-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B9s1OOOoiNH1BGQ4nasqvaolVdPGPLU6nDljr6GopPjAn/VgxlXtmZs493WXPZvc xc98+J7tie4Q4NDpXwXlVA== 0000034629-00-000002.txt : 20000328 0000034629-00-000002.hdr.sgml : 20000328 ACCESSION NUMBER: 0000034629-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARR CO CENTRAL INDEX KEY: 0000034629 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 951288401 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04723 FILM NUMBER: 578761 BUSINESS ADDRESS: STREET 1: 2201 PARK PLACE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: (310) 727- MAIL ADDRESS: STREET 1: PO BOX 92187 STREET 2: AIRPORT STATION CITY: LOS ANGELES STATE: CA ZIP: 90009-2187 10-K 1 FARR COMPANY 1999 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ( X ) EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 1, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______________ to _______________ Commission file number 0-4723 FARR COMPANY (Exact name of registrant as specified in its charter) Delaware 95-1288401 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2201 Park Place, El Segundo, CA 90245 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 727-6300 Securities registered pursuant to Section 12 (g) of the Act: Title of Class Name of Exchange on Which Registered Common Stock, $.10 Par Value NASDAQ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __x__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __x__ The aggregate market value of voting common stock held by non-affiliates of Registrant on March 15, 2000, based on the closing sale price on such date, was $83,699,381. The number of shares of common stock outstanding on March 15, 2000 was 7,278,207. ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE PART I AND II: The Annual Report to Stockholders for the fiscal year ended January 1, 2000. PART I Item 1. Business - ------- -------- Farr Company and its subsidiaries (hereinafter collectively referred to as the "Company" or "Registrant") are engaged in the design, development, manufacture, sale and service of filters and filtration systems. These products are used for a wide variety of applications, including heating, ventilation and air conditioning systems, manufacturing and process cleanrooms, special application filters for original equipment manufacturers, diesel-powered truck engines, railroad locomotives, dust collection systems and gas turbines. Air filter efficiencies range from 20 percent in disposable products to 99.9999+ percent in cleanroom products. Products are available as standard items or may be custom engineered. They range in size and complexity from a small throwaway air filter to large gas turbine systems with a single filter component module weighing in excess of twenty tons. All of the Company's filter products incorporate at least one of five basic methods of filtration. These include strainer type filters which block the passage of particles through the use of various types of materials such as paper, non-woven cotton fabric, fiberglass and metal screening; impingement and diffusion type filters which consist of layers of various types of screening materials sometimes with an oil coating that traps dust particles; inertial separators which filter high velocity air by changing its direction; and activated carbon filters which absorb odors and gases. Paper, fabric, fiberglass and carbon filters are disposable and the Company sells replacements. Many products manufactured by the Company are enclosed in hardware ranging from simple frames to large component modules weighing in excess of twenty tons. The percentage of the Company's total sales involving the fabrication of large enclosures used in special filtration was 5 percent, 6 percent and 5 percent in 1999, 1998 and 1997, respectively. These products are sold primarily for use with gas turbine installations in applications in the electrical generating, oil and gas industries. The Company also maintains and services air filtration systems and accessory equipment in buildings and industrial plants in Southern California and Phoenix, Arizona. Services include replacing disposable filters. The Company was organized in California in 1938 and reincorporated in Delaware in 1987. - 2 - Materials The principal materials used in manufacturing the Company's products are ferrous and non-ferrous materials, plastisols, urethanes, adhesives and certain finished and semi-finished filter materials, including screen, activated carbon, cotton fibers, paper and fiberglass. The Company does not depend on any single materials supplier for a significant portion of its raw materials. Product Engineering and Development At January 1, 2000, the Company employed approximately 45 engineers, draftsmen and technicians in the United States, Canada and England to improve and develop existing products, to design, develop and test new products and to improve production equipment and techniques. The Company spent approximately $2,658,000, $2,530,000 and $2,129,000 for product engineering and development in 1999, 1998 and 1997, respectively. The Company owns a number of United States and foreign patents. Although the Company considers these patents to be of value in its operations, its business is not dependent on any single patent or group of patents. Sales and Distribution The Company's products are sold throughout the United States and in over 30 foreign countries through salesmen working out of field sales offices and through various distributors and manufacturers' representatives. Certain of the Company's products are manufactured and sold under licensing agreements with manufacturers located in Argentina, Hong Kong, India, Indonesia, Japan, Malaysia, Mexico, New Zealand, Singapore, South Africa, Taiwan and through the Company's joint-venture in Malaysia. During 1999, no customer accounted for more than 10 percent of net sales. Backlog The Company's backlog at January 1, 2000 was $15,293,000 as compared to $14,961,000 at January 2, 1999. Historically, backlog has not been a significant measure of the Company's future business activities since the majority of orders are shipped within forty-five to sixty days of receipt. During 1999, approximately 5 percent of the Company's business was derived from products with lead times longer than 60 days. These products are primarily heavy fabrication products such as gas turbine equipment. The backlog of orders relating to heavy fabrication products was approximately $3,936,000 and $2,231,000 at January 1, 2000 and January 2, 1999, respectively. All of the January 1, 2000 backlog is scheduled for delivery during 2000. - 3 - International Operations The Company engages in operations in foreign countries as described above. For information regarding the geographic distribution of revenue and long-lived assets of the Company's domestic and international operations, see Note 12 of Notes to Consolidated Financial Statements, included in the Company's Annual Report to Stockholders, which is incorporated herein by reference. The Company's international operations are subject to the additional risks inherent in doing business in countries whose governments have policies different than those of the United States. To date the Company has experienced no material problems in foreign countries arising from political instability or currency restrictions or fluctuations. Competition The fields in which the Company operates are highly competitive with numerous other companies manufacturing and selling competing products. While information with respect to the industry ranking of the Company among manufacturers of similar products is not available, the Company believes that its principal competitors in most of its major product areas are Flanders Corporation, American Air Filter Company, Inc., a wholly owned subsidiary of Hoeng Leong OYL Group, Malaysia, Donaldson Company, Inc. and Clarcor, Inc. A number of the Company's competitors have greater financial and marketing resources than the Company. The Company believes the principal competitive factors in the sale of its products are technical competence, price, quality and the ability to respond to the individual requirements of its customers. Employees At March 15, 2000, the Company had approximately 1,212 employees as compared to approximately 1,285 on March 12, 1999. The Company's three drivers and warehouse operators at its El Segundo service office are covered by a collective bargaining agreement with the Teamsters Union that expired on February 6, 2000. Twenty-six employees at the Company's Delano plant are covered by a collective bargaining agreement with the Sheet Metal Workers International Association that expires June 30, 2001. At January 1, 2000, 139 employees at the Company's Montreal, Canada plant were covered by a three year collective bargaining agreement expiring August 31, 2000, and 40 employees at the Company's Birmingham, England plant were covered by a collective bargaining agreement that expires on December 31, 2000. - 4 - Executive Officers of the Registrant ================================================================================ Position Held and Name Age Business Experience During Past Five Years - ---- --- ------------------------------------------ John C. Johnston 56 President and Chief Executive Officer of the Company (since February 1999), Director of the Company (since September 1996), President and Chief Operating Officer of the Company (from February 1996 to February 1999), Senior Vice President of the Company (from January 1995 to February 1996); President of Easton Aluminum, Inc. (from January 1986 to December 1994). Richard C. Larson 50 Executive Vice President of the Company (since March 1999), Senior Vice President of the Company (from February 1998 to March 1999), Vice President of the Company (from June 1997 to February 1998), President and Chief Executive Officer of Mac Equipment, Inc., from May 1994 to May 1997. H. Jack Meany 77 Chairman of the Board (since April 1994), Chief Executive Officer of the Company (from February 1996 to February 1999), President and Chief Executive Officer (from April 1994 to February, 1996), Director of the Company (from June 1976 to March 1994); Chairman of the Board and Chief Executive Officer (from October 1975 to March 1988) of NI Industries, Inc., a manufacturer of building, industrial, and defense products; Director, APS Corp. and ESI, Inc. Steve Pegg 41 Senior Vice President, Secretary and Chief Financial Officer of the Company (since August 1998); Vice President and Chief Financial Officer of Mac Equipment, Inc., from June 1992 to August 1998. John Vissers 50 Vice President, Controller, Assistant Secretary and Assistant Treasurer of the Company (since April 1998), Controller and Assistant Secretary of the Company (from March 1992 to April 1998). Philip L. Whitaker 36 Vice President of the Company (since September 1998); International Sales Manager of Crisparire Corporation (from June 1997 to September 1998); General Sales Manager of Airflow Company (from May 1992 to June 1997). ================================================================================ - 5 - Item 2. Properties - ------- ---------- The location and general description of the Company's principal properties at March 15, 2000 are set forth in the following tables. All such properties are owned by the Company except as noted: Floor Area Location (Square Feet) Principal Uses Jonesboro, AR 220,000 Manufacturing El Segundo, CA 40,000 Corporate Offices Delano, CA 39,000 Manufacturing Corcoran, CA 80,000 Manufacturing Eatonton, GA (leased) 76,000 Closed Crystal Lake, IL 120,000 Manufacturing Holly Springs, MS 208,000 Manufacturing Conover, NC 107,000 Manufacturing Robersonville, NC 148,000 Manufacturing Washington, NC (leased) 15,000 Manufacturing Montreal, Canada 158,000 Manufacturing Birmingham, England 86,000 Manufacturing Memphis, Tennessee 5,000 Sales/Engineering Office The Company leases sales office and warehouse space in or near San Diego, California; Phoenix, Arizona; Toronto, Ontario, Canada; British Columbia, Canada; Manitoba, Canada; Quebec, Canada; and Singapore. The Company believes that its facilities and manufacturing equipment are well maintained and adequate for current operations. During 1999, the Company believes that utilization of its various production facilities ranged from 50 to 90 percent. In February 2000, the Company purchased a 148,000 square foot industrial manufacturing facility located in Robersonville, North Carolina. Manufacturing operations are anticipated to commence during the second quarter 2000. Item 3. Legal Proceedings - ------- ----------------- The Company is involved in several claims and suits that arise out of the ordinary course of business, and has tax returns under review. Management believes that these matters are either adequately reserved, covered by insurance, or would not have a material adverse effect on the financial position or operations of the Company if disposed of unfavorably. - 6 - Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- Not applicable. Incorporation by Reference - -------------------------- The following portion of the Company's Annual Report to Stockholders for the year ended January 1, 2000 ("Annual Report") is hereby incorporated by reference. Form 10-K Item No. Document Portion of Document ---------------------- ------------- ------------------- Part I -- Item 1 and 2 Annual Report Pages 2 through 14 - 7 - PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------- --------------------------------------------------------------------- The Company's Common Stock trades on the Nasdaq National Market under the symbol FARC. At March 15, 2000, there were approximately 394 stockholders of record of the Company's Common Stock. Dividends - --------- The Company did not pay any cash dividends on its Common Stock over the last two years. On April 29, 1998, The Company's Board of Directors declared a dividend to be paid in the form of a 3 for 2 stock split, payable on May 29, 1998, to stockholders of record on May 8, 1998. This Item 5 should be read in conjunction with information appearing under the captions "Consolidated Statements of Stockholders' Investment", "Selected Financial Data" and "Summary of Stock Quotations" on pages 3, 15 and 20, respectively, of the Annual Report. Item 6. Selected Financial Data - ------- ----------------------- The five year summary under "Selected Financial Data" included on page 15 of the Annual Report is incorporated herein by this reference. The five-year summary should be read in conjunction with the Company's consolidated financial statements and accompanying notes included under Item 8, Consolidated Financial Statements and Supplementary Data. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations ------------- "Management's Discussion and Analysis" on pages 16 through 19 of the Annual Report is incorporated herein by this reference. Item 8. Consolidated Financial Statements and Supplementary Data - ------- -------------------------------------------------------- Pages 2 through 14 of the Annual Report, which include the consolidated financial statements, and the Report of Independent Public Accountants as listed in Item 14 (a) (1), are incorporated herein by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- Not applicable. - 8 - PART III Compliance with Section 16(a) of the Exchange Act - ------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership (Forms 3, 4 and 5) with the SEC. Officers, directors and greater-than-ten-percent holders are required to furnish the Company with copies of all such forms which they file. To the Company's knowledge, based solely on its review of such reports or written representations from certain reporting persons, the Company believes that during its fiscal year ended January 1, 2000, all filing requirements applicable to its officers, directors, greater-than-ten-percent beneficial owners and other persons subject to Section 16(a) of the Exchange Act were complied with. Item 10. Directors and Executive Officers of the Registrant. - -------- --------------------------------------------------- In accordance with the Company's Bylaws, the Board of Directors is divided into three classes (two classes consisting of three directors and one class consisting of two directors). Three directors are to be elected at the Annual Meeting, each of whom will serve until the 2003 Annual Meeting or until their respective successors shall have been elected or appointed. Although the Board of Directors expects that each of the nominees will be available to serve as a director, in the event any of them should become unavailable prior to the Annual Meeting, the proxy will be voted for a nominee or nominees designated by the Board of Directors, or the number of directors may be reduced accordingly. However, the proxy cannot be voted for a greater number of persons than the number of nominees designated by the Board of Directors. 2000 Nominees -------------
Principal Business Experience During Past Director Name Age 5 Years and Certain Other Directorships Since - --------------- ----- ---------------------------------------------------------- --------- Denis R. Brown 59 President and Chief Executive Officer and a Director of 1997 Pinkerton, Inc. since April 1994, a leading supplier of global security solutions; Director, CalMat Co. since January 1997. John J. Kimes 56 President and Chief Executive Officer of Computerized 1995 Security Systems since 1988, a manufacturer of electronic and mechancial lock hardware and systems. H. Jack Meany 76 Chairman of the Board since April 1994; Chief Excutive 1976 Officer of the Company from February 1996 to February 1999; President and Chief Executive Officer of the Company from April 1994 to February 1996; Director , APS Inc. since 1990; Director, ESI, Inc. since 1980.
- 9 - Continuing Directors --------------------
Principal Business Experience During Past Director Term Name Age 5 Years and Certain Other Directorships Since Expires - ------------------- ----- ------------------------------------------------------ --------- ------- Robert Batinovich 63 Chairman and Chief Executive Officer of Glenborough 1994 2001 Realty Trust Incorporated since 1996, a real estate investment company; President and majority owner of Glenborough Corporation since 1978. Richard P. Bermingham 60 Chairman of Bermingham Investment Company since 1997; 1990 2002 Vice Chairman of American Golf Corporation, a golf course management company, from 1994 to 1997. A. Frederick Gerstell 62 Vice Chairman, Director and Consultant of Vulcan 1998 2001 Materials Company since January 1999; Chairman and Chief Executive Officer of CalMat Co., a producer of construction materials, from 1996 to January 1999; Chairman, President, Chief Executive Officer and Chief Operating Officer of CalMat from 1991 to 1996; Director, Ameron, Inc., since 1997; Director and Vice Chairman of the National Stone Association since 1997. John C. Johnston 56 President and Chief Executive Officer of the Company 1996 2002 since February 1999; President and ChiefOperating Officer of the Company from February 1996 to February 1999; Senior Vice President of the Company from January 1995 to February 1996; President of Easton Aluminum, Inc. an atheleticequipment manufacturer, from 1986 to December 1994. John A. Sullivan 45 Investments Advisor of Relational Investors, LLC 1996 2002 since 1998; Financial Consultant with Batchelder & Partners, Inc., from May 1996 to March 1998; Senior Vice President of The Seidler Companies Incorporated from August 1993 to April 1996; Director, American Coin Merchandising, Inc. since October 1995.
- 10 - Item 11. Executive Compensation - -------- ---------------------- The following table shows the compensation earned by the Company's Chief Executive Officer and the four other most highly compensated officers whose cash compensation for the fiscal year ended January 1, 2000 exceeded $100,000 (collectively, the "Named Officers"). Summary Compensation Table --------------------------
Long Term Compensation ------------ Annual Compensation Awards -------------------------- ------------ Securities All Other Underlying Compensation Name and Principal Position Year Salary ($) Bonus ($) Options (#) ($)(1) - ---------------------------------------- ------ ------------ ----------- ------------ ------------ H. Jack Meany, 1999 187,615 82,729 250,000 21,688(3) Chairman of the Board (2) 1998 246,002 203,307 0 23,546(3) 1997 246,002 247,834 0 25,829(3) John C. Johnston, 1999 195,500 119,804 15,000 18,881(4) President and Chief Executive 1998 170,000 112,397 22,500 13,187(4) Officer (2) 1997 170,000 137,013 30,000 14,522(4) Richard Larson, 1999 147,500 56,493 5,000 13,962(6) Executive Vice President (5) 1998 140,000 57,851 22,500 59,065(6) 1997 72,693 36,617 15,000 30,728(6) Steve Pegg, 1999 124,000 49,600 5,000 16,987(8) SeniorVice President and Chief 1998 50,077 20,031 20,000 18,090(8) Financial Officer (7) Myron Rasmussen, 1999 117,393 25,179 0 15,945(9) Vice President 1998 117,393 27,165 0 16,613(9) 1997 117,393 33,115 0 18,090(9) - ----------------------------------------
(1) Excludes compensation in the form of perquisites and other personal benefits that do not exceed the lesser of (i) $50,000 or (ii) 10% of the total annual salary and bonus reported for each year. (2) Effective February 16, 1999, Mr. Meany resigned from the position of the Company's Chief Executive Officer, though he still serves the Company as its Chairman of the Board and remains an officer of the Company. Effective the same date, Mr. Johnston, who previously served as President and Chief Operating Officer, assumed the role of President and Chief Executive Officer of the Company. (3) Consists of contributions by the Company under its Supplemental Executive Savings Plan and 401(k) Retirement Plan (collectively, the "Retirement Plans") except in 1999 that included $2,301 of certain life insurance premiums paid on behalf of Mr. Meany. (4) In 1999, consists of $15,731 of contributions by the Company under the Retirement Plans and $3,150 of certain life insurance premiums paid on behalf of Mr. Johnston. In 1998, consists of $9,002 of contributions by the Company under the Retirement Plans and $4,185 of certain life insurance premiums paid on behalf of Mr. Johnston. In 1997, consists of $11,666 of contributions by the Company under the Retirement Plans and $2,856 of certain life insurance premiums paid on behalf of Mr. Johnston. (5) Mr. Larson's employment with the Company commenced in June 1997. (6) In 1999 , consists of $12,652 of contributions by the Company under the retirement Plans and $1,310 of certain life insurance premiums paid on behalf of Mr. Larson. In 1998, consists of $47,662 for reimbursement of relocation costs, $6,517 of contributions by the Company under the Retirement Plans and $800 of certain life insurance premiums paid on behalf of Mr. Larson. In 1997, includes $27,180 for reimbursement of relocation costs and $770 of certain life insurance premiums paid on behalf of Mr. Larson. (7) Mr. Pegg's employment with the Company commenced in August 1998. - 11 - (8) In 1999, consists of $10,389 for reimbursement for relocation cost, $ 6,150 of contributions by the Company under the Retirement Plans and $ 448 of certain life insurance premiums paid on behalf of Mr. Pegg. In 1998, consists of $2,850 for reimbursement of relocation costs and $140 of certain life insurance premiums paid on behalf of Mr. Pegg. (9) In 1999, consists of $ 11,057 of contributions by the Company under the Retirement Plans and $ ,000 of certain life insurance premiums paid on behalf of Mr. Rasmussen. In 1998, consists of $10,084 of contributions by the Company under the Retirement Plans and $6,529 of certain life insurance premiums paid on behalf of Mr. Rasmussen. In 1997, consists of $11,130 of contributions by the Company under the Retirement Plans and $6,960 of certain life insurance premiums paid on behalf of Mr. Rasmussen. OPTION GRANTS IN LAST FISCAL YEAR Shown below is information concerning grants of options by the Company to the Named Officers in 1999:
Potential Realizable Value at Number of % of Total Assumed Annual Rates of Stock Securities Options Price Appreciation Underlying Granted to Exercise For Option Term (2) Options Employees in Price Expiration ----------------------------- Name Granted(#)(1) Fiscal Year ($/Share) Date 5% 10% - ----------------- ------------- ------------ --------- ---------- ----------------------------- H. Jack Meany 250,000 86.5% $9.50 2/16/09 $ 1,493,624 $ 3,785,138 John C. Johnston 15,000 5.2% $9.50 2/16/09 $ 89,617 $ 227,108 Richard Larson 5,000 1.7% $9.50 2/16/09 $ 29,872 $ 75,703 Steve Pegg 5,000 1.7% $9.50 2/16/09 $ 29,872 $ 75,703 - ----------------------------------------------------------------------------------------------------
(1) Such options were granted on February 16, 1999 with an exercise price equal to the closing sale price of the Common Stock as reported on the Nasdaq National Market on such date. (2) The 5% and 10% assumed rates of appreciation are specified under the rules of the SEC and do not represent the Company's estimate or projection of the future price of the Common Stock. The actual value, if any, which a Named Officer may realize upon the exercise of stock options will be based upon the difference between the market price of the Common Stock on the date of exercise and the exercise price. STOCK OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES The following table sets forth for the Named Officers information with respect to unexercised options and year-end option values, in each case with respect to options to purchase shares of Common Stock held as of January 1, 2000.
Value of Unexercised In-the- Shares Number of Unexercised Money Options at Acquired Value Options at FY-End (#) FY-End ($) (1) on Realized -------------------------- ---------------------------- Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable - --------------------- ------------ -------- ----------- ------------- ------------ -------------- H. Jack Meany(2) 0 -- 268,000 -- 178,500 -- John C. Johnston 0 -- 119,625 46,875 771,500 30,000 Richard Larson 0 -- 13,125 29,375 -- 1,250 Steve Pegg 0 -- 5,000 20,000 -- 3,125 Myron G. Rasmussen 1,406 $6,452 34,313 -- 201,422 -- - -------------------------------------------------------------------------------------------------------
(1) Calculated based on the closing price of the Company's Common Stock ($9.75 per share) as reported on the Nasdaq National Market on January 1, 2000. (2) Mr. Meany holds options to purchase 18,000 shares of Common Stock that were granted pursuant to the Director Plan for his services to the Company as a non-employee director. - 12 - Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- -------------------------------------------------------------- The following table sets forth information as of March 15, 2000 with respect to shares of the Common Stock which are held by persons known to the Company to be beneficial owners of more than 5% of the Common Stock. For purposes of this proxy statement, beneficial ownership of securities is defined in accordance with the rules of the SEC and means generally the power to vote or dispose of securities, regardless of any economic interest therein.
Amount and Nature of Name and Address of Beneficial Owner Beneficial Ownership Percent of Class(1) - ------------------------------------ -------------------- ------------------- Wellington Management Company, LLP 693,150(2) 9.5% 75 State Street Boston, Massachusetts 02109 Fleet Boston Corporation 553,375(3) 7.6% One Federal Street Boston, Massachusetts 02110 DimensionalFund Advisors, Inc. 423,985(4) 5.8% 1299 Ocean Ave, 11th Floor Santa Monica, CA 90401 Reed Conner & Birdwell, Inc. 375,060(5) 5.2% 11111 Santa Monica Boulevard, Suite 1700 Los Angeles, California 90025 - ------------------------------------
(1) Based on 7,278,207 shares of Common Stock outstanding as of March 15, 2000 (not including 1,635,445 shares held in treasury). (2) Based on information contained in a Schedule 13G/A filed with the SEC on February 4, 2000. (3) Based on information contained in a Schedule 13G filed with the SEC on February 14, 2000. (4) Based on information contained in a Schedule 13G/A filed with the SEC on January 24, 2000. (5) Based on information contained in a Schedule 13G/A filed with the SEC on February 14, 2000. - 13 - OWNERSHIP BY MANAGEMENT The following table sets forth as of March 15, 2000 information with respect to the beneficial ownership of the Common Stock by each director, each Named Officer (as defined below) and by all of the Company's directors and executive officers as a group:
Shares Percent Beneficially of Name of Beneficial Owner Position Owned(1)(2) Class(1)(3) - ----------------------------------- -------------------------------- -------------- ----------- H. Jack Meany...................... Chairman of the Board........... 480,975 6.4% Robert Batinovich.................. Director........................ 252,000 3.4% Richard P. Bermingham.............. Director........................ 46,125 * Denis R. Brown..................... Director........................ 24,000 * John J. Kimes...................... Director........................ 24,000 * John A. Sullivan................... Director........................ 26,550 * A. Frederick Gerstell.............. Director........................ 13,500 * John C. Johnston................... President and Chief Executive Officer, Director.............. 138,699 1.9% Richard Larson..................... Executive Vice President........ 20,000 * Stephen Pegg....................... Senior.Vice President........... 31,250 * Myron G. Rasmussen................. Vice President.................. 43,758 * Directors and Executive Officers as a group (11 persons)............. 1,100,857 14.0% - -----------------------------------
* = Less than 1%. (1) Based on 7,278,207 shares of Common Stock outstanding as of March 15, 2000 (not including 1,635,445 shares held in treasury). Shares shown as beneficially owned are those as to which the named persons possess sole voting and investment power. However, under California law, personal property owned by a married person may be community property that either spouse may manage and control. The Company does not have any information as to whether any shares shown in this table are subject to California community property law. (2) Includes shares purchasable within 60 days upon exercise of outstanding stock options as follows: H.J. Meany, 268,000; R. Batinovich, 27,000; R.P. Bermingham, 40,500; D. Brown, 13,500; J.J. Kimes, 22,500; J. Sullivan, 18,000; A.F. Gerstell, 9,000; J. Johnston, 136,500; R. Larson, 20,000; M.G. Rasmussen, 16,312; Steve Pegg, 6,250; and all Directors and Executives Officers as a group, 577,562. (3) For purposes of computing the percentages, the number of shares of Common Stock outstanding includes shares purchasable by such individual or group within 60 days upon exercise of outstanding stock options. Item 13. Certain Relationships and Related Transactions - -------- ---------------------------------------------- INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP ("Arthur Andersen"), the Company's auditors since 1970, audited the Company's financial statements for the year ended January 1, 2000. In connection with its audit of the Company's financial statements for the year ended January 1, 2000, Arthur Andersen reviewed the Company's Annual Report to Stockholders, its filings with the Securities and Exchange Commission and its unaudited quarterly financial information. Representatives of Arthur Andersen are expected to be present at the Company's Annual Stockholder meeting and will be given the opportunity to make a statement if they desire to do so. It is expected that they will be available to respond to appropriate questions from the stockholders at the meeting. The Board of Directors has selected Arthur Andersen as the Company's auditors for the fiscal year ending December 31, 2000. - 14 - PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------- --------------------------------------------------------------- (a) Financial Statements, Schedules and Exhibits: (1) Index to Financial Statements and Supplementary Data The financial statements listed below are set forth in the Annual Report for the fiscal year ended January 1, 2000 and are incorporated herein by this reference. Annual Report Page No. ------------- Consolidated Balance Sheets at January 1, 2000 and January 2, 1999. 2 Consolidated Statements of Income and Consolidated Statements of Stockholders' Investment for the three years ended January 1, 2000, January 2, 1999 and January 3, 1998. 3 Consolidated Statements of Cash Flows for the three years ended January 1, 2000, January 2, 1999 and January 3, 1998. 4 Notes to the Consolidated Financial Statements 5-14 Report of Independent Public Accountants 14 (2) The following documents may be found in this report at the indicated page numbers. 10-K Page No. ------------- Report of Independent Public Accountants 21 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998 and 1997 22 Schedules I through V, inclusive, except those referred to above, are omitted as not required or not applicable. (3) The exhibits filed as part of this report are listed in the Exhibit Index which follows the Supplemental Schedules referred to above. Management contracts and compensatory plans and arrangements listed in the Exhibit Index are denoted with an asterisk (*). (b) 8-K Reports: None - 15 - SIGNATURES Pursuant to the requirements of Section 13 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. FARR COMPANY Dated: March 21, 2000 By: /s/ H. Jack Meany ------------------------ ---------------------------------------- H. Jack Meany Chairman of the Board of Directors 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. Dated: March 21, 2000 By: /s/ H. Jack Meany ------------------------ ---------------------------------------- H. Jack Meany Chairman of the Board of Directors Dated: March 21, 2000 By: /s/ Robert G. Batinovich ------------------------ ---------------------------------------- Robert G. Batinovich Director Dated: March 21, 2000 By: /s/ Richard P. Bermingham ------------------------ ---------------------------------------- Richard P. Bermingham Director Dated: March 21, 2000 By: /s/ Denis R. Brown, Jr. ------------------------ ---------------------------------------- Denis R. Brown, Jr. Director Dated: March 21, 2000 By: /s/ A. Frederick Gerstell ------------------------ ---------------------------------------- A. Frederick Gerstell Director Dated: March 21, 2000 By: /s/ John C. Johnston ------------------------ ---------------------------------------- John C. Johnston Director, President and Chief Executive Officer Dated: March 21, 2000 By: /s/ John J. Kimes ------------------------ ---------------------------------------- John J. Kimes Director Dated: March 21, 2000 By: /s/ John A. Sullivan ------------------------ ---------------------------------------- John A. Sullivan Director Dated: March 21, 2000 By: /s/ Steve Pegg ------------------------ ---------------------------------------- Steve Pegg Sr. Vice President, Secretary, Treasurer and Chief Financial Officer - 16 - FARR COMPANY AND SUBSIDIARIES List of Exhibits Item Description 3.1 Certificate of Incorporation of Registrant as currently in effect. Filed as Exhibit 3.1 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. 3.2 Amended By-Laws of Registrant as currently in effect. Filed as Exhibit 3.2 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. 3.3 Certificate of Amendment of Restated Certificate of Incorporation of Farr Company dated May 4, 1999. Filed as Exhibit 3.1 on Form 10-Q for the quarter ended July 3, 1999 dated August 15, 1999 and incorporated herein by this reference. 4.31 Rights Agreement, dated as of April 3, 1989 between Farr Company and Chase Mellon Shareholder Services (formerly Bank of America NT & SA). Filed as Exhibit 1 on Form 8K dated April 18, 1989 and incorporated herein by this reference. 4.64 Credit Agreement dated May 13, 1999 between Farr Company, as borrower, and Bank of America National Trust and Savings Association, as lender. Filed as Exhibit 4.66 on Form 10-Q for the quarter ended July 3, 1999 dated August 15, 1999 and incorporated herein by this reference. 4.65 First Amendment, dated August 26, 1999 between Farr Company, as borrower, and Bank of America National Trust and Savings Association, as lender. 4.66 First Amendment to Rights Agreement, dated March 23, 1999 between Farr Company and Chase Mellon Shareholders Services, LLC. Registrant agrees that it will furnish to the Commission upon request copies of any other instruments with respect to the long-term debt of Registrant and its subsidiaries; under none of such other instruments does the total amount of securities authorized exceed 10 percent of the total assets of Registrant and its subsidiaries on a consolidated basis. - 17 - *10.1 Non-Qualified Deferred Compensation Plan, dated July 31, 1987. Filed as Exhibit 10.1 to Annual Report on Form 10-K for the year ended January 2, 1988 and incorporated herein by this reference. *10.3 Deferred Compensation Plan for Directors dated November 5, 1980. Filed as Exhibit 10.5 to Annual Report on Form 10-K for the year ended January 3, 1981 and incorporated herein by this reference. *10.5 Deferred Compensation Plan for Officers dated April 30, 1981. Filed as Exhibit 10.7 to Annual Reporton Form 10-K for the year ended January 2, 1982 and incorporated herein by this reference. *10.7 1983 Stock Option Plan for Key Employees as amended. Filed as Exhibit A to registrant's definitive proxy statement for the annual meeting of stockholders held on May 4, 1988 and incorporated herein by this reference. *10.12 Farr Company Supplemental Executive Benefits Plan dated July 24, 1990. Filed as Exhibit 10.12 on Form 10-K for the year ended December 29, 1990 and incorporated herein by this reference. *10.14 Non-Employee Directors Stock Option Plan, filed as Exhibit 10.14 on Form 10-K for the year ended December 29, 1990 and incorporated herein by this reference. *10.21 The 1993 Stock Option Plan for Key Employees of Farr Company. Filed as Exhibit 10.21 on Form 10-K for the year ended December 31, 1994 and incorporated herein by this reference. *10.22 First Amendment to the 1993 Stock Option Plan for Key Employees of Farr Company dated September 20, 1994. Filed as Exhibit 10.22 on Form 10-Q for the quarter ended October 1, 1994 and incorporated herein by this reference. *10.23 First Amendment to the Company's 1991 Stock Option Plan for Non-Employee Directors dated September 20, 1994, filed as Exhibit 10.23 on Form 10-Q for the quarter ended October 1, 1994 and incorporated herein by this reference. *10.33 Second Amendment to the 1991 Stock Option Plan for Non-Employee Directors dated September 12, 1995. Filed as Exhibit 10.33 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. -18 - *10.35 The Farr Company 401(k)/Retirement Plan dated December 15, 1995. Filed as Exhibit 10.35 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. *10.36 The Farr Company Supplemental Executive Savings Plan Adoption Agreement, dated November 21, 1995. Filed as Exhibit 10.36 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. *10.37 The Corporate Plan for Retirement Select Plan, Fidelity Basic Plan Documentdated April 11, 1994 (SESP). Filed as Exhibit 10.37 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. 10.38 Trust Agreement for Farr Company 401K/Retirement Plan, dated December 15, 1995. Filed as Exhibit 10.38 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. 10.39 Trust Agreement for Farr Company Supplemental Executive Savings Plan between Farr Company as sponsor and Fidelity Management Trust Company as trustee dated November 21, 1995. Filed as Exhibit 10.39 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. 10.41 Joint Venture Agreement between Farr Company and Quest Technology SDN.BHD dated as of April 15, 1997. Filed as Exhibit 10.41 on Form 10-K dated January 3, 1998 and incorporated herein by this reference. 10.42 Metalcraft Stock Purchase Agreement dated October 28, 1997. Filed as Exhibit 10.42 on Form 10-K dated January 3, 1998 and incorporated herein by this reference. 10.43 Second Amendment to the 1993 Stoc Option Plan for Key Employees of Farr Company dated March 23, 1999. Filed as Exhibit 10.43 on Form 10-Q for the quarter ended July 3, 1999 dated August 15, 1999 and incorporated herein by this reference. *10.44 Employment Continuation Agreement between John C. Johnston and Farr Company dated February 15, 2000. *10.45 Employment Continuation Agreement between Richard Larson and Farr Company dated February 15, 2000. *10.46 Employment Continuation Agreement between Steve Pegg and Farr Company dated February 15, 2000. - 19 - 13 Annual Report to Stockholders. With the exception of the information incorporated by reference into Items 1, 2, 5, 6, 7 and 8 of this Form 10-K, the 1999 Annual Report to Stockholders is not deemed to be filed as a part of this report. 21 A list of all subsidiaries of registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule * Management contract or compensatory arrangements. - --------------------- Copies of Exhibits are available, on prepayment of 15 cents per page, by writing to the Secretary of the Company at the address set forth on the cover page of this Annual Report and Form 10-K. - 20 - Report of Independent Public Accountants We have audited in accordance with auditing standards generally accepted in the United States the consolidated financial statements included in Farr Company's annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule listed in Part IV of this Form 10-K are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This supplemental schedule has been subjected to the auditing procedures applies in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Los Angeles, California January 28, 2000 - 21 - Farr Company Financial Statement Schedules Schedule II FARR COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------- Balance at Deductions Beginning of charged to Balance at Description period Additions allowance end of period - ---------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 Allowance for doubtful accounts 370 57 93(1) (53) 467 For the year ended December 31, 1998 Allowance for doubtful accounts 254 171 0 (55) 370 For the year ended December 31, 1997 Allowance for doubtful accounts 297 206 0 (249) 254
(1) Accounts previously written off were collected. No other supplementary schedules have been included because they are considered not material. - 22 - EX-4 2 FIRST AMENDMENT WITH BANK OF AMERICA FARR COMPANY AND SUBSIDIARIES Exhibit 4.65 Bank of America Amendment to Documents AMENDMENT NO.1 TO BUSINESS LOAN AGREEMENT This Amendment No.1 (the "Amendment") dated as of August 26, 1999, is between Bank of America, N.A., formerly Bank of America National Trust and Savings Association (the "Bank") and Farr Company (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of May 18, 1999 (the "Agreement"). B. The Bank and the Borrower desire to amend the Agreement. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 Paragraph 1.6 of the Agreement is amended to read in its entirety as follows: "1.6 Letters of Credit (a) This line of credit may be used for financing: (i) standby letters of credit with a maximum maturity not to extend beyond the Expiration Date. The standby letters of credit may include a provision providing that the maturity date will be automatically extended each year for an additional year unless the Blank gives written notice to the contrary. (ii) the amount of the letters of credit outstanding at any one time, (including amounts drawn on the letters of credit and not yet reimbursed), may not exceed One Million Dollars ($1,000,000). (b) The Borrower agrees: (i) any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. (ii) if there is a default under this Agreement, to immediately prepay and make the Bank whole for any outstanding letters of credit. (iii) the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank. Without limiting the foregoing, no letter of credit may be issued to support any obligation of the Borrower in connection with workers' compensation laws. (iv) to sign the Bank's form Application and Agreement for Standby Letter of Credit. (v) to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit for the Borrower. (vi) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges." 3. Representations and Warranties. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4. Effect of Amendment. Except as provided in This Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. Bank of America, N.A. Farr Company /s/ Andrea Tunks /s/ Steve Pegg - --------------------------------- ----------------------------------- By: Andrea Tunks, Vice President By: Steve Pegg, Sr. Vice President, CFO & Secretary EX-4 3 FIRST AMENDMENT TO RIGHTS AGREEMENT FARR COMPANY AND SUBSIDIARIES Exhibit 4.66 FIRST AMENDMENT TO RIGHTS AGREEMENT FIRST AMENDMENT, dated as of March 23,1999 ("First Amendment"), to Rights Agreement dated as of April 3,1989 (the "Rights Agreement"), between Farr Company, a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company (the "Rights Agent"). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement. All section and exhibit references are to sections and exhibits of the Rights Agreement. WHEREAS, the Rights Agent was appointed as successor to Security Pacific National Bank, the original rights agent under the Rights Agreement; WHEREAS, the Company and the Rights Agent previously entered into the Rights Agreement; and WHEREAS, pursuant to Section 26, the Company and the Rights Agent may from time to time supplement Or amend any provision of the Rights Agreement in accordance with the terms of such Section 26. NOW, THEREFORE, in consideration of the foregoing premises and mutual agreements set forth in this Amendment, the parties hereby amend the Rights Agreement as follows: 1. Section 1(d) is hereby amended to add ", New Jersey" after "New York." 2. Section 1(g) is hereby deleted in its entirety. 3. Section 1(h) is hereby amended to add ", limited liability company" after "corporation." 4. Section 2 is hereby amended to (a) delete "and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares)" and (b) add the following at the end of the penultimate sentence thereof: "; provided, however, no such appointment or allocation of duties shall change or increase the Rights Agent's duties, liabilities or obligations. The Rights Agent shall have no duty to supervise, and in no event he liable for, the acts or omissions of any such Co-Rights Agent." 5. Section 3(a) is hereby amended (a) to amend the second sentence thereof to replace the words "beyond the earlier of the dates set forth in such preceding sentence; provided, however, there must be Continuing Directors then in office and any such postponement shall require the concurrence of a majority of such Continuing Directors" from the second sentence thereof with the words: "specified as a result of an event described in clause (ii) beyond the date set forth in such clause (ii)," (b) to add as the third and fourth sentence thereof "Nothing herein shall permit such a postponement of a Distribution Date after a Person becomes an Acquiring Person. Upon the occurrence of a Distribution Date, the Company shall promptly notify the Rights Agent and request a shareholder list from the Company's transfer agent," and (c) in the penultimate sentence, replace "Distribution Date" with "Rights Agent receives such notice and list." 6. The first sentence of Section 4 is hereby amended to add "(which do not affect the duties or responsibilities of the Rights Agent)" after "appropriate." 7. The first sentence in the last paragraph of Section 5 is hereby amended to add "and receipt by the Rights Agent of the notice and list of record holders of Rights referred to in Section 3(a) above " after "Distribution Date." 8. Section 6 is hereby amended to (a) add the following at the end of the first paragraph of Section 6: "The Rights Agent may delay the processing of such transaction until it receives evidence that all applicable taxes and governmental charges have been paid" and (b) delete the word "reasonably" two times in the second paragraph of Section 6. 9. Section 7(a) is hereby amended to replace "April 3, 1999" with "April 3, 2009." Section 7(c) is hereby amended to add "or governmental charge" after "transfer tax." Section 7(e) is hereby amended to replace "duly" with "properly" and add "or the Rights Agent" before "shall reasonably request." 10. Section 10 is hereby amended to add "and other governmental charge" after "transfer taxes." 11. Section 11(i) is hereby amended to add "and shall provide the Rights Agent with notice of such election" after "the Company may elect." 12. Section 12 is hereby amended to (a) add ", reasonably detailed" after "brief" and (b) add ", computations and methodology" after "statement of the facts." 13. Section 18 is hereby amended (a) to add in the first sentence "preparation, delivery, amendment" before "administration and execution," (b) in the second sentence to (i) add "damage, judgment, fine, penalty, claim, demand, settlement, cost" after "liability," (ii) add "gross" before "negligence," (iii) add "as determined by a court of competent jurisdiction" after "Rights Agent" and (iv) replace "anything done" with "any action taken, suffered" and (c) in the first sentence of the second paragraph of Section 18 to add "authorized and" before "protected." 14. Section 19 is hereby amended to (a) replace "corporation" with "Person" three times and (b) replace "corporate trust" with "shareholder services." 15. The first sentence of Section 20 and Sections 20(a), (b) and (c) are amended and restated in their entirety as follows: "The Rights Agent undertakes the duties and obligations, and only the duties and obligations, expressly imposed by this Rights Agreement (and no implied duties and obligations) upon the following terms and conditions, by all of which the Company and 2 the holders of Right Certificates, by their acceptance thereof shall be bound: (a) The Rights Agent may consult with legal counsel selected by it (who may be legal counsel for tile Company), and the advice or opinion of such counsel shall be full and complete authorization and protection to the Rights Agent with respect to, and the Rights Agent shall incur no liability for or in respect of, any action taken, suffered or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Rights Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking, suffering or omitting any action hereunder such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization and protection to the Rights Agent, and the Rights Agent shall incur no liability for or in respect of any action taken, suffered or omitted in good faith by it under the provisions of this Rights Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct as determined by a court of competent jurisdiction. In no case will the Rights Agent be liable for special, indirect, punitive, incidental or consequential loss or damages of any kind whatsoever (including without limitation lost profits), even if the Rights Agent has been advised of the possibility of such damages." 16. Section 20(e) is hereby amended to add "liability or" before "responsibility." 17. Section 20(g) is hereby amended to (a) replace "and it shall not be liable for" with "such instructions shall be full authorization and protection to the Rights Agent and the Rights Agent shall incur no liability for or in respect of" and (b) add the following after the last sentence thereof: 3 "The Rights Agent may conclusively rely on the most recent instructions given by any such officer." 18. The first sentence of Section 20(h) is hereby amended to add "affiliate," after "stockholder." 19. Section 20(i) is hereby amended to (a) add "or any other person after "Company" and (b) replace "reasonable care was exercised" with "absent gross negligence or bad faith." 20. Section 22 is hereby amended to add the following after the last sentence thereof: "In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the Final Expiration Date, the Company shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded, or upon exercise, conversion or exchange of securities issued by the Company, in each case existing prior to the Distribution Date, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; provided, however, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof." 21. Section 23(a) is hereby amended and restated in its entirety as follows: "(a) The Board of Directors of the Company may, at its option, at any time prior to a the time that a Person has become an Acquiring Person, redeem all but not less than all of the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend, recapitalization or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price in Common Shares (based on the "current per share market price," determined pursuant to Section 11(d), of the Common Shares at the time of redemption), cash or any other form of consideration deemed appropriate by the Board of Directors The redemption of the Rights by the Board of Directors may be made 4 effective at such time, on such basis and subject to such conditions as the Board of Directors in its sole discretion may establish." 22. Section 25 is hereby amended to replace the address of the Rights Agent with the following: "ChaseMellon Shareholder Securities L.L.C. 400 South Hope Street Fourth Floor Los Angeles, CA 90071 Attention: Mary Ann McElroy" 23. Section 26 hereby amended by deleting clause (ii) of the second sentence thereof in its entirety, renumbering clause (iii) of the second sentence to (ii), adding the word "or" immediately prior to the new clause (ii). 24. Section 30 is hereby amended to add the following at the end of the last sentence thereof: ", except that all provisions regarding the rights, duties and obligations of the Rights Agent shall be governed by and construed in accordance with the law of the State of New York applicable to contracts made and to be performed entirely within such State." 25. The Legend and the first paragraph of Exhibit A are hereby amended to replace "April 3, 1999" with "April 3, 2009." 26. The fourth paragraph of Exhibit A ("Form of Right Certificate") is hereby amended and restated in its entirety as follows: "Subject to the provisions of the Rights Agreement, the Board of Directors may, at its option, (i) redeem the Rights evidenced by this Right Certificate at a redemption price of $.01 per Right or (ii) exchange Common Shares for the Rights evidenced by this Right Certificate, in whole or in part." 27. The first sentence of the second paragraph of Exhibit B is hereby amended to delete the words "the Board of Directors, with the concurrence of a majority of the Continuing Directors (as defined below), may postpone the Distribution Date and that." 28. The fourth paragraph of Exhibit B is hereby amended to replace "April 3, 1999" with "April 3, 2009." 29. The eighth paragraph of Exhibit B is hereby amended to (a) delete the words "until ten days following the public announcement that a Person has become an Acquiring 5 Person" and replace them with the words "prior to the time that an Acquiring Person has become such" and (b) delete the second and third sentences in their entirety. 30. The ninth paragraph of Exhibit B is hereby deleted in its entirety. 31. The eleventh paragraph of Exhibit B is hereby amended to delete the following: ", to shorten or lengthen any time period under the Rights Agreement relating to when the Rights may be redeemed (so long as, under certain circumstances, a majority of Continuing Directors approve such shortening or lengthening)." 32. This First Amendment shall be effective as of the date hereof and, except as expressly set forth herein, the Rights Agreement shall remain in full force and effect and be otherwise unaffected hereby. 33. This First Amendment may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all such counterparts shall together constitute one and the same document. 6 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first written above. FARR COMPANY By /s/ Steve Pegg Name: Steve Pegg Title: Sr. Vice President & CFO CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By: /s/ Mary Ann McElroy Name: Mary Ann Mcelroy Title: Relationship Manager 7 EX-10 4 EMPLOYEE CONTINUATION AGREEMENT WITH JOHNSTON Farr Company and Subsidiaries Exhibit 10.44 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT is between FARR COMPANY, a Delaware corporation (the "Company"), and John C. Johnston (the "Executive"), dated as of this 15th day of February, 2000. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"). 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person (as defined below) has acquired, "beneficial ownership" (within the meaning of Rule 13d-3, as promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 50% or more of the combined Voting Power (as defined below) of the Company's securities; or (ii) within any 24 month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this Section 2(a)(ii) and (B) was not designated by a person who has entered into an agreement with the Company to effect a Corporate Event, as described in Section 2(a)(iii); or (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 10% of the consolidated assets of the Company immediately prior to such Event. (b) Person Defined. For purposes of this Section 2, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act; provided, however, that Person shall not include (i) the Company or any subsidiary of the Company or (ii) any employee benefit plan sponsored by the Company or any subsidiary of the Company. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the second anniversary of the Effective Date. 4. No Reduction in Position. During the Employment Period, the Executive's position, authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date, or at another location within 50 miles of it. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a rate at least equal to the base salary paid to the Executive by the Company immediately prior to the Effective Date. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period or partial year beginning during the Employment Period, the Executive shall participate in an annual bonus plan on terms and conditions no less favorable to the Executive than the annual bonus plan the Executive had participated in during the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus"). (c) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Perquisites and Fringe Benefits. During the Employment Period, the Executive shall be entitled to perquisites and fringe benefits at a level that is commensurate with the perquisites and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (e) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company. In no event shall the protection afforded to the Executive hereunder be less than that afforded immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death or termination due to "Disability". For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date or its equivalent. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction of a felony or the entering by the Executive of a plea of nolo contendere to a felony charge, (ii) the Executive's gross neglect, willful malfeasance or willful gross misconduct in connection with his employment hereunder which has had a significant adverse effect on the business of the Company and its subsidiaries, unless the Executive reasonably believed in good faith that such act or nonact was in or not opposed to the best interests of the Company, or (iii)use of alcohol or drugs to an extent determined by the board of directors in its sole discretion to be excessive. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such position, (not including changes in title), authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control; (iv) any other material breach of this Agreement by the Company; or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given within a reasonable time after the event or action believed to constitute the reason for giving notice. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein up to 30 days after receipt, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or vested benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations" which in each instance under this Agreement shall be paid in accordance with the terms of the applicable plan, program or arrangement), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (A) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (B) the Accrued Obligations. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, Executive shall be paid in a lump sum within ten days following his Date of Termination the following amounts: (A) the Executives Earned Salary, (B) a cash amount equal to one-half the Severance Amount (defined below); and (C) the Accrued Obligations. (i) Continuation of Benefits. For Cause or voluntarily by Executive in First Six Months. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), Executive shall participate in no Benefit Plans (hereinafter defined) following the Date of Termination. (ii) Continuation of Benefits. For Voluntary Termination by Executive after First Six Months and Before Twelve Months. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the first anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the following plans of the Company: medical, dental, health, disability, group life and accidental death (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Payments. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to two point six (2.6) times the sum of (x) the Executive's annual Base Salary and (y) an amount equal to the last annual bonus earned by the Executive during the full year preceding the Change of Control; and (C) the Accrued Obligations. The Earned Salary shall be paid in accordance with the Company's regular payroll practices. The Severance Amount shall be paid in fifty-two (52) equal payments at dates concurrent with the Company's regular payroll cycle commencing with the next payroll cycle following the Date of Termination. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the second anniversary of the Date of Termination (the "End Date") to continue participation in those Benefit Plans listed above in Section 7 (b) (ii). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. (i) Application of Section 7(e). In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) (x) whether Covered Payments are "parachute payments" within the meaning of Section 280G of the Code, and (y) whether there are "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be determined in good faith by the Company's independent certified public accountants appointed prior to the Effective Date (the "Accountants") or tax counsel selected by such Accountants, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e)(or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive's being subject to an Excise Tax, then any amounts actually paid to or on behalf of the Executive which are treated as excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Mitigation or Offset. The Executive shall have no obligation to seek other employment and there shall be no offset against amounts due to Executive under this Agreement on account of any remuneration attributable to subsequent employment that he may obtain or on account of other claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to any material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control, except that the Executive may retain his personal notes, diaries, Rolodexes, calendars and correspondence. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applied without reference to principles of conflict of laws. (b) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the county of Los Angeles, California and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association (or such other voluntary arbitration rules applicable to employment contract disputes) in effect at the time of the arbitration, supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: FARR COMPANY with a copy to: John D. Hannesson, Esq. 2201 Park Place 18661 Via Palatino El Segundo, California 90245 Irvine, California 92612 Attn.: Chief Financial Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. FARR COMPANY /s/ Steve Pegg /s/ Steve Pegg - --------------------------- ----------------------------- WITNESSED: By: Steve Pegg APPROVED: /s/ R. Batinovich ------------------------------ R. Batinovich Chairman of Compensation Committee EXECUTIVE: /s/ Steve Pegg /s/ John C. Johnston - --------------------------- ----------------------------- WITNESSED: John C. Johnston EX-10 5 EMPLOYEEMENT CONTINUATION AGREEMENT WITH LARSON Farr Company and Subsidiaries Exhibit 10.45 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT is between FARR COMPANY, a Delaware corporation (the "Company"), and Richard Larson (the "Executive"), dated as of this 15th day of February, 2000. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"). 2.Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person (as defined below) has acquired, "beneficial ownership" (within the meaning of Rule 13d-3, as promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 50% or more of the combined Voting Power (as defined below) of the Company's securities; or (ii) within any 24 month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this Section 2(a)(ii) and (B) was not designated by a person who has entered into an agreement with the Company to effect a Corporate Event, as described in Section 2(a)(iii); or (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 10% of the consolidated assets of the Company immediately prior to such Event. (b) Person Defined. For purposes of this Section 2, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act; provided, however, that Person shall not include (i) the Company or any subsidiary of the Company or (ii) any employee benefit plan sponsored by the Company or any subsidiary of the Company. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the second anniversary of the Effective Date. 4. No Reduction in Position. During the Employment Period, the Executive's position, authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date, or at another location within 50 miles of it. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a rate at least equal to the base salary paid to the Executive by the Company immediately prior to the Effective Date. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period or partial year beginning during the Employment Period, the Executive shall participate in an annual bonus plan on terms and conditions no less favorable to the Executive than the annual bonus plan the Executive had participated in during the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus"). (c) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Perquisites and Fringe Benefits. During the Employment Period, the Executive shall be entitled to perquisites and fringe benefits at a level that is commensurate with the perquisites and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (e) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company. In no event shall the protection afforded to the Executive hereunder be less than that afforded immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death or termination due to "Disability". For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date or its equivalent. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction of a felony or the entering by the Executive of a plea of nolo contendere to a felony charge, (ii) the Executive's gross neglect, willful malfeasance or willful gross misconduct in connection with his employment hereunder which has had a significant adverse effect on the business of the Company and its subsidiaries, unless the Executive reasonably believed in good faith that such act or nonact was in or not opposed to the best interests of the Company, or (iii)use of alcohol or drugs to an extent determined by the board of directors in its sole discretion to be excessive. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such position, (not including changes in title), authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control; (iv) any other material breach of this Agreement by the Company; or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given within a reasonable time after the event or action believed to constitute the reason for giving notice. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein up to 30 days after receipt, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or vested benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations" which in each instance under this Agreement shall be paid in accordance with the terms of the applicable plan, program or arrangement), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (A) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (B) the Accrued Obligations. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, Executive shall be paid in a lump sum within ten days following his Date of Termination the following amounts: (A) the Executives Earned Salary, (B) a cash amount equal to one-half the Severance Amount (defined below); and (C) the Accrued Obligations. (i) Continuation of Benefits. For Cause or voluntarily by Executive in First Six Months. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), Executive shall participate in no Benefit Plans (hereinafter defined) following the Date of Termination. (ii) Continuation of Benefits. For Voluntary Termination by Executive after First Six Months and Before Twelve Months. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the first anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the following plans of the Company: medical, dental, health, disability, group life and accidental death (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Payments. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to two point one (2.1) times the sum of (x) the Executive's annual Base Salary and (y) an amount equal to the last annual bonus earned by the Executive during the full year preceding the Change of Control; and (C) the Accrued Obligations. The Earned Salary shall be paid in accordance with the Company's regular payroll practices. The Severance Amount shall be paid in fifty-two (52) equal payments at dates concurrent with the Company's regular payroll cycle commencing with the next payroll cycle following the Date of Termination. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the second anniversary of the Date of Termination (the "End Date") to continue participation in those Benefit Plans listed above in Section 7 (b) (ii). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. (i) Application of Section 7(e). In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) (x) whether Covered Payments are "parachute payments" within the meaning of Section 280G of the Code, and (y) whether there are "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be determined in good faith by the Company's independent certified public accountants appointed prior to the Effective Date (the "Accountants") or tax counsel selected by such Accountants, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e)(or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive's being subject to an Excise Tax, then any amounts actually paid to or on behalf of the Executive which are treated as excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Mitigation or Offset. The Executive shall have no obligation to seek other employment and there shall be no offset against amounts due to Executive under this Agreement on account of any remuneration attributable to subsequent employment that he may obtain or on account of other claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to any material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control, except that the Executive may retain his personal notes, diaries, Rolodexes, calendars and correspondence. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applied without reference to principles of conflict of laws. (b) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the county of Los Angeles, California and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association (or such other voluntary arbitration rules applicable to employment contract disputes) in effect at the time of the arbitration, supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: FARR COMPANY with a copy to: John D. Hannesson, Esq. 2201 Park Place 18661 Via Palatino El Segundo, California 90245 Irvine, California 92612 Attn.: Chief Financial Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. FARR COMPANY /s/ Steve Pegg /s/ Steve Pegg - --------------------------- ----------------------------- WITNESSED: Steve Pegg By: Steve Pegg APPROVED: /s/ R. Batinovich ------------------------------ R. Batinovich Chairman of Compensation Committee EXECUTIVE: /s/ Steve Pegg /s/ Richard Larson - --------------------------- ----------------------------- WITNESSED: Steve Pegg Richard Larson EX-10 6 EMPLOYEEMENT CONTINUATION AGREEMENT FOR PEGG Farr Company and Subsidiaries Exhibit 10.46 EMPLOYMENT CONTINUATION AGREEMENT THIS AGREEMENT is between FARR COMPANY, a Delaware corporation (the "Company"), and Steven E. Pegg (the "Executive"), dated as of this 15th day of February, 2000. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"). 2.Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any Person (as defined below) has acquired, "beneficial ownership" (within the meaning of Rule 13d-3, as promulgated under Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 50% or more of the combined Voting Power (as defined below) of the Company's securities; or (ii) within any 24 month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this Section 2(a)(ii) and (B) was not designated by a person who has entered into an agreement with the Company to effect a Corporate Event, as described in Section 2(a)(iii); or (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 10% of the consolidated assets of the Company immediately prior to such Event. (b) Person Defined. For purposes of this Section 2, "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act, as supplemented by Section 13(d)(3) of the Exchange Act; provided, however, that Person shall not include (i) the Company or any subsidiary of the Company or (ii) any employee benefit plan sponsored by the Company or any subsidiary of the Company. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the second anniversary of the Effective Date. 4. No Reduction in Position. During the Employment Period, the Executive's position, authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date, or at another location within 50 miles of it. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a rate at least equal to the base salary paid to the Executive by the Company immediately prior to the Effective Date. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period or partial year beginning during the Employment Period, the Executive shall participate in an annual bonus plan on terms and conditions no less favorable to the Executive than the annual bonus plan the Executive had participated in during the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus"). (c) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life, accidental death and travel accident insurance plans and programs of the Company at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Perquisites and Fringe Benefits. During the Employment Period, the Executive shall be entitled to perquisites and fringe benefits at a level that is commensurate with the perquisites and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (e) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company. In no event shall the protection afforded to the Executive hereunder be less than that afforded immediately prior to the Effective Date. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death or termination due to "Disability". For purposes of this Agreement, Disability shall mean the Executive's inability to perform the duties of his position, as determined in accordance with the policies and procedures applicable with respect to the Company's long-term disability plan, as in effect immediately prior to the Effective Date or its equivalent. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 30 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction of a felony or the entering by the Executive of a plea of nolo contendere to a felony charge, (ii) the Executive's gross neglect, willful malfeasance or willful gross misconduct in connection with his employment hereunder which has had a significant adverse effect on the business of the Company and its subsidiaries, unless the Executive reasonably believed in good faith that such act or nonact was in or not opposed to the best interests of the Company, or (iii)use of alcohol or drugs to an extent determined by the board of directors in its sole discretion to be excessive. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) (A) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or (B) any other material adverse change in such position, (not including changes in title), authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control; (iv) any other material breach of this Agreement by the Company; or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given within a reasonable time after the event or action believed to constitute the reason for giving notice. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein up to 30 days after receipt, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or vested benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company (the "Accrued Obligations" which in each instance under this Agreement shall be paid in accordance with the terms of the applicable plan, program or arrangement), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (A) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (B) the Accrued Obligations. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, Executive shall be paid in a lump sum within ten days following his Date of Termination the following amounts: (A) the Executives Earned Salary, (B) a cash amount equal to one-half the Severance Amount (defined below); and (C) the Accrued Obligations. (i) Continuation of Benefits. For Cause or voluntarily by Executive in First Six Months. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive during the six month period following the Effective Date or during the twelve month period following the first anniversary of the Effective Date (other than on account of Good Reason following a Change of Control), Executive shall participate in no Benefit Plans (hereinafter defined) following the Date of Termination. (ii) Continuation of Benefits. For Voluntary Termination by Executive after First Six Months and Before Twelve Months. If, during the Employment Period, Executive's employment shall be terminated voluntarily by the Executive during the six month period commencing on the 180th day after the Effective Date and ending on the first anniversary of the Effective Date, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the first anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the following plans of the Company: medical, dental, health, disability, group life and accidental death (the "Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason. (i) Payments. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Company shall pay to the Executive the following amounts: (A) the Executive's Earned Salary; (B) a cash amount (the "Severance Amount") equal to two point one (2.1) times the sum of (x) the Executive's annual Base Salary and (y) an amount equal to the last annual bonus earned by the Executive during the full year preceding the Change of Control; and (C) the Accrued Obligations. The Earned Salary shall be paid in accordance with the Company's regular payroll practices. The Severance Amount shall be paid in fifty-two (52) equal payments at dates concurrent with the Company's regular payroll cycle commencing with the next payroll cycle following the Date of Termination. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause, or following a Change of Control the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the second anniversary of the Date of Termination (the "End Date") to continue participation in those Benefit Plans listed above in Section 7 (b) (ii). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Benefit Plans will be on the same terms and conditions that would have applied had the Executive continued to be employed by the Company through the End Date. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 (whether or not reduced pursuant to Section 7(e)) following termination of his employment shall be in full and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Limit on Payments by the Company. (i) Application of Section 7(e). In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject the Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Section 7(e) shall apply to determine the amounts payable to Executive pursuant to this Agreement. (ii) Calculation of Benefits. Immediately following delivery of any Notice of Termination, the Company shall notify the Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected Date of Termination, together with the projected maximum payments, determined as of such projected Date of Termination that could be paid without the Executive being subject to the Excise Tax. (iii) Imposition of Payment Cap. If the aggregate value of all compensation payments or benefits to be paid or provided to the Executive under this Agreement and any other plan, agreement or arrangement with the Company exceeds the amount which can be paid to the Executive without the Executive incurring an Excise Tax, then the amounts payable to the Executive under this Section 7 shall be reduced (but not below zero) to the maximum amount which may be paid hereunder without the Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that the Executive receives reduced payments and benefits hereunder, the Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. (iv) Application of Section 280G. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) (x) whether Covered Payments are "parachute payments" within the meaning of Section 280G of the Code, and (y) whether there are "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be determined in good faith by the Company's independent certified public accountants appointed prior to the Effective Date (the "Accountants") or tax counsel selected by such Accountants, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (v) Adjustments in Respect of the Payment Cap. If the Executive receives reduced payments and benefits under this Section 7(e)(or this Section 7(e) is determined not to be applicable to the Executive because the Accountants conclude that Executive is not subject to any Excise Tax) and it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to the Executive or for his benefit are in an amount that would result in the Executive's being subject to an Excise Tax, then any amounts actually paid to or on behalf of the Executive which are treated as excess parachute payments shall be deemed for all purposes to be a loan to the Executive made on the date of receipt of such excess payments, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If the Executive receives reduced payments and benefits by reason of this Section 7(e) and it is established pursuant to a Final Determination that the Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay the Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Company, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Mitigation or Offset. The Executive shall have no obligation to seek other employment and there shall be no offset against amounts due to Executive under this Agreement on account of any remuneration attributable to subsequent employment that he may obtain or on account of other claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if the Executive shall not prevail, in whole or in part, as to any material issue as to the validity, enforceability or interpretation of any provision of this Agreement. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control, except that the Executive may retain his personal notes, diaries, Rolodexes, calendars and correspondence. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applied without reference to principles of conflict of laws. (b) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the county of Los Angeles, California and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association (or such other voluntary arbitration rules applicable to employment contract disputes) in effect at the time of the arbitration, supplemented, as necessary, by those principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: FARR COMPANY with a copy to: John D. Hannesson, Esq. 2201 Park Place 18661 Via Palatino El Segundo, California 90245 Irvine, California 92612 Attn.: Chief Financial Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. FARR COMPANY /s/ Steve Pegg /s/ Steve Pegg - --------------------------- ----------------------------- WITNESSED: Steve Pegg By: Steve Pegg APPROVED: /s/ R. Batinovich ------------------------------ R. Batinovich Chairman of Compensation Committee EXECUTIVE: /s/ H. Jack Meany /s/ Steven E. Pegg - --------------------------- ----------------------------- WITNESSED: H. Jack Meany Steven E. Pegg EX-13 7 1999 FARR COMPANY ANNUAL REPORT
Financial Highlights (In thousands, except per share items) 1999 1998 1997 ===================================================================================================== Net sales $116,520 $122,285 $125,762 Income before income taxes 11,175 10,993 11,240 Income tax provision 4,002 3,788 3,865 Net income 7,173 7,205 7,375 Diluted earnings per common share .93 .86 .88 Current assets 41,808 39,090 41,007 Current liabilities 17,300 14,565 19,270 Working capital 24,508 24,525 21,737 Property, plant, and equipment, net 16,838 18,027 17,619 Stockholders' investment 41,278 42,054 38,507
About the Company Farr Company's basic business is the control of particulate and vapor contaminants in air and liquids. The Company is engaged in the design, development, manufacture, sale and service of filters and filtration systems. These products are used for a wide variety of applications including heating, ventilation and air conditioning systems, manufacturing and process cleanrooms, special filters for original equipment manufacturers, natural gas, gasoline and diesel-powered engines, railroad locomotives, dust collection systems and gas turbines. Air filter efficiencies range from 20 percent (on outdoor air) in disposable products to 99.9999+ percent (@ .12 microns particulate) in cleanroom products. Products are available as standard items or may be custom engineered. They range in size and complexity from a small throwaway air filter to a large gas turbine system with a single filter component module weighing in excess of twenty tons. Products are sold in many locations of the world. Sales are made through direct Company salesmen, manufacturer's representatives, distributors and foreign licensees. - 1 -
Consolidated Balance Sheets Farr Company and Subsidiaries December 31, 1999 1998 ================================================================================================ Assets Current Assets: Cash and cash equivalents $ 3,678,000 $ 6,083,000 Restricted cash 4,905,000 -- Accounts receivable, less allowances of $467,000 in 1999 and $370,000 in 1998 19,993,000 19,433,000 Inventories Raw materials 4,099,000 4,629,000 Work in progress 3,890,000 3,413,000 Finished goods 3,221,000 2,774,000 ------------------------------- 11,210,000 10,816,000 Prepaid expenses 580,000 688,000 Income taxes receivable -- 849,000 Deferred income tax benefit 1,442,000 1,221,000 ------------------------------- Total current assets 41,808,000 39,090,000 Property, plant and equipment at cost Land 2,110,000 2,246,000 Buildings and improvements 16,423,000 18,468,000 Machinery and equipment 37,933,000 36,340,000 ------------------------------- 56,466,000 57,054,000 ------------------------------- Less accumulated depreciation and amortization 39,628,000 39,027,000 ------------------------------- 16,838,000 18,027,000 Investments and other 4,365,000 2,784,000 ------------------------------- $ 63,011,000 $ 59,901,000 =============================== Liabilities & Stockholders' Investment Current Liabilities: Notes payable to banks $ -- $ 145,000 Accounts payable 5,796,000 6,061,000 Accrued employee compensation and related taxes 3,437,000 3,958,000 Other current liabilities 6,117,000 3,114,000 Income taxes payable and current deferred income taxes 1,950,000 1,287,000 --------------------------------- Total current liabilities 17,300,000 14,565,000 --------------------------------- Deferred income taxes 1,094,000 1,773,000 Other noncurrent liabilities 3,339,000 1,509,000 Commitments and contingencies Stockholders' investment Common stock, $.10 par value - Authorized - 20,000,000 shares Outstanding 8,888,902 shares at December 31, 1999 and 8,874,468 shares at December 31, 1998 889,000 887,000 Additional paid-in capital 13,183,000 13,136,000 Cumulative translation adjustments (1,958,000) (2,405,000) Treasury stock at cost - 1,629,226 shares at December 31, 1999 and 743,944 shares at December 31, 1998 (13,773,000) (5,295,000) Retained earnings 42,937,000 35,731,000 Total stockholders' investment 41,278,000 42,054,000 ------------------------------- $ 63,011,000 $59,901,000 ===============================
The accompanying notes are an integral part of these consolidated financial statements. - 2 -
Consolidated Statements of Income Farr Company and Subsidiaries For the Years Ended December 31, 1999 1998 1997 =================================================================================================== Net Sales $ 116,520,000 $ 122,285,000 $ 125,762,000 Cost of Sales 86,193,000 91,160,000 92,792,000 ----------------------------------------------- Gross Margin 30,327,000 31,125,000 32,970,000 Selling, general and administrative expenses 20,127,000 20,298,000 21,692,000 Interest expense 100,000 103,000 197,000 Interest income (272,000) (269,000) (159,000) Gain on disposal of assets, net (1,246,000) -- -- Retirement benefit 443,000 -- -- ----------------------------------------------- Total Expenses 19,152,000 20,132,000 21,730,000 ----------------------------------------------- Income Before Income Taxes 11,175,000 10,993,000 11,240,000 Income Tax Provision 4,002,000 3,788,000 3,865,000 ----------------------------------------------- Net Income $ 7,173,000 $ 7,205,000 $ 7,375,000 =============================================== Basic Earnings per Common Share $ .95 $ .87 $ .90 =============================================== Diluted Earnings per Common Share $ .93 $ .86 $ .88 ===============================================
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Stockholders' Investment Cumulative For the Years Ended December 31, 1999, Common Additional Treasury Translation Retained Comprehensive 1998 and 1997 Stock Paid-in Capital Stock Adjustments Earnings Income ================================================================================================================================= Balance-- December 31, 1996 $ 855,000 $ 12,126,000 $ (1,399,000) $(1,206,000) $ 20,834,000 Net Income -- -- -- -- 7,375,000 $ 7,375,000 Exercise of Stock Options 7,000 250,000 -- -- -- -- Cumulative Translation Adjustment -- -- -- (543,000) -- (543,000) Treasury Stock Sold - 18,750 shares -- -- 208,000 -- -- -- Comprehensive Income - 1997 -- $ 6,832,000 ------------------------------------------------------------------------------------ Balance-- December 31, 1997 862,000 12,376,000 (1,191,000) (1,749,000) 28,209,000 Net Income -- -- -- -- 7,205,000 7,205,000 Exercise of Stock Options 25,000 772,000 -- -- -- -- Stock Options Expired -- (12,000) -- -- -- -- Cumulative Translation Adjustment -- -- -- (656,000) -- (656,000) Treasury Stock Acquired - 386,110 shares -- -- (4,104,000) -- -- -- Tax Benefit from Exercise of Stock Options -- -- -- -- 317,000 -- Comprehensive Income - 1998 $ 6,549,000 ------------------------------------------------------------------------------------ Balance-- December 31, 1998 887,000 13,136,000 (5,295,000) (2,405,000) 35,731,000 Net Income -- -- -- -- 7,173,000 7,173,000 Exercise of Stock Options 2,000 47,000 -- -- -- -- Cumulative Translation Adjustment -- -- -- 447,000 -- 447,000 Treasury Stock Acquired - 885,282 shares -- -- (8,478,000) -- -- -- Tax Benefit from Exercise of Stock Options -- -- -- -- 33,000 -- Comprehensive Income - 1999 $ 7,620,000 ------------------------------------------------------------------------------------ Balance-- December 31, 1999 $ 889,000 $ 13,183,000 $(13,773,000) $(1,958,000) $ 42,937,000 ====================================================================
The accompanying notes are an integral part of these consolidated financial statements. - 3 -
Consolidated Statements of Cash Flows Farr Company and Subsidiaries For the Years Ended December 31, 1999 1998 1997 ============================================================================================== Operating Activities: Net Income $ 7,173,000 $ 7,205,000 $ 7,375,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,606,000 2,505,000 2,360,000 Provision for loss on accounts receivable 57,000 171,000 206,000 Benefit retirement trust 1,830,000 669,000 635,000 Equity in loss of affiliate 59,000 35,000 30,000 Deferred income tax provision (744,000) (556,000) 402,000 Exchange loss (gain) 65,000 34,000 (131,000) Net (gain) loss on sale/retirement of property, plant and equipment (1,256,000) 21,000 38,000 Other 25,000 -- -- Change in assets and liabilities: Inventories (268,000) (228,000) 1,586,000 Receivables and prepaid expenses (261,000) 690,000 (126,000) Accounts payable and accrued expenses (538,000) (4,837,000) 2,250,000 Income taxes payable 983,000 397,000 (603,000) ----------------------------------------- Net cash provided by operating activities 9,731,000 6,106,000 14,022,000 ----------------------------------------- Investing Activities: Purchases of property, plant and equipment (1,904,000) (2,985,000) (4,508,000) Redemption (purchases) of short term investments and restricted cash (4,905,000) 2,031,000 (2,031,000) Restricted proceeds from sale of building 4,846,000 -- -- Net proceeds from sale of assets 10,000 -- -- Investment in joint venture -- -- (250,000) Prepaid pension costs -- -- (586,000) Note receivable-affiliate -- (106,000) -- Purchase of investments, benefit trust (1,816,000) (669,000) (635,000) Other (60,000) -- -- ----------------------------------------- Net cash used in investing activities (3,829,000) (1,729,000) (8,010,000) ----------------------------------------- Financing Activities: Proceeds from revolving line of credit and long-term debt -- 50,000 -- Principal payments on revolving line of credit and long-term debt (145,000) -- (3,114,000) Proceeds from sale of stock, stock option plans 49,000 797,000 257,000 Treasury stock acquired (8,478,000) (4,104,000) -- Other 140,000 10,000 28,000 ----------------------------------------- Net cash used in financing activities (8,434,000) (3,247,000) (2,829,000) ----------------------------------------- Effect of Exchange Rate Changes on Cash 127,000 (156,000) (71,000) ----------------------------------------- (Decrease) Increase in cash and cash equivalents (2,405,000) 974,000 3,112,000 ----------------------------------------- Cash and Cash Equivalents at Beginning of Year 6,083,000 5,109,000 1,997,000 ----------------------------------------- Cash and Cash Equivalents at End of Year $ 3,678,000 $ 6,083,000 $ 5,109,000 =========================================
The accompanying notes are an integral part of these consolidated financial statements. - 4 - Notes to Consolidated Financial Statements Farr Company and Subsidiaries 1. Significant Accounting Policies Farr Company, a Delaware corporation, and its wholly-owned subsidiaries (the "Company") has prepared its financial statements in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Following are the Company's significant accounting policies: Basis of Presentation -- Farr Company is a multinational company engaged principally in the design, development, manufacture, sale and service of air and to a minor degree, liquid filters. The principal market for the Company's products and services are North American based commercial wholesale distributors, HVAC OEMs and contractors and transportation businesses. The accompanying consolidated financial statements include the accounts of Farr Company and its wholly-owned subsidiaries. A functional currency has been determined for each foreign entity of the Company, and the exchange gain or loss from translating the foreign currency statements to their U.S. dollar equivalents at the rates of exchange in effect at the end of each period is charged or credited to cumulative translation adjustments within stockholders' investment. Differences from converting nonfunctional to functional currencies and transaction gains and losses are included in income. During 1999, 1998 and 1997, $65,000 was charged to income, $34,000 was charged to income and $131,000 was credited to income, respectively. Accounting Period -- The Company's fiscal year ends on the Saturday closest to December 31. The fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998 comprise 52, 52 and 53 weeks, respectively. In the consolidated financial statements, all fiscal years are shown to begin as of January 1 and end as of December 31 for clarity of presentation. Cash and Cash Equivalents -- Cash includes currency on hand, demand deposits with financial institutions and investments with original, maturities of three months or less. Restricted Cash -- Cash is being held in a trust account pending completion of an IRS section 1031 like-property exchange. Upon completion of the exchange, anticipated net cash proceeds from the trust will be approximately $2,800,000. The exchange will be completed during the first quarter of 2000. Inventories -- Inventories include material, labor and factory overhead. Domestic inventories are stated at cost, determined by the last-in, first-out method. All other inventories are stated at the lower of cost, using the first-in, first-out method, or market. Property, Plant and Equipment -- The cost of property, plant and equipment is depreciated over the estimated useful lives of the respective assets using a straight-line method, based upon the following lives. Building and improvements 10 - 40 years Machinery and equipment 3 - 12 years During 1999, 1998 and 1997 depreciation expense was $2,523,000, $2,422,000 and $2,346,000, respectively. Maintenance and repairs are charged to expense as incurred and the cost of additions and betterments are capitalized. When assets are retired or otherwise disposed of, the assets and the related accumulated depreciation accounts are relieved, and any resulting gains or losses from sales or retirements, are reflected in income. Investments and Other -- Investments and other include intangible assets that are amortized on a straight-line basis over five years; retirement assets held under a rabbi trust covering supplemental executive savings plan benefits for certain employees; the fair market value of an annuity policy to fund future retirement benefits for the Company's Chairman; and a 50 percent ownership interest in a Malaysian joint venture which is accounted for under the equity method. Product Engineering and Development -- Engineering and development costs aggregating $2,658,000, $2,530,000 and $2,129,000 in 1999, 1998 and 1997, respectively, for new products or improvements of existing products, were expensed as incurred. Revenue Recognition -- Revenue is recognized at the time the product is shipped to the customer. Income Taxes -- The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Incomes Taxes," which requires the use of the liability method of accounting for deferred income taxes. The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. - 5 - During fiscal 1998, the Company adopted Financial Accounting Standard No.130, "Reporting Comprehensive Income", (SFAS No. 130), which established standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Accordingly, the Company has reported its comprehensive income within its Consolidated Statements of Stockholders' Investment to meet this new reporting requirement. For all periods presented, no income tax benefit or expense was associated with any component of other comprehensive income. Certain reclassifications have been made to the prior years' financial statements to conform with current year presentation. 2. Inventories Domestic inventories totaling $6,697,000 and $6,475,000 at December 31, 1999 and December 31, 1998, respectively, are stated at cost determined by the last-in, first-out method. If the first-in, first-out method of inventory valuation had been used, inventories would have been $6,869,000 and $6,751,000 higher than reported at December 31, 1999 and December 31, 1998, respectively. During 1997, domestic inventory quantities were reduced resulting in the deposition of last-in, first-out inventory quantities carried at cost prevailing in a prior year. Charging these lower costs to operations had no material effect on net income in 1997. 3. Restructuring Costs The Company recorded a restructuring charge of $1,500,000 in the fourth quarter of 1992 related to anticipated costs associated with the closures of two manufacturing plants. The two United States plants located in Pryor, Oklahoma and Eatonton, Georgia were closed in 1993 as part of the Company's efforts to consolidate manufacturing operations and increase production efficiency, asset utilization and profitability. During the third quarter of 1999, the Company increased its restructuring reserve through the recognition of a $570,000 long-term obligation charge netted against the reported gain on disposal of assets to cover anticipated lease buy-out cost for the remaining net present value of all future lease payments through the lease expiration in October 2004 related to the Eatonton, Georgia facility. The remaining $714,000 balance of this restructuring charge is included as a component of accrued liabilities in the accompanying Consolidated Balance Sheet as of December 31, 1999. Primarily all of this reserve balance is associated with the Eatonton, Georgia facility covering estimated costs associated with a lease buy-out. In the event management is unable to negotiate an early termination of the lease by paying a lump sum equal to the discounted value of the future lease payments over the remaining term of the lease, the Company will likely need to increase the reserve to cover the future expenses associated with making actual lease payments and cover actual operating expenses for taxes, utilities, insurance and maintenance of the facility. Future expenses are estimated to be less than $300,000. 4. Common Stock On April 3, 1989, the Company's Board of Directors declared a dividend distribution of one common share purchase right for each share of common stock outstanding on April 18, 1989. An exercisable right will, under certain conditions, entitle its holder to purchase from the Company one-half of one share of common stock at the exercise price, subject to adjustment, at a price of $40 per whole share, subject to adjustment. The exercise price as of December 31, 1999 is $14.22 per whole share of common stock. The rights will become exercisable ten days after any person acquires 20 percent or more of the Company's outstanding common stock, or announces an offer which would result in such person acquiring 30 percent or more of the Company's common stock. The rights will expire on April 3, 2009, and may be redeemed by the Company for $.01 per right at any time until ten business days after a person acquires 20 percent or more of the Company's common stock. Under certain circumstances after a person acquires 20 percent or more of the Company's common stock, or after a merger or other business combination involving the Company, an exercisable right will entitle its holder to purchase shares of common stock (or shares of an acquiring company) having a market value of twice the exercise price of one right. In 1997, the Company issued 18,750 treasury shares to acquire Metalcraft Air Filtration, Inc. As of December 31, 1999 and December 31,1998 the Company held in treasury 1,629,226 and 743,944 shares of its common stock at a cost of $13,773,000 and $5,295,000, respectively. Per share amounts and shares outstanding in the prior periods have been restated to reflect the 3-for-2 stock splits paid in the form of stock dividends (see note 5). On May 4, 1999 the Company shareholders ratified an amendment to its Restated Certificate of Incorporation increasing the total number of authorized shares of common stock from 10,000,000 to 20,000,000. 5. Dividend and Stock Split On April 29, 1998 and February 18, 1997, the Company's Board of Directors declared dividends that were paid in the form of 3-for-2 stock splits on May 29, 1998 and March 28, 1997, respectively. - 6 - Farr Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Notes Payable and Long-term Debt The Company's foreign subsidiaries utilize overdraft facilities that aggregate to approximately $2,203,000 none of which was utilized as of December 31, 1999. As of December 31, 1998, total foreign overdraft facilities aggregated approximately $2,137,000 of which $145,000 was utilized. The weighted average interest rate was 6.8% in 1999 and 8.6% in 1998. The Company utilizes a $10,000,000 revolving credit facility for its domestic needs. As of December 31, 1999, the Company had no borrowings outstanding under this facility. This facility will expire on June 1, 2001 when the then outstanding loan balance, if any, will be due. Interest is payable on the loan at a floating rate equal to the Prime rate or the bank's Offshore rate plus 1.75 percent. As of 1999 and 1998 year end, no long term debt was outstanding. At December 31, 1999, no real, personal and intangible property was pledged as security for long-term debt commitments. Under the Company's domestic credit agreement, the Company is required to maintain certain financial covenants. Interest paid on outstanding debt and obligations were $101,000, $118,000 and $210,000 in 1999, 1998, and 1997, respectively. No future principal payments are scheduled as no long-term debt was outstanding as of December 31, 1999. - 7 - 7. Income Taxes The provision for income taxes is summarized as follows:
For the Years Ended December 31, 1999 1998 1997 ========================================================================================== Current -- Federal $ 2,772,000 $ 2,625,000 $ 2,441,000 State 709,000 408,000 231,000 Foreign 1,265,000 1,311,000 791,000 ----------------------------------------------- 4,746,000 4,344,000 463,000 ----------------------------------------------- Deferred -- Federal (516,000) (380,000) 429,000 State (144,000) (124,000) 16,000 Foreign (84,000) (52,000) (43,000) ----------------------------------------------- (744,000) (556,000) 402,000 ----------------------------------------------- $ 4,002,000 $ 3,788,000 $ 3,865,000 ===============================================
The following is a reconciliation of income taxes at the federal statutory rate with income taxes recorded by the Company:
For the Years Ended December 31, 1999 1998 1997 ======================================================================================================= Computed income taxes at statutory rate $ 3,800,000 $ 3,738,000 $ 3,618,000 State income taxes, net of federal income tax benefit 277,000 258,000 163,000 Taxes on foreign subsidiaries' net income in excess of (less than) income taxes at statutory rates 63,000 24,000 (61,000) Other items, net (138,000) (232,000) 145,000 ----------------------------------------------- Provision for income taxes $ 4,002,000 $ 3,788,000 $ 3,865,000 ===============================================
Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax credit carryforwards. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities were as follows:
1999 Deferred For the Years Ended December 31, 1999 1998 tax provision ====================================================================== ============= Deferred tax assets: Compensation and retirement plans $ 1,272,000 $ 1,138,000 $ (134,000) Inventories 721,000 493,000 (228,000) Plant restructuring 243,000 140,000 (103,000) Other 153,000 161,000 8,000 ----------------------------- Total gross deferred tax assets 2,389,000 1,932,000 ----------------------------- Deferred tax liabilities: Plant assets (547,000) (355,000) 192,000 DISC commission accrual (1,188,000) (1,386,000) (198,000) Acquisition reserves (329,000) (610,000) (281,000) ----------------------------- Total gross deferred tax liabilities (2,064,000) (2,351,000) ----------------------------- ------------ Net deferred tax liability $ 325,000 $ (419,000) $ (744,000) ============================= ============
Included in income taxes payable and current deferred income taxes at December 31, 1999 and December 31, 1998, were $170,000 and $ 369,000, respectively, of foreign deferred income taxes. - 8 - Farr Company and Subsidiaries Notes to Consolidated Financial Statements (continued) The consolidated income before income tax, by domestic and foreign sources is as follows:
For the Years Ended December 31, 1999 1998 1997 ========================================================================================== Domestic $ 7,887,000 $ 7,362,000 $ 8,859,000 Foreign 3,288,000 3,631,000 2,381,000 -------------------------------------------------- $ 11,175,000 $ 10,993,000 $ 11,240,000 ==================================================
Income taxes paid, net, were $3,859,000, $3,683,000 and $3,806,000 in 1999, 1998 and 1997, respectively. 8. Employee Benefit Plans The Company sponsors defined contribution retirement plans that provide employees with an opportunity to accumulate funds for their retirement. Company and discretionary employee contributions who meet eligibility requirements are based on formulas as specified in the respective plan agreements. Company contributions, which aggregated $1,042,000, $1,093,000 and $1,295,000 in 1999, 1998 and 1997, respectively, were charged to expense in accordance with plan formulas. The assets of these plans included 14,746 shares and 18,237 shares of the Company's common stock as of December 31, 1999 and 1998, respectively. Under one of the Company's domestic defined contribution plans, covering key employees, Company contributions and employee compensation deferrals are made to a Company trust under provisions of the non qualified plan. The deferred compensation, contributions and earnings from the trust are included in the Company's Consolidated Balance Sheets both as a noncurrent asset and a noncurrent liability. The total plan noncurrent assets and noncurrent liabilities as of December 31, 1999 and 1998 were $2,290,000 and $1,490,000, respectively. Pension costs for the Company's two foreign defined benefit plans, covering eligible employees in foreign operations, are determined by independent actuarial valuations. The following table sets forth the change in benefit obligation, the change in plan assets, the funded status, the assumptions used in the accounting for the plans on an average weighted basis and the components of net periodic benefit cost for the years ended December 31, 1999 and 1998.
For the Years Ended December 31, 1999 1998 =================================================================================== Change in benefit obligation Benefit obligation at beginning of year $ 6,547,000 $ 5,726,000 Foreign currency exchange rate changes (53,000) (44,000) Service cost 430,000 352,000 Interest cost 491,000 428,000 Net actuarial (gain) / loss (273,000) 274,000 Benefits paid (221,000) (189,000) ----------------------------- Benefit obligation at end of year 6,921,000 6,547,000 ----------------------------- Change in plan assets Fair value of plan assets at beginning of year 7,466,000 6,813,000 Foreign currency exchange rate changes (77,000) (30,000) Actual return on plan assets 1,219,000 642,000 Employer contribution 160,000 143,000 Plan participants' contributions 91,000 87,000 Benefits paid (231,000) (189,000) ----------------------------- Fair value of plan assets at end of year 8,628,000 7,466,000 ----------------------------- Funded status 1,708,000 919,000 Unrecognized net actuarial gain (1,166,000) (294,000) Unrecognized prior service cost 151,000 54,000 ----------------------------- Prepaid benefit cost $ 693,000 $ 679,000 =============================
- 9 -
For the Years Ended December 31, 1999 1998 1997 ===================================================================================== Weighted average assumptions Discount rate 7.7% 7.7% 7.7% Expected return on plan assets 9.5% 9.5% 9.4% Rate of compensation increase 5.5% 6.0% 6.0% Components of net periodic benefit cost Service cost $ 430,000 $ 352,000 $ 294,000 Interest cost 491,000 428,000 389,000 Expected return on plan assets (699,000) (663,000) (572,000) Amortization of prior service cost (12,000) (13,000) (12,000) Recognized net actuarial gain (202,000) (3,000) (1,000) ----------------------------------------- Net periodic benefit cost $ 8,000 $ 101,000 $ 98,000 =========================================
The Company provides no post-retirement health care and life insurance benefits or other post-employment benefits to its employees. 9. Stock Options Under the 1983 and 1993 stock option plans, the Company may grant non-qualified and incentive stock options to officers and employees. Options are contingent upon continued employment, and become exercisable from at least one year after date of grant at such times and installments as the Compensation Committee of the Board shall provide. All options outstanding at December 31, 1999 had an exercise price equal to 100 percent of the fair market value on the date the option was granted except for 99,000 shares that were granted in 1995. The exercise price per share of the 99,000 shares is $2.22 per share and the fair value is $4.08 per share. Compensation expense recorded under the plan was $17,000 in 1998 and $27,000 in 1997. Options expire ten years from the date of grant, subject to earlier expiration under the terms of the plan. The 1983 plan covered a total of 703,125 shares of the Company's common stock of which at December 31, 1999, 30,262 shares were subject to presently outstanding options. During 1999, the 1993 stock plan was amended to increase the aggregate number of shares of common stock reserved for issuance under the plan from 787,500 shares to 1,100,000 shares, of which 559,500 shares were subject to outstanding options as of December 31,1999. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), effective for 1996, the Company continues to account for stock compensation costs in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation cost for the Company's stock plans been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
For the Years Ended December 31, 1999 1998 1997 ========================================================================== Net Income As Reported $ 7,173,000 $ 7,205,000 $ 7,375,000 Pro Forma $ 6,051,000 $ 6,896,000 $ 7,237,000 Diluted EPS As Reported $ .93 $ .86 $ .88 Pro Forma $ .79 $ .82 $ .86
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to December 31, 1994, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: risk-free interest rate of 5.21 percent for options granted in 1999, 5.67 percent for options granted in 1998 and 6.26 percent for options granted in 1997; expected dividend yields of 0 percent, expected volatility of 43 percent, expected life of 7 years for 1999 options, expected dividend yields of 0 percent, expected volatility of 42 percent, expected life of 7 years for 1998 options and expected dividend yields of 0 percent and expected volatility of 45 percent, expected life of 7 years for 1997 options. - 10 - Farr Company and Subsidiaries Notes to Consolidated Financial Statements (continued) Activity under the 1983 and 1993 plans is summarized as follows:
1999 1998 1997 ============================ ============================ ============================ Weighted Weighted Weighted Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price ------ ----------------- ------ ----------------- ------ ----------------- Options outstanding beginning of year 316,417 $ 6.09 498,280 $ 3.79 500,875 $ 3.09 Granted 289,000 9.50 68,000 12.16 70,500 8.68 Exercised (12,373) 4.00 (223,890) 3.16 (68,200) 3.78 Cancelled (3,282) 7.57 (25,973) 3.14 (4,895) 3.18 -------- ------ -------- ------ ------- ------ Options outstanding end of year 589,762 $ 7.80 316,417 $ 6.09 498,280 $ 3.79 ======== ====== ======== ====== ======== ====== End of year shares exercisable 466,855 $ 7.12 92,038 $ 4.57 244,678 $ 3.41 ======== ====== ======== ====== ======== ======
================================================================================ The following table summarizes information about fixed stock options outstanding as of December 31, 1999:
Options Outstanding Options Exercisable ================================================================= ============================= Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at Dec. 31 Contractual Life Exercise Price at Dec. 31 Exercise Price --------------- ---------- ---------------- -------------- ---------- -------------- $ 4.00 - $ 5.00 30,262 1.0 Years $ 4.47 30,262 $ 4.47 2.22 - 4.11 140,625 5.1 2.47 139,218 2.45 8.00 - 12.75 418,875 8.7 9.83 297,375 9.58 --------------- ------- --- ------ ------- ------ $ 2.22 - $12.75 589,762 7.4 $ 7.80 466,855 $ 7.12 =============== ======= === ====== ======= ======
================================================================================ On January 22, 1991, the Company's Board of Directors adopted and approved the 1991 Stock Option Plan for Non-Employee Directors. Under the 1991 Stock Option Plan, the Company is authorized to issue up to 225,000 shares of common stock to the Company's non-employee directors of which 148,500 shares are subject to presently outstanding options. Activity for fiscal years 1999, 1998 and 1997 under the 1991 Plan is summarized as follows:
1999 1998 1997 =========================== =========================== =========================== Weighted Weighted Weighted Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price ------ ----------------- ------ ----------------- ------ ----------------- Options outstanding beginning of year 121,500 $ 6.05 112,500 $ 4.51 85,500 $ 3.51 Granted 27,000 9.50 31,500 11.29 27,000 7.67 Exercised -- -- (18,000) 4.31 -- -- Cancelled -- -- (4,500) 12.75 -- -- Options outstanding end of year 148,500 $ 6.68 121,500 $ 6.05 112,500 $ 4.51 ------- ------ ------- ------ ------- ------ End of year shares exercisable 121,500 $ 6.05 94,500 $ 4.54 85,500 $ 3.51 ======= ====== ======= ====== ======= ======
- 11 - The following table summarizes information about non-employee director fixed stock options outstanding as of December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------------------- ----------------------------- Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at Dec. 31 Contractual Life Exercise Price at Dec. 31 Exercise Price --------------- ----------- ---------------- -------------- ----------- -------------- $ 2.22 - $ 4.11 27,000 2.3 Years $ 3.46 27,000 $ 3.46 2.39 - 4.06 27,000 4.9 3.04 27,000 3.04 4.11 - 7.67 40,500 6.8 6.27 40,500 6.27 9.50 - 13.00 54,000 8.7 10.42 27,000 11.33 --------------- ------- --- ------ ------- ------ $ 2.22 - $13.00 148,500 6.3 $ 6.68 121,500 $ 6.05 =============== ======= === ====== ======= ======
- -------------------------------------------------------------------------------- 10. Per Share Amounts In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" (EPS), which requires dual presentation of basic EPS and diluted EPS, simplifies existing computational guidelines, and increases the comparability of earnings per share on an international basis. SFAS 128 was effective for periods ending after December 15, 1997. Income, average weighted shares outstanding and earnings per share data are as follows:
For the Years Ended December 31, 1999 1998 1997 ================================================================================================== Net Income $ 7,173,000 $ 7,205,000 $ 7,375,000 =============================================== Basic Earnings per Share Weighted average number of common shares outstanding 7,530,470 8,273,609 8,223,810 ================================================ Basic per Share Amount $ .95 $ .87 $ .90 ================================================ Diluted Earnings per Share Weighted average number of common shares outstanding 7,530,470 8,273,609 8,223,810 Diluted effect of stock options 170,175 108,146 159,414 ------------------------------------------------ Diluted, weighted average number of common shares outstanding 7,700,645 8,381,755 8,383,224 ================================================ Diluted per Share Amount $ .93 $ .86 $ .88 ================================================
Options to purchase 52,981 shares of common stock above $9.35 per share were outstanding at the end of 1999 but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. As a result of the 3-for-2 stock splits that were distributed on May 29, 1998 and March 28, 1997, per share amounts for 1997 has been restated to reflect the weighted average number of shares of common stock outstanding increased by shares issued for the stock split. - 12 - Farr Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Commitments and Contingencies The Company leases certain facilities and equipment under agreements, the majority of which expire at various dates through 2004. The majority of the Company's leases provide for the payment of real estate taxes and insurance. Net rental expense was $1,534,000 for the year ended December 31, 1999, $1,337,000 for the year ended December 31, 1998 and $1,227,000 for the year ended December 31, 1997. As of December 31, 1999, approximate minimum rental commitments under noncancelable leases which have not been capitalized were as follows: Year Ending Amount ====================================== 2000 $ 917,000 2001 699,000 2002 505,000 2003 291,000 2004 155,000 Thereafter -- ----------- Total $ 2,567,000 =========== The Company is involved in several claims and suits that arise out of the ordinary course of business, and has tax returns under review. Management believes that these matters are either adequately reserved, covered by insurance, or would not have a material adverse effect on the financial position or operations of the Company if disposed of unfavorably. 12. Segment Information The adoption of Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" does not alter the Company's business segment reporting disclosure requirements. While the Company manufactures a variety of filtration products, discrete financial information by product or market is not available. Therefore, operating decisions and operating performance assessments are not made based on aggregating within any particular filtration product or market. The Company is engaged in one line of business - filtration. The Company's basic business is manufacturing filters for the control of particulate and vapor contaminants in air and liquids. Information about the Company's operations in different geographic areas for the current year ended December 31, 1999 and the prior years ended December 31, 1998 and December 31, 1997 are presented based upon shipments from the scheduled countries as follows:
(In thousands) Net Sales to Unaffiliated Customers Long-Lived Assets - ------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, 1999 1998 1997 1999 1998 1997 ---------------------------------- ---------------------------------- United States $ 91,414 $ 96,426 $101,352 $ 17,426 $ 16,973 $ 16,348 Canada 15,544 14,723 13,162 1,813 1,764 1,961 Europe 9,562 11,136 11,248 1,964 2,046 2,095 ---------------------------------- ---------------------------------- Total Segments 116,520 122,285 125,762 21,203 20,783 20,404 Adjustments & Eliminations -- -- -- -- 28 (583) ---------------------------------- ---------------------------------- Consolidated Totals $116,520 $122,285 $125,762 $ 21,203 $ 20,811 $ 19,821 ================================== ==================================
Long-lived assets are those of the Company that are identified with the operations in each geographic area. - 13 - 13. Business Combinations and Investments in Partnership In November 1997, the Company completed its acquisition of Metalcraft Air Filtration, Inc. (MCF), a small, high quality specialty filtration manufacturer of enclosed filter housings and bags used for filtering and then containing hazardous waste dust from certain biological, chemical, nuclear and medical facilities having special air handling and filtration system requirements. MCF is located in Washington, North Carolina. The Company issued 18,750 shares of its common stock in exchange for all the shares of MCF. The transaction was accounted for under the purchase method of accounting and the operating results of this business have been included in the consolidated financial statements since the date of acquisition. The purchase price exceeded the fair value of the tangible net assets acquired by approximately $412,000. In June 1997, the Company entered into a joint venture partnership with Quest Technology Sdn. Bhd., a Malaysian manufacturer and distributor of air filtration products and a licensee of certain Farr products. Under the agreement, the Company has a 50 percent ownership interest in the operations of QF Filter Sdn. Bhd., a manufacturing operation located in Malaysia and only has a limited ability to control partnership's activities. Accordingly, this investment is accounted for using the equity method of accounting. The Company's equity in QF Filter Sdn. Bhd.'s loss was $59,000 and $35,000 in 1999 and 1998, respectively. 14. Gain on Disposal of Assets During the second half of 1999, the Company reported a net gain of $ 1,246,000 related to the disposal of assets. The net gain is comprised of two components, one a $1,816,000 gain from the sale of surplus real estate located in El Segundo, California and a $570,000 charge related to anticipated lease-buy out cost for the Company's leased Eatonton, Georgia facility. The Company received approximately $5,000,000 in cash from the sale of surplus real estate and intends to use a portion of the proceeds from the sale for the purchase of a new facility. The new facility is intended to be used primarily for manufacturing. The purchase of this facility is anticipated to be completed during the first quarter of 2000 and is intended to be accounted for under IRA section 1031 like-property exchange rule. 15. Retirement Benefit In September 1999, the Company entered into a five-year employment and retirement agreement with its Chairman of the Board of Directors. Under terms of the agreement, the Company purchased an annuity at a cost of $998,000 to fund the Chairman's retirement benefits that will be paid monthly over a ten year period commencing October 1, 2004. The Company had previously accrued $555,000 for estimated retirement benefits and recorded an additional $443,000 retirement benefit provision during the third quarter of 1999 to cover the total funding cost of the retirement benefit. The market value of the annuity that will be used to fund this benefit is included as a noncurrent asset under Investments and other and the liability for this benefit is included in Other noncurrent liabilities. As of December 31, 1999, the noncurrent asset and liability was $1,016,000. Report of Independent Public Accountants To the Board of Directors and Stockholders of Farr Company: We have audited the accompanying consolidated balance sheets of Farr Company (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1999. 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 financial statements referred to above present fairly, in all material respects, the financial position of Farr Company and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Los Angeles, California January 28, 2000 - 14 - Farr Company and Subsidiaries Selected Financial Data
Years Ended December 31 (In thousands except share and per share data) 1999 1998 1997 1996 1995 ============================================================================================================= Net Sales $ 116,520 $ 122,285 $ 125,762 $ 122,021 $ 113,275 Net Income (Notes D, E & G) 7,173 7,205 7,375 5,890 3,124 Income per diluted share (Note E) .93 .86 .88 .71 .38 Total Assets 63,011 59,901 60,828 53,687 55,570 Long-term Debt, net of current portion (Notes A, B, C & F) -- -- -- 2,068 9,412 Cash Dividends per share -- -- -- -- -- Weighted diluted average number of shares (Notes E & H) 7,700,645 8,381,755 8,383,224 8,264,911 8,330,095 Capital expenditures 1,904 2,985 4,508 1,465 1,163 Net property, plant and equipment 16,838 18,027 17,619 15,611 16,406 Working Capital (Notes A & B) 24,508 24,525 21,737 19,806 20,183
Note A. In December 1985, the Company negotiated an agreement for $8,000,000 in Industrial Revenue Bonds to finance the Company's facility in Jonesboro, Arkansas. In December 1993 and February 1994, the Company redeemed a total of $2,615,000 of the bonds with surplus cash held in trust. In January 1996, the Company fully retired these bonds. Note B. In August 1991, the Company negotiated an agreement for $2,500,000 in Industrial Revenue Bonds to finance the Company's facility in Holly Springs, Mississippi. In August 1996, the Company fully retired these bonds. Note C. In February 1996, the Company completed refinancing of its domestic long-term debt with a new lending institution, including a $15,000,000 revolving credit facility that was subsequently amended and reduced to $10,000,000 commensurate with the Company's financing requirements. Note D. In 1995, pretax income included a provision of $540,000 for the estimated cost of closing and reorganizing U.S. manufacturing facilities. Note E. As a result of the 3-for-2 stock split declared on April 29, 1998 paid on May 29, 1998 and the 3-for-2 stock split declared on February 18, 1997 paid on March 28, 1997, per share amounts for prior years have been restated to reflect the weighted average number of shares of common stock outstanding, increased by shares to be issued for the stock split. Note F. In November 1995, the Company sold its plant located in Rialto, California for $3,050,000 which resulted in a gain of $676,000. The entire amount of the net proceeds were received in cash and were primarily used to retire secured debt on the subject property. Note G. During the second half of 1999, the Company reported a net gain of $1,246,000 related to the disposal of assets. The net gain is comprised of two components, one a $1,816,000 gain from the sale of surplus real estate located in El Segundo, California and two, a $570,000 charge related to anticipated lease-buy out cost for the Company's leased Eatonton, Georgia facility. Note H. During 1999, the Company repurchased 885,282 shares of its common stock at a cost of $8,478,000. As of December 31, 1999, the Company held in treasury 1,629,226 shares of common stock at a cost of $13,773,000. - 15 - Farr Company and Subsidiaries Management's Discussion and Analysis RESULTS OF OPERATIONS 1999 Compared to 1998 Sales for 1999 were $116,520,000, down $5,765,000 or 4.7 percent from 1998 sales of $122,285,000. During the year domestic sales decreased 5.2 percent while foreign subsidiary sales declined 2.9 percent. The decline in overall sales reflected lower custom OEM, railroad, and gas turbine sales that offset sales growth of engine and air pollution control products. Sales of the Company's foreign subsidiaries were unfavorably impacted by less than one percent due to changes in foreign exchange rates between 1999 and 1998 used to convert foreign currencies into US dollars. Net income for 1999 was $7,173,000, down $32,000 from $7,205,000 in 1998. Excluding net nonrecurring income of approximately $500,000, net income for 1999 amounted to $6,673,000, down $532,000 from last year's net income. Net nonrecurring income includes $500,000 from the sale of surplus real estate in El Segundo, California, partially offset by a charge related to long term lease obligations and a retirement benefit expense related to an employment agreement with the Company's Chairman of the Board. Excluding domestic nonrecurring net income of $500,000, domestic 1999 net income increased 1 percent and foreign net income decreased 22 percent compared to the prior year. Domestic income increased marginally despite lower sales, due to stronger margins related to favorable sales mix, lower warranty costs and lower indirect cost of sales expenses. Foreign income declined due to lower margins associated with sales mix, foreign exchange losses, and increased manufacturing overhead related expenses. Gross margins for 1999 expressed as a percentage of sales, increased to 26 percent, up .5 of a percent from 25.5 percent in 1998. The 1999 increase in margins reflected favorable domestic sales mix and lower warranty cost. Based on anticipating a rebound in sales for 2000, the Company anticipates that its gross margin percentage will improve during 2000 as fixed manufacturing costs decline as an overall percentage of sales. Selling, general and administrative expenses expressed as a percentage of sales for 1999 were 17.3 percent up .7 of a percent compared to 16.6 percent in 1998. Expenses in 1999 totaled $20,127,000, down $171,000 compared to $20,298,000 in 1998. Although selling, general and administrative expenses remained virtually unchanged from prior year levels, sales and marketing expenses were increased to implement strategic programs design to improve the strength and effectiveness of the Company's domestic and foreign efforts to reinvigorate sales growth in 2000. Interest expense and interest income remained at approximately the same levels as last year. Stock repurchases of $8,478,000 during 1999 kept average surplus cash levels at or near 1998 levels keeping interest income for 1999 and 1998 roughly the same. During 2000, the Company anticipates cash flow from operating activities to continue to be strong benefiting either interest income and or other strategic investment programs. The Company's effective tax rate for 1999 was 35.8 percent compared to 34.5 percent in 1998. The slight increase in the effective tax rate reflected lower tax benefits being derived from the Company's Foreign Sales Corporation (FSC) as a result of lower foreign sales volume. In addition, the Company assessed the level of risk in relation to open and to closed tax return years. As a result, the Company was able to readjust the level of its reserves during 1999, which resulted in lowering its tax rate for the year. During 2000, the Company anticipates a slight increase in its effective tax rate to approximately 37 percent as tax benefits being derived from its FSC remain below prior year levels. 1998 Compared to 1997 Sales for 1998 reached $122,285,000, down $3,477,000 or 2.8 percent from 1997 sales of $125,762,000. For the year, foreign subsidiary sales increased 5.9 percent while domestic sales decreased 4.9 percent. For making comparisons between 1998 and 1997 it should be noted 1997's fiscal year contained 53 weeks or one week more than 1998's fiscal year period. In addition, lower 1998 foreign exchange rates as compared to 1997 rates used to convert operating results of the Company's Canadian subsidiary to U.S. dollars reduced comparable 1998 sales by $1,474,000. Excluding the effects of both these items, sales for fiscal 1998 remained virtually unchanged compared to 1997. Net income for 1998 totaled $7,205,000, down $170,000 or 2.3 percent from $7,375,000 in 1997. After adjusting for the longer fiscal year period in 1997 and the unfavorable 1998 Canadian foreign exchange rates, 1998's comparable net income would reflect an improvement over 1997's net income of 2 percent. - 16 - Gross margin for 1998 expressed as a percentage of sales, decreased to 25.5 percent, down .7 of a percent from 26.2 percent in 1997. The 1998 decrease in margin reflected higher warranty costs, unfavorable sales mix and lower sales while fixed manufacturing cost rose as a percentage of overall sales. Selling, general and administrative expenses expressed as a percentage of sales for 1998 were 16.6 percent, down .6 of a percent compared to 17.2 percent in 1997. 1998 spending totaled $20,298,000, down $1,394,000 compared to $21,692,000 in 1997. The 1998 decrease reflected cost reduction programs and lower selling and marketing expenses commensurate with 1998's lower level of sales volume. Interest expense continued to decline in 1998 and interest income continued to increase as average invested cash continued to increase during 1998. The Company's effective tax rate for 1998 was 34.5 percent compared to 34.4 percent in 1997. The continued low effective tax rate is a result of tax benefits being generated by the Company's Foreign Sales Corporation and lower effective tax rates in Canada where taxable income increased significantly during 1998. 1997 Compared to 1996 Record 1997 sales of $125,762,000 were up $3,741,000 or 3.1 percent from prior year sales of $122,021,000. Foreign subsidiary sales increased 10.9 percent and domestic sales increased 1.3 percent in 1997. Net income reached record highs during 1997 totaling $7,375,000, up 25 percent or $1,485,000 from $5,890,000 reported in the prior year as sales continued to grow and improve productivity. Increased sales volume, improved operating efficiencies, lower interest expense and lower effective income tax rates were all major contributing factors in improving 1997's net income performance over the prior year. Gross margins for 1997 improved to 26.2 percent, up 1 percent from 25.2 percent in 1996. The improvement in gross margins was the result of continued improvement in operating efficiencies and a better sales mix of products with higher margins compared to the prior year. Selling, general and administrative expenses as a percentage of sales for 1997 and 1996 were 17.2 and 16.7 percent, respectively. 1997 spending totaled 21,692,000, up $1,273,000 compared to $20,419,000 in 1996. 1997's increase reflected higher spending in the area of selling and marketing related expenses directed toward increasing sales in existing and new product markets. Interest expense during 1997 was reduced to $197,000 from $687,000 in the prior year due to long and short-term borrowing reductions. As of the end of the second quarter of 1997 the Company's domestic operations retired all previously outstanding bank debt. In addition, due to the continued strong cash flow provided by operations, the Company generated $159,000 in interest income from investing cash. The effective income tax rate for 1997 was 34.4 percent compared with 39.2 percent in 1996. The decrease in 1997's tax rate was primarily related to lower effective tax rates being generated from the Company's Foreign Sales Corporation. - 17 - LIQUIDITY & CAPITAL RESOURCES Financial Condition As of December 31, 1999, the Company's capital structure included no bank debt and $41,278,000 of stockholders' investment. Stockholders' equity decreased 1.8 percent during 1999 declining to $41,278,000 from $42,054,000 at the end of 1998. The decline in equity was attributable to $8,478,000 in stock repurchases during 1999. During 1999, the Company's beginning income tax receivable of $849,000 was received with the filing of the tax returns. In addition, the increase in income taxes payable during 1999 is primarily related to the timing differences between reporting the gain for financial statement purposes versus income tax purposes from the section 1031 property exchange. The 1999 increase in other current liabilities of $3,003,000 is primarily related to a deferred gain associated with the section 1031 property exchange transaction. The deferred gain amount of approximately $2,500,000 is included in other current liabilities and will be reclassified out of other current liabilities into property in the first quarter of 2000, following the close of escrow on the replacement property portion of the section 1031 exchange transaction. In September 1999, the Company entered into a five-year employment and retirement agreement with its Chairman of the Board of Directors. Under terms of the agreement, the Company purchased an annuity at a cost of $998,000 to fund the Chairman's retirement benefits that will be paid monthly over a ten year period commencing October 1, 2004. The Company had previously accrued $555,000 for estimated retirement benefits and recorded an additional $443,000 retirement benefit provision during the third quarter of 1999 to cover the total funding cost of the retirement benefit. The market value of the annuity that will be used to fund this benefit is included as a noncurrent asset under Investments and other and the liability for this benefit is included in Other noncurrent liabilities. As of December 31, 1999, the noncurrent asset and liability were both $1,016,000 During 1999, the Company's domestic operations were financed through an unsecured $10,000,000 long-term credit facility. As of December 31, 1999, no borrowings were outstanding and unused borrowing availability was $10,000,000. The Company's foreign subsidiaries borrow under overdraft credit facilities. As of December 31, 1999, overdraft facilities amount to $2,173,000 of which no borrowings were outstanding. As of December 31, 1998, foreign overdraft facilities amounted to $2,137,000 of which $145,000 was utilized. Cash Flow During 1999, cash flows from operating activities increased to $9,696,000 compared to $6,106,000 in 1998 and $14,022,000 in 1997. The 1999 increase was primarily related to an increase in the level of deferred benefit retirement expenses that are being funded through investing activities. Cash flow from operations were used to support $1,904,000 of capital expenditures and treasury stock purchases of $8,478,000. As of January 1, 2000 restricted cash included $4,905,000 held in trust received from the sale of surplus real estate. This cash is being held in a trust account pending completion of an IRS section 1031 like-property exchange. Upon completion of the exchange, anticipated net cash proceeds from the trust will be approximately $2,800,000. The exchange transaction was completed during the first quarter of 2000. Capital expenditures decreased in 1999 to $1,904,000 from $2,985,000 in 1998. The decrease in capital spending reflected higher spending in 1998 related to a new sales office facility in Memphis, Tennessee. Capital spending in 2000 is anticipated to increase over 1999 levels based on increasing investment in manufacturing equipment and tooling. The Company's cash flow generated from operating activities combined with current cash balances are anticipated to generate adequate cash flow to meet planned operating needs, provide for capital spending and provide for stock repurchase program activity in 2000, if any. - 18 - Farr Company and Subsidiaries Management's Discussion and Analysis (continued) Share Repurchase Plan In February 1999 and May 1999, the Board of Directors authorized 500,000 and 1,000,000 shares, respectively, of its common stock to be repurchased. Including 500,000 shares authorized for repurchase in July, 1999, the total authorized number of shares authorized for repurchase in 1998 and 1999 totaled 2,000,000 shares of common stock. At December 31, 1999, the Company had approximately 755,000 remaining shares available for repurchase under the repurchase authorizations. Management and the Board of Directors believe the share repurchase program is an excellent means of returning shareholder value to shareholders. In 1999, the company repurchased 885,000 shares for $8,478,000, at an average price of $9.58 per share. The Company repurchased 386,000 shares for $4,104,000 in 1998. Market Risk The Company's market risk includes the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. The Company invests its cash in money market funds and short-term investment funds that carry maturities of less than 180 days. Over ninety percent of these investments have their interest rates adjusted weekly or monthly and consequently, the cost of these securities approximates market value. Although the company periodically evaluates derivative and financial instruments, including forwards, swaps and purchased options, to manage foreign currency exchange rate exposures, the company does not currently hold any derivatives for managing these risks or for trading purposes. YEAR 2000 The Company's internal business systems are Year 2000 (Y2K) compliant as of December 31, 1999. Major customers and suppliers have advised the Company that their systems either are Year 2000 compliant or were anticipated to be compliant by December 31, 1999. The Company does not anticipate material or significant external risks or exposures associated with Year 2000 issues. Unanticipated Year 2000 related problems will be addressed by a Y2K Task Force Team within the Company. The Company's estimate for external cost including consultants and software applications used to make the Company's internal business systems Y2K compliant are not material to the Company's business, operations or financial condition. The Company did not track internal cost incurred for the Y2K project that was principally related to payroll costs for its information systems group. Through March 1, 2000, the Company is not aware of any significant business interruption as a result of a Year 2000 issue. In addition, no significant additional costs or remediation activities are expected with respect to Year 2000 issues. However, the Year 2000 problem is complex as virtually every computer operation may be affected in some way. Consequently, no assurance can be given that Year 2000 compliance can be fully achieved without additional costs that might have a material adverse effect on the Company's financial condition or consolidated results of operations. - 19 - Farr Company and Subsidiaries SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands except per share data)* 1999 1998 --------------------------------------------- -------------------------------------------- Net Gross Income Net Per Net Gross Income Net Per Quarter Sales Margin Tax Income Share Sales Margin Tax Income Share ==================================================================================================== First $ 29,743 $ 7,742 $1,006 $1,722 $.21 $ 31,989 $ 8,206 $1,038 $1,918 $.23 Second 29,464 7,785 927 1,612 .21 30,434 7,900 1,002 1,876 .22 Third 28,146 6,914 1,163 1,995** .27 31,011 7,897 1,047 1,784 .21 Fourth 29,167 7,886 906 1,844 .25 28,851 7,122 701 1,627 .20 - --------------------------------------------------------------------------------------------------- Year $116,520 $30,327 $4,002 $7,173 $.93 $122,285 $31,125 $3,788 $7,205 $.86 ===================================================================================================
* Per share data has been restated for the 3-for-2 stock split declared in May 1998 and is presented on a diluted basis. ** 1999 third quarter net income includes nonrecurring net income of $500,000 related to a net gain on disposal of property partially offset by retirement benefit expense. Quarterly earnings per share and annual earnings per share may not equal due to rounding differences in the average weighted shares outstanding used to calculate earnings per share for each respective period. SUMMARY OF STOCK QUOTATIONS
1999 1998 1997 -------------------- -------------------- --------------------- Quarter High Low High Low High Low =========================================================================================== First $10.00 $ 8.00 $13.00 $ 9.00 $ 8.67 $ 7.28 Second 11.00 7.94 14.33 10.50 11.00 8.00 Third 11.00 8.88 13.00 9.00 12.67 10.33 Fourth 10.00 7.50 10.44 8.25 12.00 9.67 - ------------------------------------------------------------------------------------------- Year $11.00 $ 7.50 $14.33 $ 8.25 $12.67 $ 7.28 ===========================================================================================
The above information was obtained from the National Association of Securities Dealers, Inc. (NASD) Monthly Statistical Report. The Company's stock is traded in the over-the-counter National Market System under the symbol FARC. Price per share has been restated for the 3 for 2 stock split declared in May 1998. No cash dividends were declared on the Company's common stock in 1999, 1998 or 1997. - 20 - Farr Company and Subsidiaries CORPORATE INFORMATION DIRECTORS - --------- Farr Company Robert Batinovich Chairman and Chief Executive Officer Glenborough Realty Trust Incorporated NYSE, GLB Management of Commercial Real Estate (2) Richard P. Bermingham Chairman Bermingham Investment Company (1) (3) Denis R. Brown, Jr. President and Chief Executive Officer Pinkerton, Inc. Security & Investigation Services (2) A. Frederick Gerstell Vice Chairman, Director and Consultant Vulcan Materials Company (2) John C. Johnston President and Chief Executive Officer Farr Company (3) John J. Kimes Chief Executive Officer and President Computerized Security Systems, Inc. Manufacturer of Electronic and Mechanical Lock Hardware and Systems (1) H. Jack Meany Chairman of the Board of Directors Farr Company (3) John A. Sullivan Financial Consultant Batchelder & Partners, Inc. (1) (1) Audit Committee (2) Compensation Committee (3) Executive Committee OFFICERS - -------- FARR COMPANY H. Jack Meany Chairman of the Board of Directors John C. Johnston President and Chief Executive Officer Steve Pegg Senior Vice President, Chief Financial Officer, Treasurer and Secretary Richard Larson Executive Vice President, Sales and Marketing John Vissers Vice President, Controller, Assistant Treasurer and Assistant Secretary Phil Whitaker Vice President, International Sales and Marketing FARR FILTRATION, LTD. (UNITED KINGDOM) Clive J. Jones Managing Director FARR, INC. (CANADA) Dominique Mignacco Vice President and General Manager - 21 - Corporate Offices Manufacturing Distributors 2201 Park Place Genmech Engineering, Singapore El Segundo, California 90245 310-727-6300 Internet address: http://www.farrco.com Registrar and Transfer Agent Company's Internet home page offers access to a variety of information Chemical Mellon Shareholder Services including Farr's products and services, Los Angeles, California worldwide operations, financial data, and stockholder related information. Legal Counsel Subsidiaries and Joint Ventures Gibson, Dunn & Crutcher LLP Farr, Inc., Montreal, Canada Los Angeles, California Farr Filtration, Ltd., Birmingham, England QF Filters, SDN BHD, Malaysia Auditors Manufacturing and Distribution Facilities Arthur Andersen LLP Los Angeles, California Jonesboro, Arkansas Corcoran, California Delano, California Form 10-K Crystal Lake, Illinois Holly Springs, Mississippi Stockholders of record as of March Conover, North Carolina 15, 2000 may obtain copies of the Washington, North Carolina Company's Annual Report on Form 10-K Montreal, Canada filed with the Securities and Toronto, Canada Exchange Commission by writing to: Birmingham, England Steve Pegg, 2201 Park Place, Kuala Lumpur, Malaysia El Segundo, California 90245-4900 Paris, France Manufacturing Licensees Anfilco Ltd., Curgaon, India Antung Trading Corp., Taipei, Taiwan Boart MSA (PTY) Ltd. South Africa Casiba S. A., Buenos Aires, Argentina Genmech Engineering, Singapore Industries Filvac S.A. de C.V., Mexico Nihon Spindle Mfg., Co., Ltd. Osaka, Japan QF Filters, SDN BHD, Malaysia (Joint Venture) Taymac Ltd., Christchurch, New Zealand Wilectec Co., Ltd., Kwai Chung, N.T., Hong Kong - 22 - FARR 1999 Annual Report EX-21 8 SUBSIDIARIES OF FARR COMPANY Exhibit 21 List of Subsidiaries FARR COMPANY AND SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation Farr Filtration Limited England Farr Company International California Farr Inc. Canada Farr International U.S. Virgin Islands Metalcraft Air Filtration, Inc. North Carolina EX-23 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 28, 2000 included and incorporated by reference in this Form 10-K, into Farr Company's previously filed Registration Statements on File Numbers 2-83890, 33-18897, 33-47836, 33-71400 and 33-64387. Los Angeles, California Arthur Andersen LLP March 20, 2000 EX-27 10 ART. 5 1999 FARR COMAPNY FDS
5 12-MOS JAN-01-2000 JAN-03-1999 JAN-01-2000 3,678,000 0 19,993,000 467,000 11,210,000 41,808,000 56,466,000 39,628,000 63,011,000 17,300,000 0 0 0 889,000 41,278,000 63,011,000 116,520,000 116,520,000 86,193,000 86,193,000 19,052,000 0 100,000 11,175,000 4,002,000 7,173,000 0 0 0 7,173,000 .95 .93
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