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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required] For the fiscal year ended December 31, 2001 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-19703
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FARREL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2689245
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
25 Main Street, Ansonia, Connecticut 06401
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (203) 736-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value NASD OTC Bulletin Board
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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 25, 2002 was $3,007,819.
The number of shares outstanding of the registrant's common stock as of March
25, 2002 was 5,228,461 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on June 12, 2002
are incorporated by reference into Part III.
Page 1 of 49
PART I
ITEM 1 - BUSINESS
GENERAL
Farrel Corporation (the "Company") designs, manufactures, sells and
services machinery and associated equipment for the rubber and plastics
industries worldwide. The Company's principal products are batch and continuous
mixers, single and twin-screw extruders, pelletizers, gear pumps and mills. In
conjunction with sales of capital equipment, the Company provides process
engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment and equipment upgrade services, spare parts sales and field
services. The Company also provides laboratory services and facilities for
product demonstrations and for the development and testing of rubber and
plastics equipment and processes.
The Company's rubber processing equipment is primarily sold to tire
manufacturers, custom compounders and manufacturers of rubber goods, such as
sheet products, molded products, automotive components, footwear, wire and cable
and hoses. In the plastics processing industry, the Company's equipment is
primarily sold to large plastic resins producers and compounders. The Company
markets its products through its strategically located domestic and
international sales and service organization.
COMPANY STRATEGY
The Company's business objectives are to increase market share in
relatively slow-growth, cyclical markets by broadening its product range and
continuing to strengthen its market position. The Company continues to pursue
manufacturing cost reductions by continually reevaluating its current operating
practices and by purchasing, rather than manufacturing, a significant number of
equipment components and maintaining overhead and manpower levels in line with
prevailing economic conditions. The Company has taken measures in the recent
past to achieve these objectives by transferring U.S. parts manufacturing from
Connecticut to its U.K. subsidiary and moving U.S. assembly operations from its
former Derby, Connecticut plant to its Ansonia, Connecticut facility.
In line with this strategy, in December 1997, the Company acquired the
assets of the Francis Shaw Rubber Machinery ("Shaw") business in England for the
production of INTERMIX(R) internal mixers with intermeshing rotors, extruders
and related equipment. The products serve principally the technical rubber goods
manufacturers and the tire industry. The internal mixers produced by Shaw are
essentially similar to the Company's BANBURY(R) internal mixers, differing only
in the configuration of the mixing rotors. The combined complimentary product
lines provide the Company with global access to all rubber products
manufacturers, thereby increasing markets served. The Shaw operations were
transferred to the Farrel Limited facility beginning in the fall of 1998 and
were totally integrated by the end of the second quarter of 1999.
INDUSTRY OVERVIEW
The Company's products are used primarily by manufacturers of rubber
and plastic materials and products. The rubber and plastics processing
industries are global in nature and intensely competitive. Both industries are
cyclical in nature, with capital equipment purchases characterized by long lead
times between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers, custom compounders and manufacturers of rubber goods such as
sheet products, molded products, automotive components, footwear and wire and
cable. The Company considers the non-tire sector its primary market for growth
opportunities. There are approximately 50 tire manufacturers in the world, six
of which account for a majority of total worldwide tire production. Demand in
the tire and rubber industry is influenced by, among other things, general
economic conditions and the growth or decline in sales of automobiles and trucks
as well as overall truck tonnage and mileage driven. The industry trend is to
shift production capacities into low cost and emerging regions, creating
potential opportunities in the future.
Page 2 of 49
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 the Company's machinery are primarily polyethylene, polypropylene,
polyvinyl chloride and polystyrene. A large portion of the market is controlled
by a few major producers who license their technologies to other producers
worldwide. These licensees are potential customers for the Company's products
and services. The plastics compounding market consists of those companies that
mix large volumes of plastics in a relatively small number of formulations,
companies which perform specialty mixing for end users, and end users that mix
largely for their internal use.
Many manufacturers in the industries and markets served by the
Company's products and services are impacted by local political and economic
events. The Company's equipment is supplied to manufacturers and represents
capital commitments for new plants, expansion or modernization. New capital and
marketing expenditures in the Company's markets depend, in large part, on an
increase in market demand, which may require the need for additional capacity.
Overall the Company is part of the capital goods industry. The capital
goods industry in which the Company operates is cyclical in nature and is
subject to significant changes in demand. Capital goods demand is influenced by
many factors, including, but not limited to, general economic conditions,
factory capacity utilization and availability of financing. The Company cannot
predict when cyclical changes will occur or the extent that demand for its
products will change as a result of cyclical changes. Since 1998, the Company's
sales have declined significantly. In 1998, the Company's net sales were $98.3
million, which compares to net sales of $56.2 million in 2001.
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 and mills. The Company
also provides process engineering, installation and commissioning services for
its equipment. The Company's customer service division repairs, refurbishes and
provides upgrade services and spare parts for the Company's installed base of
machines worldwide.
The following table illustrates the percentage breakdown of the
Company's sales between new machines/related services and aftermarket business
(spare parts, repairs and rebuild) in the last three fiscal years:
Year Year Year
ended ended ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
New Machines/Related Services............ 42.4% 45.1% 44.6%
Aftermarket.............................. 57.6% 54.9% 55.4%
------ ------ ------
Total.................................... 100.0% 100.0% 100.0%
====== ====== ======
The Company does not publish a standard price list. Prices for the
Company's new equipment are based upon a customer's specifications and/or
production requirements. Unit prices for the Company's new equipment products
range from approximately $50,000 to more than $4 million.
CUSTOMERS AND MARKETING
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastic materials. The Company's customers often
purchase significant equipment for new plants, plant expansion or plant
modernization. Purchases by any single customer typically vary significantly
from year to year according to each customer's capital equipment needs. As a
result, the composition of the Company's customers may vary from one year to the
next. The Company considers its operations to be one operating segment. The
sales, manufacturing, assembly and distribution are essentially the same.
Segment information for new equipment sales, aftermarket sales, geographic sales
and operating results for fiscal 2001, 2000, and 1999 are reported in Note 16 to
the Consolidated Financial Statements.
The Company's products are sold primarily by its direct sales and
support staff augmented by agents in certain foreign countries. The Company's
sales organization is headquartered in Ansonia, Connecticut and Rochdale,
England.
Page 3 of 49
The Company has additional sales and service offices strategically located in
the United States and a representative office in Singapore. In certain
geographic areas outside the United States, sales are facilitated by independent
representatives who assist employees of the Company.
PROCESS LABORATORY SERVICES
The Company maintains two process laboratories in Ansonia, Connecticut
and one laboratory in Rochdale, England. In addition, the Company has an
agreement with a research and development organization in Taiwan to use and
demonstrate the Company's technology. This contractual arrangement provides the
Company with laboratory facilities in Asia to complement the U.S. and U.K.
laboratories. The Company uses its laboratories to demonstrate the capabilities
of its processing equipment and to provide customers with production-sized
equipment in order to experiment with new processing techniques and
formulations. The Company considers its process laboratories to be vital
contributors to its continuing technology development and marketing efforts and
routinely modernizes its process laboratories and related equipment.
COMPETITION
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in both the
rubber and plastics processing markets. Numerous competitors of varying sizes
compete with the Company in one or more of its product lines. A number of the
Company's competitors are former licensees of the Company, divisions or
subsidiaries of larger companies with financial and other resources greater than
those of the Company or copycats that mimic the Company's technology and
designs. The Company has historically faced, and will continue to face,
considerable competitive pressures, particularly predatory price competition and
nationalistic preferences. The Company believes that the principal competitive
factors affecting its business are price, performance, technology, breadth of
product line, product availability, reputation and customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
BACKLOG
The Company's backlog of orders considered firm by management at
December 31, 2001, 2000 and 1999 was approximately $18.1 million, $27.7 million
and $28.9 million, respectively. Substantially all of the orders included in the
December 31, 2001 backlog have contractual ship dates in fiscal 2002. Firm
backlog at March 25, 2002 and March 26, 2001 was $23.4 million and $29 million,
respectively.
As of December 31, 2001, the Company's backlog was at its lowest
year-end level since the Company became public. As a result the Company is now
more dependent on obtaining orders, including those with shorter delivery times,
in order to cover fixed expenses, particularly in the U.K., where the Company
maintains its manufacturing operations.
Page 4 of 49
MANUFACTURING
The Company's manufacturing facility in Rochdale, England provides the
Company with fully integrated manufacturing capability including a complete
range of machining and fabrication equipment used to produce proprietary
components. Final assembly, product testing and quality control activities are
performed by Company personnel in both the U.S. and U.K. The Company also has
repair and rebuild operations in Ansonia, Connecticut; Deer Park, Texas; and
Rochdale, England and contracts for such services in Australia and Singapore.
The Company's consolidation of its Derby and Ansonia, Connecticut
assembly, repair and spare parts operations, into available space in Ansonia was
completed in 1998 and yielded significant reductions in operating costs. The
Derby, Connecticut facility was sold in January 1999.
The production equipment acquired in the 1997 Shaw acquisition, located
in Manchester, England, was transferred to Farrel Limited's facility in nearby
Rochdale, England. The facility integration was completed during the second
quarter of 1999 and has generated substantial cost reductions and production
efficiencies.
The Company believes the Ansonia, Connecticut and Rochdale, England
facilities provide the Company with the cost structure to maintain its
competitive position.
COMPONENTS AND RAW MATERIALS
The Company purchases most of the components used in producing its
machines from reliable domestic and international suppliers. The basic raw
materials used by the Company are steel plates, bars, castings, forgings and
hard-surfacing alloys. Principal components and raw materials are available from
a number of sources. The Company is not dependent on any supplier that cannot be
replaced in the normal course of business. The Company's U.K. subsidiary is a
major source of large-scale components of proprietary designs.
RESEARCH AND DEVELOPMENT AND ENGINEERING
The Company's research and development and engineering staffs are
located in Ansonia, Connecticut and Rochdale, England. Their major activities
are: application engineering for specific customer orders; standardization of
existing machinery as part of the Company's ongoing cost reduction measures; and
development of new products and product features. The Company's twin screw
rubber sheeter as well as the recent development of a new very large-scale
pelletizing system for the petrochemical industry are examples of the
collaborative success of the research and development and product engineering
staffs to produce a new product. Current development activities are in the batch
mixing process. The acquisition of the INTERMIX(R) intermeshing technology and
rotor design development provides opportunities to strengthen our business with
batch mixer customers. A summary of research and development and engineering
expenditures incurred during the last three fiscal years is as follows:
Year Year Year
ended ended ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
(Dollars in thousands)
Research and development expense
pertaining to new products or
significant improvements to existing
products $1,354 $1,580 $1,570
All other product development and
engineering expenditures related to
ongoing refinements, improvements of
existing products, and custom engineering 2,700 3,224 3,580
------ ------ ------
Total $4,054 $4,804 $5,150
====== ====== ======
Percent of net sales 7.2% 7.5% 6.9%
Page 5 of 49
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 193 patents that cover technology utilized in its products and
currently has approximately 14 patent applications pending. The Company's
patents have expiration dates ranging from 2002 through 2017. Although the
Company believes that its patents provide some competitive advantage, the
Company also depends upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain its competitive
advantage.
The Company considers the following trademarks to be material to its
business: FARREL(R); BANBURY(R); INTERMIX(R); ST(TM); MVX(TM); CP-SERIES II(TM);
FTX(TM); and TSS(TM).
ENVIRONMENTAL
The Company and The Black & Decker Corporation ("Black and Decker")
entered into a Settlement Agreement pursuant to which Black & Decker agreed to
assume full responsibility for the investigation and remediation of any pre-May
12, 1986 environmental contamination at the Company's Ansonia and former Derby,
Connecticut facilities as required by the Connecticut Department of
Environmental Protection ("DEP"). Black and Decker has conducted a preliminary
environmental assessment of the Ansonia and Derby facilities. Although this
assessment is still being evaluated by the DEP, on the basis of the preliminary
data available there is no reason to believe that any activities that might be
required as a result of the findings of the assessment will have a material
effect upon the capital expenditures, results of operations, financial position
or the competitive position of the Company.
EMPLOYEES
As of December 31, 2001, the Company had 321 employees compared to 376
employees at December 31, 2000. The workforce reduction is primarily a result of
the Company's ongoing restructuring activities. Approximately 31 employees in
the U.S. are covered by a collective bargaining agreement which expires on June
15, 2003. In the U.K., the Company is a party to non-binding national and local
collective bargaining agreements with several U.K. unions, which cover 65
employees.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company.
Location Principal Use Approx. Sq. Ft.
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Ansonia, Connecticut.... Office, research, laboratory, 520,000
repair, rebuild, assembly and
storage
Deer Park, Texas........ Repair and rebuild 22,000
Rochdale, England....... Office, research, laboratory, 210,000
manufacturing, repair and rebuild,
and storage
The Company believes that the facilities used in its operations are in
satisfactory condition and adequate for its present and anticipated future
operations. In addition to the facilities listed above, the Company leases space
in various domestic and international locations, primarily for use as sales
offices.
Page 6 of 49
ITEM 3 - LEGAL PROCEEDINGS
As of the date hereof, the Company is not aware of any contamination,
other than pre-May 12, 1986 contamination (as described in Part I, Item 1,
Environmental), at any of its facilities that would require material
environmental remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company or its predecessors. While the outcome of
lawsuits or other proceedings against the Company cannot be predicted with any
certainty, the Company does not expect that these matters will have a material
adverse effect on the Company's financial position or results of operations.
Page 7 of 49
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 8 of 49
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 on the OTC Bulletin Board. The
following chart sets forth the high and low prices for the Common Stock and
dividends declared for the last two fiscal years:
Fiscal 2001 High Low Dividend
- ----------- ---- --- --------
First Quarter $0.97 $0.75 -
Second Quarter $0.75 $0.54 -
Third Quarter $0.89 $0.58 -
Fourth Quarter $1.01 $0.55 -
Fiscal 2000 High Low Dividend
- ----------- ---- --- --------
First Quarter $2.22 $1.75 $0.04
Second Quarter $1.87 $1.38 $0.04
Third Quarter $1.62 $1.25 $0.04
Fourth Quarter $1.46 $0.69 -
(b) As of March 25, 2002 the approximate number of record holders of the
Company's common stock was 1,100.
(c) Dividends
No cash dividends were declared for the quarter ended December 31, 2000
and for any period in fiscal 2001. The Company pays quarterly cash dividends on
its Common Stock as its Board of Directors deems appropriate, after
consideration of the Company's operating results, financial condition, cash
requirements, general business conditions, compliance with covenants in the
credit facility (see Management's Discussion and Analysis of Liquidity and
Capital Resources) and such other factors as the Board of Directors deems
relevant.
(d) There were no sales or issuance's of the Company's equity shares that
were not registered under the Securities Act.
Page 9 of 49
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
Year Year Year Year Year
ended ended ended ended ended
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
-------- -------- -------- -------- --------
Statement of Operations Data: (In thousands, except per share data)
Net sales (1) ....................................... $ 56,249 $ 64,223 $ 74,455 $ 98,267 $ 85,550
======== ======== ======== ======== ========
Gross margin ........................................ $ 13,844 $ 15,158 $ 18,156 $ 22,772 $ 17,711
======== ======== ======== ======== ========
As a percent of net sales ........................ 24.6% 23.6% 24.4% 23.2% 20.7%
======== ======== ======== ======== ========
Operating income (loss) ............................. $ 1,114 ($ 837) $ 1,204 $ 4,521 $ 1,542
Other income (expense), net (2) .................. 73 (129) 1,671 (698) 542
-------- -------- -------- -------- --------
Income (loss) before income taxes ................... 1,187 (966) 2,875 3,823 2,084
Provision for income taxes ......................... 397 17 1,115 1,546 727
-------- -------- -------- -------- --------
Net income (loss) ................................... $ 790 ($ 983) $ 1,760 $ 2,277 $ 1,357
======== ======== ======== ======== ========
Net income (loss) per share - Basic and Diluted ..... $ 0.15 ($ 0.19) $ 0.32 $ 0.38 $ 0.23
======== ======== ======== ======== ========
Dividends per share of Common Stock ................. -- $ 0.12 $ 0.24 $ 0.08 $ 0.64
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Basic (000's) 5,229 5,249 5,448 5,942 5,950
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Diluted (000's) 5,231 5,249 5,454 5,966 5,951
======== ======== ======== ======== ========
Balance Sheet Data:
Current assets ................................... $ 26,845 $ 30,581 $ 34,445 $ 48,273 $ 37,104
Current liabilities .............................. $ 11,011 $ 16,277 $ 16,930 $ 28,893 $ 23,286
Working capital ratio ............................ 2.4 1.9 2.0 1.7 1.6
Total assets ..................................... $ 35,966 $ 43,932 $ 48,862 $ 63,265 $ 56,381
Long-term debt ................................... $ 1,019 $ 1,194 $ 2,584 $ 3,983 $ 5,283
Stockholders' equity (3) ......................... $ 19,705 $ 23,963 $ 25,864 $ 26,301 $ 25,782
Other Data:
Backlog .......................................... $ 18,101 $ 27,680 $ 28,929 $ 33,269 $ 46,554
(1) Information for years prior to 2000 were restated in 2000 to reflect the
adoption of Emerging Issues Task Force consensus Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs".
(2) 1999 Other Income includes $1.9 million gain from the sale of real estate.
(3) Amount as of December 31, 2001, reflects a charge to equity related to
pension plan accounting. See Note 11 to the Consolidated Financial
Statements.
Page 10 of 49
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in the Company's public documents,
included in this report and in particular in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" may be forward
looking and may be subject to a variety of risks and uncertainties. Various
factors could cause actual results to differ materially from these statements.
These factors include, but are not limited to, pricing pressures from
competitors and/or customers; continued economic and political uncertainty in
certain of the Company's markets; the Company's ability to maintain and increase
gross margin levels; the Company's ability to generate positive cash; changes in
business conditions, in general, and, in particular, in the businesses of the
Company's customers and competitors; the Company's access to adequate financing
at competitive rates and other factors that might be described from time to time
in the Company's filings with the Securities and Exchange Commission.
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales in 2001 and 2000 were $56.2 million and $64.2 million,
respectively, a decrease of $8.0 million. The decrease in net sales is due to
lower sales in North America of $17.0 million partially offset by an increase in
new machine sales in Europe. The timing of the Company's sales, particularly
sales of new machines, is highly dependent on when an order is received, the
amount of lead-time from receipt of order to delivery and specific customer
requirements. The Company operates in markets that are extremely competitive
with cyclical demand. Many of our customers and markets operate at less than
full capacity and certain markets remain particularly competitive and are
subject to local economic conditions.
The Company received $47.0 million in orders in 2001 compared to $62.7
million for 2000. The decrease is primarily due to lower new machine orders
received in Europe.
The Company's products are primarily supplied to manufacturers and
represent capital commitments for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which time economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's traditional customers
and markets are operating with excess capacity thereby reducing the number of
projects for plant expansion and modernization. The Company is experiencing
increased pricing pressures from our competitors in an overall smaller market.
In addition, since its introduction, the decline in the value of the Euro versus
the US dollar and British pound sterling has increased pricing pressures. The
Euro's weakness provides substantial advantages to our competitors in the
Euro-zone. These conditions are resulting in customer orders with lower margins
and lost business. Further, the cyclical nature of industry demand and,
therefore, the timing of order intake may effect the Company's quarterly results
in the current and future fiscal quarters. The Company's ability to maintain and
increase net sales depends upon a strengthening and stability in the Company's
traditional markets and our ability to control costs to effectively compete in
the current market. There can be no assurance that the level of orders
experienced in 2001 will continue, that market conditions will not worsen, or
that improvements in the Company's traditional markets will lead to increased
orders for the Company's products.
Gross margin in 2001 was $13.8 million compared to $15.2 million for
2000, a decrease of $1.3 million. The decrease in gross margin is a result of
lower sales. The gross margin as a percent of sales for 2001 was 24.6% compared
to 23.6% for 2000. The increase in gross margin as a percent of sales is
primarily due to a change in sales mix.
Operating expenses in 2001 were $12.7 million compared to $16.0 million
in 2000, a decrease of $3.3 million. The decrease is primarily due to $2.5
million in lower employee compensation and related expenses and $0.5 million in
lower travel expenses. The remaining decrease is in various different types of
expenses.
Interest expense in 2001 was $0.2 million compared to $0.3 million in
2000. Interest income was $0.2 million in 2001 and 2000.
Net other income was $66,000 in 2001 compared to net other expense of
$86,000 in 2000.
Page 11 of 49
The Company provides for income taxes in the jurisdictions in which it
pays income taxes at the statutory rates in effect in each jurisdiction,
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes. The provision for income taxes in 2001
represents primarily income tax expense related to pre-tax income generated by
the Company's U.K. operations. The provision for income taxes in 2000 is
comprised of $498,000 of income tax expense related to pre-tax income generated
by the Company's U.S. operations offset by a $481,000 income tax benefit related
to a pre-tax loss generated by the Company's U.K. operations.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales in 2000 and 1999 were $64.2 million and $74.4 million,
respectively, a decrease of $10.2 million. The decrease in net sales is
primarily due to lower sales in the European markets resulting from weak demand
and the detrimental effect of the strength of the US dollar and British Pound
Sterling versus the Euro. The weakness of the Euro provides substantial
advantages to our competitors located in the Euro-zone. The timing of the
Company's sales, particularly sales of new machines, is highly dependent on when
an order is received, the amount of lead-time from receipt of order to delivery
and specific customer requirements. The Company operates in markets that are
extremely competitive with cyclical demand. Many of our customers and markets
operate at less than full capacity and certain markets remain particularly
competitive and are subject to local economic conditions.
The Company received $62.7 million in orders in 2000 compared to $70.0
million for 1999. The decrease is primarily due to lower new machine orders
received in North America offset to some extent by increased new machine orders
received in the European markets.
The Company's products are primarily supplied to manufacturers and
represent capital commitments for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which time economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's traditional customers
and markets are operating with excess capacity thereby reducing the number of
projects for plant expansion and modernization. The Company is experiencing
increased pricing pressures from our competitors in an overall smaller market.
In addition, the decline in the value of the Euro versus the US dollar and
British pound sterling has increased pricing pressures. These conditions are
resulting in customer orders with lower margins and lost business. Further, the
cyclical nature of industry demand and, therefore, the timing of order intake
may effect the Company's quarterly results in the current and future fiscal
quarters. The Company's ability to maintain and increase net sales depends upon
a strengthening and stability in the Company's traditional markets and our
ability to control costs to effectively compete in the current market. There can
be no assurance that the level of orders experienced in 2000 will continue, that
market conditions will not worsen, or that improvements in the Company's
traditional markets will lead to increased orders for the Company's products.
Gross margin in 2000 was $15.2 million compared to $18.2 million for
1999, a decrease of $3.0 million. The margin percentage decreased to 23.6% from
24.4%. The decrease in comparative periods margin as a percent of sales is
primarily attributed to changes in product mix, competitive pricing pressures
and higher warranty costs. New machine shipments in 1999 included more Compact
Processing machines which tend to have higher margins than other new machines.
Operating expenses in 2000 were $16.0 million compared to $17.0 million
in 1999, a decrease of $1.0 million. Approximately half the decrease is due to
lower employee compensation and related benefit costs with the remaining decline
due to small decreases in numerous expenses.
During 2000, the Company incurred $326,000 of severance payments
related to headcount reductions, predominately in the Company's UK operations.
Of these payments, $77,000 was charged to cost of sales and $249,000 was charged
to selling, general and administrative expenses.
Interest expense in 2000 was $0.3 million compared to $0.4 million in
1999. The decrease is due to lower average borrowings. Interest income in 2000
was $0.2 million compared to $0.4 million in 1999. The decrease is due to lower
average cash balances available for investment.
Page 12 of 49
Net other expense in 2000 and 1999 was $0.1 million.
The Company provides for income taxes in the jurisdictions in which it
pays income taxes at the statutory rates in effect in each jurisdiction,
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes. The provision for income taxes is comprised
of $498,000 of income tax expense related to pretax income generated by the
Company's U.S. operations offset by a $481,000 income tax benefit related to a
pre-tax loss generated by the Company's UK operations.
MATERIAL CONTINGENCIES
As described in Part I, Item 1, Environmental, on the basis of the
preliminary data now available there is no reason to believe that any
remediation activities that the DEP might require as a result of the findings of
the assessment at the Ansonia and Derby, Connecticut facilities will have a
material effect upon the capital expenditures, results of operations, financial
position or the competitive position of the Company. This forward looking
statement could, however, be influenced by any findings of environmental
contamination attributable to post-May 12, 1986 activities, the results of any
further investigation that 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 2001 decreased approximately
$15.7 million, or approximately 25%, to approximately $47.0 million compared to
$62.7 million in fiscal 2000.
The Company's products are primarily supplied to manufacturers and
represent capital commitment for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's customers and markets
are operating with excess capacity thereby reducing the number of projects in
our traditional markets for plant expansion and modernization. The Company is
experiencing increased pricing pressures from our competitors in an overall
smaller market. In addition, the decline in the value of the Euro versus the US
dollar and British pound sterling has increased pricing pressures. These
conditions are resulting in customer orders with lower margins and lost orders.
Further, the cyclical nature of industry demand and, therefore, the timing of
order intake may effect the Company's quarterly results in the current and
future fiscal quarters. The Company's ability to maintain and increase net sales
depends upon a strengthening and stability in the Company's traditional markets
and our ability to control costs to effectively compete in the current market.
There can be no assurance that the level of orders experienced in 2001 will
continue, that market conditions will not worsen, or that improvements in the
Company's traditional markets will lead to increased orders for the Company's
products.
The level of backlog considered firm by management at December 31, 2001
and 2000 is $18.1 million and $27.7 million, respectively. The contractual ship
dates for substantially all of the December 31, 2001 backlog is in 2002. The
backlog at March 25, 2002 and March 26, 2001 was $23.4 million and $29 million,
respectively.
As of December 31, 2001, the Company's backlog was at its lowest
year-end level since the Company became public. As a result the Company is now
more dependent on obtaining orders, including those with shorter delivery times,
in order to cover fixed expenses, particularly in the U.K., where the Company
maintains its manufacturing operations.
Page 13 of 49
LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES
Working capital and the working capital ratio at December 31, 2001 were
$15.8 million and 2.4 to 1.0, respectively, compared to $14.3 million and 1.9 to
1.0 at December 31, 2000, respectively. During the year ended December 31, 2000
the Company paid dividends of $0.12 per share. No dividends were paid during the
year ended December 31, 2001.
During 1999, the Company extended its discretionary open market stock
repurchase program, increasing the amount to be used to repurchase common stock
by $2.5 million to $4,750,000. During 2001 and 2000 the Company has repurchased
1,600 and 20,000 shares of common stock, respectively, at varying times and in
varying amounts totaling approximately $1,000 and $16,000, respectively. The
repurchased shares are held in treasury (See Note 10 to the Consolidated
Financial Statements).
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, the timing of recording such sales may cause the
balances in accounts receivable and/or inventory to fluctuate dramatically from
time to time and may result in significant fluctuations in cash provided from
operating activities. Historically, the Company has not experienced significant
problems regarding the collection of accounts receivable. The Company has
historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
In June 2001, the Company entered into a new worldwide multi-currency
credit facility with a major US bank. This facility includes a $10 million
revolving credit facility for direct borrowings and letters of credit. The
facility contains a sub-limit that caps the amount of direct borrowings the
Company can make at $5 million. The revolving credit facility expires on June
15, 2003. The facility contains limits on direct borrowings and issuances of
letters of credit based upon stipulated percentages of accounts receivable and
inventory. The facility, as amended, also contains covenants specifying minimum
and/or maximum thresholds for operating results, selected financial ratios and
backlog. The backlog covenant requires that end of month backlog will not be
less than $20 million for more than two consecutive months. The Company did not
achieve the backlog covenant as of the end of January and February 2002;
however, the bank waived the non-compliance. The agreement contains certain
restrictions on investments, borrowings and the sale of assets. Dividend
declarations or payments are allowed under this credit facility as long as there
exists under the credit facility no Event of Default (as defined in the credit
facility) or no condition which upon giving notice or lapse of time or both,
would become an Event of Default. The Company's old credit facility was
terminated except in relation to approximately $0.1 million of letters of credit
which had previously been posted under that facility and continue to be
outstanding on December 31, 2001. The Company has approximately $1.6 million of
letters of credit posted under its new facility on December 31, 2001.
In June 2001, the Company also entered into a term loan for (pound)1.4
million (approximately $2 million) as part of this credit facility. The proceeds
of this loan were used to repay an existing term loan of the same amount. The
new term loan is repayable in monthly installments of (pound)38,888
(approximately $55,000) through June 2004. The term loan has an interest rate of
LIBOR plus 2.7%. The term loan balance outstanding on December 31, 2001, was
$1.7 million.
Management anticipates that its cash balances, operating cash flows and
the credit line will be adequate to fund its anticipated capital commitments and
working capital requirements for at least the next twelve months. The Company
made capital expenditures of approximately $0.6 and $1.1 million during fiscal
2001 and 2000.
In fiscal 2000, new legal minimum funding guidelines for pension plans
became effective in the U.K. which are significantly different than the prior
guidelines. Based upon the new guidelines the Company is required to make
significant cash contributions to the Company's U.K. pension plan. Prior to
2000, the Company was not required to make substantial contributions to the U.K.
pension plans. In 2001 and 2000, the Company contributed approximately $799,000
and $946,000 to the U.K. pension plan. The Company anticipates that it will
continue to be required to make substantial contributions in the same order of
magnitude to the U.K. pension plan in the coming years; however, the level of
future contributions is subject to several factors including investment
performance on existing assets.
Page 14 of 49
The Company manufactures and assembles its products in the U.K.,
assembles its products in the U.S. and sells its products in the U.S., U.K. and
other foreign markets. The Company's financial position and results are affected
by changes in foreign currency exchange rates in the foreign markets in which it
operates. When the value of the U.S. dollar or U.K. sterling strengthens against
other currencies, the value of the transaction in the foreign currency
decreases. The Company, from time to time, enters into foreign exchange forward
contracts to hedge foreign currency transactions. Foreign currency transactions
generally are for periods of no more than twelve months. In addition, the
Company maintains foreign currency bank accounts in other currencies in which it
regularly transacts business.
The Company's interest income and expense are sensitive to changes in
the market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
FINANCIAL POSITION
The Accumulated Other Comprehensive Loss section of stockholders'
equity reflects a charge of $4.8 million at December 31, 2001, related to the
Company's pension plans. Of this amount, $4.2 million relates to the Company's
U.K. pension plan. The U.K. plan experienced a significant decline in the value
of its assets during 2001. As a result of the poor investment performance,
mid-year the plan's trustees moved the asset management to a different
investment manager. The decline in the assets resulted in a requirement to
record a minimum pension liability of $2.6 million for the U.K. plan. This
requirement resulted in a net of tax charge to stockholders' equity of $4.2
million. This charge was required to write down the existing prepaid pension
asset and establish a net liability.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union entered
into a three-year transition phase during which a common currency, the "EURO"
was introduced in participating countries. The Company does not have operations
in the participating countries and the conversion to the EURO is not expected to
have a material impact on the Company's financial position, results of
operations or cash flows, except as it relates to the previously described
competitive price disadvantages due to the relative weakness of the Euro versus
the U.S. dollar and British Pound Sterling.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which the Company was required to
adopt on January 1, 2001. The statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The adoption of this statement did not have a
significant effect on the Company's results of operations or financial position.
In the fourth quarter of 2000, the Company was required to adopt the
Emerging Issues Task Force Consensus Issue 00-10 "Accounting for Shipping and
Handling Fees and Costs" ("EITF00-10"), and SEC Staff Accounting Bulletin 101
"Revenue Recognition" ("SAB-101"). As a result of EITF00-10, financial
statements prior to the fourth quarter of 2000, were restated to reflect as
revenue, amounts received from customers as reimbursement for freight costs paid
by the Company on their behalf. Such reimbursement had previously been reflected
as a reduction to the related expenses. The adoption of SAB-101 did not have a
material impact on the prior annual financial statements but it did result in
changes in the timing of when certain revenues were recognized within a fiscal
year.
Page 15 of 49
In June 2001, the Financial Accounting Standards Board issued
statements No. 142 (Goodwill and Other Intangible Assets) and No. 143
(Accounting for Asset Retirement Obligations). Statement No. 142 must be adopted
by the Company in January 2002 and statement No. 143 must be adopted by the
Company no later than January 2003. Statement No. 142 changes the accounting for
Goodwill and Other Intangible Assets, such that those assets whose life is
determined to be indefinite are not subject to amortization. These assets shall
be tested for impairment at least annually, and the value will need to be
written down if the fair value is less than the carrying value. Statement No.
143 requires that a liability must be recognized for an asset retirement
obligation related to long lived tangible assets. The liability shall be
recorded at fair value. The Company does not anticipate the adoption of these
statements will have a significant effect on its financial position or results
of operations.
In August 2001, the Financial Accounting Standards Board issued
statement No. 144 (Accounting for the Impairment or Disposals of Long-lived
Assets). Statement No. 144 must be adopted by the Company in January 2002. This
statement requires an impairment loss to be recognized if the carrying value of
a long-lived asset (asset group) is not recoverable and exceeds its fair value.
Long-lived assets (asset group) shall be tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. At the time of adoption, the Company does not anticipate the
adoption of this statement will have a significant effect on its financial
position or results of operations.
CRITICAL ACCOUNTING POLICIES
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. The Company
believes that of its significant accounting policies (see Note 1 to the
Consolidated Financial Statements), the following may involve a higher degree of
judgement and complexity.
REVENUE RECOGNITION
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with delivery. When customers,
under the terms of specific orders or contracts, request that the Company delay
shipment of the manufactured equipment, the Company recognizes revenue based
upon receiving contractual confirmation of acceptance of the equipment from the
customer and legal transfer of title and risk of loss to the customer. Revenue
on repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
WARRANTY
Equipment sold is generally covered by a warranty of one to three
years. The Company's estimate of costs to service its warranty obligations is
based on historical experience and expectations of future conditions. To the
extent the Company experiences increased warranty claim activity, or increased
costs in servicing those claims, its warranty accrual will increase, resulting
in decreased gross profit.
DEFERRED TAX ASSETS
The Company has a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, should the Company
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
INVENTORY RESERVES
The Company maintains reserves for estimated excess and obsolete
inventory to reflect a write down of the value of unsaleable inventory based
upon evaluations of slow moving items. If future demand is different from that
anticipated by management, these reserves may need to be adjusted.
Page 16 of 49
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
and interest rates. The Company manufactures many of its products and components
in the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenues are generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies in which it regularly transacts
business and through the use of foreign exchange forward contracts. The Company,
from time to time, enters into foreign exchange forward contracts to hedge
foreign currency transactions. These derivative instruments usually involve
little complexity and are generally for periods of less than twelve months. The
Company does not enter into derivative contracts for speculative trading
purposes. The amount of foreign exchange forward contracts are not considered
material to the Company's financial position or its operations.
The Company's cash equivalents and short-term investments and its
outstanding debt bear variable interest rates. The rates are adjusted to market
conditions. Changes in the market rate effects interest earned and paid by the
Company. The Company does not use derivative instruments to offset the exposure
to changes in interest rates. Changes in these interest rates are not expected
to have a material impact on the Company's results of operations.
Page 17 of 49
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ............................................19
Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and 2000 ..............20
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999 ........................................21
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999 ...................................22
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 .........................................23
Notes to Consolidated Financial Statements ...........................24 - 39
Page 18 of 49
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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
Stamford, Connecticut
February 1, 2002
Page 19 of 49
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
12/31/01 12/31/00
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ........................................... $ 5,579 $ 2,486
Accounts receivable, net of allowance for doubtful
accounts of $179 and $139, respectively ............................ 9,416 13,607
Inventory ........................................................... 10,554 12,411
Deferred income taxes ............................................... 423 793
Other current assets ................................................ 873 1,284
-------- --------
Total current assets .............................................. 26,845 30,581
Property, plant and equipment, net of accumulated
depreciation of $14,995 and $14,037, respectively ................... 8,101 9,538
Prepaid pension costs ................................................. -- 3,514
Deferred income taxes ................................................. 764 --
Other assets .......................................................... 256 299
-------- --------
Total assets .......................................................... $ 35,966 $ 43,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................... $ 4,393 $ 6,400
Accrued expenses and taxes .......................................... 1,482 1,660
Advances from customers ............................................. 3,452 5,948
Accrued warranty costs ............................................. 1,004 1,075
Short-term debt ..................................................... 680 1,194
-------- --------
Total current liabilities .......................................... 11,011 16,277
Long-term debt ........................................................ 1,019 1,194
Postretirement benefit obligation ..................................... 1,076 1,118
Minimum pension obligations ........................................... 3,155 --
Deferred income taxes ................................................. -- 1,380
Commitments and contingencies ......................................... -- --
-------- --------
Total liabilities .................................................. 16,261 19,969
-------- --------
Stockholders' equity
Preferred stock, par value $100, 1,000,000 shares
authorized, no shares issued ....................................... -- --
Common stock, par value $.01, 10,000,000 shares
authorized, 6,142,106 shares issued ................................ 61 61
Paid in capital ..................................................... 19,295 19,295
Treasury stock, 913,645 and 912,045 shares at December
31, 2001 and 2000, respectively, at cost ............................ (2,530) (2,529)
Retained earnings ................................................... 9,120 8,330
Accumulated other comprehensive loss ................................ (6,241) (1,194)
-------- --------
Total stockholders' equity ......................................... 19,705 23,963
-------- --------
Total liabilities and stockholders' equity ............................ $ 35,966 $ 43,932
======== ========
See Notes to Consolidated Financial Statements
Page 20 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
-------------------------------------
12/31/01 12/31/00 12/31/99
-------- -------- --------
Net sales ................................... $ 56,249 $ 64,223 $ 74,455
Cost of sales ............................... 42,405 49,065 56,299
-------- -------- --------
Gross margin ................................ 13,844 15,158 18,156
Operating expenses:
Selling .................................. 4,857 6,713 6,791
General and administrative ............... 6,519 7,702 8,591
Research and development ................. 1,354 1,580 1,570
-------- -------- --------
Total operating expenses ............... 12,730 15,995 16,952
-------- -------- --------
Operating income (loss) ..................... 1,114 (837) 1,204
Interest income ............................. 157 222 384
Interest expense ............................ (150) (265) (449)
Gain from sale of real estate ............... -- -- 1,879
Other (expense) income, net ................. 66 (86) (143)
-------- -------- --------
Income (loss) before income taxes ........... 1,187 (966) 2,875
Provision (benefit) for income taxes:
Current ................................ 3 499 1,143
Deferred ............................... 394 (482) (28)
-------- -------- --------
Total .................................. 397 17 1,115
-------- -------- --------
Net income (loss) ........................... $ 790 ($ 983) $ 1,760
======== ======== ========
Per share data:
Basic and diluted net income (loss) per share $ 0.15 ($ 0.19) $ 0.32
======== ======== ========
Average shares outstanding (000's):
Basic .................................... 5,229 5,249 5,448
======== ======== ========
Diluted .................................. 5,231 5,249 5,454
======== ======== ========
See Notes to Consolidated Financial Statements
Page 21 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Paid other Total
Common stock in Treasury Retained comprehensive Stockholders'
Shares Amount capital stock earnings expense equity
------------ --------- ----------- ------------ ----------- ------------------ ----------------
Balance, December 31, 1998 6,142,106 $61 $19,295 ($990) $9,576 ($1,641) $26,301
------------ --------- ----------- ------------ ----------- ------------------ ----------------
Comprehensive Income:
Net income --- --- --- --- 1,760 --- 1,760
----------------
Other Comprehensive income,
net of tax
Foreign currency translation --- --- --- --- --- (245) (245)
Minimum pension liability --- --- --- --- --- 964 964
----------------
Other Comprehensive income 719
----------------
Comprehensive income 2,479
Treasury stock transactions --- --- --- (1,523) (17) --- (1,540)
Cash dividend declared
at $.24 per common share --- --- --- --- (1,376) --- (1,376)
----------- --------- ----------- ------------ ----------- ------------------ ----------------
Balance, December 31, 1999 6,142,106 $61 $19,295 ($2,513) $9,943 ($922) $25,864
----------- --------- ----------- ------------ ----------- ------------------ ----------------
Net (loss) --- --- --- --- (983) --- (983)
----------------
Other Comprehensive income,
net of tax
Foreign currency translation --- --- --- --- --- (885) (885)
Minimum pension liability --- --- --- --- --- 613 613
----------------
Other Comprehensive (loss) (272)
----------------
Comprehensive (loss) (1,255)
Treasury stock transactions --- --- --- (16) --- --- (16)
Cash dividend declared
at $.12 per common share --- --- --- --- (630) --- (630)
----------- --------- ----------- ------------ ----------- ------------------ ----------------
Balance, December 31, 2000 6,142,106 $61 $19,295 ($2,529) $8,330 ($1,194) $23,963
----------- --------- ----------- ------------ ----------- ------------------ ----------------
Net income --- --- --- --- 790 --- 790
----------------
Other Comprehensive income,
net of tax
Foreign currency translation --- --- --- --- --- (226) (226)
Minimum pension liability --- --- --- --- --- (4,821) (4,821)
----------------
Other Comprehensive (loss) (5,047)
----------------
Comprehensive (loss) (4,257)
Treasury stock transactions --- --- --- (1) --- --- (1)
----------- --------- ----------- ------------ ----------- ------------------ ----------------
Balance, December 31, 2001 6,142,106 $61 $19,295 ($2,530) $9,120 ($6,241) $19,705
=========== ========= =========== ============ =========== ================== ================
See Notes to Consolidated Financial Statements
Page 22 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .................................... $ 790 ($ 983) $ 1,760
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
(Gain) loss on disposal of fixed assets ............. (412) 8 (1,930)
Depreciation and amortization ....................... 1,670 1,980 2,362
Decrease (increase) in accounts receivable .......... 4,039 972 5,456
Decrease (increase) in inventory .................... 1,719 (842) 2,143
Decrease (increase) in net pension costs ............ (499) (814) 290
(Decrease) increase in accounts payable ............. (1,928) (1,136) (5,986)
(Decrease) increase in advances from customers ..... (2,363) 2,068 (2,945)
(Decrease) increase in accrued expenses and taxes ... 142 (1,018) (2,342)
(Decrease) increase in warranty costs ............... (63) (506) (25)
(Decrease) increase in deferred income taxes ........ (26) 128 (297)
Other ............................................... 509 (527) 336
------- ------- -------
Total adjustments ................................... 2,788 313 (2,938)
------- ------- -------
Net cash (used in) provided by operating activities . 3,578 (670) (1,178)
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets ............. 747 276 2,279
Purchases of property, plant and equipment ......... (553) (1,083) (1,092)
Refund of Shaw asset purchase price ................ -- -- 4,405
------- ------- -------
Net cash (used in) provided by investing activities 194 (807) 5,592
------- ------- -------
Cash flows from financing activities:
Repayment of bank borrowings ....................... (2,264) (1,225) (1,293)
Bank borrowings .................................... 1,652 -- --
Purchase of treasury stock ......................... (1) (16) (1,523)
Dividends paid ..................................... -- (630) (1,376)
------- ------- -------
Net cash (used in) provided by financing activities (613) (1,871) (4,192)
Effect of foreign currency exchange rate changes on cash (66) (235) 61
------- ------- -------
Net increase (decrease) in cash and cash equivalents ... 3,093 (3,583) 283
Cash and cash equivalents--
Beginning of year .................................. 2,486 6,069 5,786
------- ------- -------
End of year ........................................ $ 5,579 $ 2,486 $ 6,069
======= ======= =======
Income taxes paid ...................................... $ 33 $ 601 $ 2,760
======= ======= =======
Interest paid .......................................... $ 148 $ 259 $ 445
======= ======= =======
See Notes to Consolidated Financial Statements
Page 23 of 49
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of Farrel Corporation and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
The Company designs, manufactures, sells and services machinery for the
rubber and plastics industry. The Company's principal products are batch and
continuous mixers, extruders, pelletizers and mills. The Company also provides
process engineering services, process design and related services for rubber and
plastics processing installations in conjunction with its sales of capital
equipment. The Company's new machinery and related services generally represents
approximately half of its revenues. The Company's aftermarket business consists
of contractual repair, refurbishment and equipment upgrade services, spare parts
sales and field services.
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastics. Foreign customers are primarily located
throughout Europe, Asia and the Middle East.
Due to the nature of the Company's products, which can individually
cost up to $4.0 million, the percent of sales of any product line can change
significantly from year to year. However, the more significant products are the
Company's batch and continuous mixers.
(a) Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, amounts due from banks,
and any other highly liquid investments with a maturity of three months or less
when purchased. The carrying amount approximates fair value because of the short
maturity of those instruments.
(b) Other Financial Instruments:
The carrying amount of the Company's trade receivables and payables
approximates fair value because of the short maturity of these instruments. The
carrying value of long term debt approximates fair value. The interest rate on
the long-term debt is variable and approximates current market rates.
(c) Inventory:
Inventory is valued at the lower of cost or market. Inventory is
accounted for on the last-in, first-out (LIFO) basis in the U.S. and first-in,
first-out (FIFO) basis in the U.K.
(d) Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Improvements are
capitalized and expenditures for normal maintenance and repairs are charged to
expense. Depreciation is computed on a straight line basis based on the
estimated useful lives of the related assets which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets.
Page 24 of 49
(e) Patents and Acquired Technology:
Other assets includes acquired patents and technical know-how and a
technology license agreement, which represents the cost of licensed and
purchased technology, know how, and trade secrets including technology that is
patented or for which a patent has been applied. Such costs are amortized over
periods from 5 to 7 years.
(f) Revenue Recognition:
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with delivery. When customers,
under the terms of specific orders or contracts, request that the Company delay
shipment of the manufactured equipment, the Company recognizes revenue based
upon receiving contractual confirmation of acceptance of the equipment from the
customer and legal transfer of title and risk of loss to the customer . Revenue
on repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
The Company typically requires advances from customers upon entering a
contract and at times will require progress payments during the manufacturing
process. Generally, letters of credit are required on contracts with export
customers to minimize credit risk.
During the fourth quarter of 2000, the Company was required to adopt
SEC Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB-101"). SAB-101
provides guidelines on when revenue can be recognized. The adoption of SAB-101
did not have a material impact on the Company's annual financial statements but
it did result in changes in the timing of when certain revenues were recognized
within a fiscal year.
(g) Warranty Obligations:
Estimated costs to be incurred under warranty obligations relating to
products which have been sold are provided for at the time of sale.
(h) Income Taxes:
Deferred income taxes are provided on temporary differences between the
financial statement and tax basis of the Company's assets and liabilities in
accordance with the liability method of accounting for income taxes. Provision
has not been made for U.S. income taxes or additional foreign taxes on
approximately $7.5 million of undistributed earnings of foreign subsidiaries
because it is expected that those earnings will be reinvested indefinitely.
(i) Earnings Per Share:
Basic earnings per share is determined by dividing net income (loss) by
the weighted average shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if options to issue
common stock (see Note 10) were exercised and converted to common stock. (See
Note 14 to the financial statements.)
(j) Foreign Currency Translation:
Assets and liabilities denominated in foreign currencies are translated
into United States dollars at current exchange rates. Income and expense
accounts are translated at average rates of exchange prevailing during the year.
Adjustments resulting from these translations are included in the accumulated
other comprehensive expense in stockholders' equity.
Transaction gains and losses are included in earnings. The Company
experienced a net foreign currency transaction gain of $142,000 and $63,000 in
2001 and 1999, respectively, and a net foreign currency transaction loss of
$64,000 in fiscal 2000. These amounts are included in cost of goods sold in the
accompanying financial statements.
Page 25 of 49
(k) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
(l) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company adopted the new Statement effective January 1, 2001. The Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. The adoption of this Statement did not have a significant effect on the
Company's results of operations or financial position.
In June 2001, the Financial Accounting Standards Board issued
statements No. 142 (Goodwill and Other Intangible Assets) and No. 143
(Accounting for Asset Retirement Obligations). Statement No. 142 must be adopted
by the Company in January 2002 and statement No. 143 must be adopted by the
Company no later than January 2003. Statement No. 142 changes the accounting for
Goodwill and other intangible assets, such that those assets whose life is
determined to be indefinite are not subject to amortization. These assets shall
be tested for impairment at least annually, and the value will need to be
written down if the fair value is less than the carrying value. Statement No.
143 requires that a liability must be recognized for an asset retirement
obligation related to long lived tangible assets. The liability shall be
recorded at fair value. The Company does not anticipate the adoption of these
statements will have a significant effect on its financial position or results
of operations.
In August 2001, the Financial Accounting Standards Board issued
statement No. 144 (Accounting for the Impairment or Disposals of Long-lived
Assets). Statement No. 144 must be adopted by the Company in January 2002. This
statement requires an impairment loss to be recognized if the carrying value of
a long-lived asset (asset group) is not recoverable and exceeds its fair value.
Long-lived assets (asset group) shall be tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. At the time of adoption, the Company does not anticipate the
adoption of this statement will have a significant effect on its financial
position or results of operations.
(m) Advertising:
Advertising costs are expensed in the period the advertising takes
place. Advertising expense for the years ended December 31, 2001, 2000 and 1999
was $67,000, $238,000 and $248,000, respectively.
(n) Reclassifications:
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation.
NOTE 2 - ASSET PURCHASE
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of
the Company, acquired certain assets and the operations of the Francis Shaw
Rubber Machinery ("Shaw") operations from EIS Group PLC of the United Kingdom
("Seller"). The estimated purchase price, including costs of the acquisition,
was approximately $13.9 million. The purchase and sale agreement ("Agreement")
between the Company and the Seller required subsequent adjustment to the
purchase price if (1) the inventory value of Shaw at the transfer date was less
than approximately $5 million and (2) the Shaw operations did not produce a
minimum profit, as defined in the Agreement, of approximately $1.7 million for
the year ended December 31, 1998 (the "Profit Guaranty").
Page 26 of 49
In June 1998, the Company and the Seller reached agreement on the
inventory value transferred resulting in a payment to the Company by the Seller
of approximately $2.7 million , which amount was used to reduce the purchase
price. The operations of Shaw produced a loss (as computed under the terms of
the Agreement) of approximately $3.6 million for the year ended December 31,
1998. Accordingly, the Company recorded a receivable from the Seller at December
31, 1998 of approximately $5.3 million under the terms of the Profit Guaranty
provisions of the Agreement and reduced the purchase price. In May 1999, the
Company reached an agreement with the seller and received a cash payment of $4.4
million under the Profit Guaranty provisions of the Agreement. The difference
between the amount recorded at December 31, 1998 for the Profit Guaranty
receivable and the amount received from the Seller in May 1999 resulted in an
adjustment of the purchase price allocation.
NOTE 3 - OTHER ASSETS
12/31/01 12/31/00
-------- --------
(In thousands)
Acquired patents and technical know how,
net of accumulated amortization of $582
and $448, respectively........................... $146 $299
Other.............................................. 110 -
---- ----
Total............................................ $256 $299
==== ====
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. Pursuant to an amendment
to the agreement, First Funding reduced the annual retainer to $400,000 for the
period March 1, 2002 to March 1, 2003. The Company also paid for advisory
services provided by other First Funding employees on an hourly basis and
out-of-pocket expenses. Since July 1, 2001, First Funding agreed to provide
these services as part of its annual retainer fee until further notice. The
Company also pays transaction fees in the event of certain successful
transactions. The Company recorded amounts, including the annual retainer, due
to First Funding of $522,000, $526,000 and $719,000, in fiscal 2001, 2000 and
1999, respectively. In addition, the Company also reimbursed First Funding
$104,000, $207,000, and $160,000 for out-of-pocket costs during the same three
periods, respectively.
NOTE 5 - INVENTORY
Inventory is comprised of the following:
12/31/01 12/31/00
-------- --------
(In thousands)
Stock and raw materials................ $ 6,444 $ 7,997
Work-in-process........................ 4,110 4,414
------- -------
Total.................................. $10,554 $12,411
======= =======
Of the above inventories at December 31, 2001 and 2000, $5.5 million
and $7.0 million, respectively are valued using the LIFO method. Current
replacement costs were greater than the LIFO carrying amounts by approximately
$0.1 million and $0.2 million at December 31, 2001 and 2000, respectively.
Page 27 of 49
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
12/31/01 12/31/00
-------- --------
(In thousands)
Land and buildings..................... $3,882 $3,894
Machinery, equipment and other......... 19,214 19,155
Construction in progress............... - 526
-------- --------
23,096 23,575
Accumulated depreciation............. (14,995) (14,037)
-------- --------
Property, plant and equipment, net... $ 8,101 $ 9,538
======== ========
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years.
NOTE 7 - ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes includes accrued wages and benefits of
approximately $0.6 million and $0.8 million at December 31, 2001 and 2000,
respectively. Also included are income taxes payable of $0.4 million and $0.3
million, at December 31, 2001 and 2000.
NOTE 8 - BANK CREDIT ARRANGEMENTS
The Company has a worldwide multi-currency credit facility with a major
U.S. bank, which includes a $10 million revolving credit facility for direct
borrowings and letters of credit. The revolving credit facility contains a
sub-limit that caps the amount of direct borrowings the Company can make at $5
million. The facility contains limits on direct borrowings and issuances of
letters of credit based upon stipulated percentages of accounts receivable and
inventory. The revolving credit facility expires on June 15, 2003. Interest
varies based upon prevailing market interest rates. This credit facility also
includes a term loan for British pound sterling 1.4 million (approximately $2
million), which the Company borrowed in June 2001. The term loan is repayable in
monthly installments of British pound sterling 38,888 (approximately $55,000)
through June 2004. The term loan has an interest rate of LIBOR plus 2.7%. The
proceeds of this term loan were used to repay an existing term loan.
The credit facility, as amended, contains covenants specifying minimum
and/or maximum thresholds for operating results, selected financial ratios and
backlog. The backlog covenant requires that end of month backlog will not be
less than $20 million for more than two consecutive months. The Company did not
achieve the backlog covenant as of the end of January and February 2002;
however, the bank waived the non-compliance. The agreement contains certain
restrictions on investments, borrowings and sale of assets. Dividend
declarations or payments are allowed under this credit facility as long as there
exists under the credit facility no Event of Default (as defined in the credit
facility) or no condition which upon given notice or lapse of time or both,
would become an Event of Default.
At December 31, 2001 and 2000, there was $1.7 million and $2.4 million
outstanding under the term loan. Approximately, $680,000 and $1,194,000 was
classified as a current liability at December 31, 2001, and 2000, respectively.
At December 31, 2001 and 2000, $1,019,000 and $1,194,000 was classified as a
long-term liability, respectively.
Page 28 of 49
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)
------------ --------------
2002 $224
2003 157
2004 96
2005 38
2006 21
Rental expense for the years ended December 31, 2001, 2000 and 1999 was
$370,000, $494,000 and $464,000, 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 or its predecessors. While the outcome of
lawsuits or other proceedings against the Company cannot be predicted with
certainty, the Company does not expect that these matters will have a material
adverse effect on the Company's financial position or results of operations.
NOTE 10 - STOCK PLANS
The Company sponsors a Stock Option Plan and an Employees' Stock
Purchase Plan, both established in 1997.
The 1997 Omnibus Stock Incentive Plan authorizes the granting of
incentive stock options and non-qualified stock options to purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the discretion of the Compensation Committee subject to the following
limitations. The exercise price of an Incentive Stock Option may not be less
than the fair market value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant. At December 31, 2001, 350,000
shares are available for future issuance.
Prior to 1997 the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 2001, options to purchase 309,000 shares remain outstanding under that plan.
The Company accounts for stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
not the fair value method as provided by Financial Accounting Standard Number
123, "Accounting and Disclosure of Stock-Based Compensation." The Company's
Stock Option Plan requires options to be granted at the market price of the
Company's common stock on the date the options are granted, and as a result,
under APB 25 no compensation expense is recognized.
Page 29 of 49
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
2001 2000 1999
------------------- --------------------- ----------------------
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 499 $5.42 514 $5.32 515 $5.45
Granted 90 0.70 10 2.13 85 2.00
Exercised - - - - - -
Forfeited 130 4.43 25 2.00 86 3.34
------------------- ------------------- -----------------------
Outstanding, end of year 459 $4.78 499 $5.42 514 $5.32
------------------- ------------------- -----------------------
Exercisable, end of year 400 $5.39 472 $5.62 435 $5.83
Weighted-average fair value of options
granted during the year $0.53 $1.16 $1.18
The following table summarizes information about stock options
outstanding at December 31, 2001:
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
- --------------------------------------------------------------------------- --------------------------------
$0.60 - $0.81 90,000 10 years $0.69 29,999 $0.69
2.00 - 2.00 60,000 8 2.00 60,000 2.00
3.75 - 4.00 76,000 4 3.92 76,000 3.92
5.25 - 5.44 52,000 3 5.29 52,000 5.29
6.00 - 6.75 95,000 1.5 6.32 95,000 6.32
9.50 - 10.00 86,000 0.3 9.73 86,000 9.73
- --------------------------------------------------------------------------- --------------------------------
$0.60 - $10.00 459,000 3.52 years $4.78 398,999 $5.39
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of FAS 123. The fair value
for these options granted under the Stock Option Plan was estimated at the date
of grant using the Black-Scholes option pricing model, one of the allowable
valuation models under FAS 123, with the following assumptions for 2001, 2000
and 1999:
2001 2000 1999
---- ---- ----
Risk free interest rate 5.00% 6.07% 6.52%
Dividend yields 0.0% 0.0% 2.0%
Expected volatility factor of the expected
market price of the Company's common stock .621 .379 .639
Weighted average expected life of each option 10 yrs. 8 yrs. 8 yrs.
Page 30 of 49
The weighted average fair value of options granted during 2001, 2000
and 1999 was $0.53, $1.16, and $1.18, respectively. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restriction and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The Company's
employee stock options have characteristics different than those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate, therefore, in management's judgment, applying the
provisions of FAS 123 does not necessarily provide a reliable single measure of
the fair value of its stock options. The current pro forma net income will not
necessarily be representative of pro forma net income in future years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information is as follows:
Year ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
(In thousands, except per share data)
Pro forma net income (loss) $ 772 ($1,001) $1,731
Pro forma earnings (loss) per share - basic and diluted $0.15 ($ 0.19) $ 0.32
Under the 1997 Employees' Stock Purchase Plan, the Board of Directors'
may offer each eligible employee of the Company the right to purchase, in each
year through 2001, shares of common stock equivalent in value to not more than
5% of the employee's annual compensation, up to a maximum of $25,000 per year.
At the time of the offering by the Board of Directors the employees must
designate the amount to be withheld during the next 24 month purchase period.
The purchase price is the lower of 85% of the fair market value of the common
stock on the date of offering or 85% of the fair market value on the date the
applicable purchase period ends. Not more than an aggregate of 500,000 shares of
common stock may be purchased under the stock purchase plan. Any employee who,
after the purchase, would hold 5% or more of the common stock is ineligible. No
options to purchase shares were offered during 2001, 2000 and 1999.
During 1999, approximately 11,700 shares were distributed to employees
under this plan. The 1999 distribution includes 4,875 shares from the Company's
treasury shares, for which retained earnings was adjusted. At December 31, 2001,
there were no shares subscribed to under these plans.
The Company may purchase up to $4,750,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 2001, 2000 and
1999 the Company purchased 1,600, 20,000 and 694,300 shares of common stock,
respectively, under this plan for approximately $1,000, $16,000 and $1.5
million, respectively which are included in treasury stock.
Page 31 of 49
NOTE 11 - BENEFIT PLANS
The accounting for pensions and retiree health benefits, which will be
paid out over an extended period of time in the future, requires the use of
significant estimates concerning uncertainties about employee turnover, future
pay scales, interest rates, rates of return on investments and future medical
costs. The estimates of these future employee costs are allocated in a
systematic manner to the years when service is rendered to the Company by the
employee. The annual cost is comprised of the service cost component related to
current employee service, an interest cost related to the increase in the
benefit obligations due to the passage of time (the benefit obligations are
stated at a present value which increases each year as the discount period
decreases), less the earnings achieved on assets invested in the employee
benefit plan. Differences between the estimates and actual experience are
deferred and amortized to expense over a period of time.
PENSION PLANS
The Company has retirement plans covering portions of domestic and
foreign employees. The foreign plan consists of one defined benefit plan for the
Company's U.K. employees. The Company funds the domestic plan in accordance with
the Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plan
in accordance with the U.K. Pensions Act 1995 and related regulations in the
United Kingdom. Pension expense is actuarially determined in accordance with
generally accepted accounting principles and differs from amounts funded
annually.
The Company has a domestic defined benefit pension plan for hourly
employees which provides benefits based on employees' years of service. Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has a foreign defined benefit pension plan covering substantially
all employees which provide stipulated amounts at retirement based on years of
service and earnings. Plan assets are invested in securities, real estate and
cash. The following table summarizes the components of domestic and foreign
pension expense:
Year ended
----------
12/31/01 12/31/00 12/31/99
-------- -------- --------
Domestic pension expense: (In thousands)
Service cost-benefits earned during the period $ 58 $ 73 $ 75
Interest cost on projected benefit obligation . 163 152 146
Expected return on plan assets ................ (184) (177) (174)
Recognized net actuarial loss ................. 27 44 52
Amortization of transition, asset ............. 0 0 2
Amortization of prior service cost ............ 17 10 11
------- ------- -------
Net domestic pension expense ............. $ 81 $ 102 $ 112
======= ======= =======
Foreign pension expense:
Service cost-benefits earned during the period $ 561 $ 675 $ 761
Interest cost on projected benefit obligation . 1,284 1,324 1,265
Estimated return on plan assets ............... (1,617) (1,774) (1,568)
Recognized net actuarial loss ................. -- 5 32
Amortization of transition asset .............. -- -- (39)
------- ------- -------
Net foreign pension expense .............. $ 228 $ 230 $ 451
======= ======= =======
The Company's funding policy is guided by government regulations and
the Company's desire to accumulate sufficient assets in the benefit plans to
meet obligations for retirement benefits. At any point in time there may be
differences between the estimates used in establishing pension cost for
accounting purposes, the criteria for funding amounts and actual experience,
thus there will always be an amount by which the Company is over or
under-funded.
The following table sets forth the funded status under U.S. accounting
standards of the domestic and foreign defined benefit plans and amounts
recognized in the balance sheets:
Page 32 of 49
Domestic Foreign
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----
Change in Projected Benefit Obligation
Balance at the beginning of the year ........... $ 2,308 $ 2,407 $ 22,675 $ 23,666
Service cost ................................... 58 73 561 675
Interest cost .................................. 163 152 1,283 1,323
Plan participant contributions ................. -- -- 180 196
Actuarial (gain) losses ........................ 328 (270) 677 (316)
Foreign currency exchange rates ................ -- -- (575) (1,852)
Benefits paid .................................. (115) (134) (965) (1,017)
Other .......................................... -- 80 (80) --
-------- -------- -------- --------
Balance at the end of the period ............... $ 2,742 $ 2,308 $ 23,756 $ 22,675
======== ======== ======== ========
Change in Fair Value Plan Assets
Balance at the beginning of the year ........... $ 2,371 $ 2,279 $ 24,198 $ 26,788
Actual return on assets ........................ (26) 26 (2,398) (649)
Contributions - employer ....................... -- 200 799 946
Contributions - employee ....................... -- -- 180 196
Foreign currency exchange rates ................ -- -- (700) (2,066)
Benefits paid .................................. (115) (134) (966) (1,017)
-------- -------- -------- --------
Balance at the end of the period ............... $ 2,230 $ 2,371 $ 21,113 $ 24,198
======== ======== ======== ========
Funded status of the plan
(Under) over funded ............................ ($ 512) $ 63 ($ 2,643) $ 1,523
Unrecognized net actuarial (gain) loss ........ 1,011 500 5,959 1,293
Unamortized prior service cost ................. 110 135 -- --
-------- -------- -------- --------
Prepaid Pension Expense ........................ $ 609 $ 698 $ 3,316 $ 2,816
Charge for minimum liability requirement ....... (1,121) -- (5,959) --
-------- -------- -------- --------
Net pension asset (liability) .................. ($ 512) $ 698 ($ 2,643) $ 2,816
======== ======== ======== ========
Intangible pension asset ....................... $ 110 -- -- --
======== ======== ======== ========
Discount rate .................................. 6.00% 7.25% 5.75% 6.00%
Rate of increase in future compensation levels . N/A N/A 2.50% 3.00%
Expected long-term rate of return on plan assets 8.00% 8.00% 6.50% 7.00%
The foreign plan experienced a significant decline in the value if its
assets during 2001. As a result of the poor investment performance,
mid-year the plan's trustees moved the asset management to a different
investement manager. The decline in the assets resulted in a requirement to
record a minimum pension liability of $2.6 million for the foreign plan.
This requirement resulted in a net of tax charge to stockholders' equity of
$4.2 million in 2001. This charge was required to write down the existing
prepaid pension asset and establish a net liability. This charge is
recorded as part of comprehensive income (loss) in the stockholders' equity
section of the balance sheet. At December 31, 2001, for the foreign pension
plan, the accumulated benefit obligation was $23.7 million.
Page 33 of 49
The funded status under regulatory guidelines in the U.K. used to
determine legally required minimum funding amounts for the Company's
foreign plan can vary significantly from the funded status for U.S.
accounting purposes. The amount of Company contributions to the pension
plan is based upon a minimum funding computation under U.K. guidelines.
This minimum funding computation must be performed at least every three
years. Under the last computation performed, Company is required to make
annual contributions to the pension plan for past service of approximately
$265,000 a year. Based upon the nature of the minimum funding computation,
this amount is subject to change the next time a computation is performed.
The next computation must be performed using information as of the end of
March 2002.
The Company is also required to make contributions to the plan for
current benefits earned. This amount was approximately $534,000 and
$379,000 in 2001 and 2000. The Company anticipates that it will continue to
be required to make substanial contributions in the same order of
maginitude to the U.K. pension plan in the coming years; however, the level
of future contributions is subject to several factors including investment
performance on existing assets. The Company also made a special
contribution in 2000 of approximately $302,000. U.K. government regulations
require that by the year 2012, the plan be fully funded under the statutory
minimum funding computation.
The Company changed the domestic discount rate in 2001 and 2000 in
response to year-end interest rates. The Company had a minimum pension
liability of $512,000 for its U.S. pension plan at December 31, 2001, and a
minimum pension liability of $2,643,000 for its U.K. pension plan at
December 31, 2001. No minimum pension liability was required at December
31, 2000. The adjustments to the minimum liability were recorded as
comprehensive income (loss) included in stockholders' equity, net of
applicable income taxes. For pension related matters, comprehensive loss
was $4,821,000 in fiscal 2001 and comprehensive income was $613,000 in
fiscal 2000 (see Note 12).
The Company has a domestic 401(k) retirement plan for salaried
employees which includes matching and discretionary non-matching
contributions by the Company. Approximately $101,000, $107,000, and
$112,000 of Company contributions were expensed in fiscal 2001, 2000 and
1999, respectively.
POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company generally provides health care benefits to eligible
domestic union retired employees who retired prior to 1994 and their
dependents through age 65. The Company is self-insured for claims prior to
age 65 and pays these as incurred. Retired employees and their dependents
were entitled to select Supplemental Medicare Coverage A and B only at age
65. The Company pays 100% of the monthly Medicare premiums for most of
these individuals and 75% for the remaining individuals. Eligibility for
these retiree health care benefits was attained upon reaching age 60 and
completing 10 years of service.
The following table summarizes the Company's expense for
post-employment benefits other than pensions.
Year ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
(In thousands)
Service cost- benefits earned during the period -- -- --
Interest cost on accumulated postretirement
benefit obligation .......................... $ 46 $ 54 $ 49
Amortization of net loss (gain) ............... (30) (15) --
---- ---- ----
Net periodic postretirement benefit costs ..... $ 16 $ 39 $ 49
==== ==== ====
Page 34 of 49
The Company's non-pension post-retirement benefit plans are not funded.
The status of the plans are as follows:
12/31/01 12/31/00
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
Beginning of the year ......................... $ 786 $ 918
Interest cost ................................. 46 54
Recognized actuarial (gain) loss .............. 68 (123)
Benefits Paid ................................. (58) (63)
------- -------
End of the year ............................... 842 786
Unrecognized actuarial (gain) loss ............ 234 332
------- -------
Accrued postretirement benefit obligation ....... $ 1,076 $ 1,118
======= =======
The assumed discount rate used in determining the accumulated
post-retirement benefit obligation was 6.00% and 7.25% at December 31, 2001 and
2000, respectively. The change in assumptions did not have a material impact on
the obligation or net periodic post-retirement benefit cost. The assumed health
care cost trend rate used in measuring the accumulated post-retirement benefit
obligation was 7.5% at December 31, 2001. The trend rate used for 2002 is 10%
and declines 1.0% per year to 5.0% by the year 2007 and remains at that level
thereafter. The assumed health care cost trend rate has a significant effect on
the amounts reported. A one-percentage-point change in the assumed health care
cost trend rate would have the following effects:
1-Percentage-Point
Increase Decrease
----------------------
(In thousands)
Increase (decrease) in the interest cost
components in 2001 $ 3 $ (3)
Increase (decrease) in postretirement benefit
obligation as of 2001 $785 $(690)
NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
Foreign
Currency Minimum
Translation Pension
Adjustments Liability Total
------------ --------- -----
(In thousands)
Balance at December 31, 1998 ...................... ($ 64) ($1,577) ($1,641)
Cumulative translation adjustment ................. (245) -- (245)
Minimum pension liability adjustment .............. -- 1,399 1,399
Deferred taxes relating to minimum
pension liability ............................... -- (435) (435)
------ ------ ------
Balance at December 31, 1999 ...................... (309) (613) (922)
Cumulative translation adjustment ................. (885) -- (885)
Minimum pension liability adjustment .............. -- 1,005 1,005
Deferred taxes relating to minimum
pension liability ............................... -- (392) (392)
------ ------ ------
Balance at December 31, 2000 ...................... (1,194) 0 (1,194)
Cumulative translation adjustment ................. (226) -- (226)
Minimum pension liability adjustment .............. -- (6,970) (6,970)
Deferred taxes relating to minimum
pension liability ............................... -- 2,149 2,149
------ ------ ------
Balance at December 31, 2001 ($1,420) ($4,821) ($6,241)
====== ====== ======
Page 35 of 49
NOTE 13 - PROVISION FOR INCOME TAXES
Pre-tax income (loss) and provision (benefit) for income taxes for the
years ended December 31, 2001, 2000 and 1999 are as follows:
Year ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
The domestic and foreign components of (In thousands)
income (loss) before
income taxes are:
Domestic ............................. ($ 25) $ 1,203 $ 2,284
United Kingdom ....................... 1,212 (2,169) 591
------- ------- -------
$ 1,187 $ (966) $ 2,875
======= ======= =======
The provision (benefit) for income taxes is:
Current:
United States ........................ $ (25) $ 392 $ 825
United Kingdom ....................... 34 0 110
State ................................ (6) 107 208
------- ------- -------
3 499 1,143
------- ------- -------
Deferred:
United States ........................ 37 (1) (49)
United Kingdom ....................... 352 (481) 47
State ................................ 5 0 (26)
------- ------- -------
394 (482) (28)
------- ------- -------
$ 397 $ 17 $ 1,115
======= ======= =======
Deferred tax liabilities (assets) result from the following differences
between financial reporting and tax accounting
12/31/01 12/31/00
-------- --------
(In thousands)
Deferred tax liabilities:
-------------------------
Fixed Assets ................................................... $ 337 $ 615
Pension ........................................................ -- 1,120
Inventory valuation ............................................ 81 102
Intangibles .................................................... 44 89
Other .......................................................... 22 24
------- -------
Total deferred tax liabilities ................................. 484 1,950
------- -------
Deferred tax assets:
--------------------
Pension ........................................................ (938) --
Non pension postretirement benefits ............................ (398) (447)
Warranty cost accruals ......................................... (152) (270)
Vacation reserve ............................................... (98) (98)
Bad debt reserve ............................................... (31) (36)
Net operating loss carryforward ................................ (190) (641)
Other reserves ................................................. (52) (71)
Other .......................................................... (2) 3
------- -------
Total deferred tax assets ...................................... (1,861) (1,560)
------- -------
Net deferred tax (asset) liability before valuation allowance .. (1,377) 390
Valuation allowance ............................................ 190 197
------- -------
Net deferred tax (asset) liability ............................. ($1,187) $ 587
======= =======
A valuation allowance of $197,000 was established in 2000. The Net Operating
Loss Carry-forward relates to the Company's U.K. operations and can be carried
forward indefinitely.
Page 36 of 49
A reconciliation from statutory U.S. federal income taxes to the actual
income taxes is as follows:
Year ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
(In thousands)
Statutory provision (benefit) .............. $ 404 $ (328) $ 978
U.S.--U.K. rate differential ............... (48) 87 (44)
State income taxes, net of federal benefit . -- 71 120
Permanent differences ...................... 41 2 75
Valuation allowance ........................ -- 197 --
Other ...................................... -- (12) (14)
------- ------- -------
Actual provision ........................... $ 397 $ 17 $ 1,115
======= ======= =======
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended
12/31/01 12/31/00 12/31/99
-------- -------- --------
(In thousands, except share data)
Net income (loss) applicable to
common stockholders ................ $ 790 ($ 983) $ 1,760
========= ========= ==========
Weighted average number of common
shares outstanding - basic ......... 5,228,500 5,249,228 5,447,807
Effect of dilutive stock options ..... 2,040 -- 6,195
--------- --------- ----------
Weighted average number of
common shares outstanding - diluted 5,230,540 5,249,228 5,454,002
========= ========= ==========
Net income (loss) per share-basic ..... $ 0.15 ($ 0.19) $ 0.32
========= ========= ==========
Net income (loss) per share-diluted ... $ 0.15 ($ 0.19) $ 0.32
========= ========= ==========
NOTE 15 - FOREIGN CURRENCY CONTRACTS
The Company, from time to time, enters into foreign exchange contracts
for non-trading purposes, exclusively to minimize its exposure to currency
fluctuations on trade receivables, firm commitments and payables. As a result,
changes in the values of foreign currency contracts offset changes in the values
of the underlying assets and liabilities due to changes in foreign exchange
rates, effectively deferring cash gains and losses on trade receivables, firm
commitments and payables and the related hedges until the date the transactions
are settled in cash. The Company is exposed to loss in the event of
nonperformance by the Company's bank, the other party to the foreign exchange
contracts. The Company does not anticipate nonperformance by its bank.
As of December 31, 2001, all of the Company's foreign exchange forward
contracts were designated as fair value hedges. As such, there were no charges
to the statement of operations related to these contracts. At December 31, 2001,
the difference between the spot rate and the contract rate for the foreign
exchange forwards was less than $1,000.
Page 37 of 49
NOTE 16 - FOREIGN OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS
The Company's operations are considered one operating segment. The
Company's products consist of new machines, spares and repair related services.
The Company's products and services are sold to commercial manufacturers in the
plastic and rubber industries. The manufacturing, assembly and distribution of
the Company's products are essentially the same.
The following provides gross revenue by product and geographic area for
the years ended December 31, 2001, 2000 and 1999:
Year ended
---------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Sale by Product Line
--------------------
New Machines .......................... $23,854 $29,000 $33,192
Spares ................................ 14,061 17,471 18,981
Repairs ............................... 15,241 16,270 20,620
Other ................................. 3,093 1,482 1,662
------- ------- -------
Total ................................. $56,249 $64,223 $74,455
======= ======= =======
Geographic Sales by Destination
-------------------------------
United States ......................... $26,070 $41,365 $41,601
United Kingdom ........................ 2,037 3,572 4,889
Europe (excluding U.K.) ............... 17,254 7,200 15,958
North America (excluding U.S.) ........ 2,767 4,522 2,766
Asia .................................. 6,048 5,049 5,964
Middle East ........................... 146 970 432
Other ................................. 1,927 1,545 2,845
------- ------- -------
Total ............................. $56,249 $64,223 $74,455
======= ======= =======
There are no sales to a single customer that exceeded 10% of the
Company's revenue for the years ended December 31, 2001, 2000 and 1999.
The Company operates a global business with interdependent operations
and employs a global management approach. In consideration of certain economic
factors, the distribution of customer orders and associated revenues and
expenses between the U.S. or U.K. is at the discretion of management. As such,
the chart below should not be construed as indicative of U.S. and U.K. operating
results were the Company not to operate in such a manner.
Page 38 of 49
Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K. operations for the years ended December 31, 2001, 2000 and 1999
are as follows:
United United
States Kingdom Consolidated
--------------------------------------
(In thousands)
Year ended 12/31/01:
Sales to unaffiliated Customers $ 30,849 $ 25,400 $ 56,249
Operating income .............. $ 10 $ 1,104 $ 1,114
Long-lived assets ............. $ 4,379 $ 4,742 $ 9,121
Total assets .................. $ 21,008 $ 14,958 $ 35,966
Year ended 12/31/00:
Sales to unaffiliated Customers $ 48,427 $ 15,796 $ 64,223
Operating income (loss) ....... $ 1,131 ($ 1,968) ($ 837)
Long-lived assets ............. $ 5,472 $ 7,879 $ 13,351
Total assets .................. $ 22,592 $ 21,340 $ 43,932
Year ended 12/31/99:
Sales to unaffiliated Customers $ 48,218 $ 26,237 $ 74,455
Operating income .............. $ 564 $ 640 $ 1,204
Long-lived assets ............. $ 5,713 $ 8,704 $ 14,417
Total assets .................. $ 24,451 $ 24,411 $ 48,862
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for fiscal 2001 and 2000:
(In thousands except per share data)
Quarter
----------------------------------------------------------------
First Second Third Fourth
-------------- -------------- -------------- --------------
Fiscal 2000
Net Sales $11,555 $15,270 $17,488 $19,910
============== ============== ============== =============
Gross Margin $ 2,077 $ 3,997 $ 4,066 $ 5,018
============== ============== ============== =============
Net income (loss) ($ 1,480) ($ 132) ($ 133) $ 762
============== ============== ============== =============
Basic and diluted net income (loss) per common share ($ 0.28) ($ 0.03) ($ 0.03) $ 0.15
============== ============== ============== =============
Basic weighted average shares outstanding (000's) 5,250 5,250 5,250 5,243
============== ============== ============== =============
Diluted weighted average shares outstanding (000's) 5,250 5,250 5,250 5,243
============== ============== ============== =============
(In thousands except per share data)
Quarter
-----------------------------------------------------------------
First Second Third Fourth
-------------- -------------- -------------- -------------
Fiscal 2001
Net Sales $11,080 $12,355 $15,847 $16,967
============== ============== ============== =============
Gross Margin $ 2,472 $ 2,418 $ 4,425 $ 4,529
============== ============== ============== =============
Net income (loss) ($ 607) ($ 573) $ 923 $ 1,047
============== ============== ============== =============
Basic and diluted net income (loss) per common share ($ 0.12) ($ 0.11) $ 0.18 $ 0.20
============== ============== ============== =============
Basic weighted average shares outstanding (000's) 5,230 5,229 5,228 5,228
============== ============== ============== =============
Diluted weighted average shares outstanding (000's) 5,230 5,229 5,228 5,235
============== ============== ============== =============
Page 39 of 49
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 40 of 49
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,
2001 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2002.
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,
2001 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2002.
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,
2001 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2002.
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,
2001 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 12, 2002. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Page 41 of 49
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.....................................19
Consolidated Balance Sheets as of December 31, 2001 and 2000.......20
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.................................21
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999...........................22
Consolidated Statements of Cash Flows for years ended
December 31, 2001, 2000 and 1999.................................23
Notes to Consolidated Financial Statements......................24 - 39
2. Financial Statement Schedule
Report of Independent Auditors on Financial Statement Schedule.....48
Schedule II - Valuation and Qualifying Accounts....................49
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Page 42 of 49
3. Exhibits Page
Exhibits ----
- --------
Exhibit 3(a) Articles of Incorporation - Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 3(b) By-laws - Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 4 Amended and restated Credit Agreement between Farrel Corporation
and Chase Manhattan Bank dated January 23, 1998. Filed as an exhibit
to the Registrant's Form 10K for the year ended December 31, 1997. N/A
Exhibit 4 First amendment to the amended and restated Credit Agreement
Between Farrel Corporation and Chase Manhattan Bank dated
November 30, 1998. Filed as an exhibit to the
Registrants's Form 10K for the year ended December
31, 1998. N/A
Exhibit 4 Notice of commitment reduction between Farrel Corporation and The
Chase Manhattan Bank dated October 16, 2000. Filed as an exhibit to the
Registrant's Form 10K for the year ended December 31, 2000. N/A
Exhibit 4 Second amendment to the amended and restated Credit Agreement between
Farrel Corporation and Chase Manhattan Bank dated December 27, 2000.
Filed as an exhibit to the Registrant's Form 10K for the year ended
December 31, 2000. N/A
Exhibit 4 Notice of commitment reduction between Farrel Corporation and The
Chase Manhattan Bank dated March 28, 2001. Filed as an exhibit to the
Registrant's Form 10K for the year ended December 31, 2000. N/A
Exhibit 4 Amendment to Credit Agreement and Waiver for the Amended and
Restated Credit Agreement between Farrel Corporation and Chase
Manhattan Bank dated January 23, 1998. Filed as an
exhibit to the Registrant's Form 10Q for the quarter
ended July 1, 2001. N/A
Exhibit 4 Revolving Credit and Term Loan Agreement dated June 15, 2001,
between Farrel Corporation, Farrel Limited and First Union National.
Filed as an exhibit to the Registrant's Form 10Q for the
quarter ended July 1, 2001. N/A
Exhibit 4 Revolving Promissory Note dated June 18, 2001, between Farrel
Corporation, Farrel Limited and First Union National Bank.
Filed as an exhibit to the Registrant's Form 10Q for the
quarter ended July 1, 2001. N/A
Exhibit 4 Term Promissory Note dated June 18, 2001, between Farrel Limited
and First Union National Bank. Filed as an exhibit to the
Registrant's Form 10Q for the quarter ended July 1, 2001. N/A
Page 43 of 49
Exhibit 4 Letter Agreement Dated March 18, 2002, modifying the Revolving Credit
and Term Loan Agreement dated June 15, 2001, between Farrel Corporation,
Farrel Limited and First Union National Bank 50
Exhibit 10(b) Employment Agreement between Rolf K. Liebergesell
and the Registrant, dated November 1, 1991.
Filed as an exhibit to the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 10(b) First Amendment to Employment Agreement between Rolf K. Liebergesell
and Registrant effective as of December 1, 1997. Filed as an exhibit to the
Registrant's Form 10Q for the quarter ended March 29, 1998. N/A
Exhibit 10(d) Standard Corporate Financial Services contract between
First Funding Corporation and the Registrant, dated June 17, 1986,
as amended by a Letter Agreement dated November 1, 1991.
Filed as an exhibit to the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
Exhibit 10(e) 1997 OMNIBUS Stock Incentive Plan - Filed as an exhibit to the
Registrant's definitive Proxy Statement re: Annual Meeting on
May 23, 1997 and incorporated herein by reference. N/A
Exhibit 10(f) 1997 Employee's Stock Purchase Plan - Filed on the Registrant's
Registration Statement as Form S-8 (No. 333-30735) and incorporated
herein by reference. N/A
Exhibit 10(g) Environmental Agreement between USM Corporation and the
Registrant dated as of May 12, 1986. Filed as
an exhibit to the Registrant's Registration Statement
as Form S-1 (No. 33-43539) and incorporated
herein by reference. N/A
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 10K 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 10Q for the quarter
ended June 30, 1996. N/A
Exhibit 10(k) Agreement of Purchase and Sale of certain property located
in Derby, CT between National RE/sources Acquisition, LLC
and Farrel Corporation dated July 17, 1998, and reinstatement
agreement dated October 15, 1998. Filed as an exhibit to the Registrants's
Form 10K for the year ended December 31, 1998. N/A
Page 44 of 49
Exhibit 11 Letter dated February 8, 2002, amending the Standard Corporate Financial
Services contract between First Funding Corporation and the Registrant,
dated June 17, 1986. 51
Exhibit 11 Statement re: Computation of per share earnings. 37
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 52
(b) Reports on Form 8K.
No such reports were filed by the Company during the year ended December 31,
2001.
Page 45 of 49
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Farrel Corporation
/s/ Walter C. Lazarcheck
------------------------------------------
Walter C. Lazarcheck
Vice President and Chief Financial Officer
March 25, 2002
------------------------------------------
Date
Page 46 of 49
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, President and March 25, 2002
- ------------------------ -----------------------
Rolf K. Liebergesell Chairman of the Board
/s/ Walter C. Lazarcheck Vice President - Chief Financial Officer March 25, 2002
- ------------------------ -----------------------
Walter C. Lazarcheck (Chief Accounting Officer)
/s/ Charles S. Jones Director March 25, 2002
- ------------------------- -----------------------
Charles S. Jones
/s/ James A. Purdy Director March 25, 2002
- ------------------------- -----------------------
James A. Purdy
/s/ Glenn Angiolillo Director March 25, 2002
- ------------------------- -----------------------
Glenn Angiolillo
/s/ Alberto Shaio Director March 25, 2002
- ------------------------- -----------------------
Alberto Shaio
Page 47 of 49
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, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, and have issued our report thereon dated February 1,
2001, (included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule for the years ended December 31, 2001,
2000 and 1999 listed in Item 14(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Stamford, Connecticut
February 1, 2002
Page 48 of 49
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
The allowances for doubtful receivables and reserves for excess and obsolete
inventory items have been deducted in the balance sheets from the assets to
which they apply. The accrued warranty costs are shown as liabilities in the
balance sheet.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------------- --------------------------------- ------------------- -------------
Charged
Balance at Charged to (credited)
beginning Costs and to other Balance at
Name of Debtor of period Expenses accounts (1) Deductions (2) end of period
- ----------------------------------------- ---------------- --------------- ---------------- ------------------- -------------
Year ended 12/31/99
- -------------------
Allowance for doubtful
receivables $ 297 $ 163 ($ 4) ($ 271) $ 185
Reserve for excess and obsolete
inventory items $1,550 $ 106 ($21) ($ 281) $1,354
Accrued warranty
costs $1,683 $1,426 ($30) ($1,450) $1,629
Year ended 12/31/00
- -------------------
Allowance for doubtful
receivables $ 185 $ 194 $ 1 ($ 241) $ 139
Reserve for excess and obsolete
inventory items $1,354 $ 379 ($18) ($ 271) $1,444
Accrued warranty
costs $1,629 $1,285 $22 ($1,861) $1,075
Year ended 12/31/01
- -------------------
Allowance for doubtful
receivables $ 139 $ 69 $ 0 ($ 29) $ 179
Reserve for excess and obsolete
inventory items $1,444 $ 540 ($11) ($ 48) $1,925
Accrued warranty
costs $1,075 $ 949 ($ 9) ($1,011) $1,004
(1) Represents foreign currency translation adjustments charged or credited to
stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued warranty costs to reflect expenditures
incurred.
Page 49 of 49