-----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, N59it0+9KdtebpTfI78lWmvoh0W70TqjMaE00Zh3fKPKuCe7aM2L1YDCiUYwoday A+p9hlfZGiUGB3HF33T3LA== 0000034629-97-000002.txt : 19970328 0000034629-97-000002.hdr.sgml : 19970328 ACCESSION NUMBER: 0000034629-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970327 SROS: NASD 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: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-04723 FILM NUMBER: 97564180 BUSINESS ADDRESS: STREET 1: 26161 MARGUERITE PARKWAY SUITE CITY: MISSION VIEJO STATE: CA ZIP: 92692 BUSINESS PHONE: 7143480900 MAIL ADDRESS: STREET 2: 26161 MARQUERITE PARKWAY SUITE B CITY: MISSION VIEJO STATE: CA ZIP: 92692 10-K 1 FARR COMPANY 1996 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 28, 1996 ----------------------- 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) 2221 Park Place, El Segundo, CA 90245 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 536-6300. 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 7, 1997, based on the closing sale price on such date, was $67,924,258. The number of shares of common stock outstanding on March 7, 1997 was 3,814,311. DOCUMENTS INCORPORATED BY REFERENCE PART I AND II: The Annual Report to Stockholders for the fiscal year ended December 28, 1996. PART I AND III: The Proxy Statement for the Annual Meeting of Stockholders to be held April 29, 1997. 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 7 percent, 4 percent and 6 percent in 1996, 1995 and 1994, 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, Detroit, Michigan 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 December 28, 1996, the Company employed approximately 44 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 $2,217,000, $2,251,000 and $2,221,000 for product engineering and development in 1996, 1995, and 1994, 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 40 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, Australia, France, Hong Kong, India, Indonesia, Italy, Japan, Malaysia, Mexico, New Zealand, Singapore, Taiwan and Venezuela. During 1996, no customer accounted for more than 10 percent of net sales. Backlog ------- The Company's backlog at December 28, 1996 was $13,899,000 as compared to $16,017,000 at December 30, 1995. 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 1996, approximately 7 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 $3,679,000 and $4,611,000 at December 28, 1996 and December 30, 1995, respectively. All of the December 28, 1996 backlog is scheduled for delivery during 1997. 3 International Operations ------------------------ The Company engages in operations in foreign countries as described above. For information regarding the geographic distribution, revenue, operating profit (loss) and identifiable assets of the Company's domestic and international operations, see Note 13 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 Snyder General Corporation, 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, quality and the ability to respond to the individual requirements of its customers. Employees --------- At March 7, 1997, the Company had approximately 1,307 employees as compared to approximately 1,299 on March 8, 1996. The Company's five drivers and warehouse operators at its El Segundo service office are covered by a collective bargaining agreement with the Teamsters Union that expires on February 6, 2000. Thirty-one 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, 1998. At February 28, 1997, 133 employees at the Company's Montreal, Canada plant were covered by a three year collective bargaining agreement expiring August 31, 1997, and 52 employees at the Company's Birmingham, England plant were covered by a collective bargaining agreement that expired on December 31, 1996 and is currently in negotiation. 4 Executive Officers of the Registrant - ------------------------------------ ================================================================================ Position Held and Business Experience During Name Age Past Five Years Richard L. Farr 53 Vice President of the Company (since April 1996), Senior Vice President of the Company (from January 1995 to April 1996), Vice President of the Company (from November 1987 to January 1995), Director of the Company (from November 1988 to April 1996), first cousin of David J. Farr, a Director of the Company. Kenneth W. Gerstner 53 Senior Vice President, Secretary and Chief Financial Officer of the Company (since January 1995), Vice President, Secretary and Chief Financial Officer of the Company (from June 1993 to January 1995), Controller, Archive Technology, Inc. (from June 1990 to May 1993), Assistant Corporate Controller, Archive Corporation (from March 1989 to June 1990). John C. Johnston 53 Director of the Company (since September 1996), President and Chief Operating Officer (since February 1996), Senior Vice President of the Company (from January 1995 to February 1996); President of Easton Aluminum, Inc. (from January 1986 to December 1994). H. Jack Meany 74 Chairman and Chief Executive Officer of the Company (since February 1996), Chairman, 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 BWP International, Inc. Myron G. Rasmussen 59 Vice President of the Company (since March 1990), Director of Engineering of the Company (from August 1977 to May 1990). ================================================================================ 5 Item 2. Properties ------------------- The location and general description of the Company's principal properties at March 7, 1997 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 50,000 Corporate Offices El Segundo, CA 40,000 Warehouse 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 Pryor, OK (leased) 80,000 Closed Montreal, Canada 146,000 Manufacturing Birmingham, England 82,000 Manufacturing The Company leases sales office and warehouse space in or near San Diego, California; Phoenix, Arizona; Detroit, Michigan; 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 1996, the Company believes that utilization of its various production facilities ranged from 50 to 90 percent, depending upon product mix. 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 its insurance, or would not have a material adverse effect on the financial position or operations of the Company if disposed of unfavorably. 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 December 28, 1996 ("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 8 through 20 6 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 7, 1997, there were approximately 494 stockholders of record of the Company's Common Stock. Dividends --------- The Company did not pay any dividends on its Common Stock over the last two years. On February 18, 1997, The Company's Board of Directors declared a dividend to be paid in the form of a 3 for 2 stock split, payable on March 28, 1997, to stockholders of record on March 7, 1997. 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 9, 21 and 25, respectively, of the Annual Report. Item 6. Selected Financial Data ------------------------------- The five year summary under "Selected Financial Data" included on page 21 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 22 through 24 of the Annual Report is incorporated herein by this reference. Item 8. Consolidated Financial Statements and Supplementary Data ---------------------------------------------------------------- Pages 8 through 20 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. 7 PART III Compliance with Section 16(a) of the Exchange Act ------------------------------------------------- Information appearing under the caption "Compliance With Section 16(a) of the Exchange Act" in the Company's 1996 Proxy Statement is incorporated herein by this reference. Item 10. Directors and Executive Officers of the Registrant ----------------------------------------------------------- Information appearing under the caption "Election of Directors" in the Company's 1996 Proxy Statement is incorporated herein by this reference. Item 11. Executive Compensation ------------------------------- Information appearing under the caption "Executive Compensation" in the Company's 1996 Proxy Statement is incorporated herein by this reference. Information appearing under the captions "Compensation Committee Report" and "Performance Graph" in the Company's 1996 Proxy Statement is not incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management ----------------------------------------------------------------------- Information appearing under the caption "Ownership of the Company's Securities" in the Company's 1996 Proxy Statement is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- Note 1 to the consolidated financial statements, included on page 11 of the Annual Report, and the caption "Independent Public Accountants" in the Company's 1996 Proxy Statement contain information about certain relationships and are incorporated herein by this reference. 8 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 December 28, 1996 and are incorporated herein by this reference. Annual Report Page No. ------------- Consolidated Balance Sheets at December 28, 1996 and December 30, 1995. 8 Consolidated Operations Statements and Consolidated Statements of Stockholders' Investment for the three years ended December 28, 1996, December 30, 1995 and December 31, 1994. 9 Consolidated Statements of Cash Flows for the three years ended December 28, 1996, December 30, 1995 and December 31, 1994. 10 Notes to the Consolidated Financial Statements 11-19 Report of Independent Public Accountants 20 (2) 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 9 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 20, 1997 By: /s/ H. Jack Meany -------------- ------------------------------ H. Jack Meany Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 20, 1997 By: /s/ H. Jack Meany -------------- ------------------------------ H. Jack Meany Chairman and Chief Executive Officer Dated: March 20, 1997 By: /s/ Robert G. Batinovich -------------- ------------------------------ Robert G. Batinovich Director Dated: March 20, 1997 By: /s/ Richard P. Bermingham -------------- ------------------------------ Richard P. Bermingham Director Dated: March 20, 1997 By: /s/ Denis R. Brown, Jr. -------------- ------------------------------ Denis R. Brown, Jr. Director Dated: March 20, 1997 By: /s/ David J. Farr -------------- ------------------------------ David J. Farr Director Dated: March 20, 1997 By: /s/ John C. Johnston -------------- ------------------------------ John C. Johnston Director Dated: March 20, 1997 By: /s/ John J. Kimes -------------- ------------------------------ John J. Kimes Director Dated: March 20, 1997 By: /s/ John A. Sullivan -------------- ------------------------------ John A. Sullivan Director Dated: March 20, 1997 By: /s/ Kenneth W. Gerstner -------------- ------------------------------ Kenneth W. Gerstner Sr. Vice President, Secretary and Chief Financial Officer 10 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. 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 February 15, 1996 between Farr Company, as borrower, and Bank of America National Trust and Savings Association, as lender. Filed as Exhibit 4.64 to Annual Report on Form 10-K for the year ended December 30, 1995 and incorporated herein by this reference. 4.65 Amendment, dated September 24, 1996 between Farr Company, as borrower, and Bank of America National Trust and Savings Association, as lender. 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. * 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. * 10.4 Farr Company Management Incentive Bonus Plan. Filed as Exhibit 10.6 to Annual Report on Form 10-K for the year ended January 3, 1981 and incorporated herein by this reference. 11 * 10.5 Deferred Compensation Plan for Officers dated April 30, 1981. Filed as Exhibit 10.7 to Annual Report on Form 10-K for the year ended January 2, 1982 and incorporated herein by this reference. * 10.6 Amendments to Stock Option Plan for Key Employees. Filed as Exhibit 10.8 to Annual Report on 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 by 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 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. * 10.34 Employee contract agreement between John Johnston and Farr Company dated Novembers 28, 1994. Filed as Exhibit 10.34 on Form 10-K dated December 30, 1995 and incorporated herein by this reference. * 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. 12 * 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 Document dated 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. * 10.40 Approved salary arrangement for Farr Company's Chairman and Chief Executive Officer compensation. Filed as Exhibit 10.40 on Form 10-Q dated June 29, 1996 and incorporated herein by this reference. 11 Computation of earnings per common share and common share equivalents. 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 1996 Annual Report to Stockholders is not deemed to be filed as a part of this report. 22 A list of all subsidiaries of registrant. 24 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. 13 EX-4.65 2 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 September 24, 1996, is between 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 February 15, 1996 (the "Agreement)". B. The Bank and the Borrower desire to amend the Agreement. AGREEMENT --------- 1. Definitions. Capitalized terms used but not defined in this Agreement shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 In Sub-paragraph 1.1(a) of the Agreement, the amount "Ten Million Dollars ($10,000,000)" is substituted for the amount "Fifteen Million Dollars ($15,000,000)." 2.2 In Paragraph 1.6 of the Agreement, the percent "one and three-quarters (1.75)" is substituted for the percent "one and seven-eighths (1.875)." 2.3 Article 2 of the Agreement is deleted in its entirety. 2.4 Article 4 of the Agreement is deleted in its entirety. 2.5 The following Paragraphs are deleted from the Agreement in their entirety: 6.2, 6.3, 6.5, 7.8, 8.17, and 10.2. 2.6 In Paragraph 8.4 of the Agreement, the ratio "1.25:1.0" is substituted for the ratio "1.50:1.0." 2.7 Paragraph 8.19 of the Agreement is amended to read in its entirety as follows: "8.19 General Business Insurance. To maintain insurance as is usual for the business it is in." 2.8 A new Paragraph 8.22 is added to the Agreement, which reads in its entirety as follows: "8.22 Clean Down Period. Not to have more than Five Million Dollars ($5,000,000) outstanding, and not to draw any additional advances on its revolving line of credit, for a period of at least 30 consecutive days in each line-year. "Line-year" means the period between the date of this Agreement and June 01, 1997, and each subsequent one-year period (if any). For the purposes of this Paragraph, "advances" does not include undrawn amounts of outstanding letters of credit." 3. 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 dated stated at the beginning of this Amendment. Bank Of America National Trust and Savings Association Farr Company /s/ William R. Cave /s/ H. J. Meany By: William R. Cave By: H. J. Meany Title: Vice President Title: Chairman and Chief Financial Officer EX-11 3 EARNINGS PER SHARE CALCULATION Exhibit 11 Earnings Per Share Calculation As a result of the 3 for 2 stock split to be distributed on March 28, 1997, per share amounts for the 1996 and prior years have been restated to reflect the weighted average number of shares of common stock outstanding, increased by shares issued for the stock split. The per share amounts in 1996 are calculated as though the stock split occurred on the first day of the year.
Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994 ------------- ------------- ------------- BASIC EARNINGS PER SHARE CALCULATION ------------------------------------ Earnings: Net Income (Loss) $5,890,000 $3,124,000 ($ 355,000) ========== ========== =========== Shares: Weighted average number of common shares outstanding 5,445,122 5,525,373 5,517,327 ========= ========= ========= Net Income (Loss) Per Common Share $1.08 $0.57 ($0.07) ===== ===== ====== PRIMARY EARNINGS PER SHARE CALCULATION - -------------------------------------- Earnings: Net Income (Loss) $5,890,000 $3,124,000 ($355,000) ========== ========== ========= Shares: Weighted average number of common shares outstanding 5,445,122 5,525,373 5,517,327 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 113,557 11,891 0 Weighted average number of common --------- --------- --------- shares and dilutive common share equivalents outstanding 5,558,679 5,537,264 5,517,327 ========= ========= ========= Net Income (Loss) Per Common Share $1.06 $0.57 ($0.07) ===== ===== ======
EX-13 4 1996 ANNUAL REPORT FARR Innovative Product Leadership in Filtration (picture of E-Series Riga-Flo (picture of RF-180 filter, a high filter, a totally disposable, efficiency railroad bag air filter low pressure drop, high which eliminates carry over of performance rigid air filter adhesives into the turbocharger, for HVAC systems) aftercooler and other engine components) E-Series Riga-Flo RF-180 (picture of Riga-RP Filter System, an economical replaceable panel air filtration system for high efficiency particulate filtration and/or carbon absorption, designed for new or retrofit installation in HVAC systems) Riga-RP Filter System 1996 Annual Report Mission Statement To be a highly successful company providing filtration products and services of premium value that protect people, equipment and their environment from contaminants. To produce acceptable rewards to those having a stake in the success of the enterprise. + + + SALES NET PROFIT (bar graph showing 1994, 1995 and (bar graph showing 1994, 1995 and 1996 1996 quarterly sales, in millions) quarterly net profits, in thousands) LONG TERM DEBT MARKET CAPITALIZATION (bar graph showing 1994, 1995 and (bar graph showing 1994, 1995 and 1996 1996 end of quarter long term quarterly market capitalization, debt, in millions) in millions)
Measurement Long Market Period Sales Net Profits Term Debt Capitalization (quarter) (millions) (thousands) (millions) (millions) - --------- ---------- ----------- ---------- ---------- 1994 - Q1 $25.2 ($ 415) $22.9 $23.4 - Q2 $26.5 ($ 625) $22.5 $17.9 - Q3 $27.5 $ 275 $22.0 $25.7 - Q4 $27.8 $ 410 $21.0 $22.5 1995 - Q1 $27.3 $ 633 $17.7 $24.4 - Q2 $28.7 $ 675 $17.5 $27.6 - Q3 $28.4 $ 726 $16.5 $31.3 - Q4 $28.9 $1,090 $10.1 $29.5 1996 - Q1 $31.1 $1,178 $ 8.5 $35.2 - Q2 $31.4 $1,499 $ 6.1 $49.2 - Q3 $30.0 $1,595 $ 4.5 $53.8 - Q4 $29.6 $1,618 $ 2.1 $61.7
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FINANCIAL HIGHLIGHTS (In Thousands, Except Per Share Items) 1996 1995 1994 ------------------------------------------------------------------------------ Net sales $122,021 $113,275 $106,989 Income (loss) before income taxes 9,680 5,163 ( 642) Income tax provision (benefit) 3,790 2,039 ( 287) Net Income (loss) 5,890 3,124 ( 355) Net Income (loss) per common share 1.06 .57 ( .07) Current assets 37,679 38,928 40,075 Current liabilities 17,873 18,745 18,293 Working capital 19,806 20,183 21,782 Long-term debt, net of current portion 2,068 9,412 18,957 Property, plant and equipment, net 15,611 16,406 17,930 Stockholders' Investment 31,210 24,785 21,172 ------------------------------------------------------------------------------
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 throughout the world. Sales are made through direct Company salesmen, manufacturer's representatives, distributors and foreign licensees. - 3 - LETTER TO STOCKHOLDERS - ---------------------- 1996 was a good year for Farr. All-time financial records were set and steady rates of improvement were seen in every functional area. For the year of 1996, net income set a record at $5,890,000 or $1.06 per share compared to $3,124,000 or $.57 per share for the prior year, an 89% increase. Sales for 1996 also set a record at $122,021,000 which was an increase of $8,746,000 or 8%. During 1996, the Company continued to strengthen its financial position. Long-term debt was reduced by $7,985,000 down to $2,091,000. This debt reduction was primarily accomplished through increased profits, capital spending conservation and controls aimed at minimizing our working capital requirements. Of significant note, the Company reduced its inventories by over $2,900,000 in 1996 as a result of specific programs to improve inventory turnover while at the same time decreasing customer delivery lead times. As a result of our continued debt reduction, 1996 interest expense was reduced by $1,109,000 compared to 1995. For 1997, we anticipate further interest expense reductions. In addition to debt reduction in 1996, we again leveraged our improved financial position and performance to negotiate reductions in the cost of borrowed capital from our lenders. Stockholders' Investment increased $6,425,000 to $31,210,000, an increase of 26% during 1996. Along with these financial accomplishments, significant changes were made in other areas during the year and while positive results were realized during the year from these changes, we anticipate the major benefits will be felt in succeeding years. OPERATIONAL CHANGES - ------------------- Plant rationalization was completed with the closing of the Hazleton, Pennsylvania assembly plant. The production from Hazleton was distributed among other Farr plants in Illinois, North Carolina and Montreal, Canada. The main purpose of this move was to enable more consolidation of shipments from single source regional plants because the Hazleton plant had capability to produce a limited number of products. While our Montreal plant is near the northeast U.S. market, it was not until implementation of the North American Free Trade Agreement (NAFTA) that it became a practical sourcing point for U.S. customers. Farr has been in the dust collection and engineered systems business, domestically, for a number of years and they had developed as separate organizations. A study suggested that the reasons for operating these two divisions separately were no longer of major importance. In fact, - 4 - considerable gains were possible in combining these units into a single business unit with all functions centralized at one location. This is now complete and we plan to grow this unit in both sales and profit without further investment for some time. A turnaround in these products will mean worthwhile gains to Farr because they have been only marginal to negative performers for many years. A program of improved customer service has succeeded in that our standard stock product delivery times have been cut in half with further improvement being planned. Three of our five product order desks have been relocated from the corporate headquarters to the actual producing plants to speed communications, resolve questions and make transactions more accurate. The results have been gratifying. NEW PRODUCTS - ------------ In the product development area, our activity has ranged from minor improvements in features and performance of existing products to the introduction of new products, having considerably new and different characteristics and performance profiles. These new products provide the customer with cleaner air, more convenient handling, lower operating and disposal costs and are more environmentally friendly. Some examples are pictured on the front cover. They are: o The new RF-180 engine air intake filter for railroad locomotives which doubles the time between replacements saving purchase cost, labor, down-time and disposal costs. A number of railroads have recognized this as a significant advantage over anything else available. o The E-Series Riga-Flo(R), a truly innovative product, has just been introduced creating widespread interest in this incinerable high performance industrial/commercial filter. It is strong yet lightweight so it handles and installs with less effort, resists damage more than conventional filters of equal performance and is ecologically friendly. Our sales force and distributors are enthusiastic about all of our new products and especially about this one. However, only time will measure its market performance. o The Riga-RP(R) which provides the opportunity to upgrade the indoor air quality (IAQ) of older systems without the cost of replacing duct work, blowers, etc. Among its many features is the incinerability of the filter panels with no need to change the metal housing. UPGRADED MANUFACTURING FACILITIES - --------------------------------- o New equipment has been installed in our United Kingdom factory. This enables us to provide shorter lead time on dust collection and engineered systems equipment from that facility. - 5 - We believe this is responsible for some orders which may have otherwise gone to competitors. Also, a new pleater has been installed which enables the U.K. to produce cleanroom and HEPA filters from raw stock. The prior practice was to order pleated stock from the U.S. which increased freight costs and inventories and stretched out customer deliveries. o A new state-of-the-art computer aided metal stamping center has been installed in the Jonesboro plant. This will cut costs, reduce lead times and improve quality of many of the metal products made there. STRENGTHENING THE ORGANIZATION - ------------------------------ o During the year a formal corporate purchasing function was created. Phil Hochstein was recruited as Corporate Purchasing Director. Benefits to both Farr and its suppliers are being realized from this move. Our suppliers benefit from the opportunity to sell greater quantities of combined plant requirements, whereas Farr can participate with the supplier in the economics of volume. Greater efficiency and improved vendor quality performance are goals to be realized. o In January of this year, Don Thornburg joined Farr as Engineering Manager. He brings considerable experience in cleanroom and HEPA products that were areas of needed strength. He also augments our excellent capability in HVAC product development and engineering. o As of February 1, 1997 Janet Peet became Corporate Director of Human Resources and assumed functional responsibility for all of Farr's U.S. human relations. This will improve uniformity of policies and practices throughout the Company's U.S. operations without imposing another bureaucratic layer. It is a necessary preparation for the Company's future growth. These are organizational enhancements and we are fortunate to have such highly professional managers join our team. Your Company is solidly pursuing the dual paths of performance improvement and sales growth. We have been underway on the first goal for almost three years and there is no doubt as to our ability to find ways to improve our performance. While this has been done with varying degrees of success among the many undertakings, it nonetheless has proven to be very successful overall. We can and will continue to capture those opportunities for greater efficiencies, less scrap, shorter lead times, better quality and improved customer satisfaction. - 6 - Improvements in operations have allowed us more time to concentrate on sales growth opportunities. This process was started in 1996 and some early programs have been replaced or modified and new plans are being formulated and tested. New goals are being set as we see opportunities evolve. An encouraging fact is that we have accomplished some modest sales growth while simultaneously dropping or de-emphasizing certain products or markets. More of this may have to occur before a healthy growth pattern develops. The sales growth goal is seen by your management as the challenge of our time and is taken on with great enthusiasm and a burning desire to accomplish it. We call your attention to the Company's Mission Statement printed on the inside front cover. The last phrase means we will be successful when all parties are adequately rewarded, i.e., stockholders, customers, employees, suppliers and the community at large and in that order. We appreciate the contributions of each of those parties and believe we will accomplish our mission. On February 18, 1997, the board of directors took two actions which are worthy of note. First, Denis R. Brown was elected to the board in a newly created position. Mr. Brown is President and Chief Executive Officer of Pinkerton, Inc. His considerable experience in manufacturing and international operations will be a valuable asset to the Company. Second, the board authorized a 3 for 2 stock split of the common stock in the form of a 50 percent stock dividend, to be distributed March 28, 1997 to stockholders of record March 7, 1997. ---------------------------------- ----------------------------------- H. Jack Meany John C. Johnston Chairman & Chief Executive Officer President & Chief Operating Officer - 7 -
CONSOLIDATED BALANCE SHEETS FARR COMPANY AND SUBSIDIARIES December 28, 1996 December 30, 1995 - ------------------------------------------------------------------------------------ Assets Current Assets: Cash and cash equivalents $ 1,997,000 $ 812,000 Accounts receivable, less allowances of $297,000 in 1996 and $214,000 in 1995 20,551,000 20,077,000 Inventories Raw materials 5,380,000 6,392,000 Work in progress 3,979,000 5,119,000 Finished goods 3,175,000 3,926,000 ----------- ----------- 12,534,000 15,437,000 Prepaid expenses 790,000 622,000 Deferred income tax benefit 1,807,000 1,980,000 ----------- ----------- Total current assets 37,679,000 38,928,000 ----------- ----------- Property, plant and equipment at cost Land 2,107,000 2,094,000 Buildings and improvements 15,247,000 15,231,000 Machinery and equipment 34,907,000 33,829,000 ----------- ----------- 52,261,000 51,154,000 Less accumulated depreciation and amortization 36,650,000 34,748,000 ----------- ----------- 15,611,000 16,406,000 Investments and other 397,000 236,000 ----------- ----------- $53,687,000 $55,570,000 =========== =========== Liabilities & Stockholders' Investment Current Liabilities: Notes payable to banks $ 874,000 $ 432,000 Current portion of long-term debt 23,000 664,000 Accounts payable 8,665,000 8,875,000 Accrued liabilities 7,566,000 8,248,000 Income taxes payable and current deferred income taxes 745,000 526,000 ----------- ----------- Total current liabilities 17,873,000 18,745,000 ----------- ----------- Long-term debt, net of current portion 2,068,000 9,412,000 Deferred income taxes 2,350,000 2,628,000 Other noncurrent liabilities 186,000 -- Commitments and contingencies Stockholders' investment Common stock, $.10 par value - Authorized - 10,000,000 shares Outstanding 5,707,404 shares at December 28, 1996 and 5,690,004 shares at December 30, 1995 544,000 543,000 Additional paid-in capital 11,603,000 11,487,000 Cumulative translation adjustments ( 1,206,000) ( 1,624,000) Retained earnings 20,269,000 14,379,000 ----------- ----------- Total stockholders' investment 31,210,000 24,785,000 ----------- ----------- $53,687,000 $55,570,000 =========== ===========
The accompanying notes are an integral part of these balance sheets. - 8 -
CONSOLIDATED OPERATIONS STATEMENTS FARR COMPANY AND SUBSIDIARIES For the Years Ended December 28, 1996 December 30, 1995 December 31, 1994 - -------------------------------------------------------------------------------------------------------- Net Sales $122,021,000 $113,275,000 $106,989,000 Cost of Sales 91,276,000 85,496,000 84,437,000 ------------ ------------ ------------ Gross Margin 30,745,000 27,779,000 22,552,000 Selling, general and administrative expenses 20,378,000 20,956,000 20,065,000 Interest expense 687,000 1,796,000 2,129,000 Restructuring costs -- 540,000 1,000,000 Gain on sale of assets -- ( 676,000) -- ------------ ------------ ------------ Total Expenses 21,065,000 22,616,000 23,194,000 ------------ ------------ ------------ Income (Loss) Before Income Taxes 9,680,000 5,163,000 ( 642,000) Income Tax (Benefit) Provision 3,790,000 2,039,000 ( 287,000) ------------ ------------ ------------ Net Income (Loss) $ 5,890,000 $ 3,124,000 ($ 355,000) ============ ============ ============ Net Income (Loss) per common share $ 1.06 $ .57 ($ .07) ============ ============ ============
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT Cumulative For the Years Ended December 28, 1996, Common Additional Retained Translation Loans to December 30, 1995 and December 31, 1994 Stock Paid-in Capital Earnings Adjustments ESOPs - ---------------------------------------------------------------------------------------------------------------------- Balance-- January 1, 1994 $552,000 $11,811,000 $11,636,000 ($1,639,000) ($755,000) Exercise of Stock Options -- 10,000 -- -- -- Cumulative Translation Adjustment -- -- -- ( 208,000) -- Principal Loan Payments from ESOPs -- -- -- -- 120,000 Net Loss -- -- ( 355,000) -- -- -------- ----------- ----------- ---------- -------- Balance-- December 31, 1994 552,000 11,821,000 11,281,000 ( 1,847,000) ( 635,000) Exercised and Granted Stock Options 1,000 174,000 -- -- -- Cumulative Translation Adjustment -- -- -- 223,000 -- Principal Loan Payments from ESOP's -- -- ( 26,000) -- 635,000 Treasury Stock Acquired - 99,050 shares ( 10,000) ( 508,000) -- -- -- Net Income -- -- 3,124,000 -- -- -------- ----------- ----------- ---------- -------- Balance -- December 30, 1995 543,000 11,487,000 14,379,000 ( 1,624,000) 0 Exercise of Stock Options 1,000 98,000 -- -- -- Cumulative Translation Adjustment -- -- -- 418,000 -- Treasury Stock Sold - 1,974 shares -- 18,000 -- -- -- Net Income -- -- 5,890,000 -- -- -------- ----------- ----------- ---------- -------- Balance - December 28, 1996 $544,000 $11,603,000 $20,269,000 ($1,206,000) $ 0 ======== =========== =========== ========== ========
The accompanying notes are an integral part of these statements. - 9 -
CONSOLIDATED STATEMENTS OF CASH FLOWS FARR COMPANY AND SUBSIDIARIES For the Years Ended December 28, 1996 December 30, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------------------------ Operating Activities: Net Income (Loss) $ 5,890,000 $ 3,124,000 ($ 355,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,392,000 3,299,000 3,308,000 Provision for loss on accounts receivable 109,000 151,000 202,000 Benefit retirement trust 186,000 -- -- Change in deferred income taxes 86,000 1,501,000 ( 466,000) Exchange loss (gain) 97,000 14,000 ( 128,000) Net (gain) loss on sale/retirement of property, plant and equipment 49,000 ( 701,000) 33,000 Provision for (gain) loss on investments -- ( 115,000) 170,000 Change in assets and liabilities Inventories 3,048,000 ( 734,000) 815,000 Receivables and prepaid expenses ( 600,000) 1,186,000 ( 1,393,000) Accounts payable and accrued expenses ( 960,000) 1,104,000 1,695,000 Income taxes payable 2,000 ( 100,000) ( 103,000) ----------- ----------- ----------- Net cash provided by operating activities 10,299,000 8,729,000 3,778,000 ----------- ----------- ----------- Investing Activities: Purchases of property, plant and equipment ( 1,465,000) ( 1,163,000) ( 987,000) Proceeds from sale of property, plant and equipment 6,000 2,945,000 -- Proceeds from sale of investments -- 567,000 -- Purchase of investments, benefit trust ( 186,000) -- -- ----------- ----------- ----------- Net cash provided by (used in) investing activities ( 1,645,000) 2,349,000 ( 987,000) ----------- ----------- ----------- Financing Activities: Proceeds from revolving line of credit and long-term debt 8,603,000 432,000 18,939,000 Principal payments on revolving line of credit and long-term debt ( 16,195,000) ( 10,893,000) ( 21,843,000) Principal payments received on ESOP loans 7,000 635,000 120,000 Deferred financing costs -- -- ( 552,000) Proceeds from sale of stock, stock option plans 99,000 175,000 10,000 Treasury stock sold (acquired) 18,000 ( 518,000) -- Other -- ( 167,000) -- ---------- ----------- ----------- Net cash used in financing activities ( 7,468,000) ( 10,336,000) ( 3,326,000) ---------- ----------- ----------- Effect of Exchange Rate Changes on Cash ( 1,000) ( 57,000) ( 9,000) ---------- ----------- ----------- Increase (decrease) in cash and cash equivalents 1,185,000 685,000 ( 544,000) Cash and Cash Equivalents at Beginning of Period 812,000 127,000 671,000 ----------- ----------- ----------- Cash and Cash Equivalents at End of Period $ 1,997,000 $ 812,000 $ 127,000 =========== =========== ===========
The accompanying notes are an integral part of these statements. - 10 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FARR COMPANY AND SUBSIDIARIES 1. SIGNIFICANT ACCOUNTING POLICIES Farr Company 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 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 1996, 1995 and 1994, $97,000 was charged, $14,000 was charged and $128,000 was credited to income, respectively. Accounting Period -- The Company's fiscal year ends on the Saturday closest to December 31. The fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994, were all comprised of fifty-two weeks. Cash And Cash Equivalents -- Cash includes currency on hand, demand deposits with financial institutions and investments with original maturities of three months or less. 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 declining-balance and straight-line methods, based upon the following lives. Building and improvements 10 - 40 years Machinery and equipment 3 - 12 years 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. In 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121 - "Accounting for the Impairment of Long Lived Assets to Be Disposed Of " (FASB No. 121), effective for 1996. The Company's adoption of FASB No. 121 resulted in no impact on the Company's results of operations or financial position. Investments And Other -- Investments and other include intangible assets that are amortized on a straight-line basis over various periods of time ranging from 3 to 5 years. Product Engineering And Development -- Engineering and development costs aggregating $2,217,000, $2,251,000 and $2,221,000 in 1996, 1995, and 1994, 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. Certain reclassifications have been made to the prior years' financial statements to conform with current year presentation. - 11 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FARR COMPANY AND SUBSIDIARIES 2. INVENTORIES Domestic inventories totaling $7,375,000 and $11,140,000 at December 28, 1996 and December 30, 1995, 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 $6,801,000 and $6,857,000 higher than reported at December 28, 1996 and December 30, 1995, respectively. 3. RESTRUCTURING COSTS In the fourth quarter of 1995, the Company recorded a restructuring charge of $360,000 related to the costs associated with the reorganization of its manufacturing and distribution operations in North America. This reorganization was implemented as part of the Company's effort to consolidate manufacturing and distribution operations and increase production efficiency, asset utilization and profitability. The charge was comprised of $230,000 of work force related costs (approximately 40 people) and $130,000 for facility related costs. The majority of the costs associated with this restructuring were incurred during the first quarter of 1996. At December 28, 1996, the balance of this restructuring charge was $103,000 and was included as a component of accrued liabilities in the accompanying Consolidated Balance Sheets. In the second quarter of 1994, the Company recorded a restructuring charge of $1,000,000 related to the costs associated with closing its manufacturing facility located in Rialto, California. This plant was closed as part of the Company's effort to consolidate manufacturing operations and increase production efficiency, asset utilization and profitability. This facility was sold during the fourth quarter of 1995. 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 fourth quarter of 1995, the Company recorded and increased its restructuring costs by $180,000 for facility related costs associated with these two facilities. The remaining $365,000 balance of this restructuring charge is included as a component of accrued liabilities in the accompanying Consolidated Balance Sheet as of December 28, 1996. If the present weak real estate market in Eatonton, Georgia continues beyond 1999, the Company may need to record an additional provision to cover the costs of leasing and maintaining the facility beyond the estimated disposition date. 4. GAIN ON SALE OF U.S. PLANT 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. 5. 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 28, 1996 is $21.33 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, 1999, 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 1996 the Company transferred 1,974 shares to the Employee Stock Ownership Plan. In 1995 the Company received 99,050 shares from the Employee Stock Ownership Plans as payment against the Company's outstanding loans to the Plans. As of December 28, 1996 and December 30, 1995 the Company held in treasury 251,057 and 253,031 shares of its common stock at a cost of $1,399,000 and $1,417,000, respectively. Outstanding stock amounts are reflected net of outstanding treasury shares in the Consolidated Statements of Stockholder's Investment. Per share amounts and shares outstanding in the current and prior periods have been restated to reflect a 3 for 2 stock split paid in the form of a stock dividend (see note 6). - 12 - FARR COMPANY AND SUBSIDIARIES 6. DIVIDEND AND STOCK SPLIT On February 18, 1997, The Company's Board of Directors declared a dividend to be paid in the form of a 3 for 2 stock split, payable on March 28, 1997, to stockholders of record on March 7, 1997. 7. NOTES PAYABLE AND LONG-TERM DEBT The Company's foreign subsidiaries utilize overdraft facilities that amounted to approximately $2,326,000 of which $874,000 was utilized as of December 28, 1996. As of December 30, 1995, total foreign overdraft facilities amounted to approximately $2,309,000 of which $432,000 was utilized. The weighted average interest rate was 7.3% in 1996 and 8.6% in 1995. In February 1996, the Company restructured its long term credit facilities financing. A new $10,000,000 long-term revolving credit facility replaced the Company's $22,000,000 revolving credit facility and $4,000,000 term credit facility. This loan will mature on June 1, 1998 when the then outstanding loan balance 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. In addition, the Company retired the outstanding portion of its $2,500,000 Holly Springs, Mississippi Industrial Revenue Bonds in August, 1996. Long-term debt as of December 28, 1996 and December 30, 1995 were as follows:
December 28, 1996 December 30, 1995 - ----------------------------------------------------------------------------------------------------- Revolving credit facility $2,000,000 $4,603,000 Term loan 91,000 105,000 Notes secured by deeds of trust on real property - Term loan -- 2,753,000 Jonesboro, Arkansas Industrial Revenue Bonds -- 385,000 Holly Springs, Mississippi Industrial Revenue Bonds -- 2,230,000 2,091,000 10,076,000 ---------- ----------- Less current portion ( 23,000) ( 664,000) ---------- ---------- Net long-term debt $2,068,000 $9,412,000 ========== ==========
At December 28, 1996, real, personal and intangible property of $177,000 were pledged as security for long-term debt. Under the Company's domestic credit agreement, the Company is required to maintain among other things, a minimum net domestic tangible net worth less foreign intercompany receivables balance of $10,500,000, a minimum fixed charge coverage ratio of not less than 1.35, a quick ratio of not less than .7 to 1.0 and a minimum consolidated liabilities to tangible net worth ratio of not more than 1.25 to 1.0. Interest paid on outstanding debt and obligations net of amounts capitalized were $788,000, $1,839,000, and $1,964,000 in 1996, 1995, and 1994, respectively. Principal payments are as follows: Year ending Long-term debt --------------------------------- 1997 $ 23,000 1998 2,023,000 1999 23,000 2000 22,000 ---------- Total $2,091,000 ========== - 13 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FARR COMPANY AND SUBSIDIARIES 8. INCOME TAXES The provision for income taxes is summarized as follows:
For the Years Ended December 28, 1996 December 30, 1995 December 31, 1994 - ---------------------------------------------------------------------------------------- Current -- Federal $2,772,000 $ 81,000 $ -- State 432,000 171,000 48,000 Foreign 282,000 286,000 69,000 ---------- ---------- -------- 3,486,000 538,000 117,000 ---------- ---------- -------- Deferred -- Federal ( 96,000) 1,230,000 ( 489,000) State -- 173,000 -- Foreign 400,000 98,000 85,000 ---------- ---------- -------- 304,000 1,501,000 ( 404,000) ---------- ---------- -------- $3,790,000 $2,039,000 ($287,000) ========== ========== ========
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 28, 1996 December 30, 1995 December 31, 1994 - ----------------------------------------------------------------------------------------------------------- Computed income taxes at statutory rate $3,291,000 $1,755,000 ($218,000) State income taxes, net of federal income tax benefit 285,000 113,000 31,000 Taxes on foreign subsidiaries' net income in excess of (less than) income taxes at statutory rates 40,000 46,000 (86,000) Other items, net 174,000 125,000 (14,000) ---------- ---------- -------- Provision (benefit) for income taxes $3,790,000 $2,039,000 ($287,000) ========== ========== ========
Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets andliabilities and available tax credit carryforwards. Temporary differences and carryforwards which give rise to a significantportion of deferred tax assets and liabilities were as follows:
For the Years Ended December 28, 1996 December 30, 1995 - ------------------------------------------------------------------------------- Net operating loss $ -- $ 231,000 Depreciation ( 537,000) ( 622,000) Employee compensation accruals 716,000 753,000 Plant relocation and restructuring 184,000 230,000 DISC commission accrual ( 1,782,000) ( 1,782,000) Acquisition reserves ( 639,000) ( 735,000) Inventory 928,000 788,000 Other items, net 587,000 290,000 ---------- ---------- ($ 543,000) ($ 847,000) ========== ==========
Included in income taxes payable and current deferred income taxes at December 28, 1996 and December 30, 1995were $408,000 and $199,000, respectively, of foreign deferred income taxes. - 14 - FARR COMPANY AND SUBSIDIARIES The consolidated income (loss) before income tax, by domestic and foreign sources is as follows:
For the Years Ended December 28, 1996 December 30, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------ Domestic $7,792,000 $4,170,000 ($1,350,000) Foreign 1,888,000 993,000 708,000 ---------- ---------- ---------- $9,680,000 $5,163,000 ($ 642,000) ========== ========== ==========
Net income taxes paid were $3,461,000, $466,000, and $613,000 in 1996, 1995, and 1994, respectively. 9. EMPLOYEE BENEFIT PLANS The Company has defined contribution retirement plans covering domestic employees who meet eligibility requirements. Company contributions are based on a formula as specified in the respective plan agreements. Contributions, which aggregated $851,000 in 1996, $916,000 in 1995 and $352,000 in 1994, were charged to expense in accordance with the approved plan formulas. The Company had two employee stock ownership plans (ESOPs) that operated in conjunction with the Company's prior defined contribution plans. The ESOPs previously purchased outstanding shares on a leveraged basis, with the Company making sufficient contributions to cover the interest and principal payments resulting from the borrowings. The Company contributed $133,000 and $180,000 to cover interest and principal payments on outstanding borrowings in 1995 and 1994, respectively. The Company recognized expense for the ESOPs using the cash payments method, which is subject to certain minimum amounts. The Company terminated the ESOP's in 1996. Pension costs for the Company's defined benefit plans, covering eligible employees in foreign operations, are determined by independent actuarial valuations. Pension (benefit) expense under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87,"Employers' Accounting for Pensions", was ($39,000) in 1996, ($17,000) in 1995 and $56,000 in 1994. The components of the 1996, 1995 and 1994 net periodic pension cost were as follows:
For the Years Ended 1996 1995 1994 - ------------------------------------------------------------------------------------------ Service Cost $196,000 $165,000 $216,000 Interest cost on projected benefit obligation 337,000 302,000 288,000 Actual loss (return) on plan assets ( 570,000) ( 696,000) 115,000 Net amortization and deferral ( 2,000) 212,000 ( 563,000) -------- -------- -------- ($ 39,000) ($ 17,000) $ 56,000 ======== ======== ======== The Assumptions used were: Discount rate 7.8%-- 8.0% 8.0%-- 9.0% 9.0% Rate of compensation increase 5.0%-- 6.0% 5.0%-- 6.0% 5.0%-- 6.5% Long-term rate of return on assets 9.0%--10.0% 9.0%--10.0% 9.0%--10.0%
- 15 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FARR COMPANY AND SUBSIDIARIES The following table sets forth the funded status of the defined benefit plans and amounts recognized in the Company's consolidated balance sheets as of December 28, 1996 and December 30, 1995:
For the Years Ended 1996 1995 - --------------------------------------------------------------------------------------- Actuarial present value of benefit obligations -- Vested benefit obligation $4,660,000 $3,947,000 Accumulated benefit obligation 4,660,000 3,947,000 ========== ========== Projected benefit obligation 4,962,000 4,219,000 Plan assets at fair value 6,030,000 5,112,000 ---------- ---------- Plan assets in excess of projected benefit obligation 1,068,000 893,000 Unrecognized net gain ( 1,463,000) ( 1,003,000) Prior service cost not yet recognized in net periodic pension cost 135,000 142,000 Unrecognized net transition asset ( 111,000) ( 119,000) ---------- ---------- Accrued pension cost obligation recognized in the consolidated balance sheets ($ 371,000) ($ 87,000) ========== ==========
The Company provides no post-retirement health care and life insurance benefits or other post-employment benefits to its employees. 10. 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 28, 1996 had an exercise price equal to 100 percent of the fair market value on the date the option was granted except for 118,500 shares that were granted in 1995. Compensation expense recorded under the plan was $27,000 in both 1996 and 1995, respectively. 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 468,750 shares of the Company's common stock of which at December 28, 1996, 103,293 shares were subject to presently outstanding options. At December 28, 1996, 525,000 shares of common stock were reserved for distribution under the 1993 plan, of which 230,625 shares were subject to outstanding options. 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 FASB Statement No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
For the Year Ended December 28, 1996 December 30, 1995 - ----------------------------------------------------------------------- Net Income As Reported $5,890,000 $3,124,000 Pro Forma $5,814,000 $3,062,000 Primary EPS As Reported $ 1.06 $ .57 Pro Forma $ 1.05 $ .55
Because the Statement 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 1996 and 1995: risk-free interest rates of 7.83, 7.13, 6.19 and 6.1 percent for options granted in 1995 and 6.28 and 6.76 percent for options granted in 1996; expected dividend yields of 0 percent; expected volatility of 45; expected life of 7 years for both 1996 and 1995 options. - 16 - FARR COMPANY AND SUBSIDIARIES Activity under the 1983 and 1993 plans is summarized as follows:
1996 1995 1994 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price ------ ----------------- ------ ----------------- ------ ----------------- Options outstanding beginning of year 362,545 $4.69 250,117 $5.32 224,472 $5.86 Granted 3,750 6.17 148,500 3.59 165,750 4.25 Exercised 17,400 5.26 9,795 4.11 -- -- Cancelled and expired 14,978 5.51 26,277 4.69 140,105 4.91 ------- ----- ------- ----- ------- ----- Options outstanding end of year 333,917 $4.64 362,545 $4.69 250,117 $5.32 ======= ===== ======= ===== ======= ===== End of year shares exercisable 167,231 $5.53 147,258 $5.93 127,455 $5.95 ======= ===== ======= ===== ======= =====
- -------------------------------------------------------------------------------- The following table summarizes information about fixed stock options outstanding as of December 28, 1996:
Options Outstanding Options Exercisable - --------------------------------------------------------------- --------------------------- Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at Dec. 28 Contractual Life Exercise Price at Dec. 28 Exercise Price --------------- ---------- ---------------- -------------- ----------- -------------- $4.40 - $6.67 19,968 .8 Years $5.45 19,968 $5.45 5.87 - 6.00 43,125 2.9 5.95 43,125 5.95 7.17 - 7.50 40,200 4.6 7.29 40,200 7.29 3.50 - 4.83 88,124 7.1 4.31 46,875 4.33 3.33 - 6.17 142,500 8.1 3.59 17,063 3.63 ---- ---- ------- --- ----- ------- ----- $3.33 - $7.50 333,917 6.3 $4.64 167,231 $5.53 ===== ===== ======= === ===== ======= =====
- -------------------------------------------------------------------------------- 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 72,000 shares of common stock to the Company's non-employee directors of which 57,000 shares are subject to presently outstanding options. In 1995, the Company amended this plan to increase the number of shares issuable under the plan to 150,000 shares. Activity for fiscal years 1996, 1995 and 1994 under the 1991 Plan are summarized as follows:
1996 1995 1994 ------------------------- ------------------------- ------------------------- Weighted Weighted Weighted Shares Avg. Option Price Shares Avg. Option Price Shares Avg. Option Price ------ ----------------- ------ ----------------- ------ ----------------- Options outstanding beginning of year 42,000 $4.76 51,000 $4.89 36,000 $5.43 Granted 15,000 6.63 12,000 4.96 18,000 4.03 Exercised -- -- 6,000 3.79 3,000 3.33 Cancelled and expired -- -- 15,000 5.75 -- -- ------ ----- ------ ----- ------ ----- Options outstanding end of year 57,000 $5.26 42,000 $4.76 51,000 $4.89 ====== ===== ====== ===== ====== ===== End of year shares exercisable 42,000 $4.76 30,000 $4.69 33,000 $5.37 ====== ===== ====== ===== ====== =====
- 17 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FARR COMPANY AND SUBSIDIARIES The following table summarizes information about fixed stock options outstanding as of December 28, 1996:
Options Outstanding Options Exercisable ------------------------------------------------------------- -------------------------- Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at Dec. 28 Contractual Life Exercise Price at Dec. 28 Exercise Price --------------- ---------- ---------------- -------------- ---------- -------------- $6.09 - $6.17 12,000 4.8 Years $6.13 12,000 $6.13 3.33 - 4.25 18,000 7.0 3.72 18,000 3.72 4.59 - 8.59 27,000 8.9 3.57 12,000 4.96 ----- ----- ------ --- ----- ------ ----- $3.33 - $8.59 57,000 7.4 $5.26 42,000 $4.76 ===== ===== ====== === ===== ====== =====
- ------------------------------------------------------------------------------- 11. PER SHARE AMOUNTS The weighted average number of common shares outstanding for 1996, 1995, and 1994 were 5,558,679, 5,525,373, and 5,517,327, respectively. These share amounts approximated the number of shares outstanding for fully diluted earnings per share calculations. As a result of the 3 for 2 stock split to be distributed on March 28, 1997, per share amounts for the 1996 and prior years have been restated to reflect the weighted average number of shares of common stock outstanding increased by shares issued for the stock split. 12. 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 $1,145,000 for the year ended December 28, 1996, $1,274,000 for the year ended December 30, 1995 and $1,182,000 for the year ended December 31, 1994. As of December 28, 1996, approximate minimum rental commitments under noncancelable leases which have not been capitalized were as follows: Year Ending Amount ----------- ------ 1997 $ 962,000 1998 682,000 1999 306,000 2000 198,000 2001 158,000 Thereafter 446,000 ---------- Total $2,752,000 ========== 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. - 18 - FARR COMPANY AND SUBSIDIARIES 13. SEGMENT INFORMATION Industry Segments: 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 three years ended December 28, 1996, are presented as follows:
Net Sales Transfers (In thousands) Sales to Unaffiliated Customers Between Geographic Areas Total Net Sales - ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 1996 1995 1994 1996 1995 1994 ---------------------------- ------------------------- ---------------------------- United States $100,008 $ 93,189 $ 88,831 $ 4,107 $ 3,540 $ 2,809 $104,115 $ 96,729 $ 91,640 Canada 11,632 11,002 9,165 5,854 4,251 2,412 17,486 15,253 11,577 Europe 10,381 9,084 8,993 365 268 23 10,746 9,352 9,016 -------- -------- -------- ------ ------- ------ -------- -------- -------- Total Segments 122,021 113,275 106,989 10,326 8,059 5,244 132,347 121,334 112,233 -------- -------- -------- ------ ------- ------ -------- -------- -------- Adjustments & Eliminations -- -- -- ( 10,326) ( 8,059) ( 5,244) ( 10,326)( 8,059)( 5,244) -------- -------- -------- ------- ------ ------ -------- -------- -------- Consolidated Totals $122,021 $113,275 $106,989 $ -- $ -- $ -- $122,021 $113,275 $106,989 ======== ======== ======== ======= ====== ====== ======== ======== ========
Operating Profit (Loss) (In thousands) Before Income Taxes Identifiable Assets - ----------------------------------------------------------- --------------------------- 1996 1995 1994 1996 1995 1994 -------------------------- --------------------------- United States $ 7,618 $ 5,239 ($ 58) $39,261 $43,286 $48,788 Canada 1,939 867 669 10,809 11,055 10,001 Europe 863 909 829 7,109 6,078 6,033 ------- ------- ------ ------- ------- ------- Total Segments 10,420 7,015 1,440 57,179 60,419 64,822 Adjustments & Eliminations ( 53) ( 56) 47 ( 3,492) ( 4,849) ( 5,935) Interest Expense ( 687) ( 1,796) ( 2,129) -- -- -- Corporate Assets -- -- -- -- -- 382 ------- ------- ------ ------- ------- ------- Consolidated Totals $ 9,680 $ 5,163 ($ 642) $53,687 $55,570 $59,269 ======= ======= ======= ======= ======= =======
Transfers between geographic areas are accounted for on an "arms-length" basis. Operating profit is total net sales less costs and expenses excluding interest. Identifiable assets are those of the Company that are identified with the operations in each geographic area. Corporate assets consist principally of real estate. To reconcile geographic information with consolidated totals, the following eliminations have been made: $10,326,000 in 1996, $8,059,000 in 1995 and $5,244,000 in 1994 of intercompany sales; a loss of $53,000 in 1996, a loss of $56,000 in 1995 and a gain of $47,000 in 1994 relating to the net change in unrealized operating profit in beginning and ending inventories; $3,492,000 in 1996, $4,849,000 in 1995 and $5,935,000 in 1994 of intercompany accounts receivable and unrealized operating profit in inventory at the end of each year. - 19 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FARR COMPANY AND SUBSIDIARIES 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 28, 1996 and December 30, 1995, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Farr Company and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Los Angeles, California Arthur Andersen LLP February 18, 1997 - 20 -
SELECTED FINANCIAL DATA FARR COMPANY AND SUBSIDIARIES Years Ended (In Thousands Except Share And Per Share Data) Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994 Jan. 1, 1994 Jan. 2, 1993 - ------------------------------------------------------------------------------------------------------ Net Sales $ 122,021 $ 113,275 $ 106,989 $ 112,363 $ 112,094 Net Income (Loss) 5,890 3,124 ( 355) 1,284 ( 4,590) (Notes D, E, F & H) Net Income (Loss) per share (I) 1.06 .57 ( .07) .23 ( .84) Total Assets (Notes A & B) 53,687 55,570 59,269 60,905 67,383 Long-term Debt, net of current portion (Notes A, B, C, G & H) 2,068 9,412 18,957 21,913 27,001 Cash Dividends per share -- -- -- -- .04 Weighted average number of shares (I) 5,558,679 5,525,373 5,517,327 5,503,946 5,479,727 Capital expenditures 1,465 1,163 987 674 715 Net property, plant and equipment 15,611 16,406 17,930 21,914 24,595 Working Capital (Notes A & B) 19,806 20,183 21,782 20,853 21,289 - ------------------------------------------------------------------------------------------------------
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, 1994, and 1992, pretax income (loss) included provisions of $540,000, $1,000,000 and $1,500,000 respectively for the estimated cost of closing and reorganizing U.S. manufacturing facilities. Note E. In 1992, the Company changed its method of accounting for income taxes, to comply with the provisions of Statement of the Financial Accounting Standards Board (SFAS) No. 109, "Accounting for Income Taxes", and the cumulative effect of this change ($500,000) is included in 1992 results. Note F. In 1993, the Company recorded a $149,000 extraordinary charge relating to the write off of deferred financing costs as a result of refinancing its long-term debt with new lending institutions. Note G. In 1994, the Company completed refinancing of its long-term debt with new lending institutions including a $22,000,000 revolving credit facility and $7,500,000 of term loan credit facilities. Note H. 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 I. As a result of the 3 for 2 stock split declared on February 18, 1997 payable on March 28, 1997, per share amounts for the current and 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. - 21 - MANAGEMENT'S DISCUSSION AND ANALYSIS FARR COMPANY AND SUBSIDIARIES RESULTS OF OPERATIONS --------------------- 1996 COMPARED TO 1995 Record 1996 net sales of $122,021,000 were up $8,746,000 or 7.7 percent from prior year sales of $113,275,000. For the year, Industrial Products sales were up 14 percent, Commercial Products were up 5 percent and Engine Products were up 4 percent. The increase in Industrial Products sales was led by strong sales in our Gas Turbine Filter House Market. Foreign subsidiary sales increased 6.6 percent in 1996 due to Railroad Product and Industrial Product sales that were up 28 and 31 percent, respectively. Record net income for 1996 totaled $5,890,000, up significantly from $3,124,000 in the prior year. Increased sales volume, improved operating efficiencies and lower interest expense were the primary reasons for the gain in 1996. Our foreign consolidated subsidiaries totaled approximately 20 percent of our consolidated net income, down from 21 percent in the prior year. Gross margin for 1996 increased to 25.2 percent, up .7 percent from 24.5 percent in 1995. The increase in gross margins was the result of improved operating efficiencies and a better sales mix of products with higher margins compared to the prior year. The Company anticipates that gross margin percentage will continue to improve during 1997 as a result of efficiency improvement and product sales mix. Selling, general and administrative expenses as a percentage of sales for 1996 and 1995 were 16.7 and 18.5 percent, respectively. 1996 spending totaled $20,378,000 compared to $20,956,000 in 1995, which reflects a decrease of $578,000, or 3 percent. Most of the decreased expense related to lower loan fee amortization and sales and marketing related expenses. Interest expense declined $1,109,000, or 62 percent in the year primarily due to the significant decrease in long-term debt. The declining interest expense trend is anticipated to continue in 1997. Total backlogs of $13,899,000 were down 13 percent from the prior year end. Reduced orders of Industrial Products, primarily gas turbine filter house orders were significantly off from last year's levels. Backlogs of orders scheduled for delivery in over 90 days were $3,706,000 compared to $4,611,000 as of December 30, 1995. 1995 COMPARED TO 1994 Sales for 1995 were a record $113,275,000 up 6 percent from $106,989,000 in the prior year. The 1995 increase was spread across all of the Company's products. During 1995, net income increased to $3,124,000 up from a loss of $355,000 in 1994. The $3,479,000 improvement in net income was attributable to increased sales volume, improved operating efficiencies resulting in higher gross margins, lower interest expense, a reduction in reorganization costs from the prior year and a gain on sales of assets recorded in 1996 of the Company's Rialto, California facility. Gross margins for 1995 increased to 24.5 percent, up 3.4 percent from 21.1 percent in 1994. The increase in gross margins was the result of improved operating efficiencies and lower fixed manufacturing costs primarily associated with closing the Company's Rialto, California plant in 1994. - 22 - FARR COMPANY AND SUBSIDIARIES Selling, general and administrative expenses as a percentage of sales for 1995 and 1994 were 18.5 and 18.8 percent, respectively. 1995 spending totaled $20,956,000 compared to $20,065,000 in 1994 which reflects an increase of $891,000 or 4.4 percent. Most of the increase in 1995 related to increased loan fee amortization, selling and marketing and management performance based incentive plan expenses. Interest expense declined $333,000 or 16 percent during the year primarily due to the significant decrease in long-term debt. Restructuring cost charges were recorded in both 1995 and 1994 for closing and consolidating manufacturing operations and increasing production efficiency, asset utilization and profitability. Restructuring costs recorded during the fourth quarter of 1995 amounted to $540,000 relating to the Company's reorganization of its manufacturing and distribution operations in North America and increased costs anticipated from the closure of its Eatonton, Georgia and Pryor, Oklahoma plants. In 1994, the Company recorded a second quarter restructuring cost charge of $1,000,000 for closing its Rialto, California plant. A gain of $676,000 was recognized during the fourth quarter of 1995 from the sale of the Company's previously closed Rialto, California plant. The effective income tax rate for 1995 was 39.5 percent, compared to 44.7 percent in 1994. The decrease in 1995 tax rates related to the Company's return to profitability and the assumption that certain tax credit carry forwards would be utilized in the future. 1994 COMPARED TO 1993 Sales for 1994 were $106,989,000, down $5,374,000 or 4.8 percent from $112,363,000 in 1993. The decrease in sales from the prior year was primarily attributable to a decline from 1993's record level Gas Turbine Filter House product sales volume experienced in the first half of 1993 that were a result of delayed 1992 scheduled shipments being carried over in 1993. 1994 results yielded a loss of $355,000 compared to a profit of $1,284,000 in 1993. Operating results for the year were unfavorably impacted by decreased sales volume, unfavorable manufacturing efficiencies at the Company's Holly Springs, Mississippi plant and by a restructuring charge to close the Company's Rialto, California plant. Gross margins for 1994 decreased to 21.1 percent, down 1 percent from 22.1 percent in 1993. The decrease in gross margins for 1994 was the result of unfavorable manufacturing efficiencies, increased warranty costs and an unfavorable sales mix of products with a lower margin compared to the prior year. Selling, general and administrative expenses as a percentage of sales for 1994 and 1993 were 18.8 and 18 percent, respectively. 1994 spending totaled $20,065,000 compared to $20,268,000 in 1993, which reflected a decrease of $203,000, or 1 percent. Interest expense declined $316,000 or 13 percent in the year as a result of lower average borrowings outstanding during the year compared to 1993. The effective tax rate in 1994 was 44.7 percent, compared to 33.7 percent in 1993. The increase was due to the Company's loss and nonrecurring foreign tax benefits that decreased 1993's effective tax rate. - 23 - FARR COMPANY AND SUBSIDIARIES LIQUIDITY & CAPITAL RESOURCES - ----------------------------- FINANCIAL CONDITION As of December 28, 1996, the Company's capital structure included $897,000 of current debt, $2,068,000 of long-term debt and $31,210,000 of stockholders' investment. The ratio of long term debt to stockholders' equity was 6.7 percent compared with 38.0 percent at December 30, 1995. Total debt was decreased during 1996 by $7,543,000 or 72 percent to $2,965,000 from $10,508,000 as of December 30, 1995. During 1996, the Company's domestic operations were financed through a combination of long-term credit facilities and Industrial Revenue Bonds which were utilized for major capital projects. In 1996, the Company retired both its Jonesboro, Arkansas Industrial Revenue Bonds and Holly Springs, Mississippi Industrial Revenue Bonds. In addition, the Company completed the restructuring of its $4,000,000 term loan and $22,000,000 revolving credit facility in February of 1996. Under the domestic long-term debt financing restructure, the Company replaced its two debt facilities with a $15,000,000 secured revolving credit facility. Subsequent amendments to this facility reduced its borrowing limit down to $10,000,000 and eliminated all collateral security requirements. As of December 28, 1996, $2,000,000 was outstanding under this facility and unused borrowing availability was $8,000,000. The Company's foreign subsidiaries borrow under term and overdraft credit facilities. Term facility borrowing as of December 28, 1996 amounted to $91,000 and overdraft facilities amounted to $2,326,000 of which $874,000 was utilized. As of December 30, 1995, term borrowings outstanding were $106,000 and total foreign overdraft facilities amounted to approximately $2,309,000 of which $432,000 was utilized. CASH FLOW During 1996 cash flows from operating activities increased to $10,299,000 compared to $8,729,000 in 1995 and $3,778,000 in 1994. The increase in 1996 was largely the result of increased earnings and a decrease in working capital associated with decreased inventories. Cash flow from operations were used to support $1,465,000 of capital expenditures and reduce debt. Cash and cash equivalents increased $1,185,000 during 1996. Capital expenditures increased slightly to $1,465,000 from $1,163,000 in 1995. Although capital expenditures increased during 1996, overall capital spending remained relatively low to conserve capital resources. Capital expenditures are anticipated to increase in 1997 to support expansion in Canada, remodeling of the Company's corporate offices and support operating needs. The Company's cash flow generated from operating activities are anticipated to generate adequate cash flow to meet planned operating needs, provide for capital spending and meet current debt service requirements. As of December 28, 1996, the Company's 1992 restructuring reserve balance was $365,000. This reserve is related to the anticipated costs associated with the closures of two manufacturing plants and is included as a component under accrued liabilities in the Company's Consolidated Balance Sheets. During 1996, $43,000 in facility related costs were charged against this reserve. As of December 28, 1996, the Company's 1995 restructuring reserve balance was $104,000. This reserve is related to the anticipated costs associated with the reorganization of its North America distribution and manufacturing operations and is included as a component under accrued liabilities in the Company's Consolidated Balance Sheets. During 1996, $204,000 in severance and facility related costs were charged against this reserve. # # # - 24 -
SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited) (In Thousands Except Per Share Data)* 1996 1995 1994 ---------------------------------- ---------------------------------- -------------------------------- Net Gross Net Per Net Gross Net Per Net Gross Net Per Quarter Sales Margin Income Share Sales Margin Income Share Sales Margin Income Share - ---------------------------------------------------------------------------------------------------------------- First $ 31,079 $ 7,154 $ 1,178 $ .21 $ 27,253 $ 6,396 $ 633 $ .11 $ 25,171 $ 4,876 ($ 415) ($.08) Second 31,356 8,072 1,499 .27 28,682 6,956 675 .12 26,525 5,181 ( 625) ( .11) Third 29,951 7,533 1,595 .29 28,444 6,752 726 .14 27,462 5,775 275 .05 Fourth 29,635 7,986 1,618 .29 28,896 7,675 1,090 .20 27,831 6,720 410 .07 -------- ------- ------- ------ -------- ------- ------- ----- -------- ------- ----- ---- Year $122,021 $30,745 $ 5,890 $ 1.06 $113,275 $27,779 $ 3,124 $ .57 $106,989 $22,552 ($ 355) ($.07) ======== ======= ======= ====== ======== ======= ======= ===== ======== ======= ===== ====
* Per share data has been restated for the 3 for 2 stock split declared in February 1997.
SUMMARY OF STOCK QUOTATIONS 1996 1995 1994 --------------------- -------------------- ---------------------- Quarter High Low High Low High Low - ----------------------------------------------------------------------------------- First $ 6 11/16 $ 5 $ 5 5/16 $ 3 15/16 $ 4 7/16 $ 3 13/16 Second 9 15/16 6 5 4 1/4 4 1/4 3 Third 10 7 13/16 6 5/16 4 7/16 4 13/16 3 1/16 Fourth 12 1/2 9 3/4 5 1/2 4 9/16 4 13/16 3 13/16 ------- --------- -------- --------- --------- --------- Year $ 12 1/2 $ 5 $ 6 5/16 $ 3 15/16 $ 4 13/16 $ 3 ========= ========= ======== ========= ========= =========
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. Price Per Share Has Been Restated For The 3 For 2 Stock Split Declared In February 1997. No Cash Dividends Were Declared On The Company's Common Stock In 1996, 1995 Or 1994. - 25 - CORPORATE OMFORMATION FARR COMPANY AND SUBSIDIARIES DIRECTORS --------- FARR COMPANY Robert Batinovich Chairman and Chief Executive Officer Glenborough Realty Trust Incorporated Management of Commercial Real Estate (2) Richard P. Bermingham Vice Chairman of the Board American Golf Corporation Golf Course Management (1) (3) Denis R. Brown, Jr. President and Chief Executive Officer Pinkerton, Inc. Security & Investigation Services (2) David J. Farr President David J. Farr Insurance Services Provider of Financial Planning Services (2) John C. Johnston President and Chief Operating Officer Farr Company John J. Kimes President and Chief Executive Officer Computerized Security Systems, Inc. Manufacturer of Electronic and Mechanical Lock Hardware and Systems (1) (3) H. Jack Meany Chairman and Chief Executive Officer Farr Company (3) John A. Sullivan Financial Consultant Batchelder & Partners, Inc. (1) (1) Audit Committee (2) Compensation Committee (2) Executive Committee OFFICERS -------- FARR COMPANY H. Jack Meany Chairman and Chief Executive Officer John C. Johnston President and Chief Operating Officer Kenneth W. Gerstner Senior Vice President, Chief Financial Officer and Secretary Richard L. Farr Vice President Myron G. Rasmussen Vice President FARR FILTRATION, LTD. (United Kingdom) Donald A. Parker Managing Director FARR, INC. (Canada) Dominique Mignacco Vice President and General Manager - 26 - FARR COMPANY AND SUBSIDIARIES CORPORATE OFFICES MANUFACTURING DISTRIBUTORS 2221 Park Place Genmech Engineering, Singapore El Segundo, California 90245 FEI (France Equipement Industriels), 310-536-6300 Florange, France Internet address: http://www.farrco.com Company's Internet home page offers access to a variety of information including Farr's products and services, worldwide operations, financial data, and stockholder- related information. SUBSIDIARIES REGISTRAR AND TRANSFER AGENT Farr, Inc., Montreal, Canada Chemical Mellon Shareholder Services Farr Filtration, Ltd., Birmingham, England Los Angeles, California MANUFACTURING AND DISTRIBUTION FACILITIES LEGAL COUNSEL Jonesboro, Arkansas Gibson, Dunn & Crutcher LLP Corcoran, California Los Angeles, California Delano, California Crystal Lake, Illinois AUDITORS Holly Springs, Mississippi Conover, North Carolina Arthur Andersen LLP Montreal, Canada Los Angeles, California Birmingham, England Singapore FORM 10-K MANUFACTURING LICENSEES Stockholders of record as of March 7, 1997 may obtain copies of the Anfilco Ltd., Curgaon, India Company's Annual Report on Form 10-K Antung Trading Corp., Taipei, Taiwan filed with the Securities and Boart MSA (PTY) Ltd., South Africa Exchange Commission by writing to: Casiba S. A., Buenos Aires, Argentina Kenneth Gerstner, 2221 Park Place, Clyde-Apac Ltd., Woodville, Australia El Segundo, California 90245-4900 Genmech Engineering, Singapore Industries Filvac S.A. de C.V., Mexico Nihon Spindle Mfg., Co., Ltd. Osaka, Japan Quest Technology, SND. BHD, Malaysia Taymac Ltd., Christchurch, New Zealand Turbiparts, C.A., Caracas, Venezuela Vibran Engineering (M) SDN. BHD., Petaling Jaya, Malaysia Wilectec Co., Ltd., Kwai Chung, N.T., Hong Kong - 27 - FARR 1996 Annual Report EX-22 5 LIST OF SUBSIDIARIES Exhibit 22 List of Subsidiaries FARR COMPANY AND SUBSIDIARIES Jurisdiction Name of Subsidiary of Incorporation ------------------ ---------------- Farr Filtration Limited England Farr Company International California Farr Inc. Canada Farr International U.S. Virgin Islands EX-24 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTS Exhibit 24 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report 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, 1997 EX-27 7 ART. 5 FDS FOR 1996 10-K
5 1,000 12-MOS DEC-28-1996 DEC-31-1995 DEC-28-1996 1,997 0 20,551 297 12,534 37,679 52,261 36,650 53,687 17,871 0 0 0 544 30,666 53,687 122,021 122,021 91,276 91,276 20,378 0 687 9,680 3,790 5,890 0 0 0 5,890 $1.59 $1.59
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