47,979 $50,227
Long-term debt $5,283 $214 $388 $587 $740
Stockholders' equity $25,782 $28,553 $27,814 $28,726 $26,362
Other Data:
Backlog $46,554 $50,225 $29,745 $39,123 $32,960
(1) Restated to reflect the adoption of statement of Financial Accounting
Standards No. 128, "Earnings per Share".
(2) Other income in 1994 includes $1.3 million as a result of a curtailment of
postretirement benefits accounted for under Financial Accounting Standards No.
88. "Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
Page 10 of 45
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal 1997 Compared to Fiscal 1996:
Net sales in 1997 and 1996 were $85.3 million and $75.8 million,
respectively. A substantial portion of the 1997 shipments reflects orders
received in 1996 when the dollar value of the Company's order intake was higher
than that experienced in prior years. Management still considers the markets
served by the Company's products to be extremely competitive and, to some
extent, affected by continuing uncertainty in Eastern Europe and the Middle
East. Additionally, Far Eastern markets are particularly competitive and
volatile at this time. Certain Southeast Asian countries are experiencing
currency instability which contributes to uncertainty in the region. Many rubber
manufacturers also continue to operate at less than full capacity. Management
anticipates that the markets served by the Company's products will remain
extremely competitive and that those markets characterized by economic and
political uncertainty will likely continue to be affected by such conditions.
The Company received approximately $77 million in orders during 1997
compared to $96 million in 1996 when the Company received several individually
large orders. In the case of major equipment orders, up to 12 months are
required to complete the manufacturing process. Accordingly, revenues reported
in the statement of operations may represent orders received in the current or
previous fiscal periods. In addition, the cyclical nature of industry demand
and, therefore, order intake, may affect the Company's results of operations.
The Company's ability to maintain and increase net sales depends upon a
strengthening and stability in the Company's traditional markets.
Gross margin in 1997 and 1996 was $17.7 million and $18.1 million,
respectively, representing a decrease in the gross margin percentage to 21.0%
from 24.0%. This decline is largely due to the mix of products sold in the two
periods and to continued stiff competition. The 1997 shipments also include a
higher relative proportion of new machine sales than in 1996 which generate
lower margins than the Company's more profitable spare parts, rebuild and repair
business. The 1997 margin also reflects the impact of a $.5 million increase in
commissions on shipments to markets in the world where the Company must use
outside representatives in addition to its sales force to conduct business.
Market conditions continue to exert significant pressure on margins, a trend
which is expected to continue in the foreseeable future.
Operating expenses were reduced $1.5 million to $16 million in 1997
compared to 1996. The decline in administrative costs is largely due to reduced
investment banking fees. The increase in selling expenses of $.2 million to $7
million in 1997 as compared to 1996 is largely attributed to increased marketing
programs including costs to attend the premier plastic industry convention in
the United States, which occurs every three years. Research and development
expenses declined primarily as a result of reduced headcount. Lastly, the
reduction in operating costs is also due to continuing efforts to strictly
control expenses.
Page 11 of 45
During 1997 the Company substantially completed the consolidation of
its domestic assembly, repair and spare parts operations, from two facilities,
(Derby and Ansonia) in Connecticut, to available space in the Ansonia facility,
to reduce operating costs and enhance efficiencies. The cost of this project
through December 31, 1997 was approximately $1.0 million, which included
capitalized costs of approximately $.8 million for improvements to facilities
and equipment in 1997. While the Company expects cost savings to result from
this consolidation, the size of such savings cannot be predicted with any
certainty.
As a result of this consolidation, the Company's Derby facility is held
as available for sale or lease. The Company has transferred the remaining book
value of this facility and any remaining assets no longer anticipated to be used
from Property, Plant, and Equipment to Other Assets at the end of 1996.
Subsequent to December 31, 1997, the Company signed a conditional letter of
intent to sell the Derby property. The letter of intent is subject to various
terms and conditions, some of which may affect the net proceeds or consummation
of the sale. No loss on the disposal of the assets is anticipated at this time,
and, as a result, no provision for loss has been made. It is possible that
proceeds realized from the disposal of these assets may be less than the
remaining book value. The recoverability of these assets will be evaluated
periodically as required by FAS 121, "Accounting For the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of."
Other income, net of other expense, includes approximately $.7 million
from the disposal of machinery and equipment the Company will no longer use
which results from consolidating its two Connecticut facilities into one single
facility. The consolidation has been substantially completed.
The effective income tax rates in 1997 and 1996 were 34.9% and 32.1%,
respectively. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes for financial reporting
and income tax purposes.
Fiscal 1996 Compared to Fiscal 1995:
Net sales were $75.8 million in fiscal 1996 compared to $80.1 million
in fiscal 1995. Management believes the Company operates in markets which are
extremely competitive, and to some extent, affected by continuing after-effects
of recessions in the capital goods markets in Western Europe, as well as ongoing
political and economic uncertainty in Eastern Europe and the Middle East. Far
Eastern markets remain particularly competitive and difficult to penetrate. Many
rubber and plastic manufacturers also continue to operate at less than full
capacity. The timing of receipt of customer orders will also impact the relative
level of shipments in any financial reporting period. Management is encouraged
by the recent improvement in the level of order intake and backlog, as discussed
later. It does, however, anticipate that the markets served by the Company's
products will remain extremely competitive and that those markets characterized
by economic and political uncertainty will likely continue to be affected by
such conditions.
Gross margin was $18.1 million in 1996 compared to the $19.8 million
generated in 1995. The percentage also declined in 1996 to 23.9 percent from
24.7 percent in 1995. The year to year comparison is attributed to the mix of
products sold, which can differ significantly from one period to the next, and
to continued stiff competition. In addition, management has elected to pursue
certain machinery rebuild markets more aggressively to increase market share,
and has accepted lower margins in the near term to do so. The market conditions
discussed above continue to exert significant pressure on the level of margin
percentage achieved, a trend which is expected to continue in the foreseeable
future.
In an effort to compensate for the significant pressure on margins,
management has taken several measures to aggressively control costs in recent
years including the consolidation of component manufacturing into the Company's
U.K. plant during 1996. The Company's U.K. plant was selected for this
cost-effective consolidation into a single facility due to its more modern
equipment and its greater supply of readily available skilled labor. Assembly
operations continue to be performed in both the United States and the United
Kingdom
Page 12 of 45
Total operating expenses were reduced approximately $.7 million to
$17.5 million in 1996 compared to $18.2 million in 1995. Savings were generated
in all three categories of operating costs largely due to the elimination of
selected executive and staff positions worldwide. The reduction in selling
expenses also reflects the consolidation of the Company's marketing offices in
Continental Europe to England. Administrative costs in 1996 included $.8 million
of third party costs which were deferred in prior years in connection with
efforts, ultimately unsuccessful, to identify, negotiate, and contract with
several acquisition candidates, primarily outside the United States. This
non-recurring write-off of previously deferred costs has largely offset the
other savings previously discussed. No further costs were deferred during 1996.
The 1996 income tax rate, as a percentage of pre-tax income, was 32.1%
compared to 38.0% in 1995. The relatively low 1996 rate is attributed to the
combination of the pre-tax loss in the United States and taxable income in the
United Kingdom. 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.
Material Contingencies
As described in Part 1, Item 3, the Company and Black & Decker entered
into a Settlement Agreement pursuant to which Black & Decker agreed to assume
full responsibility for the investigation and remediation of any pre-May, 1986
environmental contamination at the Company's Ansonia and Derby facilities as
required by the Connecticut Department of Environmental Protection (DEP). As
part of the settlement, the Company transferred by quit claim deed a vacant
surfaced parking lot to the City of Ansonia. As required by the Settlement
Agreement, a preliminary environmental assessment of the Company's properties in
Ansonia and Derby, Connecticut has been conducted by Black & Decker. On the
basis of the preliminary data now available there is no reason to believe that
any remediation activities which might be required as a result of the findings
of the assessment will have a material effect upon the capital expenditures,
earnings or the competitive position of the Company. This forward looking
statement could, however, be influenced by 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 1997 decreased $19 million, or
roughly 20%, to approximately $77 million compared to $96 million in fiscal 1996
and $71 million in fiscal 1995. The 1997 decrease in orders compared to 1996 is
distributed across product lines and geographically around the world with the
largest regional decrease occurring in the Far East, due to the uncertain
economic environment at this time.
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 had been severely depressed in various
geographic markets of the world. 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. There can be no assurance that the level of
orders experienced in 1997 will continue, 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, 1997
is $47 million and is largely attributed to the decrease in orders in 1997
compared to 1996. Backlog at December 31, 1996 was $50 million. The contractual
ship dates for substantially all of the December 31, 1997 backlog are in 1998.
The backlog at March 20, 1998 and 1997 was $59 million and $56 million,
respectively.
Page 13 of 45
Liquidity and Capital Resources; Capital Expenditures
Working capital and the working capital ratio at December 31, 1997 were
$13.8 million and 1.6 to 1, respectively, compared to $20.3 million and 2.0 to 1
at December 31, 1996, respectively. The decrease in the working capital ratio at
December 31, 1997 is attributed to the purchase of selected assets the Francis
Shaw Rubber Machinery Business on December 19, 1997. The net assets acquired
(see Note 2 to the Consolidated Financial Statements) included current liability
provisions of $2.1 million for the consolidation of the acquired assets into the
operations of the Company's Rochdale, England facilities. During the year ended
December 31, 1997 the Company paid dividends of $0.48 per share. The Company has
also declared a dividend of $0.16 per share which was paid January 7, 1998. 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. The Company received a waiver from its bank with respect to
dividends declared during 1997. No assurance can be given that the level of
dividends declared in 1997 will continue in 1998.
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, accounts receivable and/or inventory may be at high
levels from time to time resulting in a temporary decline in cash provided from
operating activities. Historically, the Company has not experienced significant
problems regarding the collection of accounts receivable. The Company has
historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
At December 31, 1997, the Company had a worldwide multi-currency credit
facility with a major U.S. bank in an amount of $20.0 million for direct
borrowings and letters of credit and up to (pound)3.0 million for foreign
exchange contracts. Interest varies based upon prevailing market interest rates.
The facility contains limits on direct borrowings and letters of credit combined
based upon stipulated levels of accounts receivable, inventory and backlog. The
facility also contains covenants specifying minimum and maximum thresholds for
operating results and selected financial ratios. At December 31, 1997, there was
$7.1 million in direct borrowings under this facility. There were no direct
borrowings outstanding under this facility at December 31, 1996. There were $6.0
million and $8.1 million in letters of credit outstanding at December 31, 1997
and 1996, respectively.
On January 23, 1998, the credit facility was amended and restated. The
amended and restated facility provides for total borrowings of $25,000,000,
consisting of an $18.5 million revolving credit facility and a five year term
loan for up to $6.5 million. Concurrently with the execution of the amended
credit agreement, the Company converted [Pounds] 4.0 million of the outstanding
balance under the previous credit facility to a term note. The term loan is
payable in equal quarterly payments over a five year period. At December 31,
1997, [Pounds] 3.2 million is classified as long term. The amended credit
facility contains limits in direct borrowings and letters of credit combined
based upon stipulated levels of accounts receivable, inventory and backlog. It
also contains covenants specifying minimum and maximum thresholds for operating
results and selected financial ratios and the same restrictions on the payment
of dividends as contained in the previous agreement as described above.
Management anticipates that its cash balances, operating cash
flows and available credit line will be adequate to fund its anticipated capital
commitments and working capital requirements for at least the next twelve months
including integration of the Shaw asset acquisition. The Company made capital
expenditures of approximately $1.9 million and $1.3 million, during fiscal 1997
and 1996, respectively. The increase in capital expenditures in 1997 is largely
attributed to certain improvements related to the Company's domestic assembly
and storage facilities.
Page 14 of 45
The Company manufactures its products in the United Kingdom and sells
its products in the United States, United Kingdom 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
regularly enters into foreign exchange forward and option contracts to hedge
foreign currency transactions. Foreign currency transactions generally are for
short periods of no more than six months. In addition, the Company maintains
foreign currency bank accounts in other currencies in which it regularly
transacts business.
The Company's interest income and expense are sensitive to changes in
the market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
Year 2000
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year value to 00.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company's year 2000 project is comprised of three
components-business applications, product applications and equipment
applications. The business applications component consists of the Company's
business computer systems, as well as the computer systems of third-party
suppliers or customers whose Year 2000 problems could potentially impact the
Company. Product applications exposure consist of micro processors within the
control equipment sold by the Company. Equipment exposures consist of the
micro-processors within operating equipment such as pumps, compressors, and
furnaces.
The majority of the Company's business applications are third party
purchased applications. The Company expended $.5 million during 1997 and
anticipates spending $.3 million during 1998 as part of the Company's policy to
utilize current information technology in its business applications. The Company
has begun the implementation of the vendor's current upgrade which is year 2000
compliant.
The Company is assembling a task force of internal resources from
various disciplines, including operations, facility management, product
engineering, management information systems and finance to evaluate the year
2000 readiness with respect to product and equipment applications. Work plans
detailing product control systems readiness including evaluating customer and
vendor readiness, and a comprehensive inventory of monitoring and control
devices for plants, safety systems and other similar operating systems and the
resources required are expected to be in place by the end of 1998 with
completion in the first quarter of 1999.
Safe Harbor Statements under Private Securities Litigation Reform Act of 1995
Certain statements contained in the Company's public documents,
including 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 that could cause actual results to differ materially from these
statements, 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.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Not
Applicable
Page 15 of 45
Item 8 - Financial Statements and Supplementary Data
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors................................................17
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1997 and 1996....................................................18
Consolidated Statements of Income for the years
ended December 31, 1997, 1996, and 1995 ......................................19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995..........................20
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995........................................21
Notes to Consolidated Financial Statements.................................22-36
Page 16 of 45
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, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion. the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Stamford, Connecticut
March 19, 1998
Page 17 of 45
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
12/31/97 12/31/96
-------- --------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $1,447 $3,832
Accounts receivable, net of allowance for
doubtful accounts of $179 and $464,
respectively 14,423 19,189
Inventory (Notes 1 and 5) 18,277 14,187
Other current assets (Notes 2 and 12) 2,957 2,979
------------ -----------
Total current assets 37,104 40,187
Property, plant and equipment, net of accumulated
depreciation of $9,786 and $8,357, respectively
(Notes 1 and 6) 12,416 9,555
Goodwill (Note 2) 5,295
Other assets (Notes 1, 3 and 11) 1,566 989
------------ -----------
Total assets $56,381 $50,731
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,317 $11,058
Accrued expenses and taxes (Notes 2 and 7) 4,753 2,344
Advances from customers (Note 1) 6,412 4,865
Accrued installation and warranty costs
(Note 1) 1,326 1,360
Dividends payable 951
Short-term debt (Note 8) 1,527 214
------------ -----------
Total current liabilities 23,286 19,841
Long-term debt (Note 8) 5,283 214
Postretirement benefit obligation (Note 11) 1,213 1,277
Other long-term obligations (Note 11) 592 522
Deferred income taxes (Notes 1 and 12) 225 324
Commitments and contingencies (Note 9) --- ---
------------ -----------
Total liabilities 30,599 22,178
----------- -----------
Stockholders' equity (Note 10):
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
Cumulative translation adjustment (Note 1) (63) 232
Treasury stock, 199,524 and 200,261 shares
at December 31, 1997 and 1996, respectively,
at cost (984) (987)
Retained earnings 7,776 10,228
Minimum pension liability (303) (276)
------------ -----------
Total stockholders' equity 25,782 28,553
------------ -----------
Total liabilities and stockholders' equity $56,381 $50,731
============ ===========
See Notes to Consolidated Financial Statements
Page 18 of 45
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
----------------------------------
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Net sales $85,382 $75,836 $80,067
Cost of sales 67,671 57,713 60,307
---------- --------- --------
Gross margin 17,711 18,123 19,760
Operating expenses:
Selling 7,076 6,792 7,940
General and administrative (Note 4) 7,433 8,684 8,128
Research and development 1,567 1,993 2,101
---------- --------- --------
Total operating expenses 16,076 17,469 18,169
Operating income 1,635 654 1,591
Interest income 291 203 345
Interest expense (71) (145) (86)
Other (expense)/income, net (Note 14) 229 (232) (394)
---------- --------- --------
Income before income taxes 2,084 480 1,456
Provision/(benefit) for income taxes
(Notes 1 and 12):
Current 811 (7) 654
Deferred (84) 161 (100)
---------- --------- --------
Total 727 154 554
---------- --------- --------
Net income $1,357 $326 $902
========== ========= ========
Per share data: (Note 13)
Basic and diluted net income per share $0.23 $0.05 $0.15
========== ========= ========
Average shares outstanding (000's):
Basic 5,950 5,970 6,027
========== ========= ========
Diluted 5,951 5,972 6,030
========== ========= ========
See Notes to Consolidated Financial Statements
Page 19 of 45
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Paid Cumulative Minimum Total
Common stock in Treasury translation Retained Pension Stockholders'
Shares Amount capital stock adjustment earnings Liability equity
--------- -------- ------- -------- --------- -------- --------- ----------
(In thousands, except shares)
Balance, December 31, 1994 6,142,106 61 19,295 (497) (597) 10,594 ($ 130) 28,726
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- (49) -- -- (49)
Net income -- -- -- -- -- 902 -- 902
Treasury stock transactions -- -- -- (340) -- -- -- (340)
Cash dividend declared
at $.20 per common share -- -- -- -- -- (1,209) -- (1,209)
Minimum pension liability -- -- -- -- -- -- (216) (216)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 6,142,106 61 19,295 (837) (646) 10,287 (346) 27,814
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- 878 -- -- 878
Net income -- -- -- -- -- 326 -- 326
Treasury stock transactions -- -- -- (150) -- (25) -- (175)
Cash dividend declared
at $.06 per common share -- -- -- -- -- (360) -- (360)
Minimum pension liability -- -- -- -- -- -- 70 70
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 6,142,106 $ 61 $ 19,295 ($ 987) $ 232 $ 10,228 ($ 276) $ 28,553
--------- --------- --------- --------- --------- --------- --------- ---------
Foreign currency translation -- -- -- -- ($ 295) -- -- (295)
Net income -- -- -- -- -- 1,357 -- 1,357
Treasury stock transactions -- -- -- 3 -- (3) -- 0
Cash dividend declared
at $.64 per common share -- -- -- -- -- (3,806) -- (3,806)
Minimum pension liability -- -- -- -- -- -- (27) (27)
========= ========= ========= ========= ========= ========= ========= =========
Balance, December 31, 1997 6,142,106 $ 61 $ 19,295 ($ 984) ($ 63) $ 7,776 ($ 303) $ 25,782
========= ========= ========= ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements
Page 20 of 45
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
Cash flows from operating activities:
Net income $1,357 $326 $902
Adjustments to reconcile net income
to net cash used in/provided by
operating activities:
(Gain)/loss on disposal of fixed
assets (746) --- 100
Depreciation and amortization 1,667 1,699 1,609
Decrease /(increase) in accounts
receivable 4,471 5,104 (3,860)
Decrease/(increase) in inventory 261 (915) (5,759)
(Decrease)/increase in accounts payable (2,514) (3,732) 7,030
Increase in advances from customers 608 795 777
Increase/(decrease) in accrued
expenses and taxes 1,075 (1,767) (139)
Decrease in accrued installation
and warranty costs (4) (344) (281)
Decrease/(increase) in long-term
employee benefit obligations 6 (171) (38)
Other (500) 787 (424)
------- ------- -------
Total adjustments 4,324 1,456 (985)
------- ------- -------
Net cash provided by /(used in)
operating activities 5,681 1,782 (83)
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 1,027 15 50
Purchases of property, plant and
equipment (1,878) (1,321) (2,490)
Purchase of technology license agreement --- --- (22)
Acquisition of Shaw assets (10,855) --- ---
------- ------- -------
Net cash (used in) investing activities (11,706) (1,306) (2,462)
Cash flows from financing activities:
Repayment of short term borrowings --- --- (1,057)
Proceeds from long term borrowings 6,680 --- ---
Repayment of long term borrowings (196) (200) (197)
Issuance (purchase) of treasury stock 3 (175) (340)
Used for dividends paid (2,856) (360) (1,209)
------- ------- -------
Net cash provided by (used in)
financing activities 3,631 (735) (2,803)
Effect of foreign currency exchange
rate changes on cash 9 25 30
------- ------- -------
Net decrease in cash and cash equivalents (2,385) (234) (5,318)
Cash and cash equivalents--
Beginning of period $3,832 $4,066 9,384
------- ------- -------
End of period $1,447 $3,832 $4,066
======= ======= =======
Income taxes paid $746 $756 $1,175
======= ======= =======
Interest paid $76 $55 $93
======= ======= =======
See Notes to Consolidated Financial Statements
Page 21 of 45
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Principles of Consolidation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts
of Farrel Corporation and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
The Company designs, manufactures, sells and services machinery to
customer specifications for the rubber and plastics industry. The Company's
principal products are batch and continuous mixers, extruders, pelletizers,
calenders and mills. The Company also provides process engineering services,
process design and related services for rubber and plastics processing
installations in conjunction with its sales of capital equipment. The Company's
new machinery and related services generally represents slightly more than half
of its revenues. The Company's aftermarket business consists of contractual
repair, refurbishment and equipment upgrade services, spare parts sales and
field services.
The company's principal customers are domestic and foreign
manufacturers of rubber and plastics. Foreign customers are primarily located
throughout Eastern and Western 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 relative importance 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 purchased with a maturity of three
months or less. 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 receivable 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 on an average cost basis in the U.K.
(d) Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Improvements are
capitalized and expenditures for normal maintenance and repairs are charged to
expense. Depreciation is computed on a straight line basis based on the
estimated useful lives of the related assets which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets. See Note 3 to these financial
statements.
(e) Goodwill
On December 19, 1997, the Company acquired certain assets of the
Francis Shaw Rubber Machinery operations (see Note 2). The transaction was
accounted for as a purchase. Goodwill represents the excess purchase price over
the estimated fair value of the assets acquired and is being amortized on a
straight line basis over 20 years.
Page 22 of 45
(f) Patents and Acquired Technology
Other assets includes acquired patents and technical know-how and a
technology license agreement which represents the cost of licensed and purchased
technology, know how, and trade secrets including technology which is patented
or for which a patent has been applied for. Such costs are amortized over
periods from 5 to 7 years.
(g) Revenue Recognition:
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with the shipment. Revenue on
repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
The Company requires advances from customers upon entering a contract
and progress payments during the manufacturing process. Generally, letters of
credit are required on contracts with export customers to minimize credit and
currency risk.
(h) Product Installation and Warranty Obligations:
Estimated costs to be incurred under product installation and warranty
obligations relating to products which have been sold are provided for at the
time of sale.
(i) Income Taxes:
Deferred income taxes are provided on temporary differences
between the financial statement and tax basis of the Company's assets and
liabilities in accordance with the liability method of accounting for income
taxes. Provision has not been made for U.S. income taxes or additional foreign
taxes on approximately $9.6 million of undistributed earnings of foreign
subsidiaries because it is expected that those earnings will be reinvested
indefinitely.
(j) Earnings Per Share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of stock options (see
Note 10). Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements. (See Note 13 to the financial statements.)
(k) Foreign Currency Translation:
Assets and liabilities denominated in foreign currencies are translated
into United States dollars at current exchange rates. Income and expense
accounts are translated at average rates of exchange prevailing during the year.
Adjustments resulting from the translation are included in the
cumulative translation adjustment in stockholders' equity. Transaction gains and
losses are included in earnings. The Company experienced a foreign currency
transaction loss of $131,000 in 1997 and $89,000 in fiscal 1995, respectively.
The transaction gain or loss in 1996 was not significant.
The Company enters into foreign exchange contracts for non-trading
purposes, exclusively to minimize its exposure to currency fluctuations on trade
receivables and payables. As a result, changes in the values of foreign currency
contracts offset changes in the values of the underlying assets and liabilities
due to changes in foreign exchange rates, effectively deferring gains and losses
on trade receivables and payables and the related hedges until the date the
transactions are settled in cash. At December 31, 1997, the Company has entered
into $.9 million of forward exchange contracts for transactions related to
amounts to be paid for purchase commitments. A loss of approximately $24,000 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
Page 23 of 45
the event of nonperformance by the Company's bank, the other party to the
foreign exchange contracts. However, the Company does not anticipate
nonperformance by its bank.
(l) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
(m) Reclassifications:
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no impact on previously reported results of operations.
Note 2 - Asset Purchase
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of
the Company, acquired certain assets of the Francis Shaw Rubber Machinery
operations from EIS Group PLC of the UK. The purchase price was [Pounds] 6.5
million (approximately $10.9 million), subject to further reduction as described
below.
The Asset Purchase Agreement provides for a reduction in the purchase
price to the extent the value of inventory on hand at the closing date is less
than [Pounds] 3.0 million. In addition, the Seller has guaranteed that the
acquired assets will generate a pre-tax profit (as defined) of, at least,
[Pounds] 1.0 million for fiscal 1998. Any shortfall in this amount will be paid
to the Company representing a reduction in the purchase price.
The results of operations from December 19, 1997 through December 31,
1997, are included in the consolidated results of the Company. The agreement
provides for an operating and lease agreement during the transition of the
operations from the Seller to the Company. The agreement contains provisions for
the completion of sales orders in process retained by the seller and lease of
facilities housing the operations which will be relocated and consolidated with
existing facilities in the U.K.
The acquired assets are recorded at estimated fair value and
include machinery and equipment, inventory and intangible assets as follows:
Machinery & equipment $ 2,805
Inventory stock, net of customer deposits
of $1,009 3,512
Patents/technical know how 835
Other assets 1,598
Goodwill 5,295
-----
Total $ 14,045
======
The above preliminary purchase price allocation is based upon
Management's judgment considering information currently available. The final
purchase price and allocation is subject to revisions as described above,
agreement by the Seller and terms of the Asset Purchase Agreement. The Company
has objected to the closing date inventory valuation and has put the Seller on
notice that it will request a substantial refund.
The Seller did not maintain and the Company was not provided historical
financial information for the Shaw operations. Based on the limited information
available, the Company estimates that the pro forma revenues and net income
would not vary materially from the historical amounts reported in the
Consolidated Statements of Income.
Page 24 of 45
Included in the purchase price allocation, the Company has recorded
current liabilities of $2.1 million for the costs of consolidating the acquired
operations with current facilities in Rochdale, England. The costs include
employee separation, moving and other costs.
Note 3 - Other Assets
12/31/97 12/31/96
-------- --------
(In thousands)
Technology license................................ $334 $501
Assets held for disposal.......................... 209 389
Notes receivable.................................. -- 38
Acquired patents and technical know how........... 835
Other............................................. 188 61
-------- --------
Total........................................... $1,566 $989
====== ======
Assets held for disposal represent the remaining book value of the
Company's Derby, Connecticut manufacturing facility and its remaining machinery
and equipment no longer expected to be used. Subsequent to December 31, 1997,
the Company signed a conditional letter of intent to sell the Derby property.
The letter of intent is subject to various terms and conditions, some of which
may affect the net proceeds or consummation of the sale. Currently, the estimate
of the discounted fair value of the assets exceeds the remaining book value and,
therefore, no provision for loss has been made at this time. The recoverability
of these assets will be evaluated periodically as required by FAS 121,
"Accounting For the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of." It is possible that the proceeds to be received from the sale
of these assets may prove to be less than the remaining book value, at which
point in time the appropriate provision for loss will be made.
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 paid First Funding
$894,000, $687,000 and $718,000 in fiscal 1997, 1996 and 1995, respectively. In
addition, the Company also reimbursed First Funding $319,000, $211,000 and
$285,000 for out-of-pocket costs during the same three periods, respectively.
The fiscal 1997 amount included $460,000 for services related to the asset
purchase (see Note 2) and amended credit facility (see Note 8) . The fiscal 1995
amount included services regarding the extension of the Company's worldwide
credit facility.
Page 25 of 45
Note 5 - Inventory
Inventory is comprised of the following:
12/31/97 12/31/96
-------- --------
(In thousands)
Stock and raw materials........... $9,459 $5,905
Work-in-process................... 8,818 8,282
-------- --------
Total............................. $18,277 $14,187
======= =======
Of the above inventories at December 31, 1997 and 1996, $9 million are
valued using the LIFO method. Current replacement costs of those inventories as
of these dates were greater than the LIFO carrying amounts by approximately $.5
million at December 31, 1997 and 1996.
Note 6 - Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
12/31/97 12/31/96
-------- --------
(In thousands)
Land and buildings........................... $3,927 $3,024
Machinery, equipment and other............... 18,163 14,700
Construction in progress..................... 112 188
-------- --------
22,202 17,912
Accumulated depreciation................... (9,786) (8,357)
------- -------
Property, plant and equipment, net......... $12,416 $9,555
======= ======
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years. The amounts indicated here exclude the assets held for resale which are
included in Other Assets. See Note 3 to these financial statements.
Note 7 - Accrued Expenses and Taxes
Accrued expenses and taxes includes accrued wages and benefits of
approximately $1.0 million and $.8 million at December 31, 1997 and 1996,
respectively. Also included are income taxes payable of $1.0 million, at
December 31, 1997 and 1996.
Note 8 - Bank Credit Arrangements
At December 31,1997, the Company had a worldwide multi-currency credit
facility with a major U.S. bank in the amount of $20.0 million for direct
borrowings and letters of credit and up to [Pounds] 3.0 million for foreign
exchange contracts. Interest varies based upon prevailing market interest rates
(8.75% and 7.25% at December 31, 1997 and 1996, 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 the making of investments, on borrowings and on
the sale of assets. The Company's ability to pay dividends is limited to (a) 25%
of the Company's cumulative net income during the most recently completed four
fiscal quarters after deducting distributions previously made and (b) purchases
by the Company of its common stock during the same period. At December 31, 1997,
there was $7.1 million in direct borrowings under this facility. There were no
direct borrowings outstanding under this facility at December 31 1996. The
weighted averaged interest rate incurred on short-term borrowings was 8.18%,
7.68 % and 7.75% in fiscal 1997, 1996 and 1995, respectively. There
Page 26 of 45
were $6.0 million and $8.1 million of letters of credit outstanding at December
31, 1997 and 1996, respectively.
The Company has a loan in the amount of [Pounds] 125,000 ($205,000) and
[Pounds] 250,000 ($428,000) at December 31, 1997 and 1996, respectively, from a
U.K. bank which is collateralized by the Company's facility in Rochdale,
England. The loan matures in January 1999 for which semi-annual principal
payments of approximately [Pounds] 62,500 began in 1995. Approximately [Pounds]
125,000 ($205,000 and $214,000) at December 31, 1997 and 1996, respectively, is
classified as payable currently and [Pounds] 125,000 ($214,000) was classified
as long term at December 31, 1996. The interest rate on this loan is 10 percent
per annum.
On January 23, 1998, the credit facility was amended. The amended
facility provides for total borrowings of $25 million, consisting of an $18.5
million revolving credit facility and a five year term loan for up to $6.5
million. Concurrently with the execution of the amended credit agreement, the
Company converted [Pounds] 4 million (approximately $6.5 million) of the
outstanding balance under the previous credit facility to a term note. The term
loan is payable in equal quarterly payments over a five year period. At December
31, 1997, [Pounds] 3.2 million (approximately $5.3 million) is classified as
long term. The amended credit facility contains limits in direct borrowings and
letters of credit combined based upon stipulated levels of accounts receivable,
inventory and backlog. It also contains covenants specifying minimum and maximum
thresholds for operating results and selected financial ratios.
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)
- ------------------------ --------------
1998 495
1999 361
2000 123
2001 93
2002 134
Thereafter 71
-----
$1,277
======
Rental expense for the year ended December 31, 1997, 1996 and 1995
was $332,000, $374,000, $452,000, 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 operation.
Note 10 - Stock Plans
The Company sponsors a Stock Option Plan and an Employees' Stock
Purchase Plan, both established in 1997.
Page 27 of 45
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. There were no stock options
granted during 1997.
In prior years, the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 1997, options to purchase 459,000 shares remain outstanding under the plan.
The Company has elected to continue to account for stock options under
Accounting Principles Board Opinion No. 25 , "Accounting for Stock Issued to
Employees" (APB 25) and not the fair value method as provided by FAS 123,
"Accounting and Disclosure of Stock -Based Compensation." The Company's Stock
Option Plan requires options to be granted at the market price of the Company's
common stock on the date the options are granted, and as a result, under APB 25
no compensation expense is recognized.
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
1997 1996 1995
-------------------- --------------------- --------------------
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 459 $5.86 296 $6.96 286 $7.04
Granted - - 375 4.38 72 5.28
Exercised - - - - - -
Forfeited - - 212 4.76 62 5.42
-------------------- --------------------- --------------------
Outstanding, end of year 459 5.86 459 $5.86 296 $6.96
-------------------- --------------------- --------------------
Exercisable, end of year 374 6.32 279 $7.05 213 $7.58
Weighted-average fair value of options
granted during the year - $1.75 $2.20 --
The following table summarizes information about stock options
outstanding at December 31, 1997:
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
- -------------------------------------------------------------------------- -----------------------------
$3.75 - $5.50 278,000 7.0 years $4.51 193,250 $4.79
5.51 - 8.50 95,000 5.5 6.32 95,000 6.32
8.51 - 10.00 86,000 4.0 9.73 86,000 9.73
- --------------------------------------------------------------------------- -----------------------------
$3.75 - $10.00 459,000 6.2 $5.86 374,250 $6.32
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
Page 28 of 45
date of grant using the Black-Scholes option pricing model, one of the allowable
valuation models under FAS 123, with the following assumptions for 1996:
1996
Risk free interest rate 6.0%
Dividend yields 2.0%
Expected volatility factor of the expected
market price of the Company's common stock .458
Weighted average expected life of each option 8 Yrs
The weighted average fair value of options granted during 1996 was
$1.75. 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. Because the Company's employee stock options have characteristics
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, 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. It is also not
likely that the current pro forma net income will 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
----------
12/31/97 12/31/96
-------- --------
(In thousands, except
per share data)
Pro Forma Net Income $1,331 $258
Pro Forma earnings per share - basic and diluted .22 .04
During 1997, the Company adopted the 1997 Employee's Stock Purchase Plan
as a successor to the 1992 Employees Stock Purchase Plan.
The 1997 Stock Purchase Plan gives each eligible employee of the Company
the right to purchase, in each of the years 1997 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. Each May, 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.
Under the stock purchase plans in July 1997 and May 1996, employees
elected to purchase approximately 9,000 and 3,000 shares, respectively, of the
Company's common stock through these plans. During 1997 and 1996, approximately
13,000 and 9,000 shares, respectively, were distributed to employees under this
plan. The 1997 distribution includes 647 shares from the Company's treasury
account, for which retained earnings was adjusted. At December 31, 1997, there
were approximately 13,000 shares subscribed to under these plans.
Page 29 of 45
The Company may reaquire up to $2,250,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 1996 the Company
reacquired 54,150 shares of common stock, under this plan for approximately
$175,000, which are included in treasury stock. There were no shares repurchased
during 1997.
Note 11 - Benefit Plans
The accounting for pensions and retiree health benefits, which will be
paid out over an extended period of time in the future, requires the use of
significant estimates concerning uncertainties about employee turnover, future
pay scales, interest rates, rates of return on investments and future medical
costs. The estimates of these future employee costs are allocated in a
systematic manner to the years when service is rendered to the Company by the
employee. The annual cost is comprised of the service cost component related to
current employee service, an interest cost related to the increase in the
benefit obligations due to the passage of time (the benefit obligations are
stated at a present value which increases each year as the discount period
decreases), less the earnings achieved on assets invested in the employee
benefit plan. Differences between the estimates and actual experience are
deferred and amortized to expense over a period of time.
Pension Plans
The Company has retirement plans covering portions of domestic and
foreign employees. The Company funds the domestic plan in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plans in
accordance with appropriate governmental regulations in the United Kingdom.
Pension expense is actuarially determined in accordance with generally accepted
accounting principles and differs from amounts funded annually.
The Company has a domestic defined benefit pension plan for hourly
employees which provides benefits based on employees' years of service. Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has two foreign defined benefit pension plans covering substantially
all employees which provide stipulated amounts at retirement based on years of
service and earnings. Plan assets are invested in securities, real estate and
cash. The following table summarizes the components of domestic and foreign
pension expense:
Year ended
----------
12/31/97 12/31/96 12/31/95
-------- -------- --------
Domestic pension expense: (In thousands)
Service cost-benefits earned during the period.. $62 $65 $82
Interest cost on projected benefit obligation... 124 122 110
Actual return on plan assets.................... (171) (31) (174)
Amortization of deferred items.................. 84 (52) 113
----- ----- -----
Net domestic pension expense $99 $104 $131
===== ===== =====
Foreign pension expense:
Service cost-benefits earned during the period.. $258 $226 $220
Interest cost on projected benefit obligation... 728 648 598
Actual return on plan assets.................... (802) (743) (931)
Amortization of deferred items.................. (159) (122) 116
----- ----- -----
Net foreign pension expense $25 $9 $ 3
===== ===== =====
Page 30 of 45
Over the long run, the Company's funding policy is designed to
accumulate sufficient assets in the benefit plans to meet obligations for
retirement benefits. Because at any point in time there will be differences
between the estimates used in establishing pension cost and funding amounts and
actual experience, there will always be an amount by which the Company is over
or under-funded. The domestic plan was under-funded by $211,000 and $202,000 at
December 31, 1997 and 1996, respectively, which the Company expects to reduce
through contributions to the pension plan in the future.
The following table sets forth the funded status of the domestic and
foreign defined benefit plans and amounts recognized in the balance sheets:
Domestic Foreign
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Actuarial present value of:
Vested benefit obligations $1,884 $1,694 $9,984 $8,828
====== ====== ====== ======
Accumulated benefit obligation $1,991 $1,755 $9,984 $8,828
====== ====== ====== ======
Plan assets at fair value $1,780 $1,553 $9,800 $9,289
Actuarial present value of projected benefit
obligation for service rendered to date 1,991 1,755 10,252 9,063
Projected benefit obligation (in excess of)/
less than plan assets (211) (202) (452) 226
Unrecognized actuarial variances 504 461 699 223
Unamortized net transition liability/(asset) 9 16 (198) (372)
Unamortized prior service costs 79 45 --- ---
Additional minimum liability (592) (522) --- ---
------ ------ ------ ------
Accrued pension (cost)/benefit ($211) ($202) $49 $77
====== ====== ====== ======
Plans assumptions:
Discount rate 7.00% 7.25% 7.50% 8.50%
Rate of increase in future compensation levels N/A N/A 4.50% 5.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 9.00% 9.00%
The Company changed the discount rate in 1997 in response to the lower
current and projected interest rates. The Company changed the expected long term
rate of return on plan assets in 1996 due to the fact the Company retained the
services of a professional investment advisor to manage the assets of the Plan.
As a result, investment returns are anticipated to improve. The Company recorded
a minimum liability of $592,000 and $522,000 at December 31, 1997 and 1996,
respectively. The Company has also recorded intangible assets of $88,000 and
$61,000, the amounts allowable under FAS 87, at December 31, 1997 and 1996,
respectively, which are included in Other Assets. The minimum liability in
excess of the intangible asset has been recorded as a reduction of stockholders'
equity, net of applicable income taxes.
During 1996 the Company reduced the workforce of employees covered
by the domestic defined benefit plan, and as a result, experienced a
curtailment of the pension obligation. The Company accounted for this
curtailment under FAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
The impact on 1996 operations was a minor gain.
Page 31 of 45
The Company has a domestic 401(k) retirement plan for salaried employees
which includes matching and discretionary non-matching contributions by the
Company. Approximately $119,000, $113,000 and $147,000 of such contributions
were expensed in fiscal 1997, 1996 and 1995, respectively. No discretionary
contributions were made by the Company during fiscal 1997, 1996 or 1995.
Postemployment Benefits Other Than Pensions
The Company generally provided health care benefits to eligible domestic
union retired employees and their dependents through age 65. The Company is
self-insured for claims prior to age 65 and pays these as incurred. Retired
employees and their dependents were entitled to select Supplemental Medicare
Coverage A and B only at age 65. The Company pays 75% of the monthly Medicare
premiums for most of these individuals. Eligibility for these retiree health
care benefits was attained upon reaching age 60 and completing 10 years of
service.
During 1994 the Company renegotiated its contract with domestic union
employees in which postemployment medical benefits were eliminated for future
retirees. Employees who retired prior to the signing of the new contract
maintain the postemployment medical benefits granted under prior contracts. The
elimination of these benefits reduced the obligation by approximately $1.3
million ($.8 million net of approximately $.5 million of deferred income taxes)
from that which was previously recorded by the Company when it adopted FAS 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions". The
Company accounted for the elimination of these benefits under the provisions of
FAS 106. The following table summarizes the Company's expense for postemployment
benefits other than pensions.
Year ended
----------
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Service cost- benefits earned during
the period --- --- ---
Interest cost on accumulated postretirement
benefit obligation $90 $90 $111
---- ---- ----
Net periodic postretirement benefit costs $90 $90 $111
==== ==== ====
The Company's non-pension postretirement benefit plans are not funded. The
status of the plans are as follows:
12/31/97 12/31/96
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
Retirees and dependents $1,221 $1,219
Fully eligible plan participants --- 28
Other active plan participants --- ---
------ ------
1,221 1,247
Unrecognized net gain (loss) from experience
differences and change in assumptions (8) 30
------ ------
Postretirement benefit obligation $1,213 $1,277
====== ======
Page 32 of 45
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% and 7.25% at December 31, 1997 and
1996, respectively. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 9.0% at December 31, 1997
and declines .5% per year to 5.5% by the year 2005 and remains at that level
thereafter. The change in assumptions did not have a material impact on the
obligation or net periodic postretirement benefit cost. The accumulated benefit
obligation as of December 31, 1997 and net periodic postretirement health care
cost for fiscal 1997 would increase approximately 8.1% and 8.5%, respectively,
with an annual one percentage point increase in the assumed health care cost
rate.
Note 12 - Provision for Income Taxes
Pre-tax income/(loss) and income taxes for the years ended December 31,
1997, 1996 and 1995 are as follows:
Year ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
The domestic and foreign components
of (In thousands) income/(loss)before
income taxes are:
Domestic $89 ($1,544) $971
United Kingdom 1,995 2,024 485
------ ------- ------
$2,084 $480 $1,456
====== ======= ======
The provision/(benefit) for income taxes is:
Current:
United States 101 ($646) $437
United Kingdom 658 664 88
State taxes 52 (25) 129
-- --- ----
811 (7) 654
Deferred:
United States (50) $232 $(117)
United Kingdom 7 41 53
State taxes (41) (112) (36)
------ ------- ------
(84) 161 (100)
------ ------- ------
$727 $154 $554
====== ======= ======
T
Deferred tax liabilities/(assets) result from the following differences between
financial reporting and tax accounting.
12/31/97 12/31/96
-------- --------
(In thousands)
Deferred tax liabilities:
-------------------------
Depreciation $1,054 $1,128
Inventory valuation 258 186
Other - 46
------- --------
Total deferred tax liabilities 1,312 1,360
------- -------
Deferred tax assets:
--------------------
Non pension postretirement benefits (485) (511)
Installation and warranty cost accruals (324) (220)
Vacation reserve (94) (154)
Bad debt reserve (51) (57)
Minimum pension liability (202) (184)
State tax loss carryforwards (197) (180)
Other (30) ---
-------- --------
Total deferred tax assets (1,383) (1,306)
-------- --------
Net deferred tax liability/(asset) $ (71) $ 54
======== ========
Page 33 of 45
Other current assets includes $296,000 and $274,000 of deferred tax
assets at December 31, 1997 and 1996, respectively. Other current assets also
includes prepaid income taxes of $665,000 at December 31, 1996. The state tax
loss carryforwards expire in the year 2011.
A reconciliation from statutory U.S. federal income taxes to the actual income
taxes is as follows:
Year ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Statutory provision 709 $163 $495
U.S.--U.K. rate differential (57) 17 (5)
State income taxes, net of
federal benefit 7 (90) 62
Permanent differences 98 30 39
Other (30) 34 (37)
----- ----- -----
Actual provision $727 $154 $554
===== ===== =====
Note 13 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands, except share data)
Net income applicable to
common stockholders $1,357 $326 $902
========= ========= =========
Weighted average number of common
shares outstanding - Basic earnings
per Share 5,950,240 5,969,708 6,026,942
Effect of dilutive stock and
purchase options 1,403 2,393 3,364
--------- --------- ----------
Weighted average number of
common shares outstanding -
Diluted earnings per share 5,951,643 5,972,101 6,030,307
========= ========= =========
Net income per share-basic $0.23 $0.05 $0.15
========= ========= =========
Net income per share-diluted $0.23 $0.05 $0.15
========= ========= =========
Page 34 of 45
Note 14 - Other income/(expense), net
For the year ended December 31, 1997, other income/expense includes a
gain of approximately $.7 million from the disposal of machinery and equipment
no longer used. There were no individually significant items of other income or
expense in 1996.
Note 15 - Foreign Operations, Export Sales and Major Customers
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.
Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K. operations for the years ended December 31, 1997, 1996, and 1995
are as follows: United United States Kingdom Consolidated (In thousands)
United United
States Kingdom Consolidated
-----------------------------------
(In thousands)
Year ended 12/31/97
Sales to unaffiliated Customers $60,594 $24,788 $85,382
Operating income $(310) $1,945 $1,635
Assets $29,867 $26,514 $56,381
Year ended 12/31/96:
Sales to unaffiliated Customers $50,811 $25,025 $75,836
Operating income ($1,501) $2,155 $654
Assets $31,011 $19,720 $50,731
Year ended 12/31/95:
Sales to unaffiliated customers $58,957 $21,110 $80,067
Operating income $1,169 $422 $1,591
Assets $36,390 $17,022 $53,412
The breakdown of U.S. sales to foreign countries grouped by geographic
area is as follows:
Year Year Year
ended ended ended
12/31/97 12/31/96 12/31/95
-------- -------- --------
(In thousands)
Korea $14,051 $2,053 $675
Asia 4,307 $3,452 $9,243
North America, other than the U.S. 1,452 3,975 9,232
Middle East 74 119 3,142
All other 1,414 797 699
------- ------- ------=
$21,298 $10,396 $22,991
======= ======= =======
Sales to Korea in 1997 includes $13 million to one customer.
Page 35 of 45
Note 16 - Quarterly Financial Data (unaudited):
Summarized quarterly financial data for fiscal 1997 and 1996:
(In thousands except per share data)
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- -------- ----------
Fiscal 1997
Net Sales $16,123 $26,183 $21,955 $21,121
========== ========== ======== ==========
Gross Margin $3,338 $5,344 $5,429 $3,600
========== ========== ======== ==========
Other Income (expense) net $300 $167 $20 ($38)
========== ========== ======== ==========
Net income/(loss) ($106) $870 $712 ($119)
========== ========== ======== ==========
Basic and diluted net income/(loss) per common share ($0.02) $0.15 $0.12 ($0.02)
========== ========== ======== ==========
Basic weighted average shares outstanding (000's) 5,942 5,942 5,949 5,946
========== ========== ======== ==========
Diluted weighted average shares outstanding (000's) 5,942 5,943 5,955 5,953
========== ========== ======== ==========
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- -------- ----------
Fiscal 1996
Net Sales $17,865 $13,196 $18,081 $26,694
========== ========== ======== ==========
Gross Margin $4,359 $2,818 $4,141 $6,805
========== ========== ======== ==========
Other Income/(expense) ($48) $64 ($93) ($97)
========== ========== ======== ==========
Net income/(loss) $181 ($1,170) ($25) $1,340
========== ========== ======== ==========
Basic and diluted net income/(loss) per common share $0.03 ($0.20) $0.00 $0.22
========== ========== ======== ==========
Basic weighted average shares outstanding (000's) 5,985 5,973 5,963 5,836
========== ========== ======== ==========
Diluted weighted average shares outstanding (000's) 5,987 5,973 5,963 5,837
========== ========== ======== ==========
Page 36 of 45
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 37 of 45
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,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
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,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
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,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998.
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,
1997 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 20, 1998. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Page 38 of 45
PART IV
Item 14 - Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) Documents Filed as Part of Form 10-K
Page
1. Financial Statements
Report of Independent Auditors.......................................17
Consolidated Balance Sheets as of
December 31, 1997 and, 1996.........................................18
Consolidated Statements of Income for
the years ended December 31, 1997, 1996, and 1995...................19
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997,
1996 and 1995.......................................................20
Consolidated Statements of Cash Flows for years
ended December 31, 1997, 1996 and 1995..............................21
Notes to Consolidated Financial Statements........................22-36
2. Financial Statement Schedule
Report of Independent Auditors on Financial
Statement Schedule..................................................44
Schedule II - Valuation and Qualifying Accounts......................45
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Page 39 of 45
3. Exhibits Page
Exhibits
- --------
Exhibit 2(1) Sale and purchase agreement of
the Francis Shaw Rubber Machinery
Business dated December 4,1997, between
Francis Shaw Rubber Machinery Limited,
PRC Fabrications Limited, EIS Group PLC,
Farrel Bridge Limited and Farrel
Limited. Filed as an exhibit to the
Registrant's Report on Form 8K dated
December 19, 1997 and incorporated
herein by reference. N/A
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 Amendment and Restatement of the Credit
Agreement between Farrel Corporation
Chase Manhattan Bank of Connecticut,
N.A. and Chase Manhattan Bank N.A.
London dated January 23, 1998.
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(d) Standard Corporate Financial Services
contract between First Funding
Corporation and the Registrant, dated
June 17, 1986, as amended by a Letter
Agreement dated November 1, 1991. Filed
as an exhibit to the Registrant's
Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by
reference. N/A
Exhibit 10(e) 1997 OMNIBUS Stock incentive Plan -
Filed as an exhibit to the Registrant's
definitive Proxy Statement re: Annual
Meeting on May 23, 1997 and incorporated
herein by reference. N/A
Exhibit 10(f) 1997 Employee's Stock Purchase Plan -
Filed on the Registrant's registration
Statement as Form S-8 (No. 333-30735) and
incorporated herein by reference. N/A
Exhibit 10(g) Environmental Agreement between USM
Corporation and the Registrant dated as
of May 12, 1986. Filed as an exhibit to
the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Page 40 of 45
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 11 Statement re: Computation of per share
earnings. See Note 13 to the Company's
Consolidated Financial Statments included
herewith.
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.
The following report on Form 8-K was filed by the registrant during the quarter
ended December 31, 1997.
Item 2 December 19, 1997 The registrant completes
acquisition of selected assets
of the Francis Shaw Rubber
Machinery Business
Page 41 of 45
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/Rolf K. Liebergesell
-----------------------------------
Rolf K. Liebergesell
Chief Executive Officer
President and Chairman of the Board
March 30, 1998
---------------
Date
Page 42 of 45
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,
Rolf K. Liebergesell President and chairman 3/30/98
of the Board ---------------
/s/ Catherine M. Boisvert
- ------------------------- Vice President and Controller, 3/30/98
Catherine M. Boisvert (Chief Accounting Officer) ---------------
/s/ Charles S. Jones 3/31/98
- ------------------------- Director ---------------
Charles S. Jones
- ------------------------- Director ---------------
James A. Purdy
- ------------------------- Director ---------------
Howard J. Aibel
/s/ Glenn Angiolillo 3/27/98
- ------------------------- Director ---------------
Glenn Angiolillo
/s/ Alberto Shaio 3/30/98
- ------------------------- Director ---------------
Alberto Shaio
Page 43 of 45
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, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated March 19, 1998
included elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule for the years ended December 31, 1997, 1996 and
1995 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.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Stamford, Connecticut
March 19, 1998
Page 44 of 45
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
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 12/31/95
- -------------------
Allowance for doubtful
receivables 499 (323) 0 (74) 102
Reserve for excess and obsolete
inventory items 2,131 598 (1) (1,686) 1,042
Accrued installation and warranty
costs 1,915 864 (10) (1,145) 1,624
Year ended 12/31/96
- -------------------
Allowance for doubtful
receivables 102 362 10 (10) 464
Reserve for excess and obsolete
inventory items 1,042 119 67 (137) 1,091
Accrued installation and warranty
costs 1,624 1,840 92 (2,196) 1,360
Year ended 12/31/97
- -------------------
Allowance for doubtful
receivables 464 (50) (8) (227) 179
Reserve for excess and obsolete
inventory items 1,091 208 (23) (525) 751
Accrued installation and warranty
costs 1,360 2,182 (25) (2,191) 1,326
(1) Represents foreign currency translation adjustments charged or credited
to stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued installation and warranty costs and
restructuring reserve to reflect expenditures incurred.
The allowances for doubtful receivables and reserves for excess and
obsolete inventory items have been deducted in the balance sheets from the
assets to which they apply. The accrued installation and warranty costs
are shown as liabilities in the balance sheet
Page 45 of 45