-----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, Ao65YuNKexYW/KMN/WI9s2fUqXjtEekvIUCP+EougAJ3A6dYhLNVckizMRoafNd2 sCqxZsSGlk64MbaiU52r2g== 0001133884-03-000348.txt : 20030513 0001133884-03-000348.hdr.sgml : 20030513 20030513144846 ACCESSION NUMBER: 0001133884-03-000348 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030330 FILED AS OF DATE: 20030513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARREL CORP CENTRAL INDEX KEY: 0000034645 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 222689245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19703 FILM NUMBER: 03695262 BUSINESS ADDRESS: STREET 1: 25 MAIN STREET CITY: ANSONIA STATE: CT ZIP: 06401-1601 BUSINESS PHONE: 2037365500 10-Q 1 g10q-31066.txt 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2003 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------ ------------------------ Commission file number 0 -19703 ------------------- Farrel Corporation -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-2689245 - --------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 25 Main Street, Ansonia, Connecticut, 06401 ------------------------------------------- (Address of principal executive offices) (Zip Code) (203) 736-5500 ---------------------- (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MAY 1, 2003 - --------------------------------------------------------------------------- Common Stock (Voting), $.01 par value 5,235,128 ---------
Farrel Corporation Index ----- Page ---- Part I. Financial Information --------------------- Item 1. Financial Statements Consolidated Balance Sheets - March 30, 2003 and December 31, 2002 3 Consolidated Statements of Operations - Three months ended March 30, 2003 and March 31, 2002 4 Consolidated Statements of Cash Flows - Three months ended March 30, 2003 and March 31, 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14 Item 4 - Controls and Procedures 14 Part II. Other Information 15 ----------------- Signatures 16 Exhibits - Exhibit 11 - Statement re computation of per share earnings Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Part I - Financial Information FARREL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) March 30, December 31, --------- ------------ 2003 2002 ---- ---- ASSETS (Unaudited) Current Assets: Cash and cash equivalents $8,072 $5,863 Accounts receivable, net of allowance for doubtful accounts of $88 and $96, respectively 6,212 10,848 Inventory 11,732 10,631 Deferred income taxes 538 538 Other current assets 1,308 1,170 --------------- --------------- Total current assets 27,862 29,050 Property, plant and equipment - net of accumulated depreciation of $17,193 and $17,034, respectively 6,771 7,166 Deferred income taxes 1,339 1,339 Other assets 353 373 --------------- --------------- Total Assets $36,325 $37,928 =============== =============== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $4,354 $4,009 Accrued expenses & taxes payable 830 2,309 Dividend payable 261 --- Advances from customers 5,050 4,102 Accrued warranty costs 794 842 Current portion of long - term debt 735 752 --------------- --------------- Total current liabilities 12,024 12,014 Long-term debt 184 375 Post-retirement benefit obligation 1,050 1,055 Minimum pension liability 10,031 9,961 Commitments and contingencies --- --- --------------- --------------- Total Liabilities 23,289 23,405 --------------- --------------- Stockholders' Equity: Preferred stock, par value $100, 1,000,000 shares authorized, no shares issued --- --- Common stock, par value $.01, 10,000,000 shares authorized, 6,142,106 shares issued 61 61 Paid in capital 19,295 19,295 Treasury stock, 913,645 shares at March 30, 2003 and December 31, 2002 (2,530) (2,530) Retained earnings 8,369 9,879 Accumulated other comprehensive loss (12,159) (12,182) --------------- --------------- Total Stockholders' Equity 13,036 14,523 --------------- --------------- Total Liabilities and Stockholders' Equity $36,325 $37,928 =============== =============== See Accompanying Notes to Consolidated Financial Statements 3
FARREL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Three Months Ended ------------------ March 30, March 31, 2003 2002 ---- ---- (unaudited) (unaudited) Net sales $9,699 $7,845 Cost of sales 7,909 5,993 -------------- -------------- Gross margin 1,790 1,852 Operating expenses: Selling 1,158 968 General & administrative 1,972 1,892 Research & development 247 249 -------------- -------------- Total operating expenses 3,377 3,109 -------------- -------------- Operating loss (1,587) (1,257) Interest income 15 26 Interest expense, including amortization of deferred credit facility costs (33) (36) Other income (expense), net (85) 181 -------------- -------------- Loss before income taxes (1,690) (1,086) Benefit for income taxes 441 326 -------------- -------------- Net loss $(1,249) $(760) ============== ============== Per share data: Basic and Diluted net loss per common share $(0.24) $(0.15) ============== ============== Average shares outstanding: Basic 5,228,461 5,228,461 ============== ============== Diluted 5,228,461 5,228,461 ============== ============== Dividends declared $0.05 $0.00 ============== ============== See Accompanying Notes to Consolidated Financial Statements 4
FARREL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended ------------------ March 30, March 31, --------- --------- 2003 2002 ---- ---- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $(1,249) $(760) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 331 368 Amortization 20 30 Decrease in accounts receivable 4,579 3,618 (Increase) in other current assets (153) (260) (Increase) in inventory (805) (710) Decrease in prepaid pension costs 271 67 Increase (decrease) in accounts payable 401 (1,107) Increase in customer advances 591 596 (Decrease) in accrued expenses & taxes (1,498) (472) (Decrease) in accrued warranty costs (41) (42) (Decrease) in post retirement benefit obligation (5) (9) Other (4) 4 ---------------- -------------- Total adjustments 3,687 2,083 ---------------- -------------- Net cash provided by operating activities 2,438 1,323 ---------------- -------------- Cash flows from investing activities: Purchases of property, plant and equipment (9) (14) ---------------- -------------- Net cash (used in) investing activities (9) (14) ---------------- -------------- Cash flows from financing activities: Repayment of long-term borrowings (186) (167) ---------------- -------------- Net cash (used in) financing activities (186) (167) ---------------- -------------- Effect of foreign currency exchange rate changes on cash (34) (29) ---------------- -------------- Net increase in cash and cash equivalents 2,209 1,113 Cash and cash equivalents - Beginning of period 5,863 5,579 ---------------- -------------- Cash and cash equivalents - End of period $8,072 $6,692 ================ ============== Income taxes paid $786 $27 ================ ============== Interest paid $17 $27 ================ ============== See Accompanying Notes to Consolidated Financial Statements 5
FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly in accordance with accounting principles generally accepted in the U.S., the consolidated financial position of Farrel Corporation ("Farrel" or "the Company") as of March 30, 2003, and the consolidated results of its operations and its cash flows for the three month periods ended March 30, 2003 and March 31, 2002. These results are not necessarily indicative of results to be expected for the full fiscal year. The statements should be read in conjunction with the financial statements and notes thereto, included in the Company's Annual Report and Form 10-K for the year ended December 31, 2002. NOTE 2 - STOCK OPTIONS The Company accounts for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and not the fair value method as provided by Statement of Financial Accounting Standard No. 123, Accounting and Disclosure of Stock-Based Compensation. The Company's Stock Option Plan requires options to be granted at the market price of the Company's common stock on the date the options are granted, and as a result, under APB 25 no compensation expense is recognized. Pro forma information regarding net income (loss) and earnings (loss) per share is required by statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of statement No. 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model, one of the allowable valuation models under statement No. 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The current pro forma net loss will not necessarily be representative of pro forma net income (loss) in future years.
The Company's pro forma information is as follows: Three Months Ended March 30, March 31, 2003 2002 ---- ---- (In thousands, except per share data) Net loss.................................... $(1,249) $(760) Effect of stock options, net of taxes....... (4) (4) --- --- Pro forma net loss.......................... $(1,253) $(764) ======== ======= Pro forma loss per share - basic & diluted.. $(0.24) $(0.15) ======== ======= NOTE 3 - INVENTORY Inventory is comprised of the following: March 30, December 31, 2003 2002 ---- ---- (In thousands) Stock and raw materials..................... $6,615 $6,733 Work-in process............................. 5,117 3,898 ------- ------- Total....................................... $11,732 $10,631 ======= =======
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NOTE 4 - COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) are as follows: Three Months Ended March 30, March 31, 2003 2002 ---- ---- (In thousands) Net loss.................................... $(1,249) $(760) Foreign currency translation adjustments.... (212) (203) -------- ------ Other comprehensive loss.................... $(1,461) $(963) ======== ====== Accumulated other comprehensive income (loss) consists of the following: March 30, December 31, 2003 2002 ---- ---- (In thousands) Foreign currency translation adjustments.... $(679) $(467) Minimum pension liability................... (11,480) (11,715) --------- --------- Accumulated other comprehensive loss........ $(12,159) $(12,182) ========= =========
NOTE 5 - SEGMENT INFORMATION The Company's operations are considered one operating segment. The Company's products consist of new machines, aftermarket and spare parts and repair related services. The Company's products and services are sold to commercial manufacturers in the plastic and rubber industries. The manufacturing, assembly and distribution of each of the Company's products are essentially the same. NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued statements No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by the Company in January 2002 and statement No. 143 was adopted by the Company in January 2003. Statement No. 142 changes the accounting for other intangible assets, such that those assets whose life is determined to be indefinite are not subject to amortization. These assets and goodwill shall be tested for impairment at least annually, and the value will need to be written down if the fair value is less than the carrying value. Statement No. 143 requires that a liability must be recognized for an asset retirement obligation related to long lived tangible assets. The liability shall be recorded at fair value. The adoption of statements No. 142 and 143 did not have a significant effect on the Company's financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). Statement No. 144 was adopted by the Company in January 2002. This statement requires an impairment loss to be recognized if the carrying value of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Long-lived assets (asset group) shall be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The adoption of this statement did not have a significant effect on the Company's financial position or results of operations. In December 2002, the Financial Accounting Standards Board issued statement No. 148 (Accounting for Stock-Based Compensation - Transition and Disclosures). Statement No. 148 amends the accounting for stock-based compensation by providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, statement No. 148 amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted statement 7 148 in December 2002. The Company does not anticipate changing to the fair value based method of accounting for stock-based compensation; therefore, the adoption only impacted disclosures. NOTE 7 - FOREIGN CURRENCY CONTRACTS The Company, from time to time, enters into foreign exchange contracts for non-trading purposes, exclusively to minimize its exposure to currency fluctuations on trade receivables, firm commitments and payables. As a result, changes in the values of foreign currency contracts offset changes in the values of the underlying assets and liabilities due to changes in foreign exchange rates, effectively deferring cash gains and losses on trade receivables, firm commitments and payables and the related hedges until the date the transactions are settled in cash. The Company is exposed to loss in the event of nonperformance by the Company's bank, the other party to the foreign exchange contracts. The Company does not anticipate nonperformance by its bank. As of March 30, 2003, all of the Company's then existing foreign exchange forward contracts were designated as fair value hedges. As such, there were no charges to the statement of operations related to these contracts. At March 30, 2003, the net difference between the spot rate and the contract rate for the foreign exchange forwards was an unrealized loss of approximately $31,000. At March 30, 2003 the Company is committed to provide 1,211,000 EURO's in exchange for British Pound Sterling under forward contracts expiring thru November 2003. NOTE 8 - BANK CREDIT ARRANGEMENTS The Company has a worldwide multi-currency credit facility, as amended, with a major U.S. bank, which includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The facility contains limits on direct borrowings and issuances of letters of credit based upon stipulated percentages of accounts receivable and inventory. The revolving credit facility expires on June 15, 2004. Interest varies based upon prevailing market interest rates. The revolving credit facility requires payment to the bank of a fee equal to 0.375% per annum of the average daily unused principal under the facility. The Company has approximately $2.8 million of letters of credit posted under its credit facility on March 30, 2003. This credit facility also includes a term loan which the Company borrowed in June 2001. The term loan is repayable in monthly installments of (pound)38,888 (approximately $61,000) through June 2004. The term loan has an interest rate of LIBOR plus 2.7%. The proceeds of this term loan were used to repay an existing term loan. At March 30, 2003, there was $919,000 outstanding under the term loan. The credit facility, as amended on March 25, 2003, contains covenants specifying minimum and/or maximum thresholds for operating results, selected financial ratios and backlog. The backlog covenant requires that end of month backlog will not be less than $20 million for more than two consecutive months. The Company did not achieve the backlog covenant as of the end of January and February 2002; however, the bank waived the non-compliance. There can be no assurance that the Company will achieve the required thresholds in the future. The agreement contains certain restrictions on investments, borrowings and sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which upon given notice or lapse of time or both, would become an Event of Default. NOTE 9 - WARRANTY OBLIGATIONS AND CONTINGENCIES (a) Warranty Obligations: Equipment sold is generally covered by a warranty of one to three years. The Company's estimate of costs to service its warranty obligations is based on historical experience and expectations of future conditions. To the extent the Company experiences increased warranty claim activity, or increased costs in servicing those claims, its warranty accrual will increase, resulting in decreased gross profit. 8
The change in the warranty reserve was as follows: Three Months Ended March 30, March 31, 2003 2002 ---- ---- (In thousands) Warranty reserve, beginning of period....... $842 $1,004 Charges to costs & expenses................. 133 104 Foreign currency translation adjustment..... (7) (7) Deductions for actual expenditures.......... (174) (145) ------ ------ Warranty reserve, end of period............. $794 $956 ====== ======
(b) Contingencies: The Company is a defendant in certain lawsuits arising in the ordinary course of business, primarily related to product liability claims involving machinery manufactured by the Company or its predecessors. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, the Company does not expect that these matters will have a material adverse effect on the Company's financial position or results of operations. NOTE 10 - INCOME TAXES The Company provides for income taxes at the statutory rates in effect in each tax jurisdiction in which income is earned or losses are generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax benefit rate was 26% for the three month period ended March 30, 2003, compared to 30% for the three month period ended March 31, 2002. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different tax jurisdictions. In addition, $44,000 of tax benefits in the period ending March 30, 2003 related to the Company's U.K. operations have not been recognized since these tax benefits have been deemed not to meet the accounting requirements for realization as an asset. NOTE 11 - RECLASSIFICATIONS Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. 9 PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in the Company's public documents, including this report and in particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations", may be forward looking and may be subject to a variety of risks and uncertainties. Various factors could cause actual results to differ materially from these statements. These factors include, but are not limited to, pricing pressures from competitors and/or customers; continued economic and political uncertainty in certain of the Company's markets; the Company's ability to maintain and increase gross margin levels; the Company's ability to generate positive cash flow; changes in business conditions, in general, and, in particular, in the businesses of the Company's customers and competitors; the Company's access to adequate financing at competitive rates and other factors which might be described from time to time in the Company's filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 30, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002 Net sales for the three month period ended March 30, 2003, were $9.7 million compared to $7.8 million for the three month period ended March 31, 2002, an increase of $1.8 million. The increase is primarily a result of higher sales in Europe. The timing of the Company's sales, particularly new machines sales, is highly dependent on when an order is received, the amount of lead time from receipt of order to delivery and specific customer requirements. The Company operates in markets that are extremely competitive with cyclical demand. Many of the Company's customers and markets operate at less than full capacity and certain remain particularly competitive and are subject to local economic events. Orders received for the three month period ended March 30, 2003, were $12.6 million compared to $14.1 million for the three month period ended March 31, 2002. The Company's products are primarily supplied to manufacturers and represent capital commitments for new plants, expansion or modernization. In the case of major equipment orders, up to 12 months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which time economic conditions in various geographic markets of the world impact the Company's level of order intake. Many of the Company's traditional customers and markets are operating with excess capacity thereby reducing the number of projects for plant expansion and modernization. The Company is experiencing increased pricing pressures from competitors in an overall smaller market. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results of operations. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and its ability to control costs to effectively compete in its current markets. There can be no assurance that the current level of orders will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products. The level of backlog considered firm by management at March 30, 2003, was $24.1 million compared to $21.3 million at December 31, 2002, and $24.3 million at March 31, 2002. Substantially all the backlog as of March 30, 2003, is scheduled to be shipped within the next 12 months. Such shipments are subject to various factors, such as customer requests for changes or manufacturing delays, which could result in shipments being delayed. 10 Gross margin for the three month period ended March 30, 2003, was $1.8 million compared to $1.9 million for the three month period ended March 31, 2002, a decrease of $0.1 million. The gross margin as a percent of sales for the three month period ended March 30, 2003, was 18.4% compared to 23.6% for the three month period ended March 31, 2002. Of this decline, approximately 3 percentage points are due directly to lower margins generated on sales of new machines. The Company has a varied portfolio of products that tend to have different ranges of profit margins. As a result, sales mix can make the gross margin as a percent of sales vary between periods. In addition, competitive conditions that exist at the time a customer order is received impacts the margin earned by the Company. Other major costs resulting in the additional decline in the gross margin as a percent of sales are lower absorption of fixed overhead costs due to lower factory utilization and higher engineering costs. Operating expenses for the three month period ended March 30, 2003, were $3.4 million compared to $3.1 million for the three month period ended March 31, 2002, an increase of $0.3 million. This amount includes increased selling expenses of approximately $0.2 million primarily due to higher employee compensation and related expenses and trade show expenses. Interest income for the three month period ended March 30, 2003, was $15,000 compared to $26,000 for the three month period ended March 31, 2002. Interest expense for the three month period ended March 30, 2003, was $33,000 compared to $36,000 for the three months ended March 31, 2002. Other income (expense), net for the three month period ended March 30, 2003, was expense of $85,000 compared to income of $181,000 for the three month period ended March 31, 2002. Other income for the period ended March 31, 2002 includes approximately $167,000 received by the Company as a result of the demutualization of an insurance provider used by the Company. The Company provides for income taxes at the statutory rates in effect in each tax jurisdiction in which income is earned or losses are generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax benefit rate was 26% for the three month period ended March 30, 2003, compared to 30% for the three month period ended March 31, 2002. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different tax jurisdictions. In addition, $44,000 of tax benefits in the period ending March 30, 2003 related to the Company's U.K. operations have not been recognized since these tax benefits have been deemed not to meet the accounting requirements for realization as an asset. MATERIAL CONTINGENCIES Pursuant to a settlement agreement entered into in 1995 between the Company and Black & Decker Corporation ("Black & Decker"), Black & Decker agreed to assume full responsibility for the investigation and remediation of any pre-May 12, 1986 environmental contamination at the Company's Ansonia and former Derby, Connecticut facilities, as required by the Connecticut Department of Environmental Protection ("DEP"). Black & Decker has conducted a preliminary environmental assessment of the facilities and has proposed certain remedial actions. On the basis of the preliminary data now available there is no reason to believe that any activities which might be required as a result of the findings of the assessment will have a material effect upon the capital expenditures, results of operations, financial position or the competitive position of the Company. LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES Working capital and the working capital ratio at March 30, 2003 were $15.8 million and 2.3 to 1, respectively, compared to $17.0 million and 2.4 to 1 at December 31, 2002, respectively. During the three months ended March 30, 2003, the Company declared a dividend of $0.05 per share that is payable on April 25, 2003 to shareholders of record as of April 11, 2003. Due to the nature of the Company's business, many sales are of a large dollar amount. Consequently, the timing of recording such sales may cause the balances in accounts receivable and/or inventory to fluctuate dramatically between quarters and may result in significant fluctuations in cash provided by operations. Historically, the Company has not experienced significant problems regarding 11 the collection of accounts receivable. The Company also generally has financed its operations with cash generated by operations, progress payments from customers and borrowings under its bank credit facilities. Management anticipates that its cash balances, operating cash flows and available credit line will be adequate to fund anticipated capital commitments and working capital requirements for at least the next twelve months. The Company made capital expenditures of $9,000 and $14,000 during the three month periods ended March 30, 2003 and March 31, 2002, respectively. The Company has a worldwide multi-currency credit facility, as amended, with a major U.S. bank, which includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The facility contains limits on direct borrowings and issuances of letters of credit based upon stipulated percentages of accounts receivable and inventory. The revolving credit facility expires on June 15, 2004. Interest varies based upon prevailing market interest rates. The revolving credit facility requires payment to the bank of a fee equal to 0.375% per annum of the average daily unused principal under the facility. The Company has approximately $2.8 million of letters of credit posted under its credit facility on March 30, 2003. This credit facility also includes a term loan which the Company borrowed in June 2001. The term loan is repayable in monthly installments of (pound)38,888 (approximately $61,000) through June 2004. The term loan has an interest rate of LIBOR plus 2.7%. The proceeds of this term loan were used to repay an existing term loan. At March 30, 2003, there was $919,000 outstanding under the term loan. The credit facility, as amended on March 25, 2003, contains covenants specifying minimum and/or maximum thresholds for operating results, selected financial ratios and backlog. The backlog covenant requires that end of month backlog will not be less than $20 million for more than two consecutive months. The Company did not achieve the backlog covenant as of the end of January and February 2002; however, the bank waived the non-compliance. There can be no assurance that the Company will achieve the required thresholds in the future. The agreement contains certain restrictions on investments, borrowings and sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which upon given notice or lapse of time or both, would become an Event of Default. In fiscal 2000, new minimum funding guidelines for pension plans became effective in the U.K. which are significantly different than the prior guidelines. Based upon the new guidelines the Company is required to make significant cash contributions to the Company's U.K. pension plan. Prior to 2000, the Company was not required to make substantial contributions to the U.K. pension plans. In fiscal 2002, 2001 and 2000, the Company contributed approximately $723,000, $799,000 and $946,000 respectively to the U.K. pension plan. For the years ended December 31, 2002, 2001 and 2000, the assets of the plan generated a negative return (lost value) of $2.2 million, $2.4 million and $0.6 million, respectively. The majority of 2002 loss was incurred in June 2002 as a result of the decline in the stock market. As described in the Financial Position section that follows, these losses have contributed to a substantial reduction in the Company's stockholders' equity. At March 30, 2003, total assets in the plan were approximately $21 million, which significantly exceed the historical benefits paid for the past few years. The trustees of the plan moved the plan assets out of equities in July 2002 and are reviewing the long-term investment strategy of the plan. As of March 30, 2003, the assets of the plan consisted of corporate and government bonds and cash. In addition, in January 2002, the U.K. subsidiary officially informed the plan trustees that effective the end of the first quarter of 2002, the U.K. employees would no longer accrue additional benefits under this pension plan for future service. Beginning in 2002, the U.K. subsidiary, as required under U.K. law, offered a defined contribution plan to its employees. In July 2002, the Company, the plan trustees and the plan's actuary began discussing the appropriate means of ensuring the long term funding of the plan, including among other things an assessment of the U.K. subsidiary's business prospects and cash position, the securitization of the U.K. subsidiary's assets, a parent company guarantee, increasing contributions to the plan, or other assurances, in order to avoid a determination by the actuary that the trustees should wind up the plan. Under the rules of the plan, the trustees are to wind up the plan if they receive actuarial advice that the 12 actual and expected Company contributions are so low as to prejudice seriously the long-term financial position of the plan. On a wind up basis the amount of underfunding of the plan is computed differently than, and would be substantially greater than, the amount reflected in the financial statements. Additionally, on a wind up basis, the underfunding must be paid down within a short time period. In February 2003, the Company, the plan trustees and the plan's actuary agreed upon an increased contribution schedule which provides for the Company to contribute (pound)50,600 (approximately $81,000) a month to the plan plus the costs of administering the plan, which are estimated to be $100,000 annually. The contribution schedule was based on an April 2002 actuarial computation and must be reviewed for adequacy by the actuary at least annually or, if deemed necessary by the actuary, on a more periodic basis. FINANCIAL POSITION The Accumulated Other Comprehensive Loss section of stockholders' equity reflects a cumulative charge of $11.5 million related to the Company's pension plans. This cumulative charge was required in order to reflect a minimum pension liability on the balance sheet for the pension plans. Of this amount, $10.5 million relates to the Company's U.K. pension plan. The U.K. plan experienced a significant decline in the value of its assets during 2002 and 2001. In addition, in December 2002, revised mortality tables were used in the determination of the pension liability for accounting in order to reflect updated mortality data. The change in the mortality tables along with the declines in the value of the pension assets, were the primary reasons for the cumulative charge to stockholders' equity for the U.K. plan. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued statements No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by the Company in January 2002 and statement No. 143 was adopted by the Company in January 2003. Statement No. 142 changes the accounting for other intangible assets, such that those assets whose life is determined to be indefinite are not subject to amortization. These assets and goodwill shall be tested for impairment at least annually, and the value will need to be written down if the fair value is less than the carrying value. Statement No. 143 requires that a liability must be recognized for an asset retirement obligation related to long lived tangible assets. The liability shall be recorded at fair value. The adoption of statements No. 142 and 143 did not have a significant effect on the Company's financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). Statement No. 144 was adopted by the Company in January 2002. This statement requires an impairment loss to be recognized if the carrying value of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Long-lived assets (asset group) shall be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The adoption of this statement did not have a significant effect on the Company's financial position or results of operations. In December 2002, the Financial Accounting Standards Board issued statement No. 148 (Accounting for Stock-Based Compensation - Transition and Disclosures). Statement No. 148 amends the accounting for stock-based compensation by providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, statement No. 148 amends the disclosure requirements to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted statement No. 148 in December 2002. The Company does not anticipate changing to the fair value based method of accounting for stock-based compensation; therefore, the adoption only impacted disclosures. 13 PART 1 - ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign currency and interest rates. The Company manufactures many of its products and components in the United Kingdom and purchases many components in foreign markets. Approximately 50% of the Company's revenue is generated from foreign markets. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business and the use of foreign exchange forward contracts. The Company does not enter into derivative contracts for trading or speculative purposes. The Company's cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The rates are adjusted to market conditions. Changes in the market rate effects interest earned and paid by the Company. The Company does not use derivative instruments to offset the exposure to changes in interest rates. Changes in the interest rates related to these items are not expected to have a material impact on the Company's results of operations. PART 1 - ITEM 4 - CONTROLS AND PROCEDURES Within 90 days prior to the filing of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 30, 2003. There have been no changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation. 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES N/A ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A ITEM 5 - OTHER INFORMATION N/A ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 11 (Regulation S-K) Computation of Earnings Per Share. Attached Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Attached Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Attached b) Reports on Form 8-K: No Reports on Form 8-K were filed by the registrant during the periods covered by this report. 15 SIGNATURES ---------- PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. FARREL CORPORATION ------------------ REGISTRANT DATE: 5/13/03 /s/ Rolf K. Liebergesell -------------------------- -------------------------------------------- ROLF K. LIEBERGESELL CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD DATE: 5/13/03 /s/ Walter C. Lazarcheck -------------------------- -------------------------------------------- WALTER C. LAZARCHECK VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (CHIEF ACCOUNTING OFFICER) 16 CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rolf K Liebergesell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Rolf K Liebergesell - -------------------------------------- Rolf K Liebergesell Chairman of the Board of Directors and Chief Executive Officer May 13, 2003 17 CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Walter C Lazarcheck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Walter C Lazarcheck - ------------------------------- Walter C Lazarcheck Vice President and Chief Financial Officer May 13, 2003 18 EX-11 3 gex11-31066.txt EX-11 Exhibit 11
FARREL CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share and share data) Three Months Ended March 30, March 31, 2003 2002 ---- ---- Net loss applicable to common stock $(1,249) $(760) =============== =============== Weighted average number of common shares outstanding - Basic earnings per share 5,228,461 5,228,461 Effect of dilutive stock and purchase options --- --- --------------- --------------- Weighted average number of common shares outstanding - Diluted earnings per share 5,228,461 5,228,461 =============== =============== Net loss per common share- Basic $(0.24) $(0.15) =============== =============== Diluted $(0.24) $(0.15) =============== ===============
Options outstanding at March 30, 2003, to purchase 240,000 shares of common stock at prices ranging from $2 to $6 were not included in the computation of dilutive EPS for the period ending March 30, 2003, because the options' exercise prices were greater than the average market price of the common shares. Options outstanding at March 30, 2003, to purchase 105,000 shares of common stock at prices ranging from $0.60 to $0.81 were not included in the computation of dilutive EPS for the period ending March 30, 2003, because the effect of the options was anti-dilutive. Options outstanding at March 31, 2002, to purchase 323,000 shares of common stock at prices ranging from $2 to $10 were not included in the computation of dilutive EPS for the period ending March 31, 2002, because the options' exercise prices were greater than the average market price of the common shares. Options outstanding at March 31, 2002, to purchase 90,000 shares of common stock at prices ranging from $0.60 to $0.81 were not included in the computation of dilutive EPS for the period ending March 31, 2002, because the effect of the options was anti-dilutive. 19 EX-99.1 4 gex99_1-31066.txt EX-99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Farrel Corporation (the "Company") on Form 10-Q for the period ended March 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rolf K Liebergesell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report. /s/ Rolf K Liebergesell - -------------------------------------------- Rolf K Liebergesell Chairman of the Board of Directors and Chief Executive Officer May 13, 2003 20 EX-99.2 5 gex99_2-31066.txt EX-99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Farrel Corporation (the "Company") on Form 10-Q for the period ended March 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter C Lazarcheck, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934: and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report. /s/ Walter C Lazarcheck - -------------------------------- Walter C Lazarcheck Vice President and Chief Financial Officer May 13, 2003 21 -----END PRIVACY-ENHANCED MESSAGE-----