SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required] For the fiscal year ended December 31, 2002
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 ___________________
Commission file number 0-19703
FARREL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-2689245
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
25 Main Street, Ansonia, Connecticut 06401
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code) (203) 736-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
---------------------------
(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|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 28, 2002 was $3,970,320, based on 2,406,255 shares being
held by non-affiliates.
The number of shares outstanding of the registrant's common stock as of March
25, 2003 was 5,228,461 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held on June 4, 2003
are incorporated by reference into Part III.
Exhibit Index Appears on Pages 41 to 43
Page 1 of 56
PART I
Item 1 - Business
General
Farrel Corporation (the "Company") designs, manufactures, sells and
services machinery and associated equipment for the rubber and plastics
industries worldwide. The Company's principal products are batch and continuous
mixers, single and twin-screw extruders, pelletizers, gear pumps and mills. In
conjunction with sales of capital equipment, the Company provides process
engineering, process design and related services for rubber and plastics
processing installations. The Company's aftermarket business consists of repair,
refurbishment and equipment upgrade services, spare parts sales and field
services. The Company also provides laboratory services and facilities for
product demonstrations and for the development and testing of rubber and
plastics equipment and processes.
The Company's rubber processing equipment is primarily sold to tire
manufacturers, custom compounders and manufacturers of rubber goods, such as
sheet products, molded products, automotive components, footwear, wire and cable
and hoses. In the plastics processing industry, the Company's equipment is
primarily sold to large plastic resins producers and compounders. The Company
markets its products through its strategically located domestic and
international sales and service organization.
Company Strategy
The Company's business objectives are to increase market share in
relatively slow-growth, cyclical markets by broadening its product range and
continuing to strengthen its market position. The Company continues to pursue
manufacturing cost reductions by continually reevaluating its current operating
practices and by purchasing, rather than manufacturing, a significant number of
equipment components and maintaining overhead and manpower levels in line with
prevailing economic conditions. The Company has taken measures in recent years
to achieve these objectives by transferring U.S. parts manufacturing from
Connecticut to its U.K. subsidiary and moving U.S. assembly operations from its
former Derby, Connecticut plant to its Ansonia, Connecticut facility.
In line with this strategy, in December 1997 the Company acquired the
assets of the Francis Shaw Rubber Machinery ("Shaw") business in England for the
production of INTERMIX(R) internal mixers with intermeshing rotors, extruders
and related equipment. The products serve principally the technical rubber goods
manufacturers and the tire industry. The internal mixers produced by Shaw are
essentially similar to the Company's BANBURY(R) internal mixers, differing only
in the configuration of the mixing rotors. The combined complementary product
lines provide the Company with global access to all rubber products
manufacturers, thereby increasing markets served. The Shaw operations were
transferred to the Farrel Limited facility beginning in the fall of 1998 and
were totally integrated by the end of the second quarter of 1999.
Industry Overview
The Company's products are used primarily by manufacturers of rubber and
plastic materials and products. The rubber and plastics processing industries
are global in nature and intensely competitive. Both industries are cyclical in
nature, with capital equipment purchases characterized by long lead times
between orders and shipments.
In the rubber industry, the major users of the Company's machinery are
tire manufacturers, custom compounders and manufacturers of rubber goods such as
sheet products, molded products, automotive components, footwear and wire and
cable. The Company considers the non-tire sector its primary market for growth
opportunities. There are approximately 50 tire manufacturers in the world, six
of which account for a majority of total worldwide tire production. Demand in
the tire and rubber industry is influenced by, among other things, general
economic conditions and the growth or decline in sales of automobiles and trucks
as well as overall truck tonnage and mileage driven. The industry trend is to
shift production capacities into low cost and emerging regions, creating
potential opportunities in the future.
Page 2 of 56
In the plastics industry, the Company serves two primary groups of
customers: commodity plastics producers (typically large petrochemical
companies) and value-added compounders of plastics. The commodity plastics
processed by the Company's machinery are primarily polyethylene, polypropylene,
polyvinyl chloride and polystyrene. A large portion of the market is controlled
by a few major producers who license their technologies to other producers
worldwide. These licensees are potential customers for the Company's products
and services. The plastics compounding market consists of those companies that
mix large volumes of plastics in a relatively small number of formulations,
companies which perform specialty mixing for end users, and end users that mix
largely for their internal use.
Many manufacturers in the industries and markets served by the Company's
products and services are impacted by local political and economic events. The
Company's equipment is supplied to manufacturers and represents capital
commitments for new plants, expansion or modernization. New capital and
marketing expenditures in the Company's markets depend, in large part, on an
increase in market demand, which may require the need for additional capacity.
Overall the Company is part of the capital goods industry. The capital
goods industry in which the Company operates is cyclical in nature and is
subject to significant changes in demand. Capital goods demand is influenced by
many factors, including, but not limited to, general economic conditions,
factory capacity utilization and availability of financing. The Company can not
predict when cyclical changes will occur or the extent that demand for its
products will change as a result of cyclical changes. Since 1998, the Company's
sales have declined significantly. In 1998, the Company's net sales were $98.3
million, which compares to net sales of $50.1 million in 2002.
Products and Services
The Company's products are used to mix and process materials produced by
the Company's rubber and plastics producing customers. The Company's principal
capital equipment product lines are batch and continuous mixers, single and
twin-screw extruders, pelletizers, gear pumps and mills. The Company also
provides process engineering, installation and commissioning services for its
equipment. The Company's customer service division repairs, refurbishes and
provides upgrade services and spare parts for the Company's installed base of
machines worldwide.
The following table illustrates the percentage breakdown of the Company's
sales between new machines/related services and aftermarket business (spare
parts, repairs and rebuild) in the last three fiscal years:
Year Year Year
ended ended ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
New machines/related services...... 37.8% 42.4% 45.1%
Aftermarket........................ 62.2% 57.6% 54.9%
----- ----- -----
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 process,
manufacturing, assembly and distribution are essentially the same for its
products. Segment information for new equipment sales, aftermarket sales,
geographic sales and operating results for fiscal 2002, 2001, and 2000 are
reported in Note 16 to the Consolidated Financial Statements.
Page 3 of 56
The Company's products are sold primarily by its direct sales and support
staff augmented by agents in certain foreign countries. The Company's sales
organization is headquartered in Ansonia, Connecticut and Rochdale, England. The
Company has additional sales and service offices strategically located in the
United States and a representative office in Singapore. In certain geographic
areas sales are facilitated by independent representatives who assist employees
of the Company.
Process Laboratory Services
The Company maintains two process laboratories in Ansonia, Connecticut and
one laboratory in Rochdale, England. In addition, the Company has an agreement
with a research and development organization in Taiwan to use and demonstrate
the Company's technology. This contractual arrangement provides the Company with
laboratory facilities in Asia to complement the U.S. and U.K. laboratories. The
Company uses its laboratories to demonstrate the capabilities of its processing
equipment and to provide customers with production-sized equipment in order to
experiment with new processing techniques and formulations. The Company
considers its process laboratories to be vital contributors to its continuing
technology development and marketing efforts and routinely modernizes its
process laboratories and related equipment.
Competition
The Company's products are sold in highly competitive worldwide markets. A
number of companies compete directly with the Company in both the rubber and
plastics processing markets. Numerous competitors of varying sizes compete with
the Company in one or more of its product lines. A number of the Company's
competitors are former licensees of the Company, divisions or subsidiaries of
larger companies with financial and other resources greater than those of the
Company or copycats that mimic the Company's technology and designs. The Company
has historically faced, and will continue to face, considerable competitive
pressures, particularly predatory price competition and nationalistic
preferences. The Company believes that the principal competitive factors
affecting its business are price, performance, technology, breadth of product
line, product availability, reputation and customer service.
The Company also faces strong competition in the markets for its spare
parts and repair, refurbishment and equipment upgrade services from regional
service firms that take advantage of low barriers to entry and geographic
proximity to certain of the Company's customers in order to compete on the basis
of price and service. The Company believes that it generally has a competitive
advantage in these markets due to the superior quality of its products and
services.
Backlog
The Company's backlog of orders considered firm by management at December
31, 2002, 2001 and 2000 was approximately $21.3 million, $18.1 million and $27.7
million, respectively. Substantially all of the orders included in the December
31, 2002 backlog have contractual ship dates in fiscal 2003. Firm backlog at
March 25, 2003 and March 25, 2002 was $24.8 million and $23.4 million,
respectively.
As of December 31, 2002, the Company's backlog was one of its lowest
year-end levels since the Company became publicly owned. As a result the Company
continues to be more dependent on obtaining orders, including those with shorter
delivery times, in order to cover fixed expenses, particularly in the U.K.,
where the Company maintains its manufacturing operations.
Manufacturing
The Company's manufacturing facility in Rochdale, England provides the
Company with fully integrated manufacturing capability including a complete
range of machining and fabrication equipment used to produce proprietary
components. Final assembly, product testing and quality control activities are
performed by Company personnel in both the U.S. and U.K. The Company also has
repair and rebuild operations in Ansonia, Connecticut; Deer Park, Texas; and
Rochdale, England, and contracts for such services in Australia and Singapore.
The Company believes the Ansonia,
Page 4 of 56
Connecticut and Rochdale, England, facilities provide the Company with the cost
structure to maintain its competitive position.
Components and Raw Materials
The Company purchases most of the components used in producing its
machines from reliable domestic and international suppliers. The basic raw
materials used by the Company are steel plates, bars, castings, forgings and
hard-surfacing alloys. Principal components and raw materials are available from
a number of sources. The Company is not dependent on any supplier that cannot be
replaced in the normal course of business. The Company's U.K. subsidiary is a
major source of large-scale components of proprietary designs.
Research and Development and Engineering
The Company's research and development and engineering staffs are located
in Ansonia, Connecticut and Rochdale, England. Their major activities are:
application engineering for specific customer orders; standardization of
existing machinery as part of the Company's ongoing cost reduction measures; and
development of new products and product features. The Company's twin screw
rubber sheeter as well as the recent development of a new very large-scale
pelletizing system for the petrochemical industry are examples of the
collaborative success of the research and development and product engineering
staffs to produce a new product. Current development activities are in the batch
mixing process. The acquisition of the INTERMIX(R) intermeshing technology and
rotor design development provides opportunities to strengthen our business with
batch mixer customers. A summary of research and development and engineering
expenditures incurred during the last three fiscal years is as follows:
Year Year Year
ended ended ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(Dollars in thousands)
Research and development expense pertaining to
new products or significant improvements to
existing products (included in operating expenses) $1,106 $1,354 $1,580
All other product development and engineering
expenditures related to ongoing refinements,
improvements of existing products, and custom
engineering (included in cost of sales) $2,692 $2,700 $3,224
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 119 patents that cover technology utilized in its products and
currently has approximately 18 patent applications pending. The Company's
patents have expiration dates ranging from 2003 through 2019. 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); TECHNOLAB(R); ST(TM); MVX(TM);
CP-SERIES II(TM); FTX(TM); and TSS(TM).
Page 5 of 56
Environmental
Pursuant to a settlement agreement entered into in 1995 between the
Company and Black & Decker Corporation ("Black & Decker"), Black & Decker agreed
to assume full responsibility for the investigation and remediation of any
pre-May 12, 1986 environmental contamination at the Company's Ansonia and former
Derby, Connecticut facilities, as required by the Connecticut Department of
Environmental Protection ("DEP"). Black & Decker has conducted a preliminary
environmental assessment of the facilities and has proposed certain remedial
actions. On the basis of the preliminary data now available there is no reason
to believe that any activities which might be required as a result of the
findings of the assessment will have a material effect upon the capital
expenditures, results of operations, financial position or the competitive
position of the Company.
Employees
As of December 31, 2002, the Company had 308 employees compared to 321
employees at December 31, 2001. Approximately 29 employees in the U.S. are
covered by a collective bargaining agreement that expires on June 15, 2003. In
the U.K., the Company is a party to non-binding national and local collective
bargaining agreements with several U.K. unions, which cover 60 employees.
Offer of 10-K
Copies of Form 10-K may be obtained free of charge by writing or calling the
Office of the Secretary, Farrel Corporation, 25 Main Street, Ansonia,
Connecticut, 06401. Phone (203) 736 5500.
Item 2 - Properties
The following table sets forth certain information concerning the
Company's principal facilities, all of which are owned by the Company.
Location Principal Use Approx. Sq. Ft.
- --------------------------------------------------------------------------------
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, storage 210,000
manufacturing, and repair and rebuild
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 of the date hereof, the Company is not aware of any contamination,
other than pre-May 12, 1986 contamination (as described in Part I, Item 1,
Environmental), at any of its facilities that would require material
environmental remediation costs.
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company or its predecessors. While the outcome of
lawsuits or other proceedings against the Company cannot be predicted with any
certainty, the Company does not expect that these matters will have a material
adverse effect on the Company's financial position or results of operations.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Page 6 of 56
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
Matters.
(a) Price Range of Common Stock and Dividends
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol FARL.OB. The following chart sets forth the high and low prices for
the Common Stock and dividends declared for the last two fiscal years:
Fiscal 2002 High Low Dividend
- ----------- ---- --- --------
First Quarter $1.46 $0.79 -
Second Quarter $2.11 $1.22 $0.04
Third Quarter $1.95 $1.25 -
Fourth Quarter $1.55 $1.10 -
Fiscal 2001 High Low Dividend
- ----------- ---- --- --------
First Quarter $0.97 $0.75 -
Second Quarter $0.75 $0.54 -
Third Quarter $0.89 $0.58 -
Fourth Quarter $1.01 $0.55 -
(b) As of March 25, 2003 the approximate number of holders of the
Company's common stock was 1,000.
(c) Dividends
Cash dividends of $0.04 were declared and paid in the year ended
December 31, 2002. No dividends were paid or declared in fiscal 2001. The
Company pays 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) Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information, as of December 31, 2002,
relating to equity compensation plans of the Company pursuant to which grants of
options, restricted stock, or other rights to acquire shares may be granted from
time to time.
Number of securities
Number of securities to be remaining available for
issued upon exercise of Weighted-average exercise future issuance under plans
outstanding options, price of outstanding (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
Plan category (a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders (1) 373,000 $3.64 350,000
Equity compensation plans
not approved by
shareholders 0 0 0
Total 373,000 $3.64 350,000
Page 7 of 56
(1) Issued pursuant to the Company's 1992 Stock Option Plan and 1997
Stock Option Plan. No additional shares may be issued under the 1992
Stock Option Plan.
(e) There were no sales or issuance's of the Company's equity shares that
were not registered under the Securities Act
Item 6 - Selected Consolidated Financial Data
Year Year Year Year Year
ended ended ended ended ended
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Net sales (1) $50,091 $56,249 $64,223 $74,455 $98,267
======= ======= ======== ======= ========
Gross margin $13,451 $13,844 $15,158 $18,156 $22,772
======= ======= ======== ======= ========
As a percent of net sales 26.8% 24.6% 23.6% 24.4% 23.2%
======= ======= ======== ======= ========
Operating income (loss) $1,382 $1,114 ($837) $1,204 $4,521
Other income (expense), net (2) 335 73 (129) 1,671 (698)
------- ------- -------- ------- --------
Income (loss) before income taxes 1,717 1,187 (966) 2,875 3,823
Provision for income taxes 749 397 17 1,115 1,546
------- ------- -------- ------- --------
Net income (loss) $968 $790 ($983) $1,760 $2,277
======= ======= ======== ======= ========
Net income (loss) per share - Basic and Diluted $0.18 $0.15 ($0.19) $0.32 $0.38
======= ======= ======== ======= ========
Dividends per share of Common Stock $0.04 -- $0.12 $0.24 $0.08
======= ======= ======== ======= ========
Weighted Average Shares Outstanding - Basic (000's) 5,228 5,229 5,249 5,448 5,942
======= ======= ======== ======= ========
Weighted Average Shares Outstanding - Diluted (000's) 5,273 5,231 5,249 5,454 5,966
======= ======= ======== ======= ========
Balance Sheet Data:
Current assets $29,050 $26,845 $30,581 $34,445 $48,273
Current liabilities $12,014 $11,011 $16,277 $16,930 $28,893
Working capital ratio 2.4 2.4 1.9 2.0 1.7
Total assets $37,928 $35,966 $43,932 $48,862 $63,265
Long-term debt $375 $1,019 $1,194 $2,584 $3,983
Stockholders' equity (3) $14,523 $19,705 $23,963 $25,864 $26,301
Other Data:
Backlog $21,321 $18,101 $27,680 $28,929 $33,269
(1) Information for years prior to 2000 were restated in 2000 to reflect the
adoption of Emerging Issues Task Force consensus Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs".
(2) 1999 Other Income includes $1.9 million gain from the sale of real estate.
(3) Amounts as of December 31, 2002 and 2001, reflect a charge to equity
related to pension plan accounting. See Note 11 to the Consolidated
Financial Statements.
Page 8 of 56
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor Statements under Private Securities Litigation Reform Act of 1995
Certain statements contained in the Company's public documents, included
in this report and in particular in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" may be forward looking and may
be subject to a variety of risks and uncertainties. Various factors could cause
actual results to differ materially from these statements. These factors
include, but are not limited to pricing pressures from competitors and/or
customers; continued economic and political uncertainty in certain of the
Company's markets; the Company's ability to maintain and increase gross margin
levels; the Company's ability to generate positive cash; changes in business
conditions, in general, and, in particular, in the businesses of the Company's
customers and competitors; the Company's access to adequate financing at
competitive rates and other factors that might be described from time to time in
the Company's filings with the Securities and Exchange Commission.
Fiscal 2002 Compared to Fiscal 2001
Net sales in 2002 and 2001 were $50.1 million and $56.2 million,
respectively, a decrease of $6.1 million. The decrease in net sales is due to
lower sales in Europe of $4.0 and Asia of $3.1 million, partially offset by an
increase in sales in North America. These declines in sales are a result
primarily of weak market demand. The timing of the Company's sales, particularly
sales of new machines, is highly dependent on when an order is received, the
amount of lead-time from receipt of order to delivery and specific customer
requirements. The Company operates in markets that are extremely competitive
with cyclical demand. Many of our customers and markets operate at less than
full capacity and certain markets remain particularly competitive and are
subject to local economic conditions.
The Company received $52.1 million in orders in 2002 compared to $47.0
million for 2001. The increase is primarily due to higher new machine orders
received in North America.
The Company's products are primarily supplied to manufacturers and
represent capital commitments for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which time economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's traditional customers
and markets are operating with excess capacity thereby reducing the number of
projects for plant expansion and modernization. The Company is experiencing
increased pricing pressures from our competitors in an overall smaller market.
Until recently, the value of the Euro versus the U.S. dollar and British pound
sterling had decreased significantly since it was introduced which resulted in
increased pricing pressures. Although it would be expected that a stronger Euro
would benefit the Company from a competitive standpoint, the Company cannot be
certain that it will alleviate any of the current pricing pressures in the
market place. Further, the cyclical nature of industry demand and, therefore,
the timing of order intake may effect the Company's quarterly results in the
current and future fiscal quarters. The Company's ability to maintain and
increase net sales depends upon a strengthening and stability in the Company's
traditional markets and our ability to control costs to effectively compete in
the current market. There can be no assurance that the level of orders
experienced in 2002 will continue, that market conditions will not worsen, or
that improvements in the Company's traditional markets will lead to increased
orders for the Company's products.
Gross margin in 2002 was $13.4 million compared to $13.8 million for 2001,
a decrease of $0.4 million. The decrease in gross margin is a result of lower
sales. The gross margin as a percent of sales for 2002 was 26.8% compared to
24.6% for 2001. The increase in gross margin as a percent of sales is primarily
due to a change in sales mix. The Company has a varied portfolio of products
that tend to have different ranges of profit margins, as a result sales mix can
make the gross margin as a percent of sales vary between periods.
Operating expenses in 2002 were $12.1 million compared to $12.7 million in
2001, a decrease of $0.7 million. The decrease is primarily due to lower
employee compensation and related expenses in the selling and research and
Page 9 of 56
development functions. These decreases were offset to some extent by higher
general and administrative expenses related to increased pension costs.
Interest expense includes interest paid to banks and amortization of
deferred credit facility costs. Interest paid to banks in 2002 and 2001 was $0.1
million. Amortization of deferred credit facility costs in 2002 was $0.1 million
compared to $0.2 million in 2001. Interest income was $0.1 million in 2002
compared to $0.2 million in 2001.
Net other income was $0.4 million in 2002 compared to net other income of
$0.2 million in 2001. Other income for 2002 includes approximately $0.2 million
received by the Company as a result of the demutualization of an insurance
provider used by the Company.
The Company provides for income taxes in the jurisdictions in which it
pays income taxes at the statutory rates in effect in each jurisdiction,
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes. The provision for income taxes in 2002
represents primarily income tax expense related to pre-tax income generated by
the Company's U.S. operations offset by a tax benefit recorded for pre-tax
losses generated by the Company's U.K. operations. The provision for income
taxes in 2001 represents primarily income tax expense related to pre-tax income
generated by the Company's U.K. operations. The effective tax rate was 43.6% for
2002 compared to 33.4% for 2001. The effective tax rate varies due to
differences in the amount of the income or loss generated in each tax
jurisdiction by year.
Fiscal 2001 Compared to Fiscal 2000
Net sales in 2001 and 2000 were $56.2 million and $64.2 million,
respectively, a decrease of $8.0 million. The decrease in net sales is due to
lower sales in North America of $17.0 million partially offset by an increase in
new machine sales in Europe. The timing of the Company's sales, particularly
sales of new machines, is highly dependent on when an order is received, the
amount of lead-time from receipt of order to delivery and specific customer
requirements. The Company operates in markets that are extremely competitive
with cyclical demand. Many of our customers and markets operate at less than
full capacity and certain markets remain particularly competitive and are
subject to local economic conditions.
The Company received $47.0 million in orders in 2001 compared to $62.7
million for 2000. The decrease is primarily due to lower new machine orders
received in Europe.
The Company's products are primarily supplied to manufacturers and
represent capital commitments for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which time economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's traditional customers
and markets are operating with excess capacity thereby reducing the number of
projects for plant expansion and modernization. The Company is experiencing
increased pricing pressures from our competitors in an overall smaller market.
In addition, since its introduction, the decline in the value of the Euro versus
the US dollar and British pound sterling has increased pricing pressures. The
Euro's weakness provides substantial advantages to our competitors in the
Euro-zone. These conditions are resulting in customer orders with lower margins
and lost business. Further, the cyclical nature of industry demand and,
therefore, the timing of order intake may effect the Company's quarterly results
in the current and future fiscal quarters. The Company's ability to maintain and
increase net sales depends upon a strengthening and stability in the Company's
traditional markets and our ability to control costs to effectively compete in
the current market. There can be no assurance that the level of orders
experienced in 2001 will continue, that market conditions will not worsen, or
that improvements in the Company's traditional markets will lead to increased
orders for the Company's products.
Gross margin in 2001 was $13.8 million compared to $15.2 million for 2000,
a decrease of $1.3 million. The decrease in gross margin is a result of lower
sales. The gross margin as a percent of sales for 2001 was 24.6% compared to
23.6% for 2000. The increase in gross margin as a percent of sales is primarily
due to a change in sales mix.
Page 10 of 56
Operating expenses in 2001 were $12.7 million compared to $16.0 million in
2000, a decrease of $3.3 million. The decrease is primarily due to $2.5 million
in lower employee compensation and related expenses and $0.5 million in lower
travel expenses. The remaining decrease is in various different types of
expenses.
Interest expense includes interest paid to banks and amortization of
deferred credit facility costs. Interest paid to banks in 2001 was $0.1 compared
to $0.3 million in 2000. The decrease is due to lower average debt borrowings
and lower interest rates. Amortization of deferred credit facility costs in 2001
was $0.2 million compared to $0.1 million in 2000. Interest income was $0.2
million in 2001and 2000.
Net other income was $237,000 in 2001 compared to net other expense of
$9,000 in 2000.
The Company provides for income taxes in the jurisdictions in which it
pays income taxes at the statutory rates in effect in each jurisdiction,
adjusted for differences in providing for income taxes between financial
reporting and income tax purposes. The provision for income taxes in 2001
represents primarily income tax expense related to pre-tax income generated by
the Company's U.K. operations. The provision for income taxes in 2000 is
comprised of $498,000 of income tax expense related to pre-tax income generated
by the Company's U.S. operations offset by a $481,000 income tax benefit related
to a pre-tax loss generated by the Company's U.K. operations.
Material Contingencies
As described in Part I, Item 1, Environmental, on the basis of the
preliminary data now available there is no reason to believe that any
remediation activities that the DEP might require as a result of the findings of
the assessment at the Ansonia and former Derby, Connecticut facilities will have
a material effect upon the capital expenditures, results of operations,
financial position or the competitive position of the Company. This forward
looking statement could, however, be influenced by any findings of environmental
contamination attributable to post-May 12, 1986 activities, the results of any
further investigation that the DEP might require, by DEP's conclusions and
requirements based upon its review of complete information when such is
available, unanticipated discoveries, the possibility that new or different
environmental laws might be adopted and the possibility that further regulatory
review or litigation might become necessary or appropriate.
Orders and Backlog
Orders received by the Company during 2002 increased approximately $5.1
million, or approximately 10.9%, to approximately $52.1 million compared to
$47.0 million in fiscal 2001.
The Company's products are primarily supplied to manufacturers and
represent capital commitment for new plants, expansion or modernization. In the
case of major equipment orders, up to twelve months are required to complete the
manufacturing process. Accordingly, revenues reported in the statement of
operations may represent orders received in the current or previous periods
during which economic conditions in various geographic markets of the world
impact our level of order intake. Many of the Company's customers and markets
are operating with excess capacity thereby reducing the number of projects in
our traditional markets for plant expansion and modernization. The Company is
experiencing increased pricing pressures from our competitors in an overall
smaller market. Until recently, the value of the Euro versus the U.S. dollar and
British pound sterling had decreased significantly since it was introduced which
resulted in increased pricing pressures. Although it would be expected that a
stronger Euro would benefit the Company from a competitive standpoint, the
Company cannot be certain that it will alleviate any of the current pricing
pressures in the market place. Further, the cyclical nature of industry demand
and, therefore, the timing of order intake may effect the Company's quarterly
results in the current and future fiscal quarters. The Company's ability to
maintain and increase net sales depends upon a strengthening and stability in
the Company's traditional markets and our ability to control costs to
effectively compete in the current market. There can be no assurance that the
level of orders experienced in 2002 will continue, that market conditions will
not worsen, or that improvements in the Company's traditional markets will lead
to increased orders for the Company's products.
Page 11 of 56
The level of backlog considered firm by management at December 31, 2002
and 2001 is $21.3 million and $18.1 million, respectively. The contractual ship
dates for substantially all of the December 31, 2002 backlog is in 2003. The
backlog at March 25, 2003 and March 25, 2002 was $24.8 million and $23.4
million, respectively.
As of December 31, 2002, the Company's backlog was one of its lowest
year-end levels since the Company became publicly owned. As a result the Company
continues to be more dependent on obtaining orders, including those with shorter
delivery times, in order to cover fixed expenses, particularly in the U.K.,
where the Company maintains its manufacturing operations.
Liquidity and Capital Resources; Capital Expenditures
Working capital and the working capital ratio at December 31, 2002 were
$17.0 million and 2.4 to 1.0, respectively, compared to $15.8 million and 2.4 to
1.0 at December 31, 2001, respectively. During the year ended December 31, 2002
the Company paid dividends of $0.04 per share. No dividends were paid during the
year ended December 31, 2001.
During 1999, the Company extended its discretionary open market stock
repurchase program, increasing the amount to be used to repurchase common stock
by $2.5 million to $4,750,000. During 2001 and 2000 the Company repurchased
1,600 and 20,000 shares of common stock, respectively, at varying times and in
varying amounts totaling approximately $1,000 and $16,000, respectively. The
repurchased shares are held in treasury (See Note 10 to the Consolidated
Financial Statements).
Due to the nature of the Company's business, many sales are of a large
dollar amount. Consequently, the timing of recording such sales may cause the
balances in accounts receivable and/or inventory to fluctuate dramatically from
time to time and may result in significant fluctuations in cash provided from
operating activities. Historically, the Company has not experienced significant
problems regarding the collection of accounts receivable. The Company has
historically financed its operations with cash generated by operations, with
customer progress payments and borrowings under its bank credit facilities.
The Company has a worldwide multi-currency credit facility, as amended,
with a major U.S. bank. This facility includes a $10 million revolving credit
facility for direct borrowings and letters of credit. The facility contains a
sub-limit that caps the amount of direct borrowings the Company can make at $5
million. The revolving credit facility expires on June 15, 2004. The facility
contains limits on direct borrowings and issuances of letters of credit based
upon stipulated percentages of accounts receivable and inventory. The facility
also contains covenants, as amended on March 25, 2003, specifying minimum and/or
maximum thresholds for operating results, selected financial ratios and backlog.
The backlog covenant requires that end of month backlog will not be less than
$20 million for more than two consecutive months. The Company did not achieve
the backlog covenant as of the end of January and February 2002; however, the
bank waived the non-compliance. The agreement contains certain restrictions on
investments, borrowings and the sale of assets. Dividend declarations or
payments are allowed under this credit facility as long as there exists under
the credit facility no Event of Default (as defined in the credit facility) or
no condition which upon giving notice or lapse of time or both, would become an
Event of Default. The Company has approximately $2.7 million of letters of
credit posted under its credit facility on December 31, 2002.
The Company also has a term loan as part of this credit facility which was
entered into in June 2001. The proceeds of this loan were used to repay an
existing term loan. The term loan is repayable in monthly installments of
(pound)38,888 (approximately $63,000) through June 2004. The term loan has an
interest rate of LIBOR plus 2.7%. The term loan balance outstanding on December
31, 2002 and 2001, was $1.1 million and $1.7 million, respectively.
Management anticipates that its cash balances, operating cash flows and
the credit line will be adequate to fund its anticipated capital commitments and
working capital requirements for at least the next twelve months. The Company
made capital expenditures of approximately $0.2 and $0.6 million during fiscal
2002 and 2001.
In fiscal 2000, new minimum funding guidelines for pension plans became
effective in the U.K. which are significantly different than the prior
guidelines. Based upon the new guidelines the Company is required to make
significant
Page 12 of 56
cash contributions to the Company's U.K. pension plan. Prior to 2000, the
Company was not required to make substantial contributions to the U.K. pension
plans. In 2002, 2001 and 2000, the Company contributed approximately $723,000,
$799,000 and $946,000 to the U.K. pension plan.
For the years ended December 31, 2002, 2001 and 2000, the assets of the
plan generated a negative return (lost value) of $2.2 million, $2.4 million and
$0.6 million, respectively. The majority of 2002 loss was incurred in June 2002
as a result of the decline in the stock market. As described in the Financial
Position section that follows, these losses have contributed to a substantial
reduction in the Company's stockholders' equity. At December 31, 2002, total
assets in the plan were approximately $21 million, which significantly exceed
the historical benefits paid for the past few years. The trustees of the plan
moved the plan assets out of equities in July 2002 and are reviewing the
long-term investment strategy of the plan. As of December 31, 2002 and March 25,
2003, the assets of the plan consisted of corporate and government bonds and
cash. In addition, in January 2002, the U.K. subsidiary officially informed the
plan trustees that effective the end of the first quarter of 2002, the U.K.
employees would no longer accrue additional benefits under this pension plan for
future service. Beginning in 2002, the U.K. subsidiary, as required under U.K.
law, offered a defined contribution plan to its employees.
In July 2002, the Company, the plan trustees and the plan's actuary began
discussing the appropriate means of ensuring the long term funding of the plan,
including among other things an assessment of the U.K. subsidiary's business
prospects and cash position, the securitization of the U.K. subsidiary's assets,
a parent company guarantee, increasing contributions to the plan, or other
assurances, in order to avoid a determination by the actuary that the trustees
should wind up the plan. Under the rules of the plan, the trustees are to wind
up the plan if they receive actuarial advice that the actual and expected
Company contributions are so low as to prejudice seriously the long-term
financial position of the plan. On a wind up basis the amount of underfunding of
the plan is computed differently than, and would be substantially greater than,
the amount reflected in the financial statements. Additionally, on a wind up
basis, the underfunding must be paid down within a short time period. In
February 2003, the Company, the plan trustees and the plan's actuary agreed upon
an increased contribution schedule which provides for the Company to contribute
(pound)50,600 (approximately $81,000) a month to the plan plus the costs of
administering the plan, which are estimated to be $100,000 annually. The
contribution schedule was based on an April 2002 actuarial computation and must
be reviewed for adequacy by the actuary at least annually or, if deemed
necessary by the actuary, on a more periodic basis.
The Company manufactures and assembles its products in the U.K., assembles
its products in the U.S. and sells its products in the U.S., U.K. and other
foreign markets. The Company's financial position and results are affected by
changes in foreign currency exchange rates in the foreign markets in which its
operates. When the value of the U.S. dollar or U.K. sterling strengthens against
other currencies, the value of the transaction in the foreign currency
decreases. The Company, from time to time, enters into foreign exchange forward
contracts to hedge foreign currency transactions. Foreign currency transactions
generally are for periods of no more than twelve months. In addition, the
Company maintains foreign currency bank accounts in other currencies in which it
regularly transacts business.
The Company's interest income and expense are sensitive to changes in the
market level of interest rates. The changes in interest rates earned on the
Company's cash equivalents and short term investments as well as interest paid
on its debt are variable and are adjusted to market conditions.
Financial Position
The Accumulated Other Comprehensive Loss section of stockholders' equity
reflects a charge of $6.9 and $4.8 million at December 31, 2002 and 2001,
respectively, related to the Company's pension plans. Of these amounts, $10.8
million relates to the Company's U.K. pension plan. The U.K. plan experienced a
significant decline in the value of its assets during 2002 and 2001. In 2001,
the decline in the assets resulted in a requirement to record a minimum pension
liability of $2.6 million for the U.K. plan. This requirement resulted in a net
of tax charge to stockholders' equity of $4.2 million. This charge was required
to write down the existing prepaid pension asset and establish a net liability.
In December 2002, revised mortality tables were used in the determination of the
pension liability for accounting in order to reflect updated mortality data. The
change in the mortality tables along with the decline in the value of the
pension assets, were the primary reasons for a charge in 2002 to stockholders'
equity of $6.2 million. This charge, for which no tax benefit was established,
Page 13 of 56
was required in order to increase the minimum pension liability to $9 million at
December 31, 2002 for the U.K. pension plan.
EURO Conversion
On January 1, 1999, the European Economic and Monetary Union entered into
a three-year transition phase during which a common currency, the "EURO" was
introduced in participating countries. The Company does not have operations in
the participating countries and the conversion to the EURO did not have a
material impact on the Company's financial position, results of operations or
cash flows, except as it relates to the previously described competitive price
disadvantages related to the relative weakness of the Euro versus the U.S.
dollar and British Pound Sterling.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which the
Company was required to adopt on January 1, 2001. The statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of this statement did not have
a significant effect on the Company's results of operations or financial
position.
In June 2001, the Financial Accounting Standards Board issued statements
No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset
Retirement Obligations). Statement No. 142 was adopted by the Company in January
2002 and statement No. 143 must be adopted by the Company no later than January
2003. Statement No. 142 changes the accounting for other intangible assets, such
that those assets whose life is determined to be indefinite are not subject to
amortization. These assets and goodwill shall be tested for impairment at least
annually, and the value will need to be written down if the fair value is less
than the carrying value. Statement No. 143 requires that a liability must be
recognized for an asset retirement obligation related to long lived tangible
assets. The liability shall be recorded at fair value. The adoption of statement
No. 142 did not have a significant effect on the Company's financial position or
results of operations. The Company does not anticipate that the adoption of
statement No. 143 will have a significant effect on its financial position or
results of operations.
In August 2001, the Financial Accounting Standards Board issued statement
No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets).
Statement No. 144 was adopted by the Company in January 2002. This statement
requires an impairment loss to be recognized if the carrying value of a
long-lived asset (asset group) is not recoverable and exceeds its fair value.
Long-lived assets (asset group) shall be tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. The adoption of this statement did not have a significant effect on
the Company's financial position or results of operations.
In December 2002, the Financial Accounting Standards Board issued
statement No. 148 (Accounting for Stock-Based Compensation - Transition and
Disclosures). Statement 148 amends the accounting for stock-based compensation
by providing alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, statement 148 amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted statement 148 in December 2002.
The Company does not anticipate changing to the fair value based method of
accounting for stock-based compensation; therefore, the adoption only impacted
disclosures.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
Page 14 of 56
accompanying notes. Actual results can differ from those estimates. The Company
believes that of its significant accounting policies, the following may involve
a higher degree of judgement and complexity.
Revenue Recognition
Revenue on new machine sales is recognized upon completion of the customer
contract, which generally coincides with delivery. At times, the Company may
provide full installation services related to new equipment. Revenue for such
services is generally recognized separately at the time such installation is
complete. When customers, under the terms of specific orders or contracts,
request that the Company delay shipment of the manufactured equipment, the
Company recognizes revenue based upon receiving contractual confirmation of
acceptance of the equipment from the customer and legal transfer of title and
risk of loss to the customer. Revenue on repair and refurbishment of customer
owned machines is recognized when the contractual work is completed. Spare parts
revenue is recognized upon shipment.
Warranty
Equipment sold is generally covered by a warranty of one to three years.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expectations of future conditions. To the extent the
Company experiences increased warranty claim activity, or increased costs in
servicing those claims, its warranty accrual will increase, resulting in
decreased gross profit.
Deferred Tax Assets
The Company has a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company may
consider future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, should the Company
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
Inventory Reserves
The Company maintains reserves for estimated excess and obsolete inventory
to reflect a write down of the value of unsaleable inventory based upon
evaluations of slow moving items. If future demand is different from that
anticipated by management, these reserves may need to be adjusted.
Defined Benefit Pension Plans
Pension expense is actuarially determined in accordance with accounting
principles generally accepted in the U.S. The accounting for pensions, which
will be paid out over an extended period of time in the future, requires the use
of significant estimates and assumptions concerning uncertainties about employee
turnover, future pay scales, interest rates, rates of return on investments,
mortality tables used to determine life expectancy of plan members, and the rate
of mandated increases in pension payments for cost of living adjustments. These
estimates and assumptions rely heavily on judgment and the actual outcome could
be materially different than what has been estimated and assumed. In addition,
these estimates and assumptions, some of which are of a long-term nature,
require periodic updating and could change significantly in the future.
Differences in actual outcome versus what has been estimated and assumed along
with changes to these estimates and assumptions in the future to reflect
prevailing conditions at such time, could materially impact the amounts
reflected in the financial statements.
Page 15 of 56
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency and
interest rates. The Company manufactures many of its products and components in
the United Kingdom and purchases many components in foreign markets.
Approximately 50% of the Company's revenues are generated from foreign markets.
The Company manages its risk to foreign currency rate changes by maintaining
foreign currency bank accounts in currencies in which it regularly transacts
business and through the use of foreign exchange forward contracts. The Company,
from time to time, enters into foreign exchange forward contracts to hedge
foreign currency transactions. These derivative instruments usually involve
little complexity and are generally for periods of less than twelve months. The
Company does not enter into derivative contracts for speculative trading
purposes. The amount of foreign exchange forward contracts are not considered
material to the Company's financial position or its operations.
The Company's cash equivalents and short-term investments and its
outstanding debt bear variable interest rates. The rates are adjusted to market
conditions. Changes in the market rate affects interest earned and paid by the
Company. The Company does not use derivative instruments to offset the exposure
to changes in interest rates. Changes in these interest rates are not expected
to have a material impact on the Company's results of operations.
Page 16 of 56
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, 2002 and 2001 ........... 19
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000 .................................... 20
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 ............................... 21
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 ..................................... 22
Notes to Consolidated Financial Statements ............................. 23 - 38
Page 17 of 56
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Farrel Corporation
We have audited the accompanying consolidated balance sheets of Farrel
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Farrel
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States.
/s/ERNST & YOUNG LLP
Stamford, Connecticut
February 20, 2003,
except for the third paragraph of Note 8,
as to which the date is March 25, 2003
Page 18 of 56
FARREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
12/31/02 12/31/01
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $5,863 $5,579
Accounts receivable, net of allowance for doubtful
accounts of $96 and $179, respectively 10,848 9,416
Inventory 10,631 10,554
Deferred income taxes 538 423
Other current assets 1,170 873
-------- --------
Total current assets 29,050 26,845
Property, plant and equipment, net of accumulated
depreciation of $17,034 and $14,995, respectively 7,166 8,101
Deferred income taxes 1,339 764
Other assets 373 256
-------- --------
Total assets $37,928 $35,966
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $4,009 $4,393
Accrued expenses and taxes 2,309 1,482
Advances from customers 4,102 3,452
Accrued warranty costs 842 1,004
Short-term debt 752 680
-------- --------
Total current liabilities 12,014 11,011
Long-term debt 375 1,019
Postretirement benefit obligation 1,055 1,076
Minimum pension obligations 9,961 3,155
Commitments and contingencies -- --
-------- --------
Total liabilities 23,405 16,261
-------- --------
Stockholders' Equity
Preferred stock, par value $100, 1,000,000 shares
authorized, no shares issued -- --
Common stock, par value $.01, 10,000,000 shares
authorized, 6,142,106 shares issued 61 61
Paid in capital 19,295 19,295
Treasury stock, 913,645 shares at December
31, 2002 and 2001, at cost (2,530) (2,530)
Retained earnings 9,879 9,120
Accumulated other comprehensive loss (12,182) (6,241)
-------- --------
Total stockholders' equity 14,523 19,705
-------- --------
Total liabilities and stockholders' equity $37,928 $35,966
======== ========
See Notes to Consolidated Financial Statements
Page 19 of 56
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
----------------------------------
12/31/02 12/31/01 12/31/00
-------- -------- --------
Net sales $50,091 $56,249 $64,223
Cost of sales 36,640 42,405 49,065
-------- -------- --------
Gross margin 13,451 13,844 15,158
Operating expenses:
Selling 4,190 4,857 6,713
General and administrative 6,773 6,519 7,702
Research and development 1,106 1,354 1,580
-------- -------- --------
Total operating expenses 12,069 12,730 15,995
-------- -------- --------
Operating income (loss) 1,382 1,114 (837)
Interest income 104 157 222
Interest expense, including amortization
of deferred credit facility costs (161) (321) (342)
Other income (expense), net 392 237 (9)
-------- -------- --------
Income (loss) before income taxes 1,717 1,187 (966)
Provision for income taxes 749 397 17
-------- -------- --------
Net income (loss) $968 $790 ($983)
======== ======== ========
Per share data:
Basic and diluted net income (loss) per
share $0.18 $0.15 ($0.19)
======== ======== ========
Average shares outstanding (000's):
Basic 5,228 5,229 5,249
======== ======== ========
Diluted 5,273 5,231 5,249
======== ======== ========
See Notes to Consolidated Financial Statements
Page 20 of 56
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Paid other Total
Common stock in Treasury Retained comprehensive Stockholders'
Shares Amount capital stock earnings loss equity
---------- ------- ------- ------- -------- ------------- -------------
Balance, December 31, 1999 6,142,106 $61 $19,295 ($2,513) $9,943 ($922) $25,864
---------- ------- ------- ------- ------- ----------- -----------
Net (loss) -- -- -- -- (983) -- (983)
-----------
Other Comprehensive income, net of
taxes as applicable
Foreign currency translation -- -- -- -- -- (885) (885)
Minimum pension liability -- -- -- -- -- 613 613
-----------
Other Comprehensive (loss) (272)
-----------
Comprehensive (loss) (1,255)
Treasury stock transactions -- -- -- (16) -- -- (16)
Cash dividend declared
at $0.12 per common share -- -- -- -- (630) -- (630)
---------- ------- ------- ------- ------- ----------- -----------
Balance, December 31, 2000 6,142,106 $61 $19,295 ($2,529) $8,330 ($1,194) $23,963
---------- ------- ------- ------- ------- ----------- -----------
Net income -- -- -- -- 790 -- 790
-----------
Other Comprehensive income, net of
taxes as applicable
Foreign currency translation -- -- -- -- -- (226) (226)
Minimum pension liability -- -- -- -- -- (4,821) (4,821)
-----------
Other Comprehensive (loss) (5,047)
-----------
Comprehensive (loss) (4,257)
Treasury stock transactions -- -- -- (1) -- -- (1)
---------- ------- ------- ------- ------- ----------- -----------
Balance, December 31, 2001 6,142,106 $61 $19,295 ($2,530) $9,120 ($6,241) $19,705
---------- ------- ------- ------- ------- ----------- -----------
Net income -- -- -- -- 968 -- 968
-----------
Other Comprehensive income, net of
taxes as applicable
Foreign currency translation -- -- -- -- -- 953 953
Minimum pension liability -- -- -- -- -- (6,894) (6,894)
-----------
Other Comprehensive (loss) (5,941)
-----------
Comprehensive (loss) (4,973)
Cash dividend declared
at $0.04 per common share -- -- -- -- (209) -- (209)
---------- ------- ------- ------- ------- ----------- -----------
Balance, December 31, 2002 6,142,106 $61 $19,295 ($2,530) $9,879 ($12,182) $14,523
========== ======= ======= ======= ======= =========== ===========
See Notes to Consolidated Financial Statements
Page 21 of 56
FARREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $968 $790 ($983)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
(Gain) loss on disposal of fixed assets (108) (412) 8
Depreciation 1,433 1,526 1,827
Amortization 127 144 153
Decrease (increase) in deferred income taxes (288) (26) 128
Decrease (increase) in accounts receivable (1,018) 4,039 972
Decrease (increase) in inventory 846 1,719 (842)
Decrease (increase) in other current assets (254) 661 (507)
Decrease (increase) in other assets (66) (110) --
(Decrease) increase in pension obligations 81 (499) (814)
(Decrease) in accounts payable (599) (1,928) (1,136)
(Decrease) increase in advances from customers 474 (2,363) 2,068
(Decrease) in accrued expenses and taxes 476 142 (1,018)
(Decrease) in accrued warranty costs (197) (63) (506)
(Decrease) in postretirement benefit obligation (21) (42) (20)
------- ------- -------
Total adjustments 886 2,788 313
------- ------- -------
Net cash (used in) provided by operating activities 1,854 3,578 (670)
------- ------- -------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 212 747 276
Purchases of property, plant and equipment (233) (553) (1,083)
Purchase of certain assets of Skinner Engine Company (623) -- --
------- ------- -------
Net cash (used in) provided by investing activities (644) 194 (807)
------- ------- -------
Cash flows from financing activities:
Repayment of bank borrowings (700) (2,264) (1,225)
Bank borrowings -- 1,652 --
Purchase of treasury stock -- (1) (16)
Dividends paid (209) -- (630)
------- ------- -------
Net cash (used in) financing activities (909) (613) (1,871)
Effect of foreign currency exchange rate changes on cash (17) (66) (235)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 284 3,093 (3,583)
Cash and cash equivalents--
Beginning of year 5,579 2,486 6,069
------- ------- -------
End of year $5,863 $5,579 $2,486
======= ======= =======
Income taxes paid $250 $33 $601
======= ======= =======
Interest paid $98 $148 $259
======= ======= =======
See Notes to Consolidated Financial Statements
Page 22 of 56
FARREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Principles of Consolidation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Farrel Corporation and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
The Company designs, manufactures, sells and services machinery for the
rubber and plastics industry. The Company's principal products are batch and
continuous mixers, extruders, pelletizers and mills. The Company also provides
process engineering services, process design and related services for rubber and
plastics processing installations in conjunction with its sales of capital
equipment. The Company's new machinery and related services generally represents
approximately half of its revenues. The Company's aftermarket business consists
of contractual repair, refurbishment and equipment upgrade services, spare parts
sales and field services.
The Company's principal customers are domestic and foreign manufacturers
of rubber and plastics. Foreign customers are primarily located throughout
Europe, Asia and the Middle East. Due to the nature of the Company's products,
which can individually sell for as high as $4.0 million, the percent of sales of
any product line can change significantly from year to year. However, the more
significant products are the Company's batch and continuous mixers.
(a) Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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.
(b) Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand, amounts due from banks,
and any other highly liquid investments with a maturity of three months or less
when purchased. The carrying amount approximates fair value because of the short
maturity of those instruments.
(c) Other Financial Instruments:
The carrying amount of the Company's trade receivables and payables
approximates fair value because of the short maturity of these instruments.
Historically, the Company has not experienced significant problems regarding the
collection of accounts receivable. An allowance for doubtful accounts receivable
is established based upon a review of the individual amounts comprising accounts
receivable to determine the estimated uncollectable amounts. The carrying value
of long-term debt approximates fair value as the interest rate on the long-term
debt is variable and approximates current market rates.
(d) Inventory:
Inventory is valued at the lower of cost or market. Inventory is accounted
for on the last-in, first-out (LIFO) basis in the U.S. and first-in, first-out
(FIFO) basis in the U.K.
(e) 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 3 to 40 years.
Assets no longer anticipated to be used are segregated from Property, Plant and
Equipment and included in Other Assets.
Page 23 of 56
(f) Patents and Acquired Technology:
Other assets includes acquired patents and technical know-how, which
represents the cost of purchased technology, know how, and trade secrets
including technology that is patented or for which a patent has been applied.
Such costs are amortized over periods from 5 to 7 years.
(g) Revenue Recognition:
Revenue on new machine sales is recognized upon completion of the customer
contract, which generally coincides with delivery. At times, the Company may
provide full installation services related to new equipment. Revenue for such
services is generally recognized separately at the time such installation is
complete. When customers, under the terms of specific orders or contracts,
request that the Company delay shipment of the manufactured equipment, the
Company recognizes revenue based upon receiving contractual confirmation of
acceptance of the equipment from the customer and legal transfer of title and
risk of loss to the customer. Revenue on repair and refurbishment of customer
owned machines is recognized when the contractual work is completed. Spare parts
revenue is recognized upon shipment.
The Company typically requires advances from customers upon entering a
contract and at times will require progress payments during the manufacturing
process. Generally, letters of credit are required on contracts with export
customers to minimize credit risk.
(h) Warranty Obligations:
Estimated costs to be incurred under warranty obligations relating to
products which have been sold are provided for at the time of sale.
(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 $7.7 million of undistributed earnings of foreign subsidiaries
because it is expected that those earnings will be reinvested indefinitely.
(j) Earnings (Loss) Per Share:
Basic earnings per share is determined by dividing net income (loss) by
the weighted average shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if options to issue
common stock (see Note 10) were exercised and converted to common stock. (See
Note 14.)
(k) Foreign Currency Translation:
Assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at current exchange rates. Income and expense accounts are
translated at average rates of exchange prevailing during the year. Adjustments
resulting from these translations are included in the accumulated other
comprehensive loss in stockholders' equity.
Transaction gains and losses are included in earnings. The Company
experienced a net foreign currency transaction loss of $134,000 and $64,000 in
fiscal 2002 and 2000, respectively, and a net foreign currency transaction gain
of $142,000 in fiscal 2001. These amounts are included in cost of goods sold in
the accompanying financial statements.
(l) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company adopted the new Statement effective January 1, 2001. The Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. The adoption of this Statement did not have a significant effect on the
Company's results of operations or financial position.
Page 24 of 56
In June 2001, the Financial Accounting Standards Board issued statements
No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset
Retirement Obligations). Statement No. 142 was adopted by the Company in January
2002 and statement No. 143 must be adopted by the Company no later than January
2003. Statement No. 142 changes the accounting for other intangible assets, such
that those assets whose life is determined to be indefinite are not subject to
amortization. These assets and goodwill shall be tested for impairment at least
annually, and the value will need to be written down if the fair value is less
than the carrying value. Statement No. 143 requires that a liability must be
recognized for an asset retirement obligation related to long lived tangible
assets. The liability shall be recorded at fair value. The adoption of statement
No. 142 did not have a significant effect on the Company's financial position or
results of operations. The Company does not anticipate that the adoption of
statement No. 143 will have a significant effect on its financial position or
results of operations.
In August 2001, the Financial Accounting Standards Board issued statement
No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets).
Statement No. 144 was adopted by the Company in January 2002. This statement
requires an impairment loss to be recognized if the carrying value of a
long-lived asset (asset group) is not recoverable and exceeds its fair value.
Long-lived assets (asset group) shall be tested for impairment whenever events
or changes in circumstances indicate that its carrying amount may not be
recoverable. The adoption of this statement did not have a significant effect on
the Company's financial position or results of operations.
In December 2002, the Financial Accounting Standards Board issued
statement No. 148 (Accounting for Stock-Based Compensation - Transition and
Disclosures). Statement 148 amends the accounting for stock-based compensation
by providing alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, statement 148 amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted statement 148 in December 2002.
The Company does not anticipate changing to the fair value based method of
accounting for stock-based compensation; therefore, the adoption only impacted
disclosures.
(m) Advertising:
Advertising costs are expensed in the period the advertising takes place.
Advertising expense for the years ended December 31, 2002, 2001 and 2000 was
$61,000, $67,000 and $238,000, respectively.
(n) Shipping and handling costs:
Shipping and handling related to freight in and freight out costs are
charged to cost of sales when incurred.
(o) Stock options:
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and not
the fair value method as provided by Financial Accounting Standard Number 123,
"Accounting and Disclosure of Stock-Based Compensation". The Company's Stock
Option Plan requires options to be granted at the market price of the Company's
common stock on the date the options are granted, and as a result, under APB 25
no compensation expense is recognized. Pro forma information regarding net
income (loss) and earnings (loss) per share is required by statement 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of statement 123. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting period. The current pro forma net income (loss) will
not necessarily be representative of pro forma net income (loss) in future
years.
Page 25 of 56
The Company's pro forma information is as follows:
Year ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands, except per share data)
Net income (loss) $968 $790 ($983)
Effect of stock options, net of taxes (14) (18) (18)
----- ----- -------
Pro forma net income (loss) $954 $772 ($1,001)
===== ===== =======
Pro forma earnings (loss) per share - basic and diluted $0.18 $0.15 ($0.19)
(p) Reclassifications:
Certain amounts in prior year financial statements have been reclassified
to conform with the current year presentation.
Note 2 - Asset Purchase
On November 8, 2002, the Company purchased for $527,500 certain assets of
the mixer business of Skinner Engine Company, which is currently in bankruptcy.
The bankruptcy court approved the purchase. In addition, the Company incurred
$96,000 of expenses related to this purchase. The assets acquired consist
primarily of inventory, tooling and fixtures and engineering and technical data.
Note 3 - Other Assets
12/31/02 12/31/01
-------- --------
(In thousands)
Acquired patents and technical know how, net of
accumulated amortization of $781 and $582, respectively .. $196 $146
Intangible pension asset ................................... 94 110
Due from employee .......................................... 83 --
------ ------
Total .................................................... $373 $256
====== ======
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 agreement also requires
the payment of certain transaction based fees related to transactions such as
obtaining credit facilities or assets acquisitions. Pursuant to amendments to
the agreement, First Funding reduced the annual retainer by $42,000 in fiscal
2002 and $71,000 in fiscal 2003. The agreement also requires the Company to pay
for advisory services provided by other First Funding employees on an hourly
basis and out-of-pocket expenses. Since July 1, 2001, and to further notice,
First Funding agreed to provide the service of other First Funding employees as
part of its annual retainer fee. The Company also pays transaction fees in the
event of certain successful transactions. The Company recorded amounts,
including the annual retainer, due to First Funding of $536,000, $522,000 and
$526,000, in fiscal 2002, 2001 and 2000, respectively. Included in the amount
for fiscal 2002 is $77,500 related the Company's credit facility and $50,000
related to the acquisition of certain assets of Skinner Engine Corp. In addition
to the amounts above, the Company reimbursed First Funding $96,000, $104,000,
and $207,000 for out-of-pocket costs in fiscal 2002, 2001 and 2000,
respectively.
Page 26 of 56
The Company has a receivable of $83,400 due from its Chief Executive
Officer which is repayable no later than March 2006.
Note 5 - Inventory
Inventory is comprised of the following:
12/31/02 12/31/01
-------- --------
(In thousands)
Stock and raw materials .................... $6,733 $6,444
Work-in-process ............................ 3,898 4,110
------- -------
Total ...................................... $10,631 $10,554
======= =======
Of the above inventories at December 31, 2002 and 2001, $5.7 million and
$5.5 million, respectively are valued using the LIFO method. Current replacement
costs were approximately equal to LIFO carrying amounts at December 31, 2002,
and greater than the LIFO carrying amounts by approximately $0.1 million at
December 31, 2001.
Note 6 - Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
12/31/02 12/31/01
-------- --------
(In thousands)
Land and buildings ......................... $4,090 $3,882
Machinery, equipment and other ............. 20,013 19,214
Construction in progress ................... 97 --
------- -------
24,200 23,096
Accumulated depreciation ................. (17,034) (14,995)
------- -------
Property, plant and equipment, net ....... $7,166 $8,101
======= =======
Estimated depreciable lives of buildings are 33-40 years. Estimated
depreciable lives of machinery, equipment and other depreciable assets are 3-10
years.
Note 7 - Accrued Expenses and Taxes
Accrued expenses and taxes includes accrued wages and benefits of
approximately $0.8 million and $0.6 million at December 31, 2002 and 2001,
respectively. Also included are income taxes payable of $1.1 million and $0.4
million, at December 31, 2002 and 2001.
Note 8 - Bank Credit Arrangements
The Company has a worldwide multi-currency credit facility, as amended,
with a major U.S. bank, which includes a $10 million revolving credit facility
for direct borrowings and letters of credit. The facility contains a sub-limit
that caps the amount of direct borrowings the Company can make at $5 million.
The facility contains limits on direct borrowings and issuances of letters of
credit based upon stipulated percentages of accounts receivable and inventory.
The revolving credit facility expires on June 15, 2004. Interest varies based
upon prevailing market interest rates. The revolving credit facility requires
payment to the bank of a fee equal to 0.375% per annum of the average daily
unused principal under the facility. The Company has approximately $2.7 million
of letters of credit posted under its credit facility on December 31, 2002.
This credit facility also includes a term loan which the Company borrowed
in June 2001. The term loan is repayable in monthly installments of
(pound)38,888 (approximately $63,000) through June 2004. The term loan has an
Page 27 of 56
interest rate of LIBOR plus 2.7%. The proceeds of this term loan were used to
repay an existing term loan. At December 31, 2002 and 2001, there was $1.1
million and $1.7 million outstanding under the term loan. Approximately,
$752,000 and $680,000 was classified as a current liability at December 31,
2002, and 2001, respectively. At December 31, 2002 and 2001, $375,000 and
$1,019,000 was classified as a long-term liability, respectively.
The credit facility, as amended on March 25, 2003, contains covenants
specifying minimum and/or maximum thresholds for operating results, selected
financial ratios and backlog. The backlog covenant requires that end of month
backlog will not be less than $20 million for more than two consecutive months.
The Company did not achieve the backlog covenant as of the end of January and
February 2002; however, the bank waived the non-compliance. The agreement
contains certain restrictions on investments, borrowings and sale of assets.
Dividend declarations or payments are allowed under this credit facility as long
as there exists under the credit facility no Event of Default (as defined in the
credit facility) or no condition which upon given notice or lapse of time or
both, would become an Event of Default.
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)
------------ --------------
2003 $303
2004 238
2005 137
2006 45
2007 25
Rental expense for the years ended December 31, 2002, 2001 and 2000 was
$317,000, $370,000 and $494,000, respectively.
(b) Contingencies:
The Company is a defendant in certain lawsuits arising in the ordinary
course of business, primarily related to product liability claims involving
machinery manufactured by the Company or its predecessors. While the outcome of
lawsuits or other proceedings against the Company cannot be predicted with
certainty, the Company does not expect that these matters will have a material
adverse effect on the Company's financial position or results of operations.
Note 10 - Stock Plans
The Company sponsors a Stock Option Plan and an Employees' Stock Purchase
Plan, both established in 1997. The 1997 Omnibus Stock Incentive Plan authorizes
the granting of incentive stock options and non-qualified stock options to
purchase up to 500,000 shares of common stock. Option awards may be granted by
the Compensation Committee of the Board of Directors through May 23, 2007 to
eligible employees. The terms (exercise price, exercise period and expirations)
of each option award are at the discretion of the Compensation Committee subject
to the following limitations. The exercise price of an Incentive Stock Option
may not be less than the fair market value as of the date of the grant (or 110%
in the case of an incentive stock option granted to a 10% stockholder). The
exercise period may not exceed 10 years from the date of the grant. At December
31, 2002, 350,000 shares are available for future issuance.
Page 28 of 56
Prior to 1997 the Company granted stock options under a previously
sponsored plan to eligible employees and directors of the Company. At December
31, 2002, options to purchase 223,000 shares remain outstanding under that plan.
The following table presents a summary of the Company's stock option
activity and related information for the years ended:
2002 2001 2000
--------------------- ------------------- ---------------------
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 $4.78 499 $5.42 514 $5.32
Granted -- -- 90 0.70 10 2.13
Exercised -- -- -- -- -- --
Forfeited/expired 86 9.73 130 4.43 25 2.00
------------------- ----------------- ------------------
Outstanding, end of year 373 $3.64 459 $4.78 499 $5.42
------------------- ----------------- ------------------
Exercisable, end of year 343 $3.89 400 $5.39 472 $5.62
Weighted-average fair value of options
granted during the year N/A $0.53 $1.16
The following table summarizes information about stock options outstanding
at December 31, 2002:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Options Contractual Life Price Options Price
- --------------------------------------------------------------------------- ----------------------------
$0.60 - $0.81 90,000 9 years $0.69 60,000 $0.69
2.00 - 2.00 60,000 7 2.00 60,000 2.00
3.75 - 4.00 76,000 3 3.92 76,000 3.92
5.25 - 5.44 52,000 2 5.29 52,000 5.29
6.00 - 6.75 95,000 1 6.32 95,000 6.32
- ------------------------------------------------------------------------------------------------------------------
$0.60 - $6.75 373,000 4.04 years $3.64 343,000 $3.89
Pro forma information regarding net income (loss) and earnings (loss) per
share required by Financial Accounting Standard Number 123 presented in Note 1
has been determined as if the Company had accounted for its employee stock
options under the fair value method of statement 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 statement 123, with the following assumptions for 2001 and 2000 (no
options were issued in 2002):
2001 2000
---- ----
Risk free interest rate 5.00% 6.07%
Dividend yields 0.0% 0.0%
Expected volatility factor of the expected
market price of the Company's common stock .621 .379
Weighted average expected life of each option 10 yrs. 8 yrs.
The weighted average fair value of options granted during 2001 and 2000
was $0.53, and $1.16, respectively. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. The Company's employee
Page 29 of 56
stock options have characteristics different than those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate, therefore, in management's judgment, applying the provisions of
statement 123 does not necessarily provide a reliable single measure of the fair
value of its stock options.
The Company may purchase up to $4,750,000 of its common stock under its
discretionary open market stock repurchase plan. During fiscal 2001 and 2000 the
Company purchased 1,600 and 20,000 shares of common stock, respectively, under
this plan for approximately $1,000 and $16,000, respectively which are included
in treasury stock.
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 and assumptions concerning uncertainties about employee
turnover, future pay scales, interest rates, rates of return on investments,
mortality tables used to determine life expectancy of plan members, the rate of
mandated increases in pension payments for cost of living adjustments and future
medical costs. These estimates and assumptions rely heavily on judgment and the
actual outcome could be materially different than what has been estimated and
assumed. In addition, these estimates and assumptions, some of which are of a
long-term nature, require periodic updating and could change significantly in
the future. Differences in actual outcome versus what has been estimated and
assumed along with changes to these estimates and assumptions in the future to
reflect prevailing conditions at such time, could materially impact the amounts
reflected in the financial statements.
The annual cost for these benefits is comprised primarily of the service
cost component related to current employee service, an interest cost related to
the increase in the benefit obligations due to the passage of time (the benefit
obligations are stated at a present value which increases each year as the
discount period decreases), less the earnings achieved on assets invested in the
employee benefit plan. Differences between the estimates and actual experience
are deferred and amortized to expense over a period of time. Pension expense is
actuarially determined in accordance with accounting principles generally
accepted in the U.S. and differs from amounts funded annually.
Pension Plans
The Company has a domestic defined benefit pension plan for hourly
employees, which provides benefits based on employees' years of service. The
Company's U.K. subsidiary has a foreign defined benefit pension plan covering
substantially all employees, which provides stipulated amounts at retirement
based on years of service and earnings. As a response to the increasing cost of
the foreign pension plan, in January 2002, the U.K. subsidiary officially
informed the foreign plan's trustees that effective the end of the first quarter
of 2002, the U.K. employees would no longer accrue additional benefits under
this pension plan for future service. No curtailment gain or loss was generated
as a result of this action. The following table summarizes the components of
domestic and foreign pension expense:
Year ended
----------
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands)
Domestic pension expense:
Service cost-benefits earned during the period $66 $58 $73
Interest cost on projected benefit obligation 161 163 152
Expected return on plan assets ............... (178) (184) (177)
Recognized net actuarial loss ................ 78 27 44
Amortization of prior service cost ........... 17 17 10
--------- --------- ---------
Net domestic pension expense ............ $144 $81 $102
========= ========= =========
Page 30 of 56
Year ended
----------
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands)
Foreign pension expense:
Service cost-benefits earned during the period $196 $561 $675
Interest cost on projected benefit obligation 1379 1,284 1,324
Estimated return on plan assets .............. (1,390) (1,617) (1,774)
Amortization of net actuarial loss ........... 439 -- 5
--------- --------- ---------
Net foreign pension expense ............. $624 $228 $230
========= ========= =========
The Company's funding policy is guided by government regulations and the
Company's desire to accumulate sufficient assets in the benefit plans to meet
obligations for retirement benefits. The Company funds the domestic plan in
accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and
the foreign plan in accordance with the U.K. Pensions Act 1995 and related
regulations in the United Kingdom. At any point in time there may be differences
between the estimates used in establishing pension cost for accounting purposes,
the criteria for funding amounts and actual experience. As a result there will
always be an amount by which the Company is over or under-funded.
The following table sets forth the funded status under U.S. accounting
standards of the domestic and foreign defined benefit plans and amounts
recognized in the balance sheets:
Domestic Foreign
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Change in Projected Benefit Obligation
Balance at the beginning of the year ........... $2,742 $2,308 $23,756 $22,675
Service cost ................................... 66 58 196 561
Interest cost .................................. 161 163 1,379 1,283
Plan participant contributions ................. -- -- 45 180
Actuarial (gain) losses ........................ 236 328 2,748 677
Foreign currency exchange rates ................ -- -- 2,800 (575)
Benefits paid .................................. (124) (115) (770) (965)
Other .......................................... -- -- (75) (80)
------- ------- -------- --------
Balance at the end of the period ............... $3,081 $2,742 $30,079 $23,756
======= ======= ======== ========
Change in Fair Value Plan Assets
Balance at the beginning of the year ........... $2,230 $2,371 $21,113 $24,198
Actual return on assets ........................ (148) (26) (2,201) (2,398)
Contributions - employer ....................... 158 -- 723 799
Contributions - employee ....................... -- -- 45 180
Foreign currency exchange rates ................ -- -- 2,173 (700)
Benefits paid .................................. (124) (115) (770) (966)
------- ------- -------- --------
Balance at the end of the period ............... $2,116 $2,230 $21,083 $21,113
======= ======= ======== ========
Funded status of the plan
(Under) funded ................................. ($965) ($512) ($8,996) ($2,643)
Unrecognized net actuarial loss ................ 1,494 1,011 12,952 5,959
Unamortized prior service cost ................. 94 110 -- --
------- ------- -------- --------
Prepaid pension expense ........................ $623 $609 $3,956 $3,316
Charge for minimum liability requirement ....... (1,588) (1,121) (12,952) (5,959)
------- ------- -------- --------
Net pension (liability) ........................ ($965) ($512) ($8,996) ($2,643)
======= ======= ======== ========
Intangible pension asset ....................... $94 $110 -- --
======= ======= ======== ========
Discount rate .................................. 5.50% 6.00% 5.75% 5.75%
Rate of increase in future compensation levels . N/A N/A 2.50% 2.50%
Expected long-term rate of return on plan assets 7.75% 8.00% 6.50% 6.50%
Page 31 of 56
For the years ended December 31, 2002 and 2001, the assets of the foreign
plan generated a negative return (lost value). The majority of the 2002 loss was
incured in June 2002 as a result of the decline in the stock market. As a result
of the poor investment performance in 2001, mid-year 2001 the plan's trustees
moved the asset management to a different investment manager. The trustees of
the plan moved the plan assets out of equities in July 2002 and are reviewing
the long-term investment strategy of the plan. As of December 31, 2002 and March
25, 2003, the assets of the plan consisted of corporate and government bonds and
cash. The 2001 decline in the assets resulted in a requirement to record a
minimum pension liability of $2.6 million for the foreign plan. This requirement
resulted in a net of tax charge to stockholders' equity of $4.2 million in 2001.
This charge was required to write down the existing prepaid pension asset and
establish a net liability. This charge is recorded as part of accumulated other
comprehensive (loss) in the stockholders' equity section of the balance sheet.
At December 31, 2001, for the foreign pension plan, the accumulated benefit
obligation was $23.7 million.
In December 2002, revised mortality tables were used in the determination
of the foreign pension liability for accounting in order to reflect updated
mortality data. The change in the mortality tables along with the decline in the
value of the pension assets, are the primary reasons for the charge in 2002 to
stockholders' equity of $6.2 million related to the foreign pension plan. The
charge was required to increase the minimum pension liability on the balance
sheet to $9 million. This charge is recorded as part of accumulated other
comprehensive (loss) in the stockholders' equity section of the balance sheet.
At December 31, 2002, for the foreign pension plan, the accumulated benefit
obligation was $30.1 million.
The funded status under regulatory guidelines in the U.K. used to
determine legally required minimum funding amounts for the Company's foreign
plan can vary significantly from the funded status for U.S. accounting purposes.
The amount of Company contributions to the pension plan is based upon a minimum
funding computation under U.K. guidelines and the advice of the plan's actuary.
Under the rules of the foreign plan, the trustees are to wind up the plan if
they receive actuarial advice that the actual and expected Company contributions
are so low as to prejudice seriously the long-term financial position of the
plan. On a wind up basis the amount of underfunding of the plan is computed
differently than, and would be substantially greater than, the amount reflected
in the financial statements. Additionally, on a wind up basis, the underfunding
must be paid down within a short time period. In February 2003, the Company, the
foreign plan's trustees and the foreign plan's actuary agreed to a monthly
contribution schedule which provides for the Company to contribute (pound)50,600
(approximately $81,000) a month to the plan plus the costs of administering the
plan, which are estimated to be $100,000 annually. The contribution schedule was
based on an April 2002 actuarial computation and must be reviewed for adequacy
by the actuary at least annually or, if deemed necessary by the actuary, on a
more periodic basis. The level of future contributions is subject to several
factors including investment performance on existing assets.
The Company changed the domestic plan's discount rate in 2002 and 2001 in
response to year-end interest rates. The Company had a minimum pension liability
of $965,000 and $512,000 for its U.S. pension plan at December 31, 2002 and
2001, respectively. The adjustments to the minimum liability for the domestic
plan were recorded as comprehensive (loss) included in stockholders' equity, net
of applicable income taxes. The charge to accumulated other comprehensive (loss)
related to the domestic plan was $304,000 and $632,000 in 2002 and 2001,
respectively. At December 31, 2002 and 2001, for the domestic pension plan, the
accumulated benefit obligation was $3.1 and $2.7 million, respectively.
The Company has domestic and foreign defined contribution retirement plans
for certain employees, which include matching and discretionary non-matching
contributions by the Company. Approximately $174,000, $101,000, and $107,000 of
Company contributions were expensed in fiscal 2002, 2001 and 2000, respectively.
Page 32 of 56
Post-employment Benefits Other Than Pensions
The Company generally provides health care benefits to eligible domestic
union retired employees who retired prior to 1994 and their dependents through
age 65. The Company is self-insured for claims prior to age 65 and pays these as
incurred. Retired employees and their dependents were entitled to select
Supplemental Medicare Coverage A and B only at age 65. The Company pays 100% of
the monthly Medicare premiums for most of these individuals and 75% for the
remaining individuals. Eligibility for these retiree health care benefits was
attained upon reaching age 60 and completing 10 years of service.
The following table summarizes the Company's expense for post-employment
benefits other than pensions.
Year ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands)
Service cost- benefits earned during the period -- -- --
Interest cost on accumulated post-retirement
benefit obligation $50 $46 $54
Amortization of net loss (gain) (10) (30) (15)
--------- --------- ---------
Net periodic post-retirement benefit costs $40 $16 $39
========= ========= =========
The Company's non-pension post-retirement benefit plans are not funded.
The status of the plans are as follows:
12/31/02 12/31/01
-------- --------
(In thousands)
Accumulated post-retirement benefit obligation:
Beginning of the year $842 $786
Interest cost 50 46
Recognized actuarial (gain) loss 148 68
Benefits Paid (61) (58)
------- -------
End of the year 979 842
Unrecognized actuarial gain 76 234
------- -------
Accrued post-retirement benefit obligation $1,055 $1,076
======= =======
The assumed discount rate used in determining the accumulated
post-retirement benefit obligation was 5.50% and 6.00% at December 31, 2002 and
2001, respectively. The change in assumptions did not have a material impact on
the obligation or net periodic post-retirement benefit cost. The assumed health
care cost trend rate used in measuring the accumulated post-retirement benefit
obligation was 10.0% at December 31, 2002. The trend rate used for 2003 is 13%
and declines 1.0% per year to 5.0% by the year 2011 and remains at that level
thereafter. The assumed health care cost trend rate has a significant effect on
the amounts reported. A one-percentage-point change in the assumed health care
cost trend rate would have the following effects:
1-Percentage-Point
Increase Decrease
------------------------
(In thousands)
Increase (decrease) in the interest cost components in 2002 $3 $(3)
Increase (decrease) in post-retirement benefit obligation as of 2002 $49 $(49)
Page 33 of 56
Note 12 - Accumulated Comprehensive Loss
The components of other comprehensive loss are as follows:
Foreign
Currency Minimum
Translation Pension
Adjustments Liability Total
----------- --------- -----
(In thousands)
Balance at December 31, 1999 ($309) ($613) ($922)
Cumulative translation adjustment (885) -- (885)
Minimum pension liability adjustment -- 1,005 1,005
Deferred taxes relating to minimum
Pension liability -- (392) (392)
---------- ---------- ----------
Balance at December 31, 2000 (1,194) -- (1,194)
Cumulative translation adjustment (226) -- (226)
Minimum pension liability adjustment -- (6,970) (6,970)
Deferred taxes relating to minimum
Pension liability -- 2,149 2,149
---------- ---------- ----------
Balance at December 31, 2001 (1,420) (4,821) (6,241)
Cumulative translation adjustment 953 -- 953
Minimum pension liability adjustment -- (6,632) (6,632)
Effect of change in foreign currency
exchange rate on beginning balance -- (441) (441)
Deferred taxes relating to minimum
Pension liability -- 179 179
---------- ---------- ----------
Balance at December 31, 2002 ($467) ($11,715) ($12,182)
========== ========== ==========
Note 13 - Provision for Income Taxes
Pre-tax income (loss) and provision (benefit) for income taxes for the
years ended December 31, 2002, 2001 and 2000 are as follows:
Year ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands)
The domestic and foreign components of
income (loss) before income taxes are:
Domestic $2,493 ($25) $1,203
United Kingdom (776) 1,212 (2,169)
--------- --------- ---------
$1,717 $1,187 $(966)
========= ========= =========
The provision (benefit) for income taxes is:
Current:
United States $893 $(25) $392
United Kingdom -- 34 --
State 144 (6) 107
--------- --------- ---------
1,037 3 499
--------- --------- ---------
Deferred:
United States (76) 37 (1)
United Kingdom (200) 352 (481)
State (12) 5 --
--------- --------- ---------
(288) 394 (482)
--------- --------- ---------
$749 $397 $17
========= ========= =========
Page 34 of 56
Deferred tax liabilities (assets) result from the following differences
between financial reporting and tax accounting.
12/31/02 12/31/01
-------- --------
(In thousands)
Deferred tax liabilities:
Fixed Assets $26 $337
Inventory valuation -- 81
Intangibles 7 44
Other 22 22
------- -------
Total deferred tax liabilities 55 484
------- -------
Deferred tax assets:
Pension (1,195) (938)
Non pension postretirement benefits (390) (398)
Warranty cost accruals (154) (152)
Vacation reserve (85) (98)
Bad debt reserve (29) (31)
Net operating loss carryforward (234) (190)
Inventory valuation (30) --
Other reserves (28) (52)
Other -- (2)
------- -------
Total deferred tax assets (2,145) (1,861)
------- -------
Net deferred tax (assets) before valuation allowance (2,090) (1,377)
Valuation allowance 213 190
------- -------
Net deferred tax (assets) ($1,877) ($1,187)
======= =======
The valuation allowance was established in 2000. The change in the amount
of the allowance is a result of changes in foreign currency exchange rates. The
Net Operating Loss Carryforward relates to the Company's U.K. operations and can
be carried forward indefinitely.
A reconciliation from statutory U.S. federal income taxes to the actual
income taxes is as follows:
Year ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands)
Statutory provision (benefit) $584 $404 $(328)
U.S.--U.K. rate differential 31 (48) 87
State income taxes, net of federal benefit 87 -- 71
Permanent differences 53 41 2
Valuation allowance -- -- 197
Other (6) -- (12)
--------- --------- ---------
Actual provision $749 $397 $17
========= ========= =========
Note 14 - Earnings (Loss) per Share
Options outstanding at December 31, 2002, to purchase 283,000 shares of
common stock at prices ranging from $2.00 to $6.75 were not included in the
computation of dilutive EPS for the year ended December 31, 2002, because the
options' exercise prices were greater than the average market price of the
common shares. Options outstanding at December 31, 2001, to purchase 459,000
shares of common stock at prices ranging from $0.81 to $10.00 were not included
in the computation of dilutive EPS for the year ended December 31, 2001, because
the options' exercise prices were greater than the average market price of the
common shares. Options outstanding at December 31, 2000, to purchase 499,000
shares of common
Page 35 of 56
stock at prices ranging from $0.60 to $10.00 were not included in the
computation of dilutive EPS for the year ended December 31, 2000, because the
effect of the options was anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
Year ended
12/31/02 12/31/01 12/31/00
-------- -------- --------
(In thousands, except share data)
Net income (loss) applicable to
Common stockholders $968 $790 ($983)
========= ========= =========
Weighted average number of common
Shares outstanding - basic 5,228,461 5,228,500 5,249,228
Effect of dilutive stock options 44,536 2,040 --
--------- --------- ---------
Weighted average number of
Common shares outstanding - diluted 5,272,997 5,230,540 5,249,228
========= ========= =========
Net income (loss) per share-basic $0.18 $0.15 ($0.19)
========= ========= =========
Net income (loss) per share-diluted $0.18 $0.15 ($0.19)
========= ========= =========
Note 15 - Foreign Currency Contracts
The Company, from time to time, enters into foreign exchange contracts for
non-trading purposes, exclusively to minimize its exposure to currency
fluctuations on trade receivables, firm commitments and payables. As a result,
changes in the values of foreign currency contracts offset changes in the values
of the underlying assets and liabilities due to changes in foreign exchange
rates, effectively deferring cash gains and losses on trade receivables, firm
commitments and payables and the related hedges until the date the transactions
are settled in cash. The Company is exposed to loss in the event of
nonperformance by the Company's bank, the other party to the foreign exchange
contracts. The Company does not anticipate nonperformance by its bank.
As of December 31, 2002 and 2001, all of the Company's foreign exchange
forward contracts existing at such times were designated as fair value hedges.
As such, there were no charges to the statement of operations related to these
contracts. At December 31, 2002 and 2001, the net difference between the spot
rate and the contract rate for the foreign exchange forwards was an unrealized
loss of approximately $13,000 and $1,000, respectively. At December 31, 2002,
the Company is committed to provide 801,000 EURO's in exchange for British Pound
Sterling under forward contracts expiring thru August 2003.
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 for all products.
Page 36 of 56
The following provides gross revenue by product and geographic area for
the years ended December 31, 2002, 2001 and 2000:
Year ended
-----------------------------------
2002 2001 2000
---- ---- ----
(In thousands)
Sale by Product Line
New Machines $18,956 $23,854 $29,000
Spares 13,457 14,061 17,471
Repairs 14,816 15,241 16,270
Other 2,862 3,093 1,482
------- ------- -------
Total $50,091 $56,249 $64,223
======= ======= =======
Geographic Sales by Destination
United States $29,568 $26,070 $41,365
United Kingdom 4,999 2,037 3,572
Europe (excluding U.K.) 10,315 17,254 7,200
North America (excluding U.S.) 970 2,767 4,522
Asia 2,997 6,048 5,049
Middle East 383 146 970
Other 859 1,927 1,545
------- ------- -------
Total $50,091 $56,249 $64,223
======= ======= =======
There were no sales to a single customer that exceeded 10% of the
Company's revenue for the years ended December 31, 2002, 2001 and 2000.
Net sales to unaffiliated customers, operating income and assets of the
U.S. and U.K. operations for the years ended December 31, 2002, 2001 and 2000
are as follows:
United United
States Kingdom Consolidated
----------------------------------
(In thousands)
Year ended 12/31/02:
Sales to unaffiliated Customers $32,404 $17,687 $50,091
Operating income (loss) $2,178 ($796) $1,382
Long-lived assets $3,988 $4,890 $8,878
Total assets $22,991 $14,937 $37,928
Year ended 12/31/01:
Sales to unaffiliated Customers $30,849 $25,400 $56,249
Operating income $10 $1,104 $1,114
Long-lived assets $4,379 $4,742 $9,121
Total assets $21,008 $14,958 $35,966
Year ended 12/31/00:
Sales to unaffiliated Customers $48,427 $15,796 $64,223
Operating income (loss) $1,131 ($1,968) ($837)
Long-lived assets $5,472 $7,879 $13,351
Total assets $22,592 $21,340 $43,932
Page 37 of 56
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 above should not be construed as indicative of U.S. and U.K. operating
results were the Company not to operate in such a manner.
Note 17 - Quarterly Financial Data (Unaudited):
Summarized quarterly financial data for fiscal 2002 and 2001:
(In thousands except per share data)
Quarter
------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Fiscal 2002
Net Sales $7,845 $9,175 $12,676 $20,395
========= ========= ========= =========
Gross Margin $1,852 $2,218 $3,441 $5,940
========= ========= ========= =========
Net income (loss) ($760) ($467) $348 $1,847
========= ========= ========= =========
Basic and diluted net income (loss) per common share ($0.15) ($0.09) $0.07 $0.35
========= ========= ========= =========
Basic weighted average shares outstanding (000's) 5,228 5,228 5,228 5,228
========= ========= ========= =========
Diluted weighted average shares outstanding (000's) 5,228 5,228 5,277 5,271
========= ========= ========= =========
(In thousands except per share data)
Quarter
------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Fiscal 2001
Net Sales $11,080 $12,355 $15,847 $16,967
========= ========= ========= =========
Gross Margin $2,472 $2,418 $4,425 $4,529
========= ========= ========= =========
Net income (loss) ($607) ($573) $923 $1,047
========= ========= ========= =========
Basic and diluted net income (loss) per common share ($0.12) ($0.11) $0.18 $0.20
========= ========= ========= =========
Basic weighted average shares outstanding (000's) 5,230 5,229 5,228 5,228
========= ========= ========= =========
Diluted weighted average shares outstanding (000's) 5,230 5,229 5,228 5,235
========= ========= ========= =========
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 38 of 56
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,
2002 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 2003.
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,
2002 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 2003.
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,
2002 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 2003.
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,
2002 and delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on June 4, 2003. See also Notes to Consolidated
Financial Statements, Note 4, appearing in Item 8 herein.
Item 14 - Controls and Procedures
Within 90 days prior to the filing of this annual report, an evaluation
was performed under the supervision and with the participation of the Company's
management, including the CEO and CFO, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and CFO, concluded that
the Company's disclosure controls and procedures were effective as of December
31, 2002. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation.
Page 39 of 56
PART IV
Item 15 - 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, 2002 and 2001 .... 19
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 .............................. 20
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 ........................ 21
Consolidated Statements of Cash Flows for years ended
December 31, 2002, 2001 and 2000 .............................. 22
Notes to Consolidated Financial Statements ...................... 23 - 38
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 40 of 56
3. Exhibits Page
Exhibits
Exhibit 3(a) Articles of Incorporation - Filed as an exhibit to N/A
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 N/A
Registration Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference. N/A
Exhibit 4 Revolving Credit and Term Loan Agreement dated June 15, N/A
2001, between Farrel Corporation, Farrel Limited and
First Union National. Filed as an exhibit to the
Registrant's Form 10Q for the quarter ended July 1, 2001.
Exhibit 4 Revolving Promissory Note dated June 18, 2001, between N/A
Farrel Corporation, Farrel Limited and First Union
National Bank. Filed as an exhibit to the Registrant's
Form 10Q for the quarter ended July 1, 2001.
Exhibit 4 Term Promissory Note dated June 18, 2001, between Farrel N/A
Limited and First Union National Bank. Filed as an
exhibit to the Registrant's Form 10Q for the quarter
ended July 1, 2001.
Exhibit 4 Letter Agreement Dated March 18, 2002, modifying the N/A
Revolving Credit and Term Loan Agreement dated June 15,
2001, between Farrel Corporation, Farrel Limited and
First Union National Bank. Filed as an exhibit to the
Registrant's Form 10K for the year ended December 31,
2001.
Exhibit 4 Amendment Dated August 2, 2002, modifying the Revolving N/A
Credit and Term Loan Agreement dated June 15, 2001,
between Farrel Corporation, Farrel Limited and First
Union National Bank. Filed as an exhibit to the
Registrant's Form 10Q for the quarter ended June 30,
2002.
Exhibit 4 Letter Agreement Dated March 25, 2003, modifying the N/A
Revolving Credit and Term Loan Agreement dated June 15,
2001, between Farrel Corporation, Farrel Limited and
First Union National Bank.
Exhibit 10(b) Employment Agreement between Rolf K. Liebergesell and the N/A
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.
Exhibit 10(b) First Amendment to Employment Agreement between Rolf K. N/A
Liebergesell and registrant effective as of December 1,
1997, filed as an exhibit to the Registrants Form 10Q for
the quarter ended March 29, 1998.
Exhibit 10(d) Standard Corporate Financial Services contract between N/A
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.
Page 41 of 56
Exhibit 10(e) 1997 OMNIBUS Stock Incentive Plan - Filed as an exhibit N/A
to the Registrant's definitive Proxy Statement re: Annual
Meeting on May 23, 1997 and incorporated herein by
reference.
Exhibit 10(f) 1997 Employee's Stock Purchase Plan - Filed on the N/A
Registrant's registration Statement as Form S-8 (No.
333-30735) and incorporated herein by reference.
Exhibit 10(g) Environmental Agreement between USM Corporation and the N/A
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.
Exhibit 10(h) Form of Director Indemnification Agreement. Filed as an N/A
exhibit to the Registrant's Registration Statement as
Form S-1 (No. 33-43539) and incorporated herein by
reference.
Exhibit 10 (i) Environmental Settlement Agreement between The Black & N/A
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.
Exhibit 10 (k) Agreement of Purchase and Sale of certain property N/A
located in Derby, CT between National RE/sources
Acquisition, LLC and Farrel Corporation dated July 17,
1998, and reinstatement agreement dated October 15, 1998.
Filed as an exhibit to the Registrant's N/A Form 10K for
the year ended December 31, 1998.
Exhibit 10 (l) Letter dated February 8, 2002, amending the Standard N/A
Corporate Financial Services contract between First
Funding Corporation and the Registrant, dated June 17,
1986. Filed as an exhibit to the registrant's Form 10K
for the year ended December 31, 2001.
Exhibit 10 (m) Letter dated January 22, 2003, amending the Standard 51
Corporate Financial Services contract between First
Funding Corporation and the Registrant, dated June 17,
1986.
Exhibit 10 (n) Officer Loan Agreement between Rolf K Liebergesell and 52
Farrel Corporation
Exhibit 11 Statement re: Computation of per share earnings. 35
Exhibit 21 Subsidiaries - Filed as an exhibit to the Registrant's N/A
Registration Statement as Form S-1 (No. 33-43539) and
incorporated herein by reference.
Exhibit 23 Consent of Ernst & Young LLP 54
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as N/A
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
Page 42 of 56
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as N/A
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K.
Form 8-K dated November 18, 2002, Item 5 - Other Events reporting the
acquisition of certain assets of the mixer business of Skinner Engine Company.
Page 43 of 56
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:
Signature Title Date
- --------- ----- ----
/s/ Rolf K. Liebergesell Chief Executive Officer, March 25, 2003
- ------------------------ President and Chairman --------------
Rolf K. Liebergesell of the Board
/s/ Walter C. Lazarcheck Vice President - Chief March 25, 2003
- ------------------------ Financial Officer --------------
Walter C. Lazarcheck (Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Rolf K. Liebergesell Chief Executive Officer, March 25, 2003
- ------------------------ President and Chairman --------------
Rolf K. Liebergesell of the Board
/s/ Walter C. Lazarcheck Vice President - Chief March 25, 2003
- ------------------------ Financial Officer --------------
Walter C. Lazarcheck (Chief Accounting Officer)
/s/ Howard J. Aibel Director March 25, 2003
- ------------------------ --------------
Howard J. Aibel
/s/ Charles S. Jones Director March 25, 2003
- ------------------------ --------------
Charles S. Jones
/s/ James A. Purdy Director March 25, 2003
- ------------------------ --------------
James A. Purdy
/s/ Glenn Angiolillo Director March 25, 2003
- ------------------------ --------------
Glenn Angiolillo
/s/ Alberto Shaio Director March 25, 2003
- ------------------------ --------------
Alberto Shaio
Page 44 of 56
CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rolf K Liebergesell, certify that:
1. I have reviewed this annual report on Form 10-K of Farrel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Rolf K Liebergesell
- ----------------------------------
Rolf K Liebergesell
Chairman of the Board of Directors
and Chief Executive Officer
March 25, 2003
Page 45 of 56
CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF
1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter C Lazarcheck, certify that:
1. I have reviewed this annual report on Form 10-K of Farrel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Walter C Lazarcheck
- ----------------------------
Walter C Lazarcheck
Vice President
and Chief Financial Officer
March 25, 2003
Page 46 of 56
REPORT OF INDEPENDENT AUDITORS ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Farrel Corporation
We have audited the consolidated financial statements of Farrel Corporation as
of December 31, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, and have issued our report thereon dated February 20,
2003, except for the third paragraph of Note 8, as to which the date is March
25, 2003, (included elsewhere in this Annual Report on Form 10-K). Our audits
also included the financial statement schedule for the years ended December 31,
2002, 2001 and 2000 listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
Stamford, Connecticut
February 20, 2003
Page 47 of 56
SCHEDULE II
FARREL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
The allowances for doubtful receivables and reserves for excess and obsolete
inventory items have been deducted in the balance sheets from the assets to
which they apply. The warranty costs are shown as liabilities in the balance
sheet.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ---------- ---------------------------- ------------- -------------
Charged
Balance at Charged to (credited)
beginning Costs and to other Balance at
Name of Debtor of period Expenses accounts (1) Deductions (2) end of period
- --------------------------------- ---------- ---------------------------- ------------- -------------
Year ended 12/31/00
Allowance for doubtful
Receivables $185 $194 $1 ($241) $139
Reserve for excess and obsolete
inventory items $1,354 $379 ($18) ($271) $1,444
Accrued warranty
Costs $1,629 $1,285 $22 ($1,861) $1,075
Year ended 12/31/01
Allowance for doubtful
Receivables $139 $69 $0 ($29) $179
Reserve for excess and obsolete
inventory items $1,444 $540 ($11) ($48) $1,925
Accrued warranty
Costs $1,075 $949 ($9) ($1,011) $1,004
Year ended 12/31/02
Allowance for doubtful
Receivables $179 $6 $5 ($94) $96
Reserve for excess and obsolete
inventory items $1,925 $610 $104 ($354) $2,285
Accrued warranty
Costs $1,004 $284 $36 ($482) $842
(1) Represents foreign currency translation adjustments charged or credited to
stockholders' equity.
(2) Represents accounts receivable written off, obsolete inventory items
written off, reductions in accrued warranty costs to reflect expenditures
incurred.
Page 48 of 56