10-Q 1 d11481.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2002 ------------------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------ ------------------------ Commission file number 0-19703 ------------------ Farrel Corporation -------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-2689245 -------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 25 Main Street, Ansonia, Connecticut, 06401 ------------------------------------------- (Address of principal executive offices) (Zip Code) (203) 736-5500 --------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT NOVEMBER 8, 2002 -------------------------------------------------------------------------------- Common Stock (Voting), $.01 par value 5,228,461 --------- Farrel Corporation Index Page ---- Part I. Item 1 - Financial Information Consolidated Balance Sheets - September 29, 2002 and December 31, 2001 3 Consolidated Statements of Operations - Three and nine months ended September 29, 2002 and September 30, 2001 4 Consolidated Statements of Cash Flows - Nine months ended September 29, 2002 and September 30, 2001 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15 Item 4 - Controls and Procedures 15 Part II. Other Information 16 Signatures 17 Exhibits - Exhibit 11 - Statement re computation of per share earnings Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Page 2 of 19 Part I - Item 1 - Financial Information FARREL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See Accompanying Notes to Consolidated Financial Statements Page 3 of 19 FARREL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share and share data) -----------------------------------------------

See Accompanying Notes to Consolidated Financial Statements Page 4 of 19 FARREL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

See Accompanying Notes to Consolidated Financial Statements Page 5 of 19 Farrel Corporation Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly in accordance with accounting principles generally accepted in the U.S., the consolidated financial position of Farrel Corporation ("Farrel" or "the Company") as of September 29, 2002, and the consolidated results of its operations and its cash flows for the three and/or nine month periods ended September 29, 2002 and September 30, 2001. These results are not necessarily indicative of results to be expected for the full fiscal year. For further information, the statements should be read in conjunction with the financial statements and notes thereto, included in the Company's Form 10-K for the year ended December 31, 2001. Note 2 - Inventory Inventory is comprised of the following: September 29, December 31, 2002 2001 ------------- ------------ (In thousands) Stock and raw materials ........ $6,729 $6,444 Work-in process ................ 7,418 4,110 ------- ------- Total .......................... $14,147 $10,554 ======= ======= Note 3 - Comprehensive Income (Loss) The components of other comprehensive income (loss) are as follows:

Accumulated other comprehensive loss consists of the following: September 29, December 31, 2002 2001 ------------- ------------ (In thousands) Foreign currency translation adjustments .................. $(779) $(1,420) Minimum pension liability .......... (5,122) (4,821) ------- ------- Accumulated other comprehensive Loss ......................... $(5,901) $(6,241) ======= ======= Page 6 of 19 Note 4 - Segment Information The Company's operations are considered one operating segment. The Company's products consist of new machines, aftermarket and spare parts and repair related services. The Company's products and services are sold to commercial manufacturers in the plastic and rubber industries. The manufacturing, assembly and distribution of the Company's products are essentially the same. Note 5 - Impact of Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (the "FASB") issued statements No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by the Company on January 1, 2002. The Company must adopt Statement No. 143 no later than January 2003. Statement No. 142 changed 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. The adoption of Statement No. 142 did not have a significant effect on the Company's financial position or results of operations. 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 anticipates the adoption of Statement No. 143 will not have a significant effect on its financial position or results of operations. In August 2001, the FASB issued Statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). The Company adopted Statement No. 144 on January 1, 2002. This statement requires an impairment loss to be recognized if the carrying value of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Long-lived assets (asset group) shall be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The adoption of this statement did not have an effect on the Company's financial position or results of operations. Note 6 - Foreign Currency Contracts In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which the Company adopted on January 1, 2001. The Statement provides a new method of accounting for derivatives and hedges. The adoption of this Statement did not have a significant effect on the Company's results of operations or financial position. The Company has entered into foreign exchange forward contracts which are designated as fair value hedges of accounts receivable and future receivables related to customer orders in backlog. The Company, from time to time, enters into foreign exchange forward contracts to hedge certain firm commitments that are denominated in currencies other than the Company's operating currencies. At September 29, 2002, 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 September 29, 2002, the difference between the spot rate and the contract rate for the foreign exchange forwards was a net unrealized loss of approximately $30,000. Note 7 - Bank Credit Arrangements In June 2001, the Company entered into a new worldwide multi-currency credit facility with a major U.S. bank. This facility includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The revolving credit facility, as amended in August 2002, expires on June 15, 2004. The facility contains limits on direct borrowings and issuance 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 Page 7 of 19 more than two consecutive months. The Company did not achieve the backlog covenant as of the end of January and February 2002; however, the bank waived the non-compliance. There can be no assurance that the Company will achieve the thresholds required under the covenants in the future. The agreement contains certain restrictions on investments, borrowings and the sale of assets. Dividend declarations or payments are allowed under this credit facility as long as there exists under the credit facility no Event of Default (as defined in the credit facility) or no condition which upon giving notice or lapse of time or both, would become an Event of Default. The Company has approximately $2.7 million of letters of credit issued under its credit facility on September 29, 2002. 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 $61,000) through June 2004. The term loan has an interest rate of LIBOR plus 2.7%. At September 29, 2002 and December 31, 2001, there were $1.3 million and $1.7 million, respectively, outstanding under the term loan. Note 8 - Pension At December 31, 2001, the Company was required to record a minimum pension liability related to the pension plan of its U.K. subsidiary since under Financial Accounting Standards Board Statement No. 87 ("FAS 87"), which prescribes the U.S. accounting for pension plans, the plan was underfunded. At December 31, 2001, under FAS 87 this plan was underfunded by approximately $2.6 million, as a result of which the Company was required to take a charge against stockholders' equity of $4.2 million. At December 31, 2002, the Company will be required to reflect the results of a FAS 87 computation as of that date in its financial statements. Based upon the decline in the plan's assets in 2002 described below, the Company expects that an additional charge to reduce stockholders' equity will be required at December 31, 2002, and that such charge will be significant. For the period January 1, 2002 to September 29, 2002, the assets in the plan declined in value by approximately $2,400,000. The majority of 2002 loss was incurred in June 2002 as a result of the decline in the stock market. The trustees of the plan moved the plan assets out of equities in July and are reviewing the long-term investment strategy of the plan. In addition, in January 2002, the U.K. subsidiary officially informed the plan trustees that effective the end of the first quarter of 2002, the U.K. employees would no longer accrue additional benefits under this pension plan for future service. Beginning in 2002, the U.K. subsidiary, as required under U.K. law, offered a defined contribution plan to its employees. Benefits paid by the pension plan were $808,000, $1,017,000 and $965,000 in 1999, 2000 and 2001, respectively. At September 29, 2002, total assets in the plan were approximately $20.2 million. The value of the plan assets currently significantly exceeds the historical benefits paid for the past few years. Under laws governing the funding of U.K. defined benefit pension plans, the pension plan of the Company's U.K. subsidiary must be 90% funded on a non-wind up basis as computed under such funding rules by 2005 and 100% funded on a non-wind up basis as computed under such funding rules by 2012. On November 6, 2002, the plan was approximately 82% funded. In July 2002, the Company, the plan trustees and the plan's actuary began discussing the appropriate means of ensuring the long term funding of the plan, including among other things an assessment of the U.K. subsidiary's business prospects and cash position, the securitization of the U.K. subsidiary's assets, a parent company guarantee, increasing contributions to the plan, or other assurances, in order to avoid a determination by the actuary that the trustees should wind up the plan. Under the rules of the plan, the trustees are to wind up the plan if they receive actuarial advice that the actual and expected Company contributions are so low as to prejudice seriously the long term financial position of the plan. On a wind up basis the amount of underfunding of the plan is computed differently than, and would be substantially greater than, the amount reflected in the financial statements. Additionally, on a wind up basis, the underfunding must be paid down within a short time period. On November 8, 2002, the Company received a preliminary funding computation from the plan's actuary. Based upon this funding computation the actuary is recommending that the Company make monthly contributions to the plan of approximately (pound)51,000 ($80,000). The actuary must finalize the funding Page 8 of 19 computation by November 30, 2002, and the Company and the trustees of the plan must agree to a contribution rate by February 2003. The Company is currently contributing (pound)36,000 ($56,000) a month to the plan. Note 9 - Subsequent Event On November 8, 2002, the Company purchased for $650,000 certain assets of the mixer business of Skinner Engine Company, which is currently in bankruptcy. The assets consist primarily of inventory, tooling and fixtures and engineering and technical data. The bankruptcy court approved the purchase. Page 9 of 19 PART I - ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Safe Harbor Statements Under Private Securities Litigation Reform Act of 1995 Certain statements contained in the Company's public documents, including this report and in particular, this "Management's Discussion and Analysis of Financial Condition and Results of Operations", may be forward looking and may be subject to a variety of risks and uncertainties. Various factors could cause actual results to differ materially from these statements. These factors include, but are not limited to, pricing pressures from competitors and/or customers; continued economic and political uncertainty in certain of the Company's markets; the Company's ability to maintain and increase gross margin levels; the Company's ability to generate positive cash flow; changes in business conditions, in general, and, in particular, in the businesses of the Company's customers and competitors; the Company's access to adequate financing at competitive rates and other factors which might be described from time to time in the Company's filings with the Securities and Exchange Commission. Results of Operations Nine Months Ended September 29, 2002 Compared To The Nine Months Ended September 30, 2001 Net sales for the nine month period ended September 29, 2002, were $29.7 million compared to $39.3 million for the nine month period ended September 30, 2001, a decrease of $9.6 million. The decrease is primarily a result of lower sales of new machines of approximately $8.5 million and after-market parts and field service of approximately $0.7 million. The timing of the Company's sales, particularly new machines sales, is highly dependent on when an order is received, the amount of lead time from receipt of order to delivery and specific customer requirements. The Company operates in markets which are extremely competitive with cyclical demand. Many of the Company's customers and markets operate at less than full capacity and certain markets remain particularly competitive and are subject to local economic events. Orders received for the nine month period ended September 29, 2002, were $40.7 million compared to $34.0 million for the nine month period ended September 30, 2001. The Company's products are primarily supplied to manufacturers and represent capital commitments for new plants, expansion or modernization. In the case of major equipment orders, up to 12 months are required to complete the manufacturing process. Accordingly, revenues reported in the statement of operations may represent orders received in the current or previous periods during which time economic conditions in various geographic markets of the world impact the Company's level of order intake. Many of the Company's traditional customers and markets are operating with excess capacity thereby reducing the number of projects for plant expansion and modernization. The Company is experiencing increased pricing pressures from competitors in an overall smaller market. Until recently, the value of the Euro versus the U.S. dollar and British pound sterling had decreased significantly since it was introduced which resulted in increased pricing pressures. Although it would be expected that a stronger Euro would benefit the Company from a competitive standpoint, the Company cannot be certain that it will alleviate any of the current pricing pressures in the market place. Demand for capital expenditures remains weak. Further, the cyclical nature of industry demand and, therefore, the timing of order intake may effect the Company's quarterly results of operations. The Company's ability to maintain and increase net sales depends upon a strengthening and stability in the Company's traditional markets and its ability to control costs to effectively compete in its current markets. There can be no assurance that the current level of orders will continue, that market conditions will not worsen, or that improvements in the Company's traditional markets will lead to increased orders for the Company's products. Page 10 of 19 The level of backlog considered firm by management at September 29, 2002, was $30.2 million compared to $18.1 million at December 31, 2001, and $22.5 million at September 30, 2001. Substantially all of the backlog as of September 29, 2002, is scheduled for shipment in the next 12 months. Gross margin for the nine month period ended September 29, 2002, was $7.5 million compared to $9.3 million for the nine month period ended September 30, 2001, a decrease of $1.8 million. The decrease in gross margin is a result of lower sales. The gross margin as a percent of sales for the nine month period ended September 29, 2002, was 25.3% compared to 23.7% for the nine month period ended September 30, 2001. The increase in gross margin as a percent of sales is primarily due to (i) sales of after-market related items representing a larger percent of total sales in 2002 versus 2001 and (ii) higher gross profit margins on new machine sales. After-market items such a spare parts typically have higher gross profit percents than new machine sales. The increase in gross margin as a percent of sales for new machines in 2002 versus 2001 is due to changes in sales mix of new machines. Operating expenses for the nine month period ended September 29, 2002, were $9.0 million compared to $9.6 million for the nine month period ended September 30, 2001, a decrease of $0.6 million. The selling and research and development components of operating expenses decreased primarily due to lower employee compensation and related expenses. The general and administrative component of operating expenses increased primarily due to higher pension related costs. Interest income for the nine month period ended September 29, 2002, was $83,000 compared to $124,000 for the nine month period ended September 30, 2001, a decrease of $41,000. The decrease is primarily due to lower interest rates. Interest expense for the nine month period ended September 29, 2002, was $77,000 compared to $117,000 for the nine month period ended September 30, 2001, a decrease of $40,000. The decrease is due to lower borrowings and lower interest rates. Other income, net for the nine month period ended September 29, 2002, was $196,000 compared to other expense, net of $112,000 for the nine month period ended September 30, 2001. Other income for the period ended September 29, 2002 includes approximately $167,000 received by the Company as a result of the demutualization of an insurance provider used by the Company. The Company provides for income taxes at the statutory rates in effect in each tax jurisdictions in which income is earned or losses generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax rate was 32.6% for the nine month period ended September 29, 2002, compared to 39.2% for the nine month period ended September 29, 2001. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different taxing jurisdictions. Three Months Ended September 29, 2002 Compared to The Three Months Ended September 30, 2001 Net sales for the three months ended September 29, 2002, were $12.7 million compared to $15.8 million for the three month period ended September 30, 2001, a decrease of $3.2 million. The decrease is primarily a result of lower sales of new machines of $3.4 million and in-house repair services of $0.4 million, offset to some extent by increased sales of after-market parts and field service. Orders received for the three month period ended September 29, 2002, were $11.3 million compared to $10.9 million for the three month period ended September 30, 2001. The Company's sales, orders and backlog levels varied when comparing the two quarters due to market conditions and the nature of the industry in which the Company operates as more fully discussed in the results of operations for the nine month period on page 10. Gross margin for the three month period ended September 29, 2002, was $3.4 million compared to $4.4 million for the three month period ended September 30, 2001, a decrease of $1.0 million. The Page 11 of 19 decrease in gross margin is a result of lower sales. The gross margin as a percent of sales for the three month period ended September 29, 2002, was 27.1% compared to 27.9% for the three month period ended September 30, 2001. The decrease in the gross margin as a percent of sales is due to changes in sales mix. Operating expenses for the three month period ended September 29, 2002, were $3.0 million compared to $2.9 million for the three month period ended September 30, 2001. Interest income for the three month period ended September 29, 2002, was $27,000 compared to $36,000 for the three month period ended September 30, 2001, a decrease of $9,000. The decrease is primarily due to lower interest rates. Interest expense for the three month periods ended September 29, 2002, was $24,000 compared to $39,000 for the three month period ended September 30, 2001, a decrease of $15,000. The decrease is primarily due to lower borrowings and lower interest rates. Other income, net for the three month period ended September 29, 2002, was $11,000 compared to other expense, net of $63,000 for the three month period ended September 30, 2001. Other expense, net in 2001 included the write off of deferred debt financing costs. The Company provides for income taxes at the statutory rates in effect in each tax jurisdiction in which income is earned or losses are generated, adjusted for permanent differences in determining income for financial reporting and income tax purposes. The effective income tax rate was 29.8% for the three month periods ended September 29, 2002, compared to 35.5% for the three months ended September 30, 2001. The effective tax rate varies among periods due to the change in the proportion and amount of income and losses generated in different tax jurisdictions. Material Contingencies Pursuant to a settlement agreement entered into in 1995 between the Company and Black & Decker Corporation ("Black & Decker"), Black & Decker agreed to assume full responsibility for the investigation and remediation of any pre-May 12, 1986 environmental contamination at the Company's Ansonia and former Derby, Connecticut facilities, as required by the Connecticut Department of Environmental Protection ("DEP"). Black & Decker has conducted a preliminary environmental assessment of the facilities. On the basis of the preliminary data now available there is no reason to believe that any activities which might be required as a result of the findings of the assessment will have a material effect upon the capital expenditures, results of operations or the competitive position of the Company. Liquidity and Capital Resources; Capital Expenditures Working capital and the working capital ratio at September 29, 2002 were $15.6 million and 2.1 to 1, respectively, compared to $15.8 million and 2.4 to 1 at December 31, 2001, respectively. During the nine months ended September 29, 2002, the Company paid a dividend of $0.04 per share. Due to the nature of the Company's business, many sales are of a large dollar amount. Consequently, the timing of recording such sales may cause the balances in accounts receivable and/or inventory to fluctuate dramatically between quarters and may result in significant fluctuations in cash provided by operations. Historically, the Company has not experienced significant problems regarding the collection of accounts receivable. The Company also generally has financed its operations with cash generated by operations, progress payments from customers and borrowings under its bank credit facilities. Management anticipates that its cash balances, operating cash flows and available credit line will be adequate to fund anticipated capital commitments and working capital requirements for at least the next twelve months. The Company made capital expenditures of $117,000 and $358,000 during the nine month periods ended September 29, 2002 and September 30, 2001, respectively. Page 12 of 19 On November 8, 2002, the Company purchased for $650,000 certain assets of the mixer business of Skinner Engine Company, which is currently in bankruptcy. The assets consist primarily of inventory, tooling and fixtures and engineering and technical data. The bankruptcy court approved the purchase. In June 2001, the Company entered into a new worldwide multi-currency credit facility with a major U.S. bank. This facility includes a $10 million revolving credit facility for direct borrowings and letters of credit. The facility contains a sub-limit that caps the amount of direct borrowings the Company can make at $5 million. The revolving credit facility, as amended in August 2002, expires on June 15, 2004. The facility contains limits on direct borrowings and issuances of letters of credit based upon stipulated percentages of accounts receivable and inventory. The facility, 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. There can be no assurance that the Company will achieve the required thresholds in the future. The agreement contains certain restrictions on investments, borrowings and 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 of notice or lapse of time or both, would become an Event of Default. The Company has approximately $2.7 million of letters of credit issued under its credit facility on September 29, 2002. 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 $61,000) through October 2004. The term loan has an interest rate of LIBOR plus 2.7%. At September 29, 2002 and December 31, 2001, there were $1.3 million and $1.7 million, respectively, outstanding under the term loan. At December 31, 2001, the Company was required to record a minimum pension liability related to the pension plan of its U.K. subsidiary since under Financial Accounting Standards Board Statement No. 87 ("FAS 87"), which prescribes the U.S. accounting for pension plans, the plan was underfunded. At December 31, 2001, under FAS 87 this plan was underfunded by approximately $2.6 million, as a result of which the Company was required to take a charge against stockholders' equity of $4.2 million. At December 31, 2002, the Company will be required to reflect the results of a FAS 87 computation as of that date in its financial statements. Based upon the decline in the plan's assets in 2002 described below, the Company expects that an additional charge to reduce stockholders' equity will be required at December 31, 2002, and that such charge will be significant. For the period January 1, 2002 to September 29, 2002, the assets in the plan declined in value by approximately $2,400,000. The majority of 2002 loss was incurred in June 2002 as a result of the decline in the stock market. The trustees of the plan moved the plan assets out of equities in July and are reviewing the long-term investment strategy of the plan. In addition, in January 2002, the U.K. subsidiary officially informed the plan trustees that effective the end of the first quarter of 2002, the U.K. employees would no longer accrue additional benefits under this pension plan for future service. Beginning in 2002, the U.K. subsidiary, as required under U.K. law, offered a defined contribution plan to its employees. Benefits paid by the pension plan were $808,000, $1,017,000 and $965,000 in 1999, 2000 and 2001, respectively. At September 29, 2002, total assets in the plan were approximately $20.2 million. The value of the plan assets currently significantly exceeds the historical benefits paid for the past few years. Under laws governing the funding of U.K. defined benefit pension plans, the pension plan of the Company's U.K. subsidiary must be 90% funded on a non-wind up basis as computed under such funding rules by 2005 and 100% funded on a non-wind up basis as computed under such funding rules by 2012. On November 6, 2002, the plan was approximately 82% funded. In July 2002, the Company, the plan trustees and the plan's actuary began discussing the appropriate means of ensuring the long term funding of the plan, including among other things an assessment of the U.K. subsidiary's business prospects and cash position, the securitization of the U.K. Page 13 of 19 subsidiary's assets, a parent company guarantee, increasing contributions to the plan, or other assurances, in order to avoid a determination by the actuary that the trustees should wind up the plan. Under the rules of the plan, the trustees are to wind up the plan if they receive actuarial advice that the actual and expected Company contributions are so low as to prejudice seriously the long term financial position of the plan. On a wind up basis the amount of underfunding of the plan is computed differently than, and would be substantially greater than, the amount reflected in the financial statements. Additionally, on a wind up basis, the underfunding must be paid down within a short time period. On November 8, 2002, the Company received a preliminary funding computation from the plan's actuary. Based upon this funding computation the actuary is recommending that the Company make monthly contributions to the plan of approximately (pound)51,000 ($80,000). The actuary must finalize the funding computation by November 30, 2002, and the Company and the trustees of the plan must agree to a contribution rate by February 2003. The Company is currently contributing (pound)36,000 ($56,000) a month to the plan. Impact of Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (the "FASB") issued statements No. 142 (Goodwill and Other Intangible Assets) and No. 143 (Accounting for Asset Retirement Obligations). Statement No. 142 was adopted by the Company on January 1, 2002. The Company must adopt statement No. 143 no later than January 2003. Statement No. 142 changed 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. The adoption of Statement No. 142 did not have a significant effect on the Company's financial position or results of operations. 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 anticipates the adoption of Statement No. 143 will not have a significant effect on its financial position or results of operations. In August 2001, the FASB issued statement No. 144 (Accounting for the Impairment or Disposals of Long-lived Assets). The Company adopted statement No. 144 on January 1, 2002. This statement requires an impairment loss to be recognized if the carrying value of a long-lived asset (asset group) is not recoverable and exceeds its fair value. Long-lived assets (asset group) shall be tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The adoption of this statement did not have an effect on the Company's financial position or results of operations. Page 14 of 19 Part 1 - Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in foreign currency and interest rates. The Company manufactures many of its products and components in the United Kingdom and purchases many components in foreign markets. Approximately 50% of the Company's revenue is generated from foreign markets. The Company manages its risk of foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business and the use of foreign exchange forward contracts. The Company does not enter into derivative contracts for trading or speculative purposes. The Company's cash equivalents and short-term investments and its outstanding debt bear variable interest rates. The rates are adjusted to market conditions. Changes in the market rate effects interest earned and paid by the Company. The Company does not use derivative instruments to offset the exposure to changes in interest rates. Changes in the interest rates related to these items are not expected to have a material impact on the Company's results of operations. Part 1 - Item 4 - Controls and Procedures Within 90 days prior to the filing of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 29, 2002. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation. Page 15 of 19 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES N/A ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS N/A ITEM 5 - OTHER INFORMATION N/A ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 11 (Regulation S-K) Computation of Earnings Per Share. Attached Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Attached Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Attached b) Reports on Form 8-K: No Reports on Form 8-K were filed by the registrant during the periods covered by this report. Page 16 of 19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. FARREL CORPORATION ------------------ REGISTRANT DATE: 11/11/02 /s/ Rolf K Liebergesell -------------------- ----------------------- ROLF K. LIEBERGESELL CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD DATE 11/11/02 /s/ Walter C Lazarcheck -------------------- ----------------------- WALTER C. LAZARCHECK VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (CHIEF ACCOUNTING OFFICER) Page 17 of 19 CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rolf K Liebergesell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Rolf K Liebergesell ------------------------------------------ Rolf K Liebergesell Chairman of the Board of Directors and Chief Executive Officer November 11, 2002 Page 18 of 19 CERTIFICATION PURSUANT TO SECTION 10A OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Walter C Lazarcheck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farrel Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Walter C Lazarcheck ----------------------------------------- Walter C Lazarcheck Vice President and Chief Financial Officer November 11, 2002 Page 19 of 19

FARREL CORP 10-Q