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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 [Fee Required] For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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COMMISSION FILE NUMBER 0-19703
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FARREL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2689245
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
25 MAIN STREET, ANSONIA, CONNECTICUT 06401
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (203) 736-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to
Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE NASDAQ
- --------------------------------------------------------------------------------
(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 22, 1999
was $5,301,164.
The number of shares outstanding of the registrant's common stock as of March
22, 1999 was 5,386,586 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 2, 1999
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 43 - 44
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, calenders and
mills. In conjunction with sales of capital equipment, the Company provides
process engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment and equipment upgrade services, spare parts sales and field
services. The Company also provides laboratory services and facilities for
product demonstrations and for the development and testing of rubber and
plastics equipment and processes.
The Company's rubber processing equipment is primarily sold to tire
manufacturers and manufacturers of rubber goods, such as sheet products, molded
products, automotive components, footwear and wire and cable. In the plastics
processing industry, the Company's equipment is primarily sold to large plastic
resins producers and compounders of plastics. The Company markets its products
through its strategically located domestic and international sales and service
organization.
COMPANY STRATEGY
The Company's business objectives are to increase market share in
relatively slow-growth markets by broadening its product range, to continue
strengthening its market position, particularly in Asia, and competitive
displacement. The Company continues to pursue manufacturing cost reductions by
continually reevaluating its current operating practices and by purchasing,
rather than manufacturing, a significant number of equipment components and
maintaining overhead and manpower levels in line with prevailing economic
conditions. The Company has taken measures in the recent past to achieve these
objectives by transferring U.S. parts manufacturing from Connecticut to its U.K.
subsidiary and moving U.S. assembly operations from its Derby, Connecticut plant
to its Ansonia, Connecticut facility. (As a result, the Derby facility became
surplus and was sold in January 1999.)
In line with this growth 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 market share. The Shaw operations
were transferred to the Farrel Limited facility beginning in the fall of 1998
and will be totally integrated by the end of the second quarter 1999. As a
result, Shaw manpower will have been reduced from 218 to approximately 60
employees and redundant plant overheads totally eliminated.
INDUSTRY OVERVIEW
The Company's products are used primarily by manufacturers of rubber
and plastic materials and products. The rubber and plastics processing
industries are global in nature and intensely competitive. Both industries are
cyclical in nature, with capital equipment purchases characterized by long lead
times between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers and manufacturers of rubber goods such as sheet products,
molded products, automotive components, footwear and wire and cable. There are
approximately 50 tire manufacturers in the world, six of which account for a
majority of total worldwide tire production. Demand in the tire and rubber
industry is influenced by, among other things, general economic conditions and
growth in sales of automobiles and trucks as well as overall truck tonnage and
mileage driven. The industry trend is to shift production capacities into low
cost and emerging regions, creating potential opportunities in the future.
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 machinery manufactured by the Company are primarily polyethylene,
polypropylene, polyvinyl chloride and polystyrene. A large portion of the market
is controlled by a few major producers who license their technologies to other
producers worldwide. These licensees are potential customers for the Company's
products and services. The plastics compounding market consists of those
companies that mix large volumes of plastics in a relatively small number of
formulations, companies which perform specialty mixing for end users, and end
users that mix largely for their internal use.
Many manufacturers in the industries and markets served by the
Company's products and services are impacted by local political and economic
events. In particular, in the Asia Pacific Region, many of the Company's
customers have suspended projects for increased capacity and growth until the
region resumes a level of financial stability. Other areas of the Far East
continue to experience growth, however, business is extremely competitive. The
Company's equipment is supplied to manufacturers and represents capital
commitments for new plants, expansion or modernization. New capital and
marketing expenditures in the Company's markets depend, in large part, on an
increase in market demand which may require the need for additional capacity.
PRODUCTS AND SERVICES
The Company's products are used to mix and process materials produced
by the Company's rubber and plastics producing customers. The Company's
principal capital equipment product lines are batch and continuous mixers,
single and twin-screw extruders, pelletizers, gear pumps, calenders and mills.
The Company also provides process engineering, installation and commissioning
services for its equipment. The Company's customer service division repairs,
refurbishes and provides upgrade services and spare parts for the Company's
installed base of machines worldwide.
The following table illustrates the percentage breakdown of the
Company's sales between new machines/related services and aftermarket business
(spare parts, repairs and rebuild) in the last three fiscal years:
Year Year Year
ended ended ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
New Machines/Related Services......... 56.9% 57.1% 53.3%
Aftermarket........................... 43.1% 42.9% 46.7%
------ ------ ------
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 1998, 1997 and 1996 are reported in Note 16 to
the Consolidated Financial Statements.
The Company's products are sold primarily by its direct sales and
support staff augmented by agents in certain countries. The Company's sales
organization is headquartered in Ansonia, Connecticut; Rochdale, England and
Singapore. The Company has additional sales and service offices strategically
located in the United States, Europe and Taiwan. In certain geographic areas
outside the United States, sales are facilitated by independent representatives
who assist employees of the Company.
Page 3 of 49
PROCESS LABORATORY SERVICES
The Company maintains two process laboratories in Ansonia, Connecticut
and one laboratory in Rochdale, England. In addition, the Company entered into
an agreement with a research and development organization in Taiwan to use and
demonstrate the Company's technology. This contractual arrangement provides the
Company with laboratory facilities in Asia to compliment the U.S. and U.K.
laboratories in that important market area. The Company uses its laboratories to
demonstrate the capabilities of its processing equipment and to provide
customers with production-sized equipment in order to experiment with new
processing techniques and formulations. The Company considers its process
laboratories to be vital contributors to its continuing technology development
and marketing efforts and routinely modernizes its process laboratories and
related equipment. The Company has experienced an increased trend to test its
plastics processing machinery, such as the continuous mixer, twin screw and
large pelletizing systems, as more new materials are developed by the Company's
customers which require testing to determine processing procedures and machine
design parameters.
In 1998, demonstration and laboratory capabilities were enhanced with
the installation of the Farrel Twin Screw Extruder (FTX) in two University
laboratories: Akron University, Akron, Ohio, USA and the German Rubber Institute
in Hanover, Germany. The Company expects to benefit from the installation and
operation of these machines by providing exposure of Farrel machinery and
technology to new graduates and access to process application development.
COMPETITION
The Company's products are sold in highly competitive worldwide
markets. A number of companies compete directly with the Company in both the
rubber and plastics processing markets. Numerous competitors of varying sizes
compete with the Company in one or more of its product lines. A number of the
Company's competitors are former licensees of the Company, divisions or
subsidiaries of larger companies with financial and other resources greater than
those of the Company or copycats who mimic the Company's technology and designs.
The Company has historically faced, and will continue to face, considerable
competitive pressures, particularly predatory price competition and
nationalistic preferences. The Company believes that the principal competitive
factors affecting its business are price, performance, technology, breadth of
product line, product availability, reputation and customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
BACKLOG
The Company's backlog of orders considered firm by management at
December 31, 1998, 1997 and 1996 was approximately $33 million, $47 million and
$50 million, respectively. Substantially all of the orders included in the
December 31, 1998 backlog have contractual ship dates in fiscal 1999. Firm
backlog at March 19, 1999 and March 20, 1998 was $38 million and $59 million,
respectively.
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 owns
repair and rebuild facilities 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 has
been completed and yielded significant reductions in operating costs. The Derby
CT facility was sold in January 1999.
Page 4 of 49
The production equipment acquired in the 1997 Shaw acquisition,
located in Manchester, England, is being transferred to Farrel Limited's
facility in nearby Rochdale, England. The facility integration is planned to be
completed during the second quarter of 1999 and is expected to generate
substantial cost reductions and production efficiencies.
Management considers the Ansonia, Connecticut, and Rochdale, England
facilities to 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 new twin screw
rubber sheeter is an example of the collaborative success of the research and
development and product engineering staffs to produce a new product as well as
the recent development of a new very large-scale pelletizing system for the
petrochemical industry. Current development activities are in the batch mixing
process. The acquisition of the INTERMIX(R) intermeshing technology and rotor
design development provides opportunities to strengthen our business with batch
mixer customers. A summary of research and development and engineering
expenditures incurred during the last three fiscal years is as follows:
Year Year Year
ended ended ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
(Dollars in thousands)
Research and development expense
pertaining to new products or
significant improvements to
existing products .................. $1,485 $1,567 $1,993
All other product development and
engineering expenditures related
to ongoing refinements, improvements
of existing products, and custom
engineering ........................ 3,700 2,874 3,329
------ ------ ------
Total ................................ $5,185 $4,441 $5,322
====== ====== ======
Percent of net sales ................. 5.3% 5.2% 7.0%
PATENTS AND TRADEMARKS
The Company possesses rights under a number of domestic and foreign
patents and trademarks relating to its products and business. The Company holds
approximately 200 patents which cover technology utilized in its products and
currently has approximately 40 patent applications pending. The Company's
patents have expiration dates ranging from 1999 through 2015. Although the
Company believes that its patents provide some competitive advantage, the
Company also depends upon trade secrets, unpatented proprietary know-how and
continuing technological innovation to develop and maintain its competitive
advantage.
The Company considers the following trademarks to be material to its
business: FARREL(R); BANBURY(R); INTERMIX(R); ST(TM); MVX(TM); CP-SERIES II(TM),
FTX(TM), and TSS(TM).
Page 5 of 49
ENVIRONMENTAL
The Company's operations are subject to normal environmental
protection regulations. Compliance with federal, state and local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment, is
not expected to have a material effect upon the capital expenditures, earnings
or the competitive position of the Company. However, environmental requirements
are constantly changing, and it is difficult to predict the effect of future
requirements on the Company.
As described in Part I, Item 3, Legal Proceedings, the Company and The
Black & Decker Corporation entered into a Settlement Agreement pursuant to which
Black & Decker agreed to assume full responsibility for the investigation and
remediation of any pre-May, 1986 environmental contamination at the Company's
Ansonia and Derby facilities as required by the Connecticut Department of
Environmental Protection (DEP). A preliminary environmental assessment of the
Company's properties in Ansonia and Derby, Connecticut has been conducted by The
Black & Decker Corporation. Although this assessment is still being evaluated by
the DEP, on the basis of the preliminary data available there is no reason to
believe that any activities which might be required as a result of the findings
of the assessment will have a material effect upon the capital expenditures,
earnings or the competitive position of the Company.
During January 1999, the Company sold all of its Derby, Connecticut,
real estate and facilities. By the terms of that sale, the purchaser committed
to cooperate with Black & Decker in any additional investigation of the Derby
property and any remediation of that property that might be required by the DEP,
in furtherance of which the Company assigned to the purchaser, and the purchaser
assumed the rights and obligations, respectively, of the Company under the
Settlement Agreement insofar as they relate to the Derby property. In addition,
the Company has been named an additional insured on a $5 million environmental
policy obtained by the purchaser and the purchaser is obligated to name the
Company an additional insured on any and all other environmental insurance
policies obtained by the purchaser related to the Derby property. The Company's
potential exposure has not changed by this transaction.
EMPLOYEES
As of December 31, 1998, the Company had 498 employees compared to 606
employees at December 31, 1997 (including 218 employees at the acquired Shaw
operations). In anticipation of the consolidation of the operations in the
United Kingdom, the Shaw workforce in Manchester was reduced by 126 employees
during 1998 and will be further reduced to about 60 during the first quarter
1999. The Company has collective bargaining agreements in the U.S. and the U.K.
which cover approximately 139 employees. The U.S. agreement expires on June 15,
2000. The agreement in the U.K. expires April 1, 1999.
ITEM 2 - PROPERTIES
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company except for
the Manchester, England facilities which are leased.
LOCATION PRINCIPAL USE APPROX. SQ. FT.
- -------------------------------------------------------------------------------------
Ansonia, Connecticut......... Office, research, laboratory, 520,000
repair, rebuild, assembly and
storage
Deer Park, Texas............. Repair and rebuild 22,000
Rochdale, England............ Office, research, laboratory, 210,000
manufacturing, repair and rebuild,
and storage
Manchester, England (Corbett St.) Office, research, laboratory, 99,000 (leased)
manufacturing, repair
and rebuild, and storage
Derby, Connecticut Available for sale 225,000 (sold January 1999)
During 1997 the Company relocated its domestic assembly and storage
operations from its Derby, Connecticut facility to available space in its
Ansonia, Connecticut facility to reduce operating costs and to enhance
efficiency. The Company's Derby, Connecticut facility was sold during January
1999.
Page 6 of 49
The Corbett Street, Manchester, England facilities are subject to a
lease which expires December 19, 1999. The lease of these facilities was
acquired in connection with the purchase of assets of the Francis Shaw Rubber
Machinery business. The Company has exercised an early termination option to
vacate these premises as of June 1999.
The Company believes that the facilities used in its operations are in
satisfactory condition and adequate for its present and anticipated future
operations. In addition to the facilities listed above, the Company leases space
in various domestic and international locations, primarily for use as sales
offices.
ITEM 3 - LEGAL PROCEEDINGS
As previously described in Part I, in Item 1, Environmental, in
February 1995, the Company and The Black & Decker Corporation settled litigation
as to the environmental conditions at the Ansonia and Derby facilities at the
time of the Company's purchase of them from USM in May 1986. Under the
Settlement Agreement, Black & Decker has assumed full responsibility for all
investigation and any remediation of pre-May, 1986 contamination at the
Company's Ansonia and Derby facilities in accordance with a Consent Decree
entered into between Black & Decker and the Connecticut Department of
Environmental Protection. In accordance with the Settlement Agreement, a
Withdrawal and Joint Stipulation of and Motion for Dismissal was filed with the
Court. The Court which originally heard this matter has continuing jurisdiction
over it, but no issues are now pending with the court.
As of the date hereof, the Company is not aware of any contamination,
other than any pre-May, 1986 contamination, at any of its facilities which would
require material remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company or by companies that manufactured similar
machinery prior to the Company's acquiring the right to manufacture and sell
that equipment in May 1986. The previous owner of the technology which the
Company acquired in May, 1986, is obligated to defend and indemnify the Company
for any claims or liabilities arising out of pre-May 1986, activities. While the
outcome of lawsuits or other proceedings against the Company cannot be predicted
with any certainty, the Company does not expect that these matters will have a
material adverse effect on the Company's financial position or results of
operations.
Page 7 of 49
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 over the counter and quoted on
the NASDAQ National Market System under the symbol "FARL". The following chart
sets forth the high and low prices for the Common Stock and dividends declared
for the last two fiscal years:
FISCAL 1998 HIGH LOW DIVIDEND
- ----------- ---- --- --------
First Quarter $6.50 $4.38 -
Second Quarter $6.13 $3.25 $0.04
Third Quarter $3.78 $1.88 $0.04
Fourth Quarter $2.94 $2.00 -
FISCAL 1997 HIGH LOW DIVIDEND
- ----------- ---- --- --------
First Quarter $3.88 $2.38 $0.16
Second Quarter $4.00 $2.63 $0.16
Third Quarter $4.38 $2.63 $0.16
Fourth Quarter $6.00 $3.00 $0.16
(b) As of March 22, 1999 the approximate number of record holders of
the Company's common stock was 850.
(c) Dividends
The Company intends, from time to time, to pay 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
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
Net Sales ............................................... $ 98,036 $ 85,382 $ 75,836 $ 80,067 $ 75,501
======== ======== ======== ======== ========
Gross margin ............................................ $ 22,772 $ 17,711 $ 18,123 $ 19,760 $ 20,008
======== ======== ======== ======== ========
As a percent of net sales ............................ 23.2% 20.7% 23.9% 24.7% 26.5%
======== ======== ======== ======== ========
Operating income ........................................ $ 4,622 $ 1,635 $ 654 $ 1,591 $ 2,601
Other income (expense), net (2) ...................... (799) 449 (174) (135) 1,436
-------- -------- -------- -------- --------
Income before income taxes .............................. 3,823 2,084 480 1,456 4,037
Provision for income taxes .............................. 1,546 727 154 554 1,531
-------- -------- -------- -------- --------
Net income .............................................. $ 2,277 $ 1,357 $ 326 $ 902 $ 2,506
======== ======== ======== ======== ========
Net income per share - Basic and diluted (1) ............ $ 0.38 $ 0.23 $ 0.05 $ 0.15 $ 0.41
======== ======== ======== ======== ========
Dividends per share of Common Stock ..................... $ 0.08 $ 0.64 $ 0.06 $ 0.20 $ 0.04
======== ======== ======== ======== ========
Weighted Average Shares Outstanding - Basic (000's) (1) 5,942 5,950 5,970 6,027 6,076
======== ======== ======== ======== ========
Weighted Average Shares outstanding - Diluted (000's) (1) 5,966 5,951 5,972 6,030 6,097
======== ======== ======== ======== ========
Balance Sheet Data:
Current Assets ....................................... $ 48,273 $ 37,104 $ 40,187 $ 41,991 $ 37,697
Current Liabilities .................................. $ 28,351 $ 23,286 $ 19,841 $ 22,878 $ 16,613
Working Capital Ratio ................................ 1.7 1.6 2.0 1.8 2.3
Total assets ......................................... $ 62,723 $ 56,381 $ 50,731 $ 53,412 $ 47,979
Long-term debt ....................................... $ 3,983 $ 5,283 $ 214 $ 388 $ 587
Stockholders' equity ................................. $ 26,301 $ 25,782 $ 28,553 $ 27,814 $ 28,726
Other Data:
Backlog .............................................. $ 33,269 $ 46,554 $ 50,225 $ 29,745 $ 39,123
(1) Restated to reflect the adoption of statement of Financial Accounting
Standards No. 128, "Earnings per Share".
(2) Other income in 1994 includes $1.3 million as a result of a curtailment of
postretirement benefits accounted for under Financial Accounting Standards
No. 88. "Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."
Page 10 of 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,
including in this report and in particular in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" may be forward
looking and may be subject to a variety of risks and uncertainties. Various
factors 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; assessment of the impact of the Year 2000 and other
factors which might be described from time to time in the Company's filings with
the Securities and Exchange Commission.
FISCAL 1998 COMPARED TO FISCAL 1997:
Year to date net sales in 1998 and 1997 were $98.0 million and $85.4
million, respectively. The 1998 amount includes net sales of approximately $13.2
million by Farrel Shaw Limited ("Shaw") which was acquired on December 19, 1997.
The timing of the Company's sales are highly dependent on when an order is
received, lead time and the customers requirements. The 1998 shipments in the
fourth quarter were $35.5 million, or 36.2% of the shipments for the full year.
A substantial portion of the 1997 shipments reflected several individually large
orders received in 1996. Management believes the Company operates in markets
which are extremely competitive. Many of our customers and markets operate at
less than full capacity and certain markets, in particular, the Far East, remain
especially competitive and are subject to local economic events.
The Company received $84.7 million in orders including approximately
$13.7 million by the newly acquired Shaw operations during 1998 compared to
$77.0 million during the same period of 1997. The Company's products are
primarily supplied to manufacturers and represent capital commitments for new
plants, expansion or modernization. In the case of major equipment orders, up to
12 months are required to complete the manufacturing process. Accordingly,
revenues reported in the statement of operations might represent orders received
in the current or previous period.
Gross margin in 1998 and 1997 was $22.8 million and $17.7 million,
respectively. The margin percentage increased to 23.2% in 1998 from 20.7% in
1997 largely due to the mix of products sold in the two periods and cost
reduction actions. The 1997 results included several large new machine shipments
with relatively lower gross margins.
Full year operating expenses increased $2.0 million to $18.1 million
in 1998 compared to 1997. The 1998 amount includes selling expenses of $0.7
million and general and administrative expenses of $1.4 million at the newly
acquired Shaw operations. Excluding the impact of the Shaw operations, operating
expenses decreased by $0.1 million to $16.0 million during 1998. The Company
intends to consolidate the operations of Shaw into manufacturing and
administrative facilities in Rochdale, England, thereby, reducing a significant
portion of the Shaw overhead expenses. The Company expects the consolidation to
be accomplished in the second quarter of 1999. The Company has reduced the
headcount at Shaw to 92 at December 31, 1998 compared to 218 at December 31,
1997. Further, Shaw manpower will be reduced to about 60 by the end of the first
quarter.
Interest expense for 1998 was $1.1 million, an increase of $1.0
million from 1997. The increase is due to borrowings associated with the
acquisition of the Shaw operations. Interest income was $0.5 million for 1998
and $0.3 million for 1997.
Net other expense for 1998, was $0.2 million compared to net other
income of $0.2 million in 1997. Included are gains from the disposal of
machinery and equipment the Company will no longer use of $0.3 million and $0.7
million during the years ended 1998 and 1997, respectively.
Page 11 of 49
The effective income tax rate in 1998 and 1997 was 40.4% and 34.9%,
respectively. The increase in the effective tax rate during 1998 is attributed
to a higher portion of the 1998 taxable income earned in the United States which
has a higher effective tax rate. The Company provides for income taxes in the
jurisdictions in which it pays income taxes at the statutory rates in effect in
each jurisdiction adjusted for differences in providing for income taxes for
financial reporting and income tax purposes.
FISCAL 1997 COMPARED TO FISCAL 1996:
Net sales in 1997 and 1996 were $85.4 million and $75.8 million,
respectively. A substantial portion of the 1997 shipments reflects orders
received in 1996 when the dollar value of the Company's order intake was higher
than that experienced in prior years. Management considers the markets served by
the Company's products to be extremely competitive and, to some extent, affected
by the uncertainty in Eastern Europe and the Middle East. Additionally, Far
Eastern markets are particularly competitive and volatile. Certain Southeast
Asian countries are experiencing currency instability which contributes to
uncertainty in the region. Many rubber manufacturers operate at less than full
capacity. Management anticipates that the markets served by the Company's
products will remain extremely competitive and that those markets characterized
by economic and political uncertainty will likely continue to be affected by
such conditions.
The Company received approximately $77 million in orders during 1997
compared to $96 million in 1996 when the Company received several individually
large orders. In the case of major equipment orders, up to 12 months are
required to complete the manufacturing process. Accordingly, revenues reported
in the statement of operations may represent orders received in the current or
previous fiscal periods. In addition, the cyclical nature of industry demand
and, therefore, order intake, may affect the Company's results of operations.
The Company's ability to maintain and increase net sales depends upon a
strengthening and stability in the Company's traditional markets.
Gross margin in 1997 and 1996 was $17.7 million and $18.1 million,
respectively, representing a decrease in the gross margin percentage to 20.7%
from 23.9%. This decline is largely due to the mix of products sold in the two
periods and to continued stiff competition. The 1997 shipments also include a
higher relative proportion of new machine sales than in 1996 which generate
lower margins than the Company's more profitable spare parts, rebuild and repair
business. The 1997 margin also reflects the impact of a $0.5 million increase in
commissions on shipments to markets in the world where the Company must use
outside representatives in addition to its sales force to conduct business.
Operating expenses were reduced $1.5 million to $16 million in 1997
compared to 1996. The decline in administrative costs is largely due to reduced
investment banking fees. The increase in selling expenses of $0.2 million to
$7.0 million in 1997 as compared to 1996 is largely attributed to increased
marketing programs including costs to attend the premier plastic industry
convention in the United States, which occurs every three years. Research and
development expenses declined primarily as a result of reduced headcount.
Lastly, the reduction in operating costs is also due to continuing efforts to
strictly control expenses.
During 1997 the Company completed the consolidation of the assembly,
repair and spare parts operations, conducted in its Derby, Connecticut facility
into available space in its Ansonia facility, to reduce operating costs and
enhance efficiencies. The cost of this project was approximately $1.3 million,
which included capitalized costs of approximately $1.0 million for improvements
to facilities and equipment. While the Company expects cost savings to result
from this consolidation, the size of such savings cannot be predicted with any
certainty.
Other income, net of other expense, includes approximately $0.7
million from the disposal of machinery and equipment the Company will no longer
use which results from consolidating its two Connecticut facilities into one
single facility.
The effective income tax rates in 1997 and 1996 were 34.9% and 32.1%,
respectively. The Company provides for income taxes in the jurisdictions in
which it pays income taxes at the statutory rates in effect in each jurisdiction
adjusted for differences in providing for income taxes for financial reporting
and income tax purposes.
Page 12 of 49
MATERIAL CONTINGENCIES
As described in Part 1, Item 3, in February 1995, the Company and
Black & Decker entered into a Settlement Agreement pursuant to which Black &
Decker agreed to assume full responsibility for the investigation and
remediation of any pre-May, 1986 environmental contamination at the Company's
Ansonia and Derby facilities as required by the Connecticut Department of
Environmental Protection (DEP). As part of the settlement, the Company
transferred by quit claim deed a vacant surfaced parking lot to the City of
Ansonia. As required by the Settlement Agreement, a preliminary environmental
assessment of the Company's properties in Ansonia and Derby, Connecticut has
been conducted by Black & Decker. On January 19, 1999, the Company sold all of
its Derby, Connecticut, real estate and facilities. By the terms of that sale,
the purchaser committed to cooperate with Black & Decker in any additional
investigation of the Derby property and any remediation of that property that
might be required by the DEP. In addition, the Company has been named an
additional insured on a $5.0million environmental policy obtained by the
purchaser and the purchaser is obligated to name the Company an additional
insured on any and all other environmental insurance policies obtained by the
purchaser related to the Derby property. On the basis of the preliminary data
now available there is no reason to believe that any remediation activities
which might be required as a result of the findings of the assessment will have
a material effect upon the capital expenditures, earnings or the competitive
position of the Company. This forward looking statement could, however, be
influenced by the results of any further investigation which the DEP might
require, by DEP's conclusions and requirements based upon its review of complete
information when such is available, unanticipated discoveries, the possibility
that new or different environmental laws might be adopted and the possibility
that further regulatory review or litigation might become necessary or
appropriate.
ORDERS AND BACKLOG
Orders received by the Company during 1998 increased $6.6 million, or
roughly 8.6%, to approximately $84.7 million compared to $77.0 million in fiscal
1997 and $96.0 million in fiscal 1996. The 1998 increase in orders includes
$13.7 million in orders from the newly acquired Shaw operations.
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. Further, the cyclical nature of
industry demand and, therefore, the timing of order intake may effect the
Company's quarterly results in the current and future fiscal quarters. The
Company's ability to maintain and increase net sales depends upon a
strengthening and stability in the Company's traditional markets. There can be
no assurance that the level of orders experienced in 1998 will continue, or that
improvements in the Company's traditional markets will lead to increased orders
for the Company's products.
The level of backlog considered firm by management at December 31,
1998 and 1997 is $33 million and $47 million, respectively. The contractual ship
dates for substantially all of the December 31, 1998 backlog are in 1999. The
backlog at March 19, 1999 and March 20, 1998 was $38 million and $59 million,
respectively.
LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES
Working capital and the working capital ratio at December 31, 1998
were $19.9 million and 1.7 to 1.0, respectively, compared to $13.8 million and
1.6 to 1.0 at December 31, 1997, respectively. The increase in the working
capital ratio at December 31, 1998 is attributed to the $5.3 million asset
purchase agreement receivable. See Note 2 to the Consolidated Financial
Statements for important information concerning the Company's demand under the
profit guaranty and the revised purchase price allocation. During the year ended
December 31, 1998 the Company paid dividends of $0.08 per share. On January 19,
1999, the Company declared a dividend of $0.16 per share which was paid February
15, 1999. The Company's ability to pay dividends in the future is limited under
the credit facility described below to the aggregate of (a) 25% of net income
during the most recently completed four fiscal quarters after deducting
distributions previously made and (b) purchases by the Company of its common
stock during the same period. The Company received a waiver from its bank with
respect to dividends paid between April 23, 1997 through June 1998.
During January 1999, the Company completed the sale of excess real
estate located in Derby, Connecticut for $2.4 million. In addition, subsequent
to December 31, 1998, under the stock repurchase plan, the Company has
repurchased 552,900 common shares in the amount of $1,272,000 (see Note 10 to
the Consolidated Financial Statements).
Page 13 of 49
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, accounts receivable and/or inventory may be at high
levels from time to time and may result in a temporary decline in cash provided
from operating activities. Historically, the Company has not experienced
significant problems regarding the collection of accounts receivable. Many of
the Farrel Shaw customers are new to the company. While there were no
significant collection problems during 1998, Farrel Shaw customers tend to be
smaller and less liquid than the Company's historical customer base. The Company
has historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
At December 31, 1998, the Company had a worldwide multi-currency
credit facility with a major U.S. bank in the amount of $25.0 million consisting
of an $18.5 million revolving credit facility for direct borrowings and letters
of credit and up to (pound)3.0 million for foreign exchange contracts and a five
year term note. Interest varies based upon prevailing market interest. The
facility contains limits on direct borrowings and letters of credit combined
based upon stipulated percentages of accounts receivable, inventory and backlog.
The facility also contains covenants specifying minimum and maximum operating
thresholds for operating results and selected financial ratios. The agreement
contains certain restrictions on the making of investments, on borrowings and on
the sale of assets. At December 31, 1998, there was $5.3 million outstanding
under the term loan. The term loan was used to finance the acquisition of
selected assets of the Francis Shaw Rubber Machinery Business. (See Note 2 to
the Consolidated Financial Statements.) At December 31, 1997, under the previous
credit facility (see Note 8 to the Consolidated Financial Statements) there was
$7.1 million in direct borrowings outstanding. There were $5.1 million and $6.0
million of letters of credit outstanding at December 31, 1998 and 1997,
respectively.
The revolving credit facility expires December 31, 2002. The term note
is payable in equal quarterly payments of (pound)200,000 (approximately
$332,000) through December 31, 2002.
Management anticipates that its cash balances, operating cash flows
and available credit line will be adequate to fund its anticipated capital
commitments and working capital requirements for at least the next twelve months
including integration of the Shaw asset acquisition. The Company made capital
expenditures of approximately $2.1 million and $1.9 million, during fiscal 1998
and 1997, respectively. The increase in capital expenditures in 1998 is largely
attributed to upgrading the Company's information systems at locations in the
United Kingdom.
The Company manufactures and assembles its products in the United
Kingdom and assembles and sells its products in the United States, United
Kingdom and other foreign markets. The Company's financial position and results
are affected by changes in foreign currency exchange rates in the foreign
markets in which its operates. When the value of the U.S. dollar or U.K.
sterling strengthens against other currencies, the value of the transaction in
the foreign currency decreases. The Company regularly enters into foreign
exchange forward and option contracts to hedge foreign currency transactions.
Foreign currency transactions generally are for short periods of no more than
six months. In addition, the Company maintains foreign currency bank accounts in
other currencies in which it regularly transacts business.
The Company's interest income and expense are sensitive to changes in
the market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
YEAR 2000
The Company has instituted a Year 2000 readiness project to address
the impact and risks related to the ability of the Company's computer hardware,
computer programs, equipment with embedded computer chips and critical suppliers
to operate and function properly during the year change from December 31, 1999
to January 1, 2000, and to process date information correctly thereafter.
The project is divided into three components - Business Applications,
comprising the Company's internal information systems as well as the readiness
of third party suppliers of goods and services whose Year 2000 readiness could
potentially have significant impact on the Company's operations; Product
Applications, relating to micro-processors within the control equipment sold by
the Company; and Equipment Applications, which relate to micro-processors within
operating equipment utilized in the Company's day to day operations.
Page 14 of 49
The project team is made up of internal resources from various
disciplines, including operations, facility management, product engineering,
management information systems and finance. The major objectives for each
component are to: (1) identify and document Year 2000 issues which affect the
Company; (2) inventory systems, machines and processes affected by the Year
2000; (3) assess Year 2000 readiness for identified items; and (4) design and
implement a plan to achieve Year 2000 readiness for significant Year 2000
issues. The identification and inventory of systems, machine and processes has
been completed. The assessment and plan to achieve Year 2000 readiness are at
various stages of completion for each of the three major components.
The Business Applications component of the Company's Year 2000 plan
relates primarily to the Company's principal internal information system which
consists of a mainframe operated with third party purchased computer software.
The conversion to a Year 2000 compliant version of the software was completed
during the fourth quarter of 1998, however, system testing will continue into
the first-half of 1999. This included the replacement of hardware and software
for one of our UK operations to provide consistency with the US operation.
Similar systems for our newly acquired subsidiary in the UK have not been
upgraded due to the planned consolidation at our other UK operation which has
been upgraded. The balance of the Company's computer based information systems
consist primarily of individual work stations and personal computers. Work
stations in Engineering were upgraded in 1997. All personal computer hardware
and software has been tested. Modifications to the equipment are being made and
upgrades purchased for non-Year 2000 ready equipment. The total amount expended
in the current and prior year, related to the Company's internal information
system, was approximately $0.9 million. Additional expenditures to complete this
phase is estimated to be less than $0.1 million. A significant portion of these
expenditures would have occurred without the Year 2000 issue and, in general,
these expenditures have not been accelerated.
The identification and assessment of critical suppliers of goods and
services is in process. Critical suppliers include suppliers of components used
in the Company's products as well as suppliers of goods and services used in the
Company's operations. Critical suppliers have been identified as suppliers of
goods or services that, if interrupted for an extended period, might impact the
Company's ability to provide goods and services to its customers, satisfy
obligations to its employees and vendors and which might pose a risk of injury
or damage to individuals, property or the environment. Critical suppliers of
goods and services are being contacted to assess their readiness for the Year
2000. Due to the varying degree of impact the Year 2000 might cause and general
uncertainty inherent in the Year 2000 problem, the Company is unable to
determine if third party supplier readiness would materially impact the
Company's results of operations, liquidity or financial condition.
The Product Applications component of the Company's Year 2000 plan
relates primarily to microprocessors within the control equipment sold by the
Company. The Company has identified auxiliary equipment and components which
were supplied with its products and which might pose a risk that the Company's
product will not function properly in the Year 2000. The process is
substantially complete. Some supplied components may require modification or
upgrade. The extent of modifications required are dependent on the use and
extent of integration of our equipment at a customer's location. The Company's
efforts are expected to continue to assist our customers to maximize
serviceability of Company supplied equipment. The cost of an upgrade or
modification may result in a warranty obligation and charge to results of
operations of the Company. The Company is unable to determine a reasonable
estimate at this time. However, the Company does not expect that these matters
will have a material adverse effect on the Company's financial position or
results of operations and some of the cost might be recovered from the Company's
vendors.
Equipment Applications component of the Company's Year 2000 plan
relates to microprocessors within the operating equipment utilized in the
Company's day to day operations. The identification of equipment used in the
Company's operation has been completed. The equipment used in our manufacturing
and other operations are not integrated systems, but consist principally of
individual stand alone machine tools and equipment. Failure of one piece of
equipment would not materially impact operations. Correspondence with the
equipment suppliers to determine Year 2000 readiness is in process and expected
to be complete before the end of June 1999. Individual pieces of equipment have
been identified for replacement. The cost of such equipment identified to date
for replacement is not significant. Replacement of all effected equipment is
expected to be completed by the middle of 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to
Page 15 of 49
determine at this time whether the consequences of Year 2000 failures might have
a material impact on the Company's results of operations, liquidity or financial
condition. The Year 2000 Project is expected to significantly reduce the
company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its critical suppliers of goods
and services. The Company believes that with the completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The above contains forward-looking statements including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" statements of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the safe harbor
statements of the Private Securities Litigation Reform Act of 1995 contained on
page eleven of this report.
Taking into account the foregoing, the following are identified as
some, but not all of, important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company: the availability and cost of personnel; the
ability to locate and correct all items; and timely responses to and corrections
by third-parties and suppliers. Due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-parties and the interconnection of global businesses, the
Company cannot ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect its operations and
business, or expose it to third-party liability.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union (EMU)
entered into a three-year transition phase during which a common currency, the
"EURO" was introduced in participating countries. The Company does not have
operations in the participating countries and the conversion to the EURO is not
expected to have a material impact on the Company's financial position, results
of operations or cash flows. However, uncertainty exists as to the effects the
EURO will have on the marketplace.
IMPACT OF RECENTLY ISSUED ACCOUNT STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which must be adopted effective
January 1, 2000. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption of
this Statement will have a significant effect on its results of operations or
financial position.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
and interest rates. The Company manufactures many of its products and components
in the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenue is generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies which it regularly transacts
business and the use of foreign exchange forward contracts. The Company
regularly enters into foreign exchange forward and option contracts to hedge
foreign currency transactions. These derivative instruments involve little
complexity and are generally for short periods of less than six months. The
Company does not enter into derivative contracts for trading in speculative
purposes. The amount of foreign exchange forward contracts are not considered
material to the Company's financial position or its operations.
The Company's cash equivalents and short-term investments and its
outstanding debt bear variable interest rates. The rates are adjusted to market
conditions. Changes in the market rate effects interest earned and paid by the
Company. The Company does not use derivative instruments to offset the exposure
to changes in interest rates. Changes in the interest rates are not expected to
have a material impact on the Company's results of operations.
Page 16 of 49
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FARREL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors................................................18
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997..................19
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996 ..........................................20
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996............................21
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996......................................22
Notes to Consolidated Financial Statements...............................23 - 39
Page 17 of 49
The Board of Directors and Stockholders
Farrel Corporation
We have audited the accompanying consolidated balance sheets of Farrel
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Stamford, Connecticut
March 18, 1999
Page 18 of 49
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
12/31/98 12/31/97
-------- --------
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) ....................... $ 5,786 $ 1,447
Accounts receivable, net of allowance for doubtful
accounts of $297 and $179, respectively ................. 20,708 14,423
Inventory (Notes 1 and 5) ................................ 14,542 18,277
Asset purchase agreement receivable (Note 2) ............. 5,284 --
Other current assets (Note 13) ........................... 1,953 2,957
-------- --------
Total current assets ................................... 48,273 37,104
Property, plant and equipment, net of accumulated
depreciation of $11,648 and $9,786, respectively
(Notes 1 and 6) ........................................... 11,614 12,416
Goodwill, net of accumulated amortization of $0.4 at
December 31, 1998 (Note 2) ............................... 1,555 5,295
Other assets (Notes 1, 3 and 11) ........................... 1,281 1,566
-------- --------
Total assets ............................................... $ 62,723 $ 56,381
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................... $ 14,039 $ 8,317
Accrued expenses and taxes (Notes 2 and 7) .............. 4,284 4,753
Advances from customers (Note 1) ......................... 7,017 6,412
Accrued installation and warranty costs (Note 1) ........ 1,683 1,326
Dividends payable ........................................ -- 951
Short-term debt (Note 8) ................................. 1,328 1,527
-------- --------
Total current liabilities ............................... 28,351 23,286
Long-term debt (Note 8) .................................... 3,983 5,283
Postretirement benefit obligation (Note 11) ................ 1,171 1,213
Other long-term obligations (Note 11) ...................... 2,429 592
Deferred income taxes (Notes 1 and 13) ..................... 488 225
Commitments and contingencies (Note 9) ..................... -- --
-------- --------
Total liabilities ....................................... 36,422 30,599
-------- --------
Stockholders' equity (Note 10):
Preferred stock, par value $100, 1,000,000 shares
authorized, no shares issued ............................ -- --
Common stock, par value $.01, 10,000,000 shares
authorized, 6,142,106 shares issued ..................... 61 61
Paid in capital .......................................... 19,295 19,295
Treasury stock, 202,620 and 199,524 shares at
December
31, 1998 and 1997, respectively, at cost ................. (990) (984)
Retained earnings ........................................ 9,576 7,776
Accumulated other comprehensive expense (Note 12) ........ (1,641) (366)
-------- --------
Total stockholders' equity .............................. 26,301 25,782
-------- --------
Total liabilities and stockholders' equity ................. $ 62,723 $ 56,381
======== ========
See Notes to Consolidated Financial Statements
Page 19 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
---------------------------------------
12/31/98 12/31/97 12/31/96
-------- -------- --------
(In thousands)
Net sales .............................. $ 98,036 $ 85,382 $ 75,836
Cost of sales .......................... 75,264 67,671 57,713
-------- -------- --------
Gross margin ........................... 22,772 17,711 18,123
Operating expenses:
Selling ............................. 7,869 7,076 6,792
General and administrative (Note 4).. 8,796 7,433 8,684
Research and development ............ 1,485 1,567 1,993
-------- -------- --------
Total operating expenses .......... 18,150 16,076 17,469
Operating income ....................... 4,622 1,635 654
Interest income ........................ 544 291 203
Interest expense ....................... (1,140) (71) (145)
Other (expense)/income, net (Note 15)... (203) 229 (232)
-------- -------- --------
Income before income taxes ............. 3,823 2,084 480
Provision/(benefit) for income taxes
(Notes 1 and 13):
Current ........................... 1,010 811 (7)
Deferred .......................... 536 (84) 161
-------- -------- --------
Total ............................. 1,546 727 154
-------- -------- --------
Net income ............................. $ 2,277 $ 1,357 $ 326
======== ======== ========
Per share data: (Note 14)
Basic and diluted net income per share.. $ 0.38 $ 0.23 $ 0.05
======== ======== ========
Average shares outstanding (000's):
Basic ............................... 5,942 5,950 5,970
======== ======== ========
Diluted ............................. 5,966 5,951 5,972
======== ======== ========
See Notes to Consolidated Financial Statements
Page 20 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Paid Other Total
Common stock in Treasury Retained comprehensive Stockholders'
Shares Amount Capital stock earnings expense equity
-------------- ---------- ----------- -------- ----------- ------------ -------------
(In thousands, except shares)
Balance, December 31, 1995 ............ 6,142,106 $ 61 $19,295 ($837) $ 10,287 ($ 992) $ 27,814
Comprehensive Income:
Net income ............................ -- -- -- -- 326 -- $ 326
--------
Other Comprehensive income, net of tax
Foreign currency translation ........ -- -- -- -- -- 878 $ 878
Minimum pension liability ........... -- -- -- -- -- 70 $ 70
--------
Other Comprehensive income ............ 948
--------
Comprehensive income .................. 1,274
Treasury stock transactions ........... -- -- -- (150) (25) -- ($ 175)
Cash dividend declared
at $.06 per common share ............ -- -- -- -- (360) -- ($ 360)
----------- ------- ------- ----- -------- ------- --------
Balance, December 31, 1996 ............ 6,142,106 $ 61 $19,295 ($987) $ 10,228 ($ 44) $ 28,553
----------- ------- ------- ----- -------- ------- --------
Comprehensive Income:
Net income ............................ -- -- -- -- 1,357 -- $ 1,357
--------
Other Comprehensive income, net of tax
Foreign currency translation ........ -- -- -- -- -- (295) ($ 295)
Minimum pension liability ........... -- -- -- -- -- (27) ($ 27)
--------
Other Comprehensive income ............ (322)
--------
Comprehensive income .................. 1,035
Treasury stock transactions ........... -- -- -- 3 (3) -- 0
Cash dividend declared
at $.64 per common share ............ -- -- -- -- (3,806) -- ($ 3,806)
----------- ------- ------- ----- -------- ------- --------
Balance, December 31, 1997 ............ 6,142,106 $ 61 $19,295 ($984) $ 7,776 ($ 366) $ 25,782
----------- ------- ------- ----- -------- ------- --------
Comprehensive Income:
Net income ............................ -- -- -- -- 2,277 -- $ 2,277
--------
Other Comprehensive income, net of tax
Foreign currency translation ........ -- -- -- -- -- (1) ($1)
Minimum pension liability ........... (1,274) ($1,274)
--------
Other Comprehensive income ............ ($ 1,275)
--------
Comprehensive income .................. $ 1,002
Treasury stock transactions ........... -- -- -- (6) (2) -- ($ 8)
Cash dividend declared ................ -- -- -- -- (475) -- ($ 475)
at $.08 per common share
=========== ======= ======= ===== ======== ======= ========
Balance, December 31, 1998............. 6,142,106 $ 61 $19,295 ($990) $ 9,576 ($1,641) $ 26,301
=========== ======= ======= ===== ======== ======= ========
See Notes to Consolidated Financial Statements
Page 21 of 49
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Year Year
ended ended ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
Cash flows from operating activities:
Net income ..................................................... $ 2,277 $ 1,357 $ 326
Adjustments to reconcile net income to net
cash used in/provided by operating activities:
Gain on disposal of fixed assets .............................. (288) (746) --
Depreciation and amortization ................................. 2,311 1,667 1,699
(Increase)/ decrease in accounts receivable ................... (6,259) 4,471 5,104
Decrease/(increase) in inventory .............................. 1,569 261 (915)
Increase/(decrease) in accounts payable ....................... 5,660 (2,514) (3,732)
Increase in advances from customers ........................... 590 608 795
(Decrease)/increase in accrued expenses and taxes .............. (1,145) 1,075 (1,767)
Increase(decrease) in accrued installation and warranty costs 354 (4) (344)
Increase/(decrease) in long-term employee benefit obligations 181 6 (171)
Other ......................................................... 207 (500) 787
-------- -------- --------
Total adjustments ............................................. 3,180 4,324 1,456
-------- -------- --------
Net cash provided by operating activities ..................... 5,457 5,681 1,782
-------- -------- --------
Cash flows from investing activities:
Refund of Shaw asset purchase price .......................... 2,701 -- --
Proceeds from disposal of fixed assets ....................... 1,193 1,027 15
Purchases of property, plant and equipment ................... (2,113) (1,878) (1,321)
Acquisition of Shaw assets ................................... (10,855) --
-------- -------- --------
Net cash provided by (used in) investing activities .......... 1,781 (11,706) (1,306)
Cash flows from financing activities:
Proceeds from long term borrowings ........................... -- 6,680 --
Repayment of long term borrowings ............................ (1,536) (196) (200)
(Purchase) issuance of treasury stock ........................ (6) 3 (175)
Used for dividends paid ...................................... (1,427) (2,856) (360)
-------- -------- --------
Net cash (used in) provided by financing activities .......... (2,969) 3,631 (735)
Effect of foreign currency exchange rate changes on cash ......... 70 9 25
-------- -------- --------
Net increase \ (decrease) in cash and cash equivalents ........... 4,339 (2,385) (234)
Cash and cash equivalents--
Beginning of period .......................................... 1,447 3,832 4,066
-------- -------- --------
End of period ................................................ $ 5,786 $ 1,447 $ 3,832
======== ======== ========
Income taxes paid ................................................ $ 870 $ 746 $ 756
======== ======== ========
Interest paid .................................................... $ 474 $ 76 $ 55
======== ======== ========
See Notes to Consolidated Financial Statements
Page 22 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 to
customer specifications for the rubber and plastics industry. The Company's
principal products are batch and continuous mixers, extruders, pelletizers,
calenders and mills. The Company also provides process engineering services,
process design and related services for rubber and plastics processing
installations in conjunction with its sales of capital equipment. The Company's
new machinery and related services generally represents slightly more than half
of its revenues. The Company's aftermarket business consists of contractual
repair, refurbishment and equipment upgrade services, spare parts sales and
field services.
The Company's principal customers are domestic and foreign
manufacturers of rubber and plastics. Foreign customers are primarily located
throughout Eastern and Western Europe, Asia and the Middle East.
Due to the nature of the Company's products, which can individually
cost up to $4.0 million, the relative importance of any product line can change
significantly from year to year. However, the more significant products are the
Company's batch and continuous mixers.
(a) Cash and Cash Equivalents:
-------------------------
Cash and cash equivalents include cash on hand, amounts due from
banks, and any other highly liquid investments purchased with a maturity of
three months or less 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 receivable and payables
approximates fair value because of the short maturity of these instruments. The
carrying value of long term debt approximates fair value. The interest rate on
the long term debt is variable and approximates current market rates.
(c) Inventory:
---------
Inventory is valued at the lower of cost or market. Inventory is
accounted for on the last-in, first-out (LIFO) basis in the U.S. and on an
average cost basis in the U.K.
(d) Property, Plant and Equipment:
-----------------------------
Property, plant and equipment is stated at cost. Improvements are
capitalized and expenditures for normal maintenance and repairs are charged to
expense. Depreciation is computed on a straight line basis based on the
estimated useful lives of the related assets which range from 5 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets. See Note 3 to these financial
statements.
(e) Goodwill:
--------
On December 19, 1997, the Company acquired certain assets of the
Francis Shaw Rubber Machinery operations (see Note 2). The transaction was
accounted for as a purchase. Goodwill represents the excess purchase price over
the estimated fair value of the assets acquired and is being amortized on a
straight line basis over 20 years.
Page 23 of 49
(f) Patents and Acquired Technology:
-------------------------------
Other assets includes acquired patents and technical know-how and a
technology license agreement which represents the cost of licensed and purchased
technology, know how, and trade secrets including technology which is patented
or for which a patent has been applied for. Such costs are amortized over
periods from 5 to 7 years.
(g) Revenue Recognition:
-------------------
Revenue on new machine sales is recognized upon completion of the
customer contract, which generally coincides with the shipment. Revenue on
repair and refurbishment of customer owned machines is recognized when the
contractual work is completed. Spare parts revenue is recognized upon shipment.
The Company requires advances from customers upon entering a contract
and progress payments during the manufacturing process. Generally, letters of
credit are required on contracts with export customers to minimize credit and
currency risk.
(h) Product Installation and Warranty Obligations:
---------------------------------------------
Estimated costs to be incurred under product installation and warranty
obligations relating to products which have been sold are provided for at the
time of sale.
(i) Income Taxes:
------------
Deferred income taxes are provided on temporary differences between
the financial statement and tax basis of the Company's assets and liabilities in
accordance with the liability method of accounting for income taxes. Provision
has not been made for U.S. income taxes or additional foreign taxes on
approximately $9.4 million of undistributed earnings of foreign subsidiaries
because it is expected that those earnings will be reinvested indefinitely.
(j) Earnings Per Share:
------------------
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of stock options (see
Note 10). Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
No. 128 requirements. (See Note 14 to the financial statements.)
(k) Foreign Currency Translation:
----------------------------
Assets and liabilities denominated in foreign currencies are
translated into United States dollars at current exchange rates. Income and
expense accounts are translated at average rates of exchange prevailing during
the year.
Adjustments resulting from the translation are included in the
accumulated other comprehensive expense in stockholders' equity. Transaction
gains and losses are included in earnings. The Company experienced a foreign
currency transaction loss of $71,000 in 1998 and $131,000 in fiscal 1997,
respectively. The transaction gain or loss in 1996 was not significant.
The Company enters into foreign exchange contracts for non-trading
purposes, exclusively to minimize its exposure to currency fluctuations on trade
receivables and payables. As a result, changes in the values of foreign currency
contracts offset changes in the values of the underlying assets and liabilities
due to changes in foreign exchange rates, effectively deferring gains and losses
on trade receivables and payables and the related hedges until the date the
transactions are settled in cash. At December 31, 1998, the Company has entered
into $1.8 million of forward exchange contracts for transactions related to
amounts to be received for sales commitments. A loss of approximately $14,000
has been deferred on these transactions to be offset against the exchange
earnings to be recognized on the hedged transaction. The Company is exposed to
loss in the event of nonperformance by the Company's bank, the other party to
the foreign exchange contracts. However, the Company does not anticipate
nonperformance by its bank.
Page 24 of 49
(l) Use of Estimates:
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates.
(m) Recent Accounting Pronouncements:
--------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Company expects to adopt the new Statement effective January 1, 2000. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. The Company does not anticipate the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
(n) Reclassifications:
-----------------
Certain amounts in prior year financial statements have been
reclassified to conform with the current year presentation. These
reclassifications had no impact on previously reported results of operations.
NOTE 2 - ASSET PURCHASE
On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of the
Company, acquired certain assets and the operations of the Francis Shaw Rubber
Machinery ("Shaw") operations from EIS Group PLC of the United Kingdom
("Seller"). The purchase price, including costs of the acquisition, totaled
approximately $13.9 million. The purchase and sale agreement ("Agreement")
between the Company and the Seller required subsequent adjustment to the
purchase price if (1) the inventory value of Shaw at the transfer date was less
than approximately $5 million and (2) the Shaw operations did not produce a
minimum profit, as defined in the Agreement, of approximately $1.7 million for
the year ended December 31, 1998 (the "Profit Guaranty").
In June 1998, the Company and the Seller reached agreement on the
inventory value transferred resulting in a payment to the Company by the Seller
of approximately $2.7 million , which amount was used to reduce the purchase
price. The operations of Shaw produced a loss (as computed under the terms of
the Agreement) of approximately $3.6 million for the year ended December 31,
1998. Accordingly, the Company has 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. The Company
made demand on the Seller under the Profit Guaranty. In late March 1999, the
Company received notice from the Seller that they do not agree with the Profit
Guaranty calculation, however, the amount of any dispute will not be
communicated to the Company until review of the Profit Guaranty by the Seller
under the terms of the Agreement, which is expected to be in April, 1999. The
Company believes it is in full compliance with the terms of the Agreement and
expects to recover the amounts due under the Profit Guaranty. Any difference
between the amounts recorded at December 31, 1998 and amounts received from the
Seller will result in an adjustment of the purchase price allocation.
The Agreement also required the transfer of the pension liability for
the Shaw employees together with the pension assets related to those employees.
The Agreement called for the Seller to appoint an actuary who, together with the
Company's actuary and the third party that holds the pension assets, were to
determine the related pension amounts to be transferred. In February 1999, the
Seller agreed to appoint an actuary to fulfill the obligations under the
Agreement. The consolidated financial statements do not include any amounts
related to the transferred Shaw employees as those amounts are presently not
determinable. The net amount of the actuarially determined excess or shortfall
of the pension assets compared with the projected benefit obligation for the
Shaw employees will be recorded as an additional purchase price adjustment when
determined.
Page 25 of 49
The revised purchase price of $7.2 million has been allocated as
follows:
(In thousands)
Inventory ................. $2,312
Machinery & Equipment...... 2,505
Patents and trademarks..... 835
Goodwill .................. 1,555
------
$7,207
======
Included in the allocation above were estimated liabilities of
approximately $2.3 million for costs of consolidating the Shaw operations with
the Company's existing Rochdale, England facility including moving, employee
separation and other costs. Through December 31, 1998, the Company has charged
$1.2 million of employee separation and $50,000 of other costs against the
liability recorded. The remaining amount of the liability recorded is expected
to be incurred by June 30, 1999.
The results of Shaw are included in the consolidated financial
statements for the year ended December 31, 1998 and 1997 for the period from
December 19, 1997 to December 31, 1997. The Seller did not maintain, and the
Company was not provided, separate historical financial information for Shaw.
Accordingly, the Company is not able to estimate the pro forma revenue and net
income for the year ended December 31, 1997.
NOTE 3 - OTHER ASSETS
12/31/98 12/31/97
-------- --------
(In thousands)
Technology license............................ $167 $334
Assets held for disposal...................... 240 209
Acquired patents and technical know how....... 664 835
Other......................................... 210 188
------ -------
Total....................................... $1,281 $1,566
====== ======
Included in other assets are assets held for disposal that represent
the remaining book value of the Company's Derby, Connecticut manufacturing
facility and machinery and equipment of Shaw at the Manchester, England
facilities no longer expected to be used. In January 1999, the Company completed
the sale of the Derby property for $2.4 million.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company is a party to an agreement with First Funding Corporation
(the "Financial Services Agreement"), pursuant to which the Company retains
First Funding as its exclusive investment adviser. Charles S. Jones, a director
of the Company and owner of over 5% of the Company's outstanding Common Stock,
is an executive officer of First Funding. The Financial Services Agreement may
be terminated by either party upon twelve months written notice or by the
Company in the event that Mr. Jones is no longer an officer or employee of First
Funding.
Under the Financial Services Agreement, the Company pays First Funding
an annual retainer of $450,000 for Mr. Jones' services. The Company also pays
for advisory services provided by other First Funding employees on an hourly
basis and out-of-pocket expenses. The Company also pays transaction fees in the
event of certain successful transactions. The Company recorded amounts due to
First Funding of $866,000, $894,000, and $687,000 in fiscal 1998, 1997 and 1996,
respectively. In addition, the Company also reimbursed First Funding $236,000,
$319,000, and $211,000 for out-of-pocket costs during the same three periods,
respectively. These amounts include $177,000 and $460,000 for services related
to the Shaw Asset Purchase Agreement (see Note 2) for 1998 and 1997,
respectively. Also included during 1998 is $205,000 related to restating and
amending our credit facility to include a term note to finance the Shaw Asset
Purchase and to increase the amount available under the credit facility and to
lengthen the term of the credit facility (see Note 8).
Page 26 of 49
NOTE 5 - INVENTORY
Inventory is comprised of the following:
12/31/98 12/31/97
-------- --------
(In thousands)
Stock and raw materials................... $7,279 $9,459
Work-in-process........................... 7,263 8,818
------- --------
Total..................................... $14,542 $18,277
======= =======
Of the above inventories at December 31, 1998 and 1997, $7.2 million
are valued using the LIFO method. Current replacement costs of those inventories
as of these dates were greater than the LIFO carrying amounts by approximately
$0.5 million at December 31, 1998 and 1997.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
12/31/98 12/31/97
-------- --------
(In thousands)
Land and buildings........................ $4,081 $3,927
Machinery, equipment and other............ 18,546 18,163
Construction in progress.................. 635 112
-------- ---------
23,262 22,202
Accumulated depreciation................ (11,648) (9,786)
-------- ---------
Property, plant and equipment, net...... $11,614 $12,416
======== ========
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 5-10
years. The amounts indicated here exclude the assets held for resale which are
included in Other Assets. See Note 3 to these financial statements.
NOTE 7 - ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes includes accrued wages and benefits of
approximately $0.8 million and $1.0 million at December 31, 1998 and 1997,
respectively. Also included are income taxes payable of $1.0 million, at
December 31, 1998 and 1997.
NOTE 8 - BANK CREDIT ARRANGEMENTS
During January 1998, the Company amended and restated its worldwide
multi-currency credit facility with a major U.S. bank from a $20 million
revolving credit facility to a $25 million credit facility consisting of an
$18.5 million revolving credit facility for direct borrowings and letters of
credit and up to (pound)3.0 million for foreign exchange contracts and a five
year term note. Interest varies based upon prevailing market interest rates
(8.4% and 8.75% at December 31, 1998 and 1997, respectively). The facility
contains limits on direct borrowings and letters of credit combined based upon
stipulated percentages of accounts receivable, inventory and backlog. The
facility also contains covenants specifying minimum and maximum operating
thresholds for operating results and selected financial ratios. The agreement
contains certain restrictions on investments, borrowings and the sale of assets.
The Company's ability to pay dividends is limited to (a) 25% of the Company's
cumulative net income during the most recently completed four fiscal quarters
after deducting distributions previously made and (b) purchases by the Company
of its common stock during the same period. At December 31, 1998, there was $5.3
million outstanding under the term loan. At December 31, 1997, there was $7.1
million in direct borrowings outstanding under the previous credit facility. The
weighted averaged interest rate incurred on short-term borrowings was 8.6%,
8.18% and 7.68% in fiscal 1998, 1997 and 1996, respectively. There were $5.1
million and $6.0 million of letters of credit outstanding at December 31, 1998
and 1997, respectively.
Page 27 of 49
During November 1998, the credit facility was amended to extend the
expiration date of the revolving credit facility from December 31, 1999 to
December 31, 2002, and an insignificant reduction in the margin added to the
base rate to determine the periodic interest rate.
The term note is payable in equal quarterly payments of (pound)200,000
through December 31, 2002. Approximately, ((pound)800,000) $1,328,000 and
$1,322,000 is classified as current and $3,983,000 and $5,283,000 was classified
as long term at December 31, 1998 and 1997, respectively.
The Company had a loan in the amount of (pound)125,000 ($205,000) at
December 31, 1997 from a U.K. bank which was collateralized by the Company's
facility in Rochdale, England. The loan was paid in full during 1998.
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)
- ------------------------ --------------
1999 $324
2000 289
2001 145
2002 18
2003 16
Thereafter 14
Rental expense for the year ended December 31, 1998, 1997 and 1996 was
$594,000, $332,000, $374,000, respectively.
(b) Contingencies:
-------------
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company. While the outcome of lawsuits or other
proceedings against the Company cannot be predicted with certainty, the Company
does not expect that these matters will have a material adverse effect on the
Company's financial position or results of operations.
NOTE 10 - STOCK PLANS
The Company sponsors a Stock Option Plan and an Employees' Stock
Purchase Plan, both established in 1997.
The 1997 Omnibus Stock Incentive Plan authorizes the granting of
incentive stock options and non-qualified stock options to purchase up to
500,000 shares of common stock. Option awards may be granted by the Compensation
Committee of the Board of Directors through May 23, 2007 to eligible employees.
The terms (exercise price, exercise period and expirations) of each option award
are at the discretion of the Compensation Committee subject to the following
limitations. The exercise price of an Incentive Stock Option may not be less
than the fair market value as of the date of the grant (or 110% in the case of
an incentive stock option granted to a 10% stockholder). The exercise period may
not exceed 10 years from the date of the grant. During 1998 options to purchase
60,000 shares were granted under this plan.
Page 28 of 49
In prior years, the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 1998, options to purchase 455,000 shares remain outstanding under that plan.
The Company has elected to continue to account for stock options under
Accounting Principles Board Opinion No. 25 , "Accounting for Stock Issued to
Employees" (APB 25) and not the fair value method as provided by FAS 123,
"Accounting and Disclosure of Stock -Based Compensation." The Company's Stock
Option Plan requires options to be granted at the market price of the Company's
common stock on the date the options are granted, and as a result, under APB 25
no compensation expense is recognized.
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
1998 1997 1996
------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
------------------- --------------------- --------------------
Outstanding, beginning of year 459 $5.86 459 $5.86 296 $6.96
Granted 60 2.19 - - 375 4.38
Exercised - - - - - -
Forfeited 4 3.88 - - 212 4.76
------------------- --------------------- --------------------
Outstanding, end of year 515 $5.45 459 $5.86 459 $5.86
------------------- --------------------- --------------------
Exercisable, end of year 420 $5.96 374 $6.32 279 $7.05
Weighted-average fair value of options
granted during the year $1.19 - $1.75 -
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
- -------------------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- -------------------------------------------------------------- ----------------------------
$2.19 - $3.74 60,000 10 years $2.19 20,000 $2.19
3.75 - 5.50 274,000 6 4.52 219,500 4.67
5.51 - 8.50 95,000 4.5 6.32 95,000 6.32
8.51 - 10.00 86,000 3.0 9.73 86,000 9.73
- -------------------------------------------------------------- ----------------------------
$2.19 -$10.00 515,000 5.7 years $5.45 420,500 $5.96
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 1998 and
1996:
1998 1996
---- ----
Risk free interest rate .......................... 4.65% 6.0%
Dividend yields .................................. 2.0% 2.0%
Expected volatility factor of the expected
market price of the Company's common stock ....... .595 .458
Weighted average expected life of each option..... 8 yrs. 8 yrs.
Page 29 of 49
The weighted average fair value of options granted during 1988 was
$1.19 and 1996 was $1.75. There were no options granted during 1997. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics different than those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's judgment, applying
the provisions of FAS 123 does not necessarily provide a reliable single measure
of the fair value of its stock options. It is also not likely that the current
pro forma net income will be representative of pro forma net income in future
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information is as follows:
Year Ended
----------
12/31/98 12/31/97 12/31/96
-------------------------------------
(In thousands, except per share data)
Pro Forma Net Income $2,237 $1,331 $258
Pro Forma earnings per share-basic
and diluted .37 .22 .04
During 1997, the Company adopted the 1997 Employees' Stock Purchase
Plan as a successor to the 1992 Employees' Stock Purchase Plan.
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 490,000 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 1998.
Under the stock purchase plan in July 1997 and May 1996, employees
elected to purchase approximately 9,000 and 3,000 shares, respectively, of the
Company's common stock through these plans. During 1998 and 1997, approximately
5,400 and 13,000 shares, respectively, were distributed to employees under this
plan. The 1998 and 1997 distribution includes 404 and 647 shares respectively
from the Company's treasury account, for which retained earnings was adjusted.
At December 31, 1998, there were approximately 5,000 shares subscribed to under
these plans.
The Company may reaquire up to $2,250,000 of its common stock under
its discretionary open market stock repurchase plan. During fiscal 1998 the
Company reacquired 3,500 shares of common stock, under this plan for
approximately $9,000, which are included in treasury stock. There were no shares
repurchased during 1997. Subsequent to December 1998, the Company has
repurchased 552,900 shares for approximately $1.3 million.
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
Page 30 of 49
employee service, an interest cost related to the increase in the benefit
obligations due to the passage of time (the benefit obligations are stated at a
present value which increases each year as the discount period decreases), less
the earnings achieved on assets invested in the employee benefit plan.
Differences between the estimates and actual experience are deferred and
amortized to expense over a period of time.
PENSION PLANS
The Company has retirement plans covering portions of domestic and
foreign employees. The Company funds the domestic plan in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plans in
accordance with appropriate governmental regulations in the United Kingdom.
Pension expense is actuarially determined in accordance with generally accepted
accounting principles and differs from amounts funded annually.
The Company has a domestic defined benefit pension plan for hourly
employees which provides benefits based on employees' years of service. Plan
assets are invested in short-term securities, equity securities and real estate.
The Company has two foreign defined benefit pension plans covering substantially
all employees which provide stipulated amounts at retirement based on years of
service and earnings. Plan assets are invested in securities, real estate and
cash. The following table summarizes the components of domestic and foreign
pension expense:
Year Ended
----------
12/31/98 12/31/97 12/31/96
-------- -------- --------
Domestic pension expense: (In thousands)
Service cost-benefits earned during the period.. $ 62 $ 62 $ 65
Interest cost on projected benefit obligation... 136 124 122
Expected return on plan assets ................. (147) (127) (125)
Recognized net actuarial (gains)/loss .......... 27 26 26
Amortization of transition, asset .............. 7 7 8
Amortization of prior service cost ............. 11 7 8
------ ------ ------
Net domestic pension expense ............... $ 96 $ 99 $ 104
====== ====== ======
Foreign pension expense:
Service cost-benefits earned during the period.. $ 641 $ 258 $ 226
Interest cost on projected benefit obligation... 762 728 648
Estimated return on plan assets ................ (799) (802) (715)
Recognized net actuarial (gains)/loss .......... 6 -- --
Amortization of transition asset ............... (159) (152) (150)
Amortization of prior service cost ............. -- (7) --
------ ------ ------
Net foreign pension expense ................ $ 451 $ 25 $ 9
====== ====== ======
Over the long run, the Company's funding policy is designed to
accumulate sufficient assets in the benefit plans to meet obligations for
retirement benefits. Because at any point in time there will be differences
between the estimates used in establishing pension cost and funding amounts and
actual experience, there will always be an amount by which the Company is over
or under-funded.
Page 31 of 49
The following table sets forth the funded status of the domestic and
foreign defined benefit plans and amounts recognized in the balance sheets:
Domestic Foreign
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Change in Projected Benefit Obligation
Balance at the beginning of the year 1,991 1,755 10,252 9,063
Service cost 62 62 294 259
Interest cost 136 124 762 731
Plan participant contributions - - 148 125
Actuarial losses 305 114 1,543 1,005
Foreign currency exchange rates - - 52 (325)
Benefits paid (107) (104) (685) (606)
Plan amendments - 40 - -
-------- -------- -------- --------
Balance at the end of the period $2,387 $1,991 $12,366 $10,252
======== ======== ======= ========
Change in Fair Value Plan Assets
Balance at the beginning of the year 1,780 1,553 9,800 9,289
Actual return on assets 184 171 929 1,326
Contributions - employer 257 160 - -
Contributions - employee - - 148 125
Foreign currency exchange rates - - 51 (334)
Benefits paid (107) (104) (685) (606)
-------- -------- -------- --------
Balance at the end of the period $2,114 $1,780 $10,243 $9,800
======== ======== ======== ========
Funded status of the plan
(Under)/over funded (273) (211) (2,123) (452)
Unrecognized net actuarial loss 745 504 2,099 699
Unamortized prior service cost 2 9 - -
Unamortized net transition obligation (asset) 68 79 (40) (198)
-------- -------- -------- --------
Prepaid/(Accrued) Pension Expense $542 $381 ($64) $49
======== ======== ======== ========
Discount rate 6.25% 7.00% 6.00% 7.50%
Rate of increase in future compensation
levels N/A N/A 4.50% 4.50%
Expected long-term rate of return on
plan assets 8.00% 8.00% 8.00% 9.00%
The Company changed the discount rate in 1998 and 1997 in response to
the lower current and projected interest rates. The Company recorded a
minimum liability of $2,429,000 and $592,000 at December 31, 1998 and 1997,
respectively. The Company has also recorded intangible assets of $70,000 and
$88,000, the amounts allowable under FAS 87, at December 31, 1998 and 1997,
respectively, which are included in Other Assets. The minimum liability in
excess of the intangible asset has been recorded as comprehensive expense
included in stockholders' equity, net of applicable income taxes.
Comprehensive expense was $1,855,000 and $43,000 for the years ended December
31, 1998 and 1997, respectively.
The Company has a domestic 401(k) retirement plan for salaried
employees which includes matching and discretionary non-matching
contributions by the Company. Approximately $78,000, $119,000 and $113,000 of
such contributions were expensed in fiscal 1998, 1997 and 1996, respectively.
No discretionary contributions were made by the Company during fiscal 1998,
1997 or 1996.
Page 32 of 49
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS
The Company generally provided health care benefits to eligible
domestic union retired employees and their dependents through age 65. The
Company is self-insured for claims prior to age 65 and pays these as incurred.
Retired employees and their dependents were entitled to select Supplemental
Medicare Coverage A and B only at age 65. The Company pays 75% of the monthly
Medicare premiums for most of these individuals. Eligibility for these retiree
health care benefits was attained upon reaching age 60 and completing 10 years
of service.
During 1994 the Company renegotiated its contract with domestic union
employees in which postemployment medical benefits were eliminated for future
retirees. Employees who retired prior to the signing of the new contract
maintain the postemployment medical benefits granted under prior contracts. The
elimination of these benefits reduced the obligation by approximately $1.3
million ($.8 million net of approximately $.5 million of deferred income taxes)
from that which was previously recorded by the Company when it adopted FAS 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions". The
Company accounted for the elimination of these benefits under the provisions of
FAS 106. The following table summarizes the Company's expense for postemployment
benefits other than pensions.
Year Ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
(In thousands)
Service cost- benefits earned during the period.. -- -- --
Interest cost on accumulated postretirement
benefit obligation ............................ $81 $90 $90
--- --- ---
Net periodic postretirement benefit costs ....... $81 $90 $90
=== === ===
The Company's non-pension postretirement benefit plans are not funded.
The status of the plans are as follows:
12/31/98 12/31/97
-------- --------
(In thousands)
Accumulated postretirement benefit obligation:
Beginning of the year $1,221 $1,247
Interest cost 81 90
Recognized actuarial loss 69 37
Benefits Paid (123) (153)
-------- --------
Accumulated postretirement obligation:
End of the year $1,248 $1,221
Unrecognized actuarial loss (77) (8)
-------- --------
Accrued postretirement benefit obligation $1,171 $1,213
======== ========
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 6.25% and 7.00% at December 31, 1998 and
1997, respectively. The assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 9.0% at December 31, 1998
and declines .5% per year to 5.5% by the year 2005 and remains at that level
thereafter. The change in assumptions did not have a material impact on the
obligation or net periodic postretirement benefit cost.
Page 33 of 49
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- 1-Percentage-
Point Point
Increase Decrease
--------------------------------
Effect on the interest cost components in 1998 $87 $(76)
Effect on postretirement benefit obligation
as of 1998 $1,341 $(1,161)
NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (EXPENSE)
The components of other comprehensive income (expense) are as follows:
Foreign
Currency Minimum
Translation Pension
Adjustments Liability Total
----------- --------- -----
Balance at December 31, 1996 ...... $ 232 $ (276) $ (44)
Cumulative translation adjustment . (295) (295)
Minimum pension liability
adjustment ........................ (43) (43)
Deferred taxes relating to minimum
Pension liability
16 16
------- ------- -------
Balance at December 31, 1997 ...... $ (63) $ (303) $ (366)
Cumulative translation adjustment.. (1) (1)
Minimum pension liability
adjustment ........................ (1,855) (1,855)
Deferred taxes relating to minimum
Pension liability 581 581
------- ------- -------
Balance at December 31, 1998 ...... $ (64) $(1,577) $(1,641)
======= ======= =======
Page 34 of 49
NOTE 13 - PROVISION FOR INCOME TAXES
Pre-tax income/(loss) and income taxes for the years ended December
31, 1998, 1997 and 1996 are as follows:
Year ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
The domestic and foreign components (In thousands)
of income/(loss) before
income taxes are:
Domestic ................ $ 3,325 $ 89 ($1,544)
United Kingdom .......... 498 1,995 2,024
------- ------- -------
$ 3,823 $ 2,084 $ 480
======= ======= =======
The provision/(benefit) for income taxes is:
Current:
United States ........... $ 918 $ 101 ($ 646)
United Kingdom .......... 9 658 664
State taxes ............. 83 52 (25)
------- ------- -------
1,010 811 (7)
------- ------- -------
Deferred:
United States ........... 127 (50) 232
United Kingdom .......... 171 7 41
State taxes ............. 238 (41) (112)
------- ------- -------
536 (84) 161
------- ------- -------
$ 1,546 $ 727 $ 154
======= ======= =======
Deferred tax liabilities/(assets) result from the following
differences between financial reporting and tax accounting.
12/31/98 12/31/97
-------- --------
(In thousands)
DEFERRED TAX LIABILITIES:
Fixed Assets $1,396 $1,054
Inventory valuation 78 258
Intangibles 249 -
------- -------
Total deferred tax liabilities 1,723 1,312
------- -------
DEFERRED TAX ASSETS:
Non pension postretirement benefits (469) (485)
Installation and warranty cost accruals (190) (324)
Vacation reserve (98) (94)
Bad debt reserve (53) (51)
Pension (686) (202)
State tax loss carryforwards - (197)
Redundancy reserve (137) -
Other reserves (343) -
Other (28) (30)
------- --------
Total deferred tax assets (2,004) (1,383)
------- --------
Net deferred tax (asset) $ (281) $ (71)
======= ========
Other current assets includes $769,000 and $296,000 of deferred tax
assets at December 31, 1998 and 1997, respectively.
Page 35 of 49
A reconciliation from statutory U.S. federal income taxes to the actual
income taxes is as follows:
Year ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
(In thousands)
Statutory provision ...................... $ 1,300 $ 709 $ 163
U.S.--U.K. rate differential ............. (20) (57) 17
State income taxes, net of federal benefit 212 7 (90)
Permanent differences .................... 79 98 30
Other .................................... (25) (30) 34
------- ------- -------
Actual provision ......................... $ 1,546 $ 727 $ 154
======= ======= =======
NOTE 14 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Year Year Year
Ended ended ended
12/31/98 12/31/97 12/31/96
-------- -------- --------
(In thousands, except share data)
Net income applicable to
common stockholders .......................... $ 2,277 $ 1,357 $ 326
========== ========== ==========
Weighted average number of common
shares outstanding - Basic earnings per Share .. 5,941,837 5,950,240 5,969,708
Effect of dilutive stock and
purchase options .............................. 24,539 1,403 2,393
---------- ---------- ----------
Weighted average number of common shares
outstanding - Diluted earnings per share 5,966,376 5,951,643 5,972,101
========== ========== ==========
Net income per share-basic ..................... $ 0.38 $ 0.23 $ 0.05
========== ========== ==========
Net income per share-diluted ................... $ 0.38 $ 0.23 $ 0.05
========== ========== ==========
Page 36 of 49
NOTE 15 - OTHER INCOME/(EXPENSE), NET
For the year ended December 31, 1998, and 1997 other income/expense
includes gains of approximately $0.3 million and $0.7 million, respectively,
from the disposal of machinery and equipment no longer used. There were no
individually significant items of other income or expense in 1996.
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, 1998, 1997 and 1996:
Sale by Product Line 1998 1997 1996
- -------------------- ---- ---- ----
New Machines $56,057 $48,745 $40,317
Spares 20,206 19,735 18,535
Repairs 21,154 16,493 16,610
Other 619 409 374
------- ------- -------
Total $98,036 $85,382 $75,836
======= ======= =======
Geographic Sales by Destination
- -------------------------------
United States $51,274 $39,402 $40,487
United Kingdom 9,915 6,122 5,134
Europe (excluding U.K.) 21,310 12,952 12,701
North America (excluding U.S.) 3,099 1,456 4,005
Asia 6,446 22,220 10,587
Middle East 4,271 1,058 1,465
Other 1,721 2,172 1,457
------- ------- -------
Total $98,036 $85,382 $75,836
======= ======= =======
Sales for 1997 included sales to one customer located in Korea
totaling $13 million. There were no other sales to a single customer which
exceeded 10% of the Company's revenue for the years ended December 31, 1998,
1997 and 1996.
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 37 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, 1998, 1997, and
1996 are as follows:
United United
States Kingdom Consolidated
-----------------------------------
(In thousands)
Year ended 12/31/98:
Sales to unaffiliated Customers $57,387 $40,649 $98,036
Operating income $3,489 $1,133 $4,622
Long-lived assets $5,502 $8,948 $14,450
Total assets $28,464 $34,259 $62,723
Year ended 12/31/97:
Sales to unaffiliated Customers $60,594 $24,788 $85,382
Operating income $(310) $1,945 $1,635
Long-lived assets $5,920 $13,357 $19,277
Total assets $26,411 $29,970 $56,381
Year ended 12/31/96:
Sales to unaffiliated Customers $50,811 $25,025 $75,836
Operating income ($1,501) $2,155 $654
Long-lived assets $5,189 $5,355 $10,544
Total assets $31,011 $19,720 $50,731
Page 38 of 49
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for fiscal 1998 and 1997:
(In thousands except per share data)
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- -----------
FISCAL 1998
Net Sales $15,976 $24,954 $21,626 $35,480
========== ========== ========== ===========
Gross Margin $4,236 $6,100 $4,341 $8,095
========== ========== ========== ===========
Other (expense) ($234) ($255) ($64) ($246)
========== ========== ========== ===========
Net income/(loss) $110 $737 ($202) $1,632
========== ========== ========== ===========
Basic and diluted net income/(loss) per common share $0.02 $0.12 ($0.03) $0.27
========== ========== ========== ===========
Basic weighted average shares outstanding (000's) 5,943 5,943 5,942 5,939
========== ========== ========== ===========
Diluted weighted average shares outstanding (000's) 5,983 5,947 5,942 5,944
========== ========== ========== ===========
Quarter
-----------------------------------------------
First Second Third Fourth
---------- ---------- ---------- -----------
FISCAL 1997
Net Sales $16,123 $26,183 $21,955 $21,121
========== ========== ========== ===========
Gross Margin $3,338 $5,344 $5,429 $3,600
========== ========== ========== ===========
Other Income/(expense) $300 $167 $20 ($38)
========== ========== ========== ===========
Net income/(loss) ($106) $870 $712 ($119)
========== ========== ========== ===========
Basic and diluted net income/(loss) per common share ($0.02) $0.15 $0.12 ($0.02)
========== ========== ========== ===========
Basic weighted average shares outstanding (000's) 5,942 5,942 5,949 5,946
========== ========== ========== ===========
Diluted weighted average shares outstanding (000's) 5,942 5,943 5,955 5,953
========== ========== ========== ===========
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,
1998 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 2,1999.
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,
1998 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 2, 1999.
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,
1998 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 2, 1999.
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,
1998 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 2, 1999. 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.........................................18
Consolidated Balance Sheets as of December 31, 1998 and, 1997..........19
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996....................................20
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996...............................21
Consolidated Statements of Cash Flows for years ended
December 31, 1998, 1997 and 1996.....................................22
Notes to Consolidated Financial Statements........................23 - 39
2. Financial Statement Schedule
Report of Independent Auditors on Financial Statement Schedule.........47
Schedule II - Valuation and Qualifying Accounts........................48
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 2(1) Sale and purchase agreement of the Francis Shaw Rubber
Machinery Business dated December 4, 1997, between
Francis Shaw Rubber Machinery Limited, PRC Fabrications
Limited, EIS Group PLC, Farrel Bridge Limited and
Farrel Limited. Filed as an exhibit to the Registrant's
Report on Form 8K dated December 19, 1997 N/A
Exhibit 3(a) Articles of Incorporation - Filed as an exhibit to the
Registrant's Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by reference. N/A
Exhibit 3(b) By-laws - Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 4 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. 51
Exhibit 10(b) Employment Agreement between Rolf K. Liebergesell and
the Registrant, dated November 1, 1991. Filed as an
exhibit to the Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated herein by
reference. N/A
Exhibit 10(d) Standard Corporate Financial Services contract between
First Funding Corporation and the Registrant, dated
June 17, 1986, as amended by a Letter Agreement dated
November 1, 1991. Filed as an exhibit to the
Registrant's Registration Statement as Form S-1 (No.
33-43539) and incorporated herein by reference. N/A
Exhibit 10(e) 1997 OMNIBUS Stock incentive Plan - Filed as an exhibit
to the Registrant's definitive Proxy Statement re:
Annual Meeting on May 23, 1997 and incorporated herein
by reference. N/A
Exhibit 10(f) 1997 Employee's Stock Purchase Plan - Filed on the
Registrant's registration Statement as Form S-8 (No.
333-30735) and incorporated herein by reference. N/A
Exhibit 10(g) Environmental Agreement between USM Corporation and the
Registrant dated as of May 12, 1986. Filed as an
exhibit to the Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated herein by
reference. N/A
Page 43 of 49
Exhibit 10(h) Form of Director Indemnification Agreement. Filed as an
exhibit to the Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated herein by
reference. N/A
Exhibit 10(i) Environmental Settlement Agreement between The Black &
Decker Corporation and the Registrant dated February
17, 1995. Filed as an exhibit to the Registrant's Form
10-K for the year ended December 31, 1994. N/A
Exhibit 10(j) Secondment Agreement between Karl N. Svensson and the
Registrant, dated March 3, 1995. Filed as an exhibit to
the Registrant's Form 10-Q for the quarter ended June
30, 1996. N/A
Exhibit 10(k) Agreement of Purchase and Sale of certain property
located in Derby CT between National RE/sources
Acquisition, LLC and Farrel Corporation dated July 17,
1998, and reinstatement agreement dated October 15,
1998.
Exhibit 11 Statement re: Computation of per share earnings.
Exhibit 21 Subsidiaries - Filed as an exhibit to the Registrant's
Registration Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 23 Consent of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8K.
No such reports were filed by the Company during the year ended December 31,
1998.
Page 44 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/ ROLF K. LIEBERGESELL
------------------------------------
Rolf K. Liebergesell
Chief Executive Officer
President and Chairman of the Board
MARCH 29, 1999
------------------------------------
Date
Page 45 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 MARCH 29, 1999
Rolf K. Liebergesell and Chairman of the Board -----------------
/S/THEODORE E. JENNY Vice President-Chief Financial MARCH 26, 1999
Theodore E. Jenny Officer (Chief Accounting Officer) -----------------
MARCH 30, 1999
/S/CHARLES S. JONES Director -----------------
Charles S. Jones
MARCH 28, 1999
/S/JAMES A. PURDY Director -----------------
James A. Purdy
MARCH 29, 1999
/S/HOWARD J. AIBEL Director -----------------
Howard J. Aibel
MARCH 30, 1999
/S/GLENN ANGIOLILLO Director -----------------
Glenn Angiolillo
MARCH 29, 1999
/S/ALBERTO SHAIO Director -----------------
Alberto Shaio
Page 46 of 49
The Board of Directors and Stockholders
Farrel Corporation
We have audited the consolidated financial statements of Farrel Corporation as
of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated March 18, 1999
(included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedule for the years ended December 31, 1998,
1997 and 1996 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
March 18, 1999
Page 47 of 49
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------- -------------- ---------------------------- ----------------- ----------------
Charged
Balance at Charged to (credited)
beginning costs and to other Balance at
Name of Debtor of period expenses accounts (1) Deductions (2) end of period
- ------------------------------------- -------------- ------------- -------------- ----------------- ----------------
Year ended 12/31/96
- -------------------
Allowance for doubtful
receivables 102 362 10 (10) 464
Reserve for excess and obsolete
inventory items 1,042 119 67 (137) 1,091
Accrued installation and warranty
costs 1,624 1,840 92 (2,196) 1,360
Year ended 12/31/97
- -------------------
Allowance for doubtful
receivables 464 (50) (8) (227) 179
Reserve for excess and obsolete
inventory items 1,091 208 (23) (525) 751
Accrued installation and warranty
costs 1,360 2,182 (25) (2,191) 1,326
Year ended 12/31/98
- -------------------
Allowance for doubtful
receivables 179 261 - (143) 297
Reserve for excess and obsolete
inventory items 751 916 3 (120) 1,550
Accrued installation and warranty
costs 1,326 2,282 2 (1,927) 1,683
(1) Represents foreign currency translation adjustments charged or credited to
stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued installation and warranty costs to
reflect expenditures incurred.
The allowances for doubtful receivables and reserves for excess and
obsolete inventory items have been deducted in the balance sheets from the
assets to which they apply. The accrued installation and warranty costs are
shown as liabilities in the balance sheet.
Page 48 of 49
(Financial Data Schedule Filed with the SEC)
Page 49 of 49