10-K 1 f10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to ----------------- ----------------- Commission file number 0-19703 --------------------------------------------------------- FARREL CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-2689245 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 25 Main Street, Ansonia, Connecticut 06401 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (Registrant's telephone number, including area code) (203) 736-5500 --------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 Par Value NASD OTC Bulletin Board -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 25, 2002 was $3,007,819. The number of shares outstanding of the registrant's common stock as of March 25, 2002 was 5,228,461 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 12, 2002 are incorporated by reference into Part III. Page 1 of 49 PART I ITEM 1 - BUSINESS GENERAL Farrel Corporation (the "Company") designs, manufactures, sells and services machinery and associated equipment for the rubber and plastics industries worldwide. The Company's principal products are batch and continuous mixers, single and twin-screw extruders, pelletizers, gear pumps and mills. In conjunction with sales of capital equipment, the Company provides process engineering, process design and related services for rubber and plastics processing installations. The Company's aftermarket business consists of repair, refurbishment and equipment upgrade services, spare parts sales and field services. The Company also provides laboratory services and facilities for product demonstrations and for the development and testing of rubber and plastics equipment and processes. The Company's rubber processing equipment is primarily sold to tire manufacturers, custom compounders and manufacturers of rubber goods, such as sheet products, molded products, automotive components, footwear, wire and cable and hoses. In the plastics processing industry, the Company's equipment is primarily sold to large plastic resins producers and compounders. The Company markets its products through its strategically located domestic and international sales and service organization. COMPANY STRATEGY The Company's business objectives are to increase market share in relatively slow-growth, cyclical markets by broadening its product range and continuing to strengthen its market position. The Company continues to pursue manufacturing cost reductions by continually reevaluating its current operating practices and by purchasing, rather than manufacturing, a significant number of equipment components and maintaining overhead and manpower levels in line with prevailing economic conditions. The Company has taken measures in the recent past to achieve these objectives by transferring U.S. parts manufacturing from Connecticut to its U.K. subsidiary and moving U.S. assembly operations from its former Derby, Connecticut plant to its Ansonia, Connecticut facility. In line with this strategy, in December 1997, the Company acquired the assets of the Francis Shaw Rubber Machinery ("Shaw") business in England for the production of INTERMIX(R) internal mixers with intermeshing rotors, extruders and related equipment. The products serve principally the technical rubber goods manufacturers and the tire industry. The internal mixers produced by Shaw are essentially similar to the Company's BANBURY(R) internal mixers, differing only in the configuration of the mixing rotors. The combined complimentary product lines provide the Company with global access to all rubber products manufacturers, thereby increasing markets served. The Shaw operations were transferred to the Farrel Limited facility beginning in the fall of 1998 and were totally integrated by the end of the second quarter of 1999. INDUSTRY OVERVIEW The Company's products are used primarily by manufacturers of rubber and plastic materials and products. The rubber and plastics processing industries are global in nature and intensely competitive. Both industries are cyclical in nature, with capital equipment purchases characterized by long lead times between orders and shipments. In the rubber industry, the major users of the Company's machinery are tire manufacturers, custom compounders and manufacturers of rubber goods such as sheet products, molded products, automotive components, footwear and wire and cable. The Company considers the non-tire sector its primary market for growth opportunities. There are approximately 50 tire manufacturers in the world, six of which account for a majority of total worldwide tire production. Demand in the tire and rubber industry is influenced by, among other things, general economic conditions and the growth or decline in sales of automobiles and trucks as well as overall truck tonnage and mileage driven. The industry trend is to shift production capacities into low cost and emerging regions, creating potential opportunities in the future. Page 2 of 49 In the plastics industry, the Company serves two primary groups of customers: commodity plastics producers (typically large petrochemical companies) and value-added compounders of plastics. The commodity plastics processed by the Company's machinery are primarily polyethylene, polypropylene, polyvinyl chloride and polystyrene. A large portion of the market is controlled by a few major producers who license their technologies to other producers worldwide. These licensees are potential customers for the Company's products and services. The plastics compounding market consists of those companies that mix large volumes of plastics in a relatively small number of formulations, companies which perform specialty mixing for end users, and end users that mix largely for their internal use. Many manufacturers in the industries and markets served by the Company's products and services are impacted by local political and economic events. The Company's equipment is supplied to manufacturers and represents capital commitments for new plants, expansion or modernization. New capital and marketing expenditures in the Company's markets depend, in large part, on an increase in market demand, which may require the need for additional capacity. Overall the Company is part of the capital goods industry. The capital goods industry in which the Company operates is cyclical in nature and is subject to significant changes in demand. Capital goods demand is influenced by many factors, including, but not limited to, general economic conditions, factory capacity utilization and availability of financing. The Company cannot predict when cyclical changes will occur or the extent that demand for its products will change as a result of cyclical changes. Since 1998, the Company's sales have declined significantly. In 1998, the Company's net sales were $98.3 million, which compares to net sales of $56.2 million in 2001. PRODUCTS AND SERVICES The Company's products are used to mix and process materials produced by the Company's rubber and plastics producing customers. The Company's principal capital equipment product lines are batch and continuous mixers, single and twin-screw extruders, pelletizers, gear pumps and mills. The Company also provides process engineering, installation and commissioning services for its equipment. The Company's customer service division repairs, refurbishes and provides upgrade services and spare parts for the Company's installed base of machines worldwide. The following table illustrates the percentage breakdown of the Company's sales between new machines/related services and aftermarket business (spare parts, repairs and rebuild) in the last three fiscal years: Year Year Year ended ended ended 12/31/01 12/31/00 12/31/99 -------- -------- -------- New Machines/Related Services............ 42.4% 45.1% 44.6% Aftermarket.............................. 57.6% 54.9% 55.4% ------ ------ ------ Total.................................... 100.0% 100.0% 100.0% ====== ====== ====== The Company does not publish a standard price list. Prices for the Company's new equipment are based upon a customer's specifications and/or production requirements. Unit prices for the Company's new equipment products range from approximately $50,000 to more than $4 million. CUSTOMERS AND MARKETING The Company's principal customers are domestic and foreign manufacturers of rubber and plastic materials. The Company's customers often purchase significant equipment for new plants, plant expansion or plant modernization. Purchases by any single customer typically vary significantly from year to year according to each customer's capital equipment needs. As a result, the composition of the Company's customers may vary from one year to the next. The Company considers its operations to be one operating segment. The sales, manufacturing, assembly and distribution are essentially the same. Segment information for new equipment sales, aftermarket sales, geographic sales and operating results for fiscal 2001, 2000, and 1999 are reported in Note 16 to the Consolidated Financial Statements. The Company's products are sold primarily by its direct sales and support staff augmented by agents in certain foreign countries. The Company's sales organization is headquartered in Ansonia, Connecticut and Rochdale, England. Page 3 of 49 The Company has additional sales and service offices strategically located in the United States and a representative office in Singapore. In certain geographic areas outside the United States, sales are facilitated by independent representatives who assist employees of the Company. PROCESS LABORATORY SERVICES The Company maintains two process laboratories in Ansonia, Connecticut and one laboratory in Rochdale, England. In addition, the Company has an agreement with a research and development organization in Taiwan to use and demonstrate the Company's technology. This contractual arrangement provides the Company with laboratory facilities in Asia to complement the U.S. and U.K. laboratories. The Company uses its laboratories to demonstrate the capabilities of its processing equipment and to provide customers with production-sized equipment in order to experiment with new processing techniques and formulations. The Company considers its process laboratories to be vital contributors to its continuing technology development and marketing efforts and routinely modernizes its process laboratories and related equipment. COMPETITION The Company's products are sold in highly competitive worldwide markets. A number of companies compete directly with the Company in both the rubber and plastics processing markets. Numerous competitors of varying sizes compete with the Company in one or more of its product lines. A number of the Company's competitors are former licensees of the Company, divisions or subsidiaries of larger companies with financial and other resources greater than those of the Company or copycats that mimic the Company's technology and designs. The Company has historically faced, and will continue to face, considerable competitive pressures, particularly predatory price competition and nationalistic preferences. The Company believes that the principal competitive factors affecting its business are price, performance, technology, breadth of product line, product availability, reputation and customer service. The Company also faces strong competition in the markets for its spare parts and repair, refurbishment and equipment upgrade services from regional service firms that take advantage of low barriers to entry and geographic proximity to certain of the Company's customers in order to compete on the basis of price and service. The Company believes that it generally has a competitive advantage in these markets due to the superior quality of its products and services. BACKLOG The Company's backlog of orders considered firm by management at December 31, 2001, 2000 and 1999 was approximately $18.1 million, $27.7 million and $28.9 million, respectively. Substantially all of the orders included in the December 31, 2001 backlog have contractual ship dates in fiscal 2002. Firm backlog at March 25, 2002 and March 26, 2001 was $23.4 million and $29 million, respectively. As of December 31, 2001, the Company's backlog was at its lowest year-end level since the Company became public. As a result the Company is now more dependent on obtaining orders, including those with shorter delivery times, in order to cover fixed expenses, particularly in the U.K., where the Company maintains its manufacturing operations. Page 4 of 49 MANUFACTURING The Company's manufacturing facility in Rochdale, England provides the Company with fully integrated manufacturing capability including a complete range of machining and fabrication equipment used to produce proprietary components. Final assembly, product testing and quality control activities are performed by Company personnel in both the U.S. and U.K. The Company also has repair and rebuild operations in Ansonia, Connecticut; Deer Park, Texas; and Rochdale, England and contracts for such services in Australia and Singapore. The Company's consolidation of its Derby and Ansonia, Connecticut assembly, repair and spare parts operations, into available space in Ansonia was completed in 1998 and yielded significant reductions in operating costs. The Derby, Connecticut facility was sold in January 1999. The production equipment acquired in the 1997 Shaw acquisition, located in Manchester, England, was transferred to Farrel Limited's facility in nearby Rochdale, England. The facility integration was completed during the second quarter of 1999 and has generated substantial cost reductions and production efficiencies. The Company believes the Ansonia, Connecticut and Rochdale, England facilities provide the Company with the cost structure to maintain its competitive position. COMPONENTS AND RAW MATERIALS The Company purchases most of the components used in producing its machines from reliable domestic and international suppliers. The basic raw materials used by the Company are steel plates, bars, castings, forgings and hard-surfacing alloys. Principal components and raw materials are available from a number of sources. The Company is not dependent on any supplier that cannot be replaced in the normal course of business. The Company's U.K. subsidiary is a major source of large-scale components of proprietary designs. RESEARCH AND DEVELOPMENT AND ENGINEERING The Company's research and development and engineering staffs are located in Ansonia, Connecticut and Rochdale, England. Their major activities are: application engineering for specific customer orders; standardization of existing machinery as part of the Company's ongoing cost reduction measures; and development of new products and product features. The Company's twin screw rubber sheeter as well as the recent development of a new very large-scale pelletizing system for the petrochemical industry are examples of the collaborative success of the research and development and product engineering staffs to produce a new product. Current development activities are in the batch mixing process. The acquisition of the INTERMIX(R) intermeshing technology and rotor design development provides opportunities to strengthen our business with batch mixer customers. A summary of research and development and engineering expenditures incurred during the last three fiscal years is as follows: Year Year Year ended ended ended 12/31/01 12/31/00 12/31/99 -------- -------- -------- (Dollars in thousands) Research and development expense pertaining to new products or significant improvements to existing products $1,354 $1,580 $1,570 All other product development and engineering expenditures related to ongoing refinements, improvements of existing products, and custom engineering 2,700 3,224 3,580 ------ ------ ------ Total $4,054 $4,804 $5,150 ====== ====== ====== Percent of net sales 7.2% 7.5% 6.9% Page 5 of 49 PATENTS AND TRADEMARKS The Company possesses rights under a number of domestic and foreign patents and trademarks relating to its products and business. The Company holds approximately 193 patents that cover technology utilized in its products and currently has approximately 14 patent applications pending. The Company's patents have expiration dates ranging from 2002 through 2017. Although the Company believes that its patents provide some competitive advantage, the Company also depends upon trade secrets, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive advantage. The Company considers the following trademarks to be material to its business: FARREL(R); BANBURY(R); INTERMIX(R); ST(TM); MVX(TM); CP-SERIES II(TM); FTX(TM); and TSS(TM). ENVIRONMENTAL The Company and The Black & Decker Corporation ("Black and Decker") entered into a Settlement Agreement pursuant to which Black & Decker agreed to assume full responsibility for the investigation and remediation of any pre-May 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 and Decker has conducted a preliminary environmental assessment of the Ansonia and Derby facilities. Although this assessment is still being evaluated by the DEP, on the basis of the preliminary data available there is no reason to believe that any activities that might be required as a result of the findings of the assessment will have a material effect upon the capital expenditures, results of operations, financial position or the competitive position of the Company. EMPLOYEES As of December 31, 2001, the Company had 321 employees compared to 376 employees at December 31, 2000. The workforce reduction is primarily a result of the Company's ongoing restructuring activities. Approximately 31 employees in the U.S. are covered by a collective bargaining agreement which expires on June 15, 2003. In the U.K., the Company is a party to non-binding national and local collective bargaining agreements with several U.K. unions, which cover 65 employees. ITEM 2 - PROPERTIES The following table sets forth certain information concerning the Company's principal facilities, all of which are owned by the Company. Location Principal Use Approx. Sq. Ft. -------------------------------------------------------------------------------- Ansonia, Connecticut.... Office, research, laboratory, 520,000 repair, rebuild, assembly and storage Deer Park, Texas........ Repair and rebuild 22,000 Rochdale, England....... Office, research, laboratory, 210,000 manufacturing, repair and rebuild, and storage The Company believes that the facilities used in its operations are in satisfactory condition and adequate for its present and anticipated future operations. In addition to the facilities listed above, the Company leases space in various domestic and international locations, primarily for use as sales offices. Page 6 of 49 ITEM 3 - LEGAL PROCEEDINGS As of the date hereof, the Company is not aware of any contamination, other than pre-May 12, 1986 contamination (as described in Part I, Item 1, Environmental), at any of its facilities that would require material environmental remediation costs. The Company is a defendant in certain lawsuits arising in the ordinary course of business, primarily related to product liability claims involving machinery manufactured by the Company or its predecessors. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with any certainty, the Company does not expect that these matters will have a material adverse effect on the Company's financial position or results of operations. Page 7 of 49 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 8 of 49 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. (a) Price Range of Common Stock and Dividends The Company's Common Stock is traded on the OTC Bulletin Board. The following chart sets forth the high and low prices for the Common Stock and dividends declared for the last two fiscal years: Fiscal 2001 High Low Dividend ----------- ---- --- -------- First Quarter $0.97 $0.75 - Second Quarter $0.75 $0.54 - Third Quarter $0.89 $0.58 - Fourth Quarter $1.01 $0.55 - Fiscal 2000 High Low Dividend ----------- ---- --- -------- First Quarter $2.22 $1.75 $0.04 Second Quarter $1.87 $1.38 $0.04 Third Quarter $1.62 $1.25 $0.04 Fourth Quarter $1.46 $0.69 - (b) As of March 25, 2002 the approximate number of record holders of the Company's common stock was 1,100. (c) Dividends No cash dividends were declared for the quarter ended December 31, 2000 and for any period in fiscal 2001. The Company pays quarterly cash dividends on its Common Stock as its Board of Directors deems appropriate, after consideration of the Company's operating results, financial condition, cash requirements, general business conditions, compliance with covenants in the credit facility (see Management's Discussion and Analysis of Liquidity and Capital Resources) and such other factors as the Board of Directors deems relevant. (d) There were no sales or issuance's of the Company's equity shares that were not registered under the Securities Act. Page 9 of 49 ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA

(1) Information for years prior to 2000 were restated in 2000 to reflect the adoption of Emerging Issues Task Force consensus Issue 00-10, "Accounting for Shipping and Handling Fees and Costs". (2) 1999 Other Income includes $1.9 million gain from the sale of real estate. (3) Amount as of December 31, 2001, reflects a charge to equity related to pension plan accounting. See Note 11 to the Consolidated Financial Statements. Page 10 of 49 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENTS UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in the Company's public documents, included in this report and in particular in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" may be forward looking and may be subject to a variety of risks and uncertainties. Various factors could cause actual results to differ materially from these statements. These factors include, but are not limited to, pricing pressures from competitors and/or customers; continued economic and political uncertainty in certain of the Company's markets; the Company's ability to maintain and increase gross margin levels; the Company's ability to generate positive cash; changes in business conditions, in general, and, in particular, in the businesses of the Company's customers and competitors; the Company's access to adequate financing at competitive rates and other factors that might be described from time to time in the Company's filings with the Securities and Exchange Commission. FISCAL 2001 COMPARED TO FISCAL 2000 Net sales in 2001 and 2000 were $56.2 million and $64.2 million, respectively, a decrease of $8.0 million. The decrease in net sales is due to lower sales in North America of $17.0 million partially offset by an increase in new machine sales in Europe. The timing of the Company's sales, particularly sales of new machines, is highly dependent on when an order is received, the amount of lead-time from receipt of order to delivery and specific customer requirements. The Company operates in markets that are extremely competitive with cyclical demand. Many of our customers and markets operate at less than full capacity and certain markets remain particularly competitive and are subject to local economic conditions. The Company received $47.0 million in orders in 2001 compared to $62.7 million for 2000. The decrease is primarily due to lower new machine orders received in Europe. The Company's products are primarily supplied to manufacturers and represent capital commitments for new plants, expansion or modernization. In the case of major equipment orders, up to twelve months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which time economic conditions in various geographic markets of the world impact our level of order intake. Many of the Company's traditional customers and markets are operating with excess capacity thereby reducing the number of projects for plant expansion and modernization. The Company is experiencing increased pricing pressures from our competitors in an overall smaller market. In addition, since its introduction, the decline in the value of the Euro versus the US dollar and British pound sterling has increased pricing pressures. The Euro's weakness provides substantial advantages to our competitors in the Euro-zone. These conditions are resulting in customer orders with lower margins and lost business. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results in the current and future fiscal quarters. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and our ability to control costs to effectively compete in the current market. There can be no assurance that the level of orders experienced in 2001 will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products. Gross margin in 2001 was $13.8 million compared to $15.2 million for 2000, a decrease of $1.3 million. The decrease in gross margin is a result of lower sales. The gross margin as a percent of sales for 2001 was 24.6% compared to 23.6% for 2000. The increase in gross margin as a percent of sales is primarily due to a change in sales mix. Operating expenses in 2001 were $12.7 million compared to $16.0 million in 2000, a decrease of $3.3 million. The decrease is primarily due to $2.5 million in lower employee compensation and related expenses and $0.5 million in lower travel expenses. The remaining decrease is in various different types of expenses. Interest expense in 2001 was $0.2 million compared to $0.3 million in 2000. Interest income was $0.2 million in 2001 and 2000. Net other income was $66,000 in 2001 compared to net other expense of $86,000 in 2000. Page 11 of 49 The Company provides for income taxes in the jurisdictions in which it pays income taxes at the statutory rates in effect in each jurisdiction, adjusted for differences in providing for income taxes between financial reporting and income tax purposes. The provision for income taxes in 2001 represents primarily income tax expense related to pre-tax income generated by the Company's U.K. operations. The provision for income taxes in 2000 is comprised of $498,000 of income tax expense related to pre-tax income generated by the Company's U.S. operations offset by a $481,000 income tax benefit related to a pre-tax loss generated by the Company's U.K. operations. FISCAL 2000 COMPARED TO FISCAL 1999 Net sales in 2000 and 1999 were $64.2 million and $74.4 million, respectively, a decrease of $10.2 million. The decrease in net sales is primarily due to lower sales in the European markets resulting from weak demand and the detrimental effect of the strength of the US dollar and British Pound Sterling versus the Euro. The weakness of the Euro provides substantial advantages to our competitors located in the Euro-zone. The timing of the Company's sales, particularly sales of new machines, is highly dependent on when an order is received, the amount of lead-time from receipt of order to delivery and specific customer requirements. The Company operates in markets that are extremely competitive with cyclical demand. Many of our customers and markets operate at less than full capacity and certain markets remain particularly competitive and are subject to local economic conditions. The Company received $62.7 million in orders in 2000 compared to $70.0 million for 1999. The decrease is primarily due to lower new machine orders received in North America offset to some extent by increased new machine orders received in the European markets. The Company's products are primarily supplied to manufacturers and represent capital commitments for new plants, expansion or modernization. In the case of major equipment orders, up to twelve months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which time economic conditions in various geographic markets of the world impact our level of order intake. Many of the Company's traditional customers and markets are operating with excess capacity thereby reducing the number of projects for plant expansion and modernization. The Company is experiencing increased pricing pressures from our competitors in an overall smaller market. In addition, the decline in the value of the Euro versus the US dollar and British pound sterling has increased pricing pressures. These conditions are resulting in customer orders with lower margins and lost business. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results in the current and future fiscal quarters. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and our ability to control costs to effectively compete in the current market. There can be no assurance that the level of orders experienced in 2000 will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products. Gross margin in 2000 was $15.2 million compared to $18.2 million for 1999, a decrease of $3.0 million. The margin percentage decreased to 23.6% from 24.4%. The decrease in comparative periods margin as a percent of sales is primarily attributed to changes in product mix, competitive pricing pressures and higher warranty costs. New machine shipments in 1999 included more Compact Processing machines which tend to have higher margins than other new machines. Operating expenses in 2000 were $16.0 million compared to $17.0 million in 1999, a decrease of $1.0 million. Approximately half the decrease is due to lower employee compensation and related benefit costs with the remaining decline due to small decreases in numerous expenses. During 2000, the Company incurred $326,000 of severance payments related to headcount reductions, predominately in the Company's UK operations. Of these payments, $77,000 was charged to cost of sales and $249,000 was charged to selling, general and administrative expenses. Interest expense in 2000 was $0.3 million compared to $0.4 million in 1999. The decrease is due to lower average borrowings. Interest income in 2000 was $0.2 million compared to $0.4 million in 1999. The decrease is due to lower average cash balances available for investment. Page 12 of 49 Net other expense in 2000 and 1999 was $0.1 million. The Company provides for income taxes in the jurisdictions in which it pays income taxes at the statutory rates in effect in each jurisdiction, adjusted for differences in providing for income taxes between financial reporting and income tax purposes. The provision for income taxes is comprised of $498,000 of income tax expense related to pretax income generated by the Company's U.S. operations offset by a $481,000 income tax benefit related to a pre-tax loss generated by the Company's UK operations. MATERIAL CONTINGENCIES As described in Part I, Item 1, Environmental, on the basis of the preliminary data now available there is no reason to believe that any remediation activities that the DEP might require as a result of the findings of the assessment at the Ansonia and Derby, Connecticut facilities will have a material effect upon the capital expenditures, results of operations, financial position or the competitive position of the Company. This forward looking statement could, however, be influenced by any findings of environmental contamination attributable to post-May 12, 1986 activities, the results of any further investigation that the DEP might require, by DEP's conclusions and requirements based upon its review of complete information when such is available, unanticipated discoveries, the possibility that new or different environmental laws might be adopted and the possibility that further regulatory review or litigation might become necessary or appropriate. ORDERS AND BACKLOG Orders received by the Company during 2001 decreased approximately $15.7 million, or approximately 25%, to approximately $47.0 million compared to $62.7 million in fiscal 2000. The Company's products are primarily supplied to manufacturers and represent capital commitment for new plants, expansion or modernization. In the case of major equipment orders, up to twelve months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which economic conditions in various geographic markets of the world impact our level of order intake. Many of the Company's customers and markets are operating with excess capacity thereby reducing the number of projects in our traditional markets for plant expansion and modernization. The Company is experiencing increased pricing pressures from our competitors in an overall smaller market. In addition, the decline in the value of the Euro versus the US dollar and British pound sterling has increased pricing pressures. These conditions are resulting in customer orders with lower margins and lost orders. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results in the current and future fiscal quarters. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and our ability to control costs to effectively compete in the current market. There can be no assurance that the level of orders experienced in 2001 will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products. The level of backlog considered firm by management at December 31, 2001 and 2000 is $18.1 million and $27.7 million, respectively. The contractual ship dates for substantially all of the December 31, 2001 backlog is in 2002. The backlog at March 25, 2002 and March 26, 2001 was $23.4 million and $29 million, respectively. As of December 31, 2001, the Company's backlog was at its lowest year-end level since the Company became public. As a result the Company is now more dependent on obtaining orders, including those with shorter delivery times, in order to cover fixed expenses, particularly in the U.K., where the Company maintains its manufacturing operations. Page 13 of 49 LIQUIDITY AND CAPITAL RESOURCES; CAPITAL EXPENDITURES Working capital and the working capital ratio at December 31, 2001 were $15.8 million and 2.4 to 1.0, respectively, compared to $14.3 million and 1.9 to 1.0 at December 31, 2000, respectively. During the year ended December 31, 2000 the Company paid dividends of $0.12 per share. No dividends were paid during the year ended December 31, 2001. During 1999, the Company extended its discretionary open market stock repurchase program, increasing the amount to be used to repurchase common stock by $2.5 million to $4,750,000. During 2001 and 2000 the Company has repurchased 1,600 and 20,000 shares of common stock, respectively, at varying times and in varying amounts totaling approximately $1,000 and $16,000, respectively. The repurchased shares are held in treasury (See Note 10 to the Consolidated Financial Statements). Due to the nature of the Company's business, many sales are of a large dollar amount. Consequently, the timing of recording such sales may cause the balances in accounts receivable and/or inventory to fluctuate dramatically from time to time and may result in significant fluctuations in cash provided from operating activities. Historically, the Company has not experienced significant problems regarding the collection of accounts receivable. The Company has historically financed its operations with cash generated by operations, with customer progress payments and borrowings under its bank credit facilities. In June 2001, the Company entered into a new worldwide multi-currency credit facility with a major US bank. This facility includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The revolving credit facility expires on June 15, 2003. The facility contains limits on direct borrowings and issuances of letters of credit based upon stipulated percentages of accounts receivable and inventory. The facility, as amended, also contains covenants specifying minimum and/or maximum thresholds for operating results, selected financial ratios and backlog. The backlog covenant requires that end of month backlog will not be less than $20 million for more than two consecutive months. The Company did not achieve the backlog covenant as of the end of January and February 2002; however, the bank waived the non-compliance. The agreement contains certain restrictions on investments, borrowings and the sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which upon giving notice or lapse of time or both, would become an Event of Default. The Company's old credit facility was terminated except in relation to approximately $0.1 million of letters of credit which had previously been posted under that facility and continue to be outstanding on December 31, 2001. The Company has approximately $1.6 million of letters of credit posted under its new facility on December 31, 2001. In June 2001, the Company also entered into a term loan for (pound)1.4 million (approximately $2 million) as part of this credit facility. The proceeds of this loan were used to repay an existing term loan of the same amount. The new term loan is repayable in monthly installments of (pound)38,888 (approximately $55,000) through June 2004. The term loan has an interest rate of LIBOR plus 2.7%. The term loan balance outstanding on December 31, 2001, was $1.7 million. Management anticipates that its cash balances, operating cash flows and the credit line will be adequate to fund its anticipated capital commitments and working capital requirements for at least the next twelve months. The Company made capital expenditures of approximately $0.6 and $1.1 million during fiscal 2001 and 2000. In fiscal 2000, new legal 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 2001 and 2000, the Company contributed approximately $799,000 and $946,000 to the U.K. pension plan. The Company anticipates that it will continue to be required to make substantial contributions in the same order of magnitude to the U.K. pension plan in the coming years; however, the level of future contributions is subject to several factors including investment performance on existing assets. Page 14 of 49 The Company manufactures and assembles its products in the U.K., assembles its products in the U.S. and sells its products in the U.S., U.K. and other foreign markets. The Company's financial position and results are affected by changes in foreign currency exchange rates in the foreign markets in which it operates. When the value of the U.S. dollar or U.K. sterling strengthens against other currencies, the value of the transaction in the foreign currency decreases. The Company, from time to time, enters into foreign exchange forward contracts to hedge foreign currency transactions. Foreign currency transactions generally are for periods of no more than twelve months. In addition, the Company maintains foreign currency bank accounts in other currencies in which it regularly transacts business. The Company's interest income and expense are sensitive to changes in the market level of interest rates. The changes in interest rates earned on the Company's cash equivalents and short term investments as well as interest paid on its debt are variable and are adjusted to market conditions. FINANCIAL POSITION The Accumulated Other Comprehensive Loss section of stockholders' equity reflects a charge of $4.8 million at December 31, 2001, related to the Company's pension plans. Of this amount, $4.2 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 2001. As a result of the poor investment performance, mid-year the plan's trustees moved the asset management to a different investment manager. The decline in the assets resulted in a requirement to record a minimum pension liability of $2.6 million for the U.K. plan. This requirement resulted in a net of tax charge to stockholders' equity of $4.2 million. This charge was required to write down the existing prepaid pension asset and establish a net liability. EURO CONVERSION On January 1, 1999, the European Economic and Monetary Union entered into a three-year transition phase during which a common currency, the "EURO" was introduced in participating countries. The Company does not have operations in the participating countries and the conversion to the EURO is not expected to have a material impact on the Company's financial position, results of operations or cash flows, except as it relates to the previously described competitive price disadvantages due to the relative weakness of the Euro versus the U.S. dollar and British Pound Sterling. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which the Company was required to adopt on January 1, 2001. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The adoption of this statement did not have a significant effect on the Company's results of operations or financial position. In the fourth quarter of 2000, the Company was required to adopt the Emerging Issues Task Force Consensus Issue 00-10 "Accounting for Shipping and Handling Fees and Costs" ("EITF00-10"), and SEC Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB-101"). As a result of EITF00-10, financial statements prior to the fourth quarter of 2000, were restated to reflect as revenue, amounts received from customers as reimbursement for freight costs paid by the Company on their behalf. Such reimbursement had previously been reflected as a reduction to the related expenses. The adoption of SAB-101 did not have a material impact on the prior annual financial statements but it did result in changes in the timing of when certain revenues were recognized within a fiscal year. Page 15 of 49 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 must be adopted by the Company in January 2002 and statement No. 143 must be adopted by the Company no later than January 2003. Statement No. 142 changes the accounting for Goodwill and Other Intangible Assets, such that those assets whose life is determined to be indefinite are not subject to amortization. These assets 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 Company does not anticipate the adoption of these statements will have a significant effect on its financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). Statement No. 144 must be 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. At the time of adoption, the Company does not anticipate the adoption of this statement will have a significant effect on its financial position or results of operations. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results can differ from those estimates. The Company believes that of its significant accounting policies (see Note 1 to the Consolidated Financial Statements), the following may involve a higher degree of judgement and complexity. REVENUE RECOGNITION Revenue on new machine sales is recognized upon completion of the customer contract, which generally coincides with delivery. When customers, under the terms of specific orders or contracts, request that the Company delay shipment of the manufactured equipment, the Company recognizes revenue based upon receiving contractual confirmation of acceptance of the equipment from the customer and legal transfer of title and risk of loss to the customer. Revenue on repair and refurbishment of customer owned machines is recognized when the contractual work is completed. Spare parts revenue is recognized upon shipment. WARRANTY Equipment sold is generally covered by a warranty of one to three years. The Company's estimate of costs to service its warranty obligations is based on historical experience and expectations of future conditions. To the extent the Company experiences increased warranty claim activity, or increased costs in servicing those claims, its warranty accrual will increase, resulting in decreased gross profit. DEFERRED TAX ASSETS The Company has a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. INVENTORY RESERVES The Company maintains reserves for estimated excess and obsolete inventory to reflect a write down of the value of unsaleable inventory based upon evaluations of slow moving items. If future demand is different from that anticipated by management, these reserves may need to be adjusted. Page 16 of 49 ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign currency and interest rates. The Company manufactures many of its products and components in the United Kingdom and purchases many components in foreign markets. Approximately 50% of the Company's revenues are generated from foreign markets. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business and through the use of foreign exchange forward contracts. The Company, from time to time, enters into foreign exchange forward contracts to hedge foreign currency transactions. These derivative instruments usually involve little complexity and are generally for periods of less than twelve months. The Company does not enter into derivative contracts for speculative trading purposes. The amount of foreign exchange forward contracts are not considered material to the Company's financial position or its operations. The Company's cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The rates are adjusted to market conditions. Changes in the market rate 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 these interest rates are not expected to have a material impact on the Company's results of operations. Page 17 of 49 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FARREL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditors ............................................19 Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and 2000 ..............20 Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999 ........................................21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 ...................................22 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 .........................................23 Notes to Consolidated Financial Statements ...........................24 - 39 Page 18 of 49 Report of Independent Auditors The Board of Directors and Stockholders Farrel Corporation We have audited the accompanying consolidated balance sheets of Farrel Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farrel Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Stamford, Connecticut February 1, 2002 Page 19 of 49 FARREL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See Notes to Consolidated Financial Statements Page 20 of 49 FARREL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)

See Notes to Consolidated Financial Statements Page 21 of 49 FARREL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data)

See Notes to Consolidated Financial Statements Page 22 of 49 FARREL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

See Notes to Consolidated Financial Statements Page 23 of 49 FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - PRINCIPLES OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Farrel Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company designs, manufactures, sells and services machinery for the rubber and plastics industry. The Company's principal products are batch and continuous mixers, extruders, pelletizers and mills. The Company also provides process engineering services, process design and related services for rubber and plastics processing installations in conjunction with its sales of capital equipment. The Company's new machinery and related services generally represents approximately half of its revenues. The Company's aftermarket business consists of contractual repair, refurbishment and equipment upgrade services, spare parts sales and field services. The Company's principal customers are domestic and foreign manufacturers of rubber and plastics. Foreign customers are primarily located throughout Europe, Asia and the Middle East. Due to the nature of the Company's products, which can individually cost up to $4.0 million, the percent of sales of any product line can change significantly from year to year. However, the more significant products are the Company's batch and continuous mixers. (a) Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, amounts due from banks, and any other highly liquid investments with a maturity of three months or less when purchased. The carrying amount approximates fair value because of the short maturity of those instruments. (b) Other Financial Instruments: The carrying amount of the Company's trade receivables and payables approximates fair value because of the short maturity of these instruments. The carrying value of long term debt approximates fair value. The interest rate on the long-term debt is variable and approximates current market rates. (c) Inventory: Inventory is valued at the lower of cost or market. Inventory is accounted for on the last-in, first-out (LIFO) basis in the U.S. and first-in, first-out (FIFO) basis in the U.K. (d) Property, Plant and Equipment: Property, plant and equipment is stated at cost. Improvements are capitalized and expenditures for normal maintenance and repairs are charged to expense. Depreciation is computed on a straight line basis based on the estimated useful lives of the related assets which range from 5 to 40 years. Assets no longer anticipated to be used are segregated from Property, Plant and Equipment and included in Other Assets. Page 24 of 49 (e) Patents and Acquired Technology: Other assets includes acquired patents and technical know-how and a technology license agreement, which represents the cost of licensed and purchased technology, know how, and trade secrets including technology that is patented or for which a patent has been applied. Such costs are amortized over periods from 5 to 7 years. (f) Revenue Recognition: Revenue on new machine sales is recognized upon completion of the customer contract, which generally coincides with delivery. When customers, under the terms of specific orders or contracts, request that the Company delay shipment of the manufactured equipment, the Company recognizes revenue based upon receiving contractual confirmation of acceptance of the equipment from the customer and legal transfer of title and risk of loss to the customer . Revenue on repair and refurbishment of customer owned machines is recognized when the contractual work is completed. Spare parts revenue is recognized upon shipment. The Company typically requires advances from customers upon entering a contract and at times will require progress payments during the manufacturing process. Generally, letters of credit are required on contracts with export customers to minimize credit risk. During the fourth quarter of 2000, the Company was required to adopt SEC Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB-101"). SAB-101 provides guidelines on when revenue can be recognized. The adoption of SAB-101 did not have a material impact on the Company's annual financial statements but it did result in changes in the timing of when certain revenues were recognized within a fiscal year. (g) Warranty Obligations: Estimated costs to be incurred under warranty obligations relating to products which have been sold are provided for at the time of sale. (h) Income Taxes: Deferred income taxes are provided on temporary differences between the financial statement and tax basis of the Company's assets and liabilities in accordance with the liability method of accounting for income taxes. Provision has not been made for U.S. income taxes or additional foreign taxes on approximately $7.5 million of undistributed earnings of foreign subsidiaries because it is expected that those earnings will be reinvested indefinitely. (i) Earnings Per Share: Basic earnings per share is determined by dividing net income (loss) by the weighted average shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock (see Note 10) were exercised and converted to common stock. (See Note 14 to the financial statements.) (j) Foreign Currency Translation: Assets and liabilities denominated in foreign currencies are translated into United States dollars at current exchange rates. Income and expense accounts are translated at average rates of exchange prevailing during the year. Adjustments resulting from these translations are included in the accumulated other comprehensive expense in stockholders' equity. Transaction gains and losses are included in earnings. The Company experienced a net foreign currency transaction gain of $142,000 and $63,000 in 2001 and 1999, respectively, and a net foreign currency transaction loss of $64,000 in fiscal 2000. These amounts are included in cost of goods sold in the accompanying financial statements. Page 25 of 49 (k) Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results can differ from those estimates. (l) Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company adopted the new Statement effective January 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. The adoption of this Statement did not have a significant effect on the Company's results of operations or financial position. 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 must be adopted by the Company in January 2002 and statement No. 143 must be adopted by the Company no later than January 2003. Statement No. 142 changes the accounting for Goodwill and other intangible assets, such that those assets whose life is determined to be indefinite are not subject to amortization. These assets 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 Company does not anticipate the adoption of these statements will have a significant effect on its financial position or results of operations. In August 2001, the Financial Accounting Standards Board issued statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). Statement No. 144 must be 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. At the time of adoption, the Company does not anticipate the adoption of this statement will have a significant effect on its financial position or results of operations. (m) Advertising: Advertising costs are expensed in the period the advertising takes place. Advertising expense for the years ended December 31, 2001, 2000 and 1999 was $67,000, $238,000 and $248,000, respectively. (n) Reclassifications: Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. NOTE 2 - ASSET PURCHASE On December 19, 1997, Farrel Shaw Limited, a wholly owned subsidiary of the Company, acquired certain assets and the operations of the Francis Shaw Rubber Machinery ("Shaw") operations from EIS Group PLC of the United Kingdom ("Seller"). The estimated purchase price, including costs of the acquisition, was approximately $13.9 million. The purchase and sale agreement ("Agreement") between the Company and the Seller required subsequent adjustment to the purchase price if (1) the inventory value of Shaw at the transfer date was less than approximately $5 million and (2) the Shaw operations did not produce a minimum profit, as defined in the Agreement, of approximately $1.7 million for the year ended December 31, 1998 (the "Profit Guaranty"). Page 26 of 49 In June 1998, the Company and the Seller reached agreement on the inventory value transferred resulting in a payment to the Company by the Seller of approximately $2.7 million , which amount was used to reduce the purchase price. The operations of Shaw produced a loss (as computed under the terms of the Agreement) of approximately $3.6 million for the year ended December 31, 1998. Accordingly, the Company recorded a receivable from the Seller at December 31, 1998 of approximately $5.3 million under the terms of the Profit Guaranty provisions of the Agreement and reduced the purchase price. In May 1999, the Company reached an agreement with the seller and received a cash payment of $4.4 million under the Profit Guaranty provisions of the Agreement. The difference between the amount recorded at December 31, 1998 for the Profit Guaranty receivable and the amount received from the Seller in May 1999 resulted in an adjustment of the purchase price allocation. NOTE 3 - OTHER ASSETS 12/31/01 12/31/00 -------- -------- (In thousands) Acquired patents and technical know how, net of accumulated amortization of $582 and $448, respectively........................... $146 $299 Other.............................................. 110 - ---- ---- Total............................................ $256 $299 ==== ==== NOTE 4 - RELATED PARTY TRANSACTIONS The Company is a party to an agreement with First Funding Corporation (the "Financial Services Agreement"), pursuant to which the Company retains First Funding as its exclusive investment adviser. Charles S. Jones, a director of the Company and owner of over 5% of the Company's outstanding Common Stock, is an executive officer of First Funding. The Financial Services Agreement may be terminated by either party upon twelve months written notice or by the Company in the event that Mr. Jones is no longer an officer or employee of First Funding. Under the Financial Services Agreement, the Company pays First Funding an annual retainer of $450,000 for Mr. Jones' services. Pursuant to an amendment to the agreement, First Funding reduced the annual retainer to $400,000 for the period March 1, 2002 to March 1, 2003. The Company also paid for advisory services provided by other First Funding employees on an hourly basis and out-of-pocket expenses. Since July 1, 2001, First Funding agreed to provide these services as part of its annual retainer fee until further notice. The Company also pays transaction fees in the event of certain successful transactions. The Company recorded amounts, including the annual retainer, due to First Funding of $522,000, $526,000 and $719,000, in fiscal 2001, 2000 and 1999, respectively. In addition, the Company also reimbursed First Funding $104,000, $207,000, and $160,000 for out-of-pocket costs during the same three periods, respectively. NOTE 5 - INVENTORY Inventory is comprised of the following: 12/31/01 12/31/00 -------- -------- (In thousands) Stock and raw materials................ $ 6,444 $ 7,997 Work-in-process........................ 4,110 4,414 ------- ------- Total.................................. $10,554 $12,411 ======= ======= Of the above inventories at December 31, 2001 and 2000, $5.5 million and $7.0 million, respectively are valued using the LIFO method. Current replacement costs were greater than the LIFO carrying amounts by approximately $0.1 million and $0.2 million at December 31, 2001 and 2000, respectively. Page 27 of 49 NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of the following: 12/31/01 12/31/00 -------- -------- (In thousands) Land and buildings..................... $3,882 $3,894 Machinery, equipment and other......... 19,214 19,155 Construction in progress............... - 526 -------- -------- 23,096 23,575 Accumulated depreciation............. (14,995) (14,037) -------- -------- Property, plant and equipment, net... $ 8,101 $ 9,538 ======== ======== Estimated depreciable lives of buildings are 33-40 years. Estimated depreciable lives of machinery, equipment and other depreciable assets are 5-10 years. NOTE 7 - ACCRUED EXPENSES AND TAXES Accrued expenses and taxes includes accrued wages and benefits of approximately $0.6 million and $0.8 million at December 31, 2001 and 2000, respectively. Also included are income taxes payable of $0.4 million and $0.3 million, at December 31, 2001 and 2000. NOTE 8 - BANK CREDIT ARRANGEMENTS The Company has a worldwide multi-currency credit facility with a major U.S. bank, which includes a $10 million revolving credit facility for direct borrowings and letters of credit. The revolving credit 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, 2003. Interest varies based upon prevailing market interest rates. This credit facility also includes a term loan for British pound sterling 1.4 million (approximately $2 million), which the Company borrowed in June 2001. The term loan is repayable in monthly installments of British pound sterling 38,888 (approximately $55,000) 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. The credit facility, as amended, contains covenants specifying minimum and/or maximum thresholds for operating results, selected financial ratios and backlog. The backlog covenant requires that end of month backlog will not be less than $20 million for more than two consecutive months. The Company did not achieve the backlog covenant as of the end of January and February 2002; however, the bank waived the non-compliance. The agreement contains certain restrictions on investments, borrowings and sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which upon given notice or lapse of time or both, would become an Event of Default. At December 31, 2001 and 2000, there was $1.7 million and $2.4 million outstanding under the term loan. Approximately, $680,000 and $1,194,000 was classified as a current liability at December 31, 2001, and 2000, respectively. At December 31, 2001 and 2000, $1,019,000 and $1,194,000 was classified as a long-term liability, respectively. Page 28 of 49 NOTE 9 - COMMITMENTS AND CONTINGENCIES (a) Commitments: Aggregate future lease commitments under operating leases, principally for office space, equipment and vehicles, are as follows: Year ending December 31, (In thousands) ------------ -------------- 2002 $224 2003 157 2004 96 2005 38 2006 21 Rental expense for the years ended December 31, 2001, 2000 and 1999 was $370,000, $494,000 and $464,000, respectively. (b) Contingencies: The Company is a defendant in certain lawsuits arising in the ordinary course of business, primarily related to product liability claims involving machinery manufactured by the Company or its predecessors. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, the Company does not expect that these matters will have a material adverse effect on the Company's financial position or results of operations. NOTE 10 - STOCK PLANS The Company sponsors a Stock Option Plan and an Employees' Stock Purchase Plan, both established in 1997. The 1997 Omnibus Stock Incentive Plan authorizes the granting of incentive stock options and non-qualified stock options to purchase up to 500,000 shares of common stock. Option awards may be granted by the Compensation Committee of the Board of Directors through May 23, 2007 to eligible employees. The terms (exercise price, exercise period and expirations) of each option award are at the discretion of the Compensation Committee subject to the following limitations. The exercise price of an Incentive Stock Option may not be less than the fair market value as of the date of the grant (or 110% in the case of an incentive stock option granted to a 10% stockholder). The exercise period may not exceed 10 years from the date of the grant. At December 31, 2001, 350,000 shares are available for future issuance. Prior to 1997 the Company granted stock options under a previously sponsored plan to eligible employees and directors of the Company. At December 31, 2001, options to purchase 309,000 shares remain outstanding under that plan. The Company accounts for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and not the fair value method as provided by Financial Accounting Standard Number 123, "Accounting and Disclosure of Stock-Based Compensation." The Company's Stock Option Plan requires options to be granted at the market price of the Company's common stock on the date the options are granted, and as a result, under APB 25 no compensation expense is recognized. Page 29 of 49 The following table presents a summary of the Company's stock option activity and related information for the years ended:

The following table summarizes information about stock options outstanding at December 31, 2001:

Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for these options granted under the Stock Option Plan was estimated at the date of grant using the Black-Scholes option pricing model, one of the allowable valuation models under FAS 123, with the following assumptions for 2001, 2000 and 1999: 2001 2000 1999 ---- ---- ---- Risk free interest rate 5.00% 6.07% 6.52% Dividend yields 0.0% 0.0% 2.0% Expected volatility factor of the expected market price of the Company's common stock .621 .379 .639 Weighted average expected life of each option 10 yrs. 8 yrs. 8 yrs. Page 30 of 49 The weighted average fair value of options granted during 2001, 2000 and 1999 was $0.53, $1.16, and $1.18, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restriction and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics different than those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, therefore, in management's judgment, applying the provisions of FAS 123 does not necessarily provide a reliable single measure of the fair value of its stock options. The current pro forma net income will not necessarily be representative of pro forma net income in future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Company's pro forma information is as follows:

Under the 1997 Employees' Stock Purchase Plan, the Board of Directors' may offer each eligible employee of the Company the right to purchase, in each year through 2001, shares of common stock equivalent in value to not more than 5% of the employee's annual compensation, up to a maximum of $25,000 per year. At the time of the offering by the Board of Directors the employees must designate the amount to be withheld during the next 24 month purchase period. The purchase price is the lower of 85% of the fair market value of the common stock on the date of offering or 85% of the fair market value on the date the applicable purchase period ends. Not more than an aggregate of 500,000 shares of common stock may be purchased under the stock purchase plan. Any employee who, after the purchase, would hold 5% or more of the common stock is ineligible. No options to purchase shares were offered during 2001, 2000 and 1999. During 1999, approximately 11,700 shares were distributed to employees under this plan. The 1999 distribution includes 4,875 shares from the Company's treasury shares, for which retained earnings was adjusted. At December 31, 2001, there were no shares subscribed to under these plans. The Company may purchase up to $4,750,000 of its common stock under its discretionary open market stock repurchase plan. During fiscal 2001, 2000 and 1999 the Company purchased 1,600, 20,000 and 694,300 shares of common stock, respectively, under this plan for approximately $1,000, $16,000 and $1.5 million, respectively which are included in treasury stock. Page 31 of 49 NOTE 11 - BENEFIT PLANS The accounting for pensions and retiree health benefits, which will be paid out over an extended period of time in the future, requires the use of significant estimates concerning uncertainties about employee turnover, future pay scales, interest rates, rates of return on investments and future medical costs. The estimates of these future employee costs are allocated in a systematic manner to the years when service is rendered to the Company by the employee. The annual cost is comprised of the service cost component related to current employee service, an interest cost related to the increase in the benefit obligations due to the passage of time (the benefit obligations are stated at a present value which increases each year as the discount period decreases), less the earnings achieved on assets invested in the employee benefit plan. Differences between the estimates and actual experience are deferred and amortized to expense over a period of time. PENSION PLANS The Company has retirement plans covering portions of domestic and foreign employees. The foreign plan consists of one defined benefit plan for the Company's U.K. employees. The Company funds the domestic plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and the foreign plan in accordance with the U.K. Pensions Act 1995 and related regulations in the United Kingdom. Pension expense is actuarially determined in accordance with generally accepted accounting principles and differs from amounts funded annually. The Company has a domestic defined benefit pension plan for hourly employees which provides benefits based on employees' years of service. Plan assets are invested in short-term securities, equity securities and real estate. The Company has a foreign defined benefit pension plan covering substantially all employees which provide stipulated amounts at retirement based on years of service and earnings. Plan assets are invested in securities, real estate and cash. The following table summarizes the components of domestic and foreign pension expense: Year ended ---------- 12/31/01 12/31/00 12/31/99 -------- -------- -------- Domestic pension expense: (In thousands) Service cost-benefits earned during the period $ 58 $ 73 $ 75 Interest cost on projected benefit obligation . 163 152 146 Expected return on plan assets ................ (184) (177) (174) Recognized net actuarial loss ................. 27 44 52 Amortization of transition, asset ............. 0 0 2 Amortization of prior service cost ............ 17 10 11 ------- ------- ------- Net domestic pension expense ............. $ 81 $ 102 $ 112 ======= ======= ======= Foreign pension expense: Service cost-benefits earned during the period $ 561 $ 675 $ 761 Interest cost on projected benefit obligation . 1,284 1,324 1,265 Estimated return on plan assets ............... (1,617) (1,774) (1,568) Recognized net actuarial loss ................. -- 5 32 Amortization of transition asset .............. -- -- (39) ------- ------- ------- Net foreign pension expense .............. $ 228 $ 230 $ 451 ======= ======= ======= The Company's funding policy is guided by government regulations and the Company's desire to accumulate sufficient assets in the benefit plans to meet obligations for retirement benefits. At any point in time there may be differences between the estimates used in establishing pension cost for accounting purposes, the criteria for funding amounts and actual experience, thus there will always be an amount by which the Company is over or under-funded. The following table sets forth the funded status under U.S. accounting standards of the domestic and foreign defined benefit plans and amounts recognized in the balance sheets: Page 32 of 49

The foreign plan experienced a significant decline in the value if its assets during 2001. As a result of the poor investment performance, mid-year the plan's trustees moved the asset management to a different investement manager. The decline in the assets resulted in a requirement to record a minimum pension liability of $2.6 million for the foreign plan. This requirement resulted in a net of tax charge to stockholders' equity of $4.2 million in 2001. This charge was required to write down the existing prepaid pension asset and establish a net liability. This charge is recorded as part of comprehensive income (loss) in the stockholders' equity section of the balance sheet. At December 31, 2001, for the foreign pension plan, the accumulated benefit obligation was $23.7 million. Page 33 of 49 The funded status under regulatory guidelines in the U.K. used to determine legally required minimum funding amounts for the Company's foreign plan can vary significantly from the funded status for U.S. accounting purposes. The amount of Company contributions to the pension plan is based upon a minimum funding computation under U.K. guidelines. This minimum funding computation must be performed at least every three years. Under the last computation performed, Company is required to make annual contributions to the pension plan for past service of approximately $265,000 a year. Based upon the nature of the minimum funding computation, this amount is subject to change the next time a computation is performed. The next computation must be performed using information as of the end of March 2002. The Company is also required to make contributions to the plan for current benefits earned. This amount was approximately $534,000 and $379,000 in 2001 and 2000. The Company anticipates that it will continue to be required to make substanial contributions in the same order of maginitude to the U.K. pension plan in the coming years; however, the level of future contributions is subject to several factors including investment performance on existing assets. The Company also made a special contribution in 2000 of approximately $302,000. U.K. government regulations require that by the year 2012, the plan be fully funded under the statutory minimum funding computation. The Company changed the domestic discount rate in 2001 and 2000 in response to year-end interest rates. The Company had a minimum pension liability of $512,000 for its U.S. pension plan at December 31, 2001, and a minimum pension liability of $2,643,000 for its U.K. pension plan at December 31, 2001. No minimum pension liability was required at December 31, 2000. The adjustments to the minimum liability were recorded as comprehensive income (loss) included in stockholders' equity, net of applicable income taxes. For pension related matters, comprehensive loss was $4,821,000 in fiscal 2001 and comprehensive income was $613,000 in fiscal 2000 (see Note 12). The Company has a domestic 401(k) retirement plan for salaried employees which includes matching and discretionary non-matching contributions by the Company. Approximately $101,000, $107,000, and $112,000 of Company contributions were expensed in fiscal 2001, 2000 and 1999, respectively. POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS The Company generally provides health care benefits to eligible domestic union retired employees who retired prior to 1994 and their dependents through age 65. The Company is self-insured for claims prior to age 65 and pays these as incurred. Retired employees and their dependents were entitled to select Supplemental Medicare Coverage A and B only at age 65. The Company pays 100% of the monthly Medicare premiums for most of these individuals and 75% for the remaining individuals. Eligibility for these retiree health care benefits was attained upon reaching age 60 and completing 10 years of service. The following table summarizes the Company's expense for post-employment benefits other than pensions.

Page 34 of 49 The Company's non-pension post-retirement benefit plans are not funded. The status of the plans are as follows: 12/31/01 12/31/00 -------- -------- (In thousands) Accumulated postretirement benefit obligation: Beginning of the year ......................... $ 786 $ 918 Interest cost ................................. 46 54 Recognized actuarial (gain) loss .............. 68 (123) Benefits Paid ................................. (58) (63) ------- ------- End of the year ............................... 842 786 Unrecognized actuarial (gain) loss ............ 234 332 ------- ------- Accrued postretirement benefit obligation ....... $ 1,076 $ 1,118 ======= ======= The assumed discount rate used in determining the accumulated post-retirement benefit obligation was 6.00% and 7.25% at December 31, 2001 and 2000, respectively. The change in assumptions did not have a material impact on the obligation or net periodic post-retirement benefit cost. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 7.5% at December 31, 2001. The trend rate used for 2002 is 10% and declines 1.0% per year to 5.0% by the year 2007 and remains at that level thereafter. The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1-Percentage-Point Increase Decrease ---------------------- (In thousands) Increase (decrease) in the interest cost components in 2001 $ 3 $ (3) Increase (decrease) in postretirement benefit obligation as of 2001 $785 $(690) NOTE 12 - ACCUMULATED COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) are as follows:

Page 35 of 49 NOTE 13 - PROVISION FOR INCOME TAXES Pre-tax income (loss) and provision (benefit) for income taxes for the years ended December 31, 2001, 2000 and 1999 are as follows:

A valuation allowance of $197,000 was established in 2000. The Net Operating Loss Carry-forward relates to the Company's U.K. operations and can be carried forward indefinitely. Page 36 of 49 A reconciliation from statutory U.S. federal income taxes to the actual income taxes is as follows: Year ended 12/31/01 12/31/00 12/31/99 -------- -------- -------- (In thousands) Statutory provision (benefit) .............. $ 404 $ (328) $ 978 U.S.--U.K. rate differential ............... (48) 87 (44) State income taxes, net of federal benefit . -- 71 120 Permanent differences ...................... 41 2 75 Valuation allowance ........................ -- 197 -- Other ...................................... -- (12) (14) ------- ------- ------- Actual provision ........................... $ 397 $ 17 $ 1,115 ======= ======= ======= NOTE 14 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Year ended 12/31/01 12/31/00 12/31/99 -------- -------- -------- (In thousands, except share data) Net income (loss) applicable to common stockholders ................ $ 790 ($ 983) $ 1,760 ========= ========= ========== Weighted average number of common shares outstanding - basic ......... 5,228,500 5,249,228 5,447,807 Effect of dilutive stock options ..... 2,040 -- 6,195 --------- --------- ---------- Weighted average number of common shares outstanding - diluted 5,230,540 5,249,228 5,454,002 ========= ========= ========== Net income (loss) per share-basic ..... $ 0.15 ($ 0.19) $ 0.32 ========= ========= ========== Net income (loss) per share-diluted ... $ 0.15 ($ 0.19) $ 0.32 ========= ========= ========== NOTE 15 - FOREIGN CURRENCY CONTRACTS The Company, from time to time, enters into foreign exchange contracts for non-trading purposes, exclusively to minimize its exposure to currency fluctuations on trade receivables, firm commitments and payables. As a result, changes in the values of foreign currency contracts offset changes in the values of the underlying assets and liabilities due to changes in foreign exchange rates, effectively deferring cash gains and losses on trade receivables, firm commitments and payables and the related hedges until the date the transactions are settled in cash. The Company is exposed to loss in the event of nonperformance by the Company's bank, the other party to the foreign exchange contracts. The Company does not anticipate nonperformance by its bank. As of December 31, 2001, all of the Company's 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 December 31, 2001, the difference between the spot rate and the contract rate for the foreign exchange forwards was less than $1,000. Page 37 of 49 NOTE 16 - FOREIGN OPERATIONS, EXPORT SALES AND MAJOR CUSTOMERS The Company's operations are considered one operating segment. The Company's products consist of new machines, spares and repair related services. The Company's products and services are sold to commercial manufacturers in the plastic and rubber industries. The manufacturing, assembly and distribution of the Company's products are essentially the same. The following provides gross revenue by product and geographic area for the years ended December 31, 2001, 2000 and 1999: Year ended --------------------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Sale by Product Line -------------------- New Machines .......................... $23,854 $29,000 $33,192 Spares ................................ 14,061 17,471 18,981 Repairs ............................... 15,241 16,270 20,620 Other ................................. 3,093 1,482 1,662 ------- ------- ------- Total ................................. $56,249 $64,223 $74,455 ======= ======= ======= Geographic Sales by Destination ------------------------------- United States ......................... $26,070 $41,365 $41,601 United Kingdom ........................ 2,037 3,572 4,889 Europe (excluding U.K.) ............... 17,254 7,200 15,958 North America (excluding U.S.) ........ 2,767 4,522 2,766 Asia .................................. 6,048 5,049 5,964 Middle East ........................... 146 970 432 Other ................................. 1,927 1,545 2,845 ------- ------- ------- Total ............................. $56,249 $64,223 $74,455 ======= ======= ======= There are no sales to a single customer that exceeded 10% of the Company's revenue for the years ended December 31, 2001, 2000 and 1999. The Company operates a global business with interdependent operations and employs a global management approach. In consideration of certain economic factors, the distribution of customer orders and associated revenues and expenses between the U.S. or U.K. is at the discretion of management. As such, the chart below should not be construed as indicative of U.S. and U.K. operating results were the Company not to operate in such a manner. Page 38 of 49 Net sales to unaffiliated customers, operating income and assets of the U.S. and U.K. operations for the years ended December 31, 2001, 2000 and 1999 are as follows:

NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for fiscal 2001 and 2000:

Page 39 of 49 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 40 of 49 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the year ended December 31, 2001 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 11 - EXECUTIVE COMPENSATION The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the year ended December 31, 2001 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the year ended December 31, 2001 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the year ended December 31, 2001 and delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on June 12, 2002. See also Notes to Consolidated Financial Statements, Note 4, appearing in Item 8 herein. Page 41 of 49 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Form 10-K Page ---- 1. Financial Statements Report of Independent Auditors.....................................19 Consolidated Balance Sheets as of December 31, 2001 and 2000.......20 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999.................................21 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999...........................22 Consolidated Statements of Cash Flows for years ended December 31, 2001, 2000 and 1999.................................23 Notes to Consolidated Financial Statements......................24 - 39 2. Financial Statement Schedule Report of Independent Auditors on Financial Statement Schedule.....48 Schedule II - Valuation and Qualifying Accounts....................49 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Page 42 of 49

(b) Reports on Form 8K. No such reports were filed by the Company during the year ended December 31, 2001. Page 45 of 49 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Farrel Corporation /s/ Walter C. Lazarcheck ------------------------------------------ Walter C. Lazarcheck Vice President and Chief Financial Officer March 25, 2002 ------------------------------------------ Date Page 46 of 49 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Page 47 of 49 Report of Independent Auditors on Consolidated Financial Statement Schedule The Board of Directors and Stockholders Farrel Corporation We have audited the consolidated financial statements of Farrel Corporation as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated February 1, 2001, (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule for the years ended December 31, 2001, 2000 and 1999 listed in Item 14(a) of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Stamford, Connecticut February 1, 2002 Page 48 of 49 SCHEDULE II FARREL CORPORATION VALUATION AND QUALIFYING ACCOUNTS The allowances for doubtful receivables and reserves for excess and obsolete inventory items have been deducted in the balance sheets from the assets to which they apply. The accrued warranty costs are shown as liabilities in the balance sheet.

(1) Represents foreign currency translation adjustments charged or credited to stockholders' equity. (2) Represents accounts receivable written off, obsolete inventory items written off, reductions in accrued warranty costs to reflect expenditures incurred. Page 49 of 49

FARREL CORP 10-K