2,000,000 Shares

@ J

Farrel Corporation Common Stock

All of the shares of Common Stock are being offrrrd hereby by Farral Corporation (the "Company"). Of thc 2,000,000 sharrs uf Common Srock offered, 1,500,000 sharrs are being offered hereby in the United States (the "U.S. Shares") and 500,000 shares are bring offered in a concurrent international offering outside the United States. Thc price to the public and aggregate underwriting discounts and commissions per share is identical for both offerings. See "Undcnvriting."

Prior to this offering, there has been no public market for the Common Stock. See "Underwriting" for a discussion of thr factors considered in determining the initial public offering price.

The Common Stuck has been approved for quotation on thr NASDAQ National Market System under the symbol "FARL."

Of the procurds of this offering, $3.8 million will be uscd to repay indebtedness relating to the repurchase of shares of Common Stock from certain principal stockholders of the Company. The Company has agreed to purchase 157,894 shares of Common Stock from its chief exrcutive officer; payment of the $1.5 million purchase pricc therefor will be madc by cancellation of existing indebtedness of such officer KO the Company. Srr "Certain Transactions."

See "Risk Factors" fo r a discussion o f certain factors tha t should b e considered by prospective investors.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES

COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY

OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

p~

PaineWebber Incorporated First Albany Corporation

Total Assuming Full Exercise of Over- Allotment Option(3). . . . . . . . . . . . .

The date of this Prospecrus is January 17, 1992

Prorrrdr ro compnnri21

58.835

$17,670,000

Underwriting Diirounrr nnd

c ~ m m i ~ r i ~ n ~ i 1 l

$0.665

$1,330,000

Per Sharr . . . . . . . . . . . . . . . . . ... . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) See "Underwriting." (2) Before deducting expenses estimated at $1,460,000, which are payable by the Company. (3) Assuming cxercise in full of the 30-day option granted by the Company to the Underwriters to purchasr

up to 300.000 additional shares, on the same terms, solely to cover over-allotments. See "Underwriting."

The US. Shares are offered by the U.S. Undcnvriters, subject to prior sale, when, as and if delivered tu and accepted by the U.S. Underwriters, and subject to their right to reject orders in whole or in part. It is expected chat delivery of thr Common Stock will be made in New York City on or about January 27, 1992.

$21,850,000

Prim to ~ u b i i i

$9.50

$19,000,000

$1,529,500 520,320,>00

THE U.S. SHARES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, OUTSIDE THE UNITED STATES OR TO ANY PERSON WHO IS NOT A UNITED STATES PERSON, AS PART OF THE DISTRIBUTION OF THE U.S. SHARES. FOR A DESCRIPTION OF THIS AND OTHER RESTRICTIONS ON THE OFFERING AND SALE OF THE SHARES, SEE "UNDERWRITING."

I S COUNECTION WI I'H 'I'HIS OFFERING. I'HE I!SDERM'RITERS MAY OVER-ALWT OR EFFECT TRANSACTIONS H HlCH ST.4BILIZE OR MAIYI'AIN THE MAHKEI' PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHER- WISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

( L E m This F-80 BANBURY Mixer incorporates the latest Farrel technology, including variable speed ST rotors.

(RIGHT)

This Side Discharge Continuous Mixer is capable of processing in excess of 70,000 pounds of plastic per hour.

FARREL, BANBURY and DISKPACK are registered trademarks of the Company and TECNO- LAB, ST, MVX and CP-SERIES are trademarks of the Company.

PROSPECWS SUMMARY The following summary is qualified in its entirety by the more detailed information andJinancia1

statements appearing elsewhere in this Prospectus. This Prospectus relates to the ofer of 2,000,000 shares (the "Shares"') of common stock, S.01 par value (the 'Common Stock'J, of Farrel Corporation. a Delaware corporation ("Farrel" or the "Company '7. Unless otherwise indicated, all share and per share data set forth in this Prospectus have been adjusted to give eflect to a stock split eficted October 24.1991, to the purchase by the Company of 1.483.870 shares of its Common Stock pursuant to an option and to the purchase by the Company of 157,894 shares of Common Stock from an oficer of the Company. See "Certain Transactions." Unless otherwise indicated, the information in this Prospectus assumes the Underwriters' over-allotment option will not be exercised. See "Underwrit- ing." Investors should carefully consider the information set forth under 'Risk Factors."

The Company The Company designs, manufactures, sells and services capital equipment used to process rubber

and plastics materials. The Company's principal products are BANBURY Mixers, continuous mixers, extruders, compact processors, pelletizers, gear pumps, calenders and mills. In conjunction with sales of capital equipment, the Company provides process engineering, process design and related services for rubber and plastics processing systems. The Company's aftermarket business consists primarily 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 customers include tire manufacturing and petrochemical firms. In fiscal 1991, approximately 65% of the Company's sales of new capital equipment and process engineering services was to customers in the rubber industry and 35% was to customers in the plastics industry. Sales outside of the United States accounted for approximately 62% of the Company's net sales during fiscal 1991.

Management believes that the Company's financial performance since 1986 is attributable to, among other factors, a strategic focus on the rubber and plastics processing industries where the Company's market position had historically been strong, the divestiture of unrelated machinery product lines, production efficiencies resulting from increased outsourcing of selected machine components and more efficient purchasing practices, an increase in the portion of the Company's revenues derived from aftermarket products and services which generally carry higher margins than new equipment salcs, and in years prior to fiscal 1991, the amortization of the excess of acquired assets over cost.

The Company was formed by its current stockholders in 1986 to acquire certain assets and to assume certain liabilities of the former Farrel Company, an unprofitable division of USM Corporation ("USM"), a subsidiary of Emhart Corporation ("Emhart"), in a leveraged buyout.

The total purchase price paid in the acquisition was $18.8 million, which included the payment of $1.8 million in cash and the assumption of $17.0 million in balance sheet liabilities of the business acquired. The Company incurred $3.1 million of indebtedness at the time of the acquisition to fund the balance of the cash portion of the purchase price, to pay expenses relating to the acquisition and for working capital, all of which bas since been repaid. See "Legal Proceedings" for a description of certain material provisions of the agreements among the parties to the acquisition, as well as certain actions pending among the parties.

The Farrel name was initially used by the Company's predecessor, Almon Farrel & Company, in 1848.

The Mering

Common Stock offered by the Com any . . . . . 2,000,000 shares P Common Stock to be outstanding a ter the offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,842,106 shares

Use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . Upgrade and expand Company facilities, acquire new machinery and add~tional facilities, establish research and development facilities, repay indebtedness relating to the acquisition of 1,483,870 shares of Common Stock, working capital and other general corporate purposes

NASDAQ Symbol.. . . . . . . . . . . . . . . . . . . . . . FARL

Summary Consolidated Financial Data

Six Months Eodcd Fiscal Year Ended April 30, Oelokr 28. Oetober 27,

1987 1988 1989 1990 - - - - - 1991 1990 1991 (In thousands, except p r share dab)

Siatement of Operations Datr: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . $55,650 $71,425 $92.382 $121,147 $104,686 $54,327 $46.547 Gross margin . . . . . . . . . . . . . . . . . . . . . . . 8,788 14,711 17,269 18,072 26,558 12,755 13,049

Percent of net sales . . . . . . . . . . . . . . . . . 15.8% 20.6% 18.7% 14.9% 25.4% 23.5% 28.0% Operating income (loss) . . . . . . . . . . . . . . . (3,367) 9 2,067 139 5,380 3,203 2,939 Other income (expense):

Amortization of excess of acquired assets overcost . . . . . . . . . . . . . . . . . . . . . . . 1,792 1,890 1,889 1,730 - - -

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.741 3,194 (713) 37 112 I1 (210) Netincome . . . . . . . . . . . . . . . . . . . . . . . . 725 3,627 2,156 1,533 3,511 2,084 1,684 Net income per share of Common Stock(1) . $ 3 $ .66 $ .39 $ .28 $ .64 $ .38 $ .31 Pro forma net inwme per share of Common

Stock(2) . . . . . . . . . . . . . . . . . . . . . . . . . S .80 1 .47 S .38

Oelokr 27, 1991 Actual As AdjtalCd(3) -

(I" thouundr)

Balance Sheet Data: Working capital(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,476 $20.286 Total assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,721 60,531 Long-term deht(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 856 856 Stockholders' equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,396 25,206

(1) Based on 5,483,870 shares outstanding during the period, after taking into account a stock split effective October 24, 1991.

(2) Based on 4,310.953 shares outstanding, after taking into account a stock split effective October 24, 1991 and the pumhase by the Company of 1,483,870 shares pursuant to the Purchase Option (as hereinafter defined) and after glvlng effect to the purchase by the Company of 157,894 shares upon consummation of the Liebergesell Purchase (as hereinafter defined) and to the issuance of 468,847 shares pursuant to this offering (representing that number of shares, the proceeds of the sale of which will be utilized by the Company to repay indebtedness relating to the purchase by the Company of 1,483,870 shares pursuant to the Purchase Option). Such calculation excludes interest income to the Company earned in respect of the $1.5 million in stockholder loans to be cancelled in wnnection with the Liebergesell Purchase. See "Certain Transactions."

(3) Based upon 5,842,106 shares outstanding after giving effect to this offering, after taking into account the urchase by the Company of 1,483,870 shares pursuant to the Purchase Option and after giving effect to the purclase by the Company of 157,894 shares upon consummation of the Liebergesell Purchase.

(4) The increase in working capital, total assets and stockholders' equity by $10.8 million, in each case, takes into account (i) the net proceeds ($16.2 million) from the issuance and sale by the Company of 2,000,000 shares at the initial offering price of $9.50 per share, after deducting underwriting discounts and estimated offering expenses, (ii) the acquisition ($.I million) and the payment of its obligations ($3.8 million) under the Purchase Option by the Company and (iii) the consummation of the Liebergesell Purchase ($1.5 million).

(5) The Company has no current maturities of long-term debt.

-

THE COMPANY

The Company designs, manufactures, sells and services capital equipment used to process rubber and plastics materials. The Company's principal products are BANBURY Mixers, continuous mixers, extruders, compact processors, pelletizers, gear pumps, calenders and mills. In conjunction with sales of capital equipment, the Company provides process engineering, process design and related services for rubber and plastics processing systems. The Company's aftermarket business consists primarily 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. Unless the context otherwise requires, all references to the "Company" in this Prospectus are to the Company and its subsidiary, Farrel Limited, collectively. See "Business of the Company-Products and Services."

The Company's customers include tire manufacturing and petrochemical firms. The Company's rubber processing equipment is primarily sold to tire manufacturers and manufacturers of rubber goods, such as sheet products, molded products, footwear a@ wire and cable. In the plastics processing industry, the Company's equipment is primarily sold to &mmodity plastics producers and value-added

o o the Company's sales of new capital equipment mixers of plastics. In fiscal 1991, approximately 65Y '1. and process engineering services was to customers in the rubber industry and 35% was to customers in the plastics industry. Sales outside of the United States accounted for approximately 62% of the Company's net sales during fiscal 1991.

Sales of new capital equipment and process engineering services accounted for approximately 63%. and sales of aftermarket products and services accounted for approximately 37%, of the Company's net sales in fiscal 1991. See "Business of the Company- Customers."

The Company's primary manufacturing facilities are located in Derby, Connecticut and Rochdale, England. The Company also operates repair facilities in Ansonia, Connecticut, Deer Park, Texas and Rochdale, England. The Company markets its products through an international sales and service organization that includes four offices in the United States, one in Canada, six in other countries, and independent sales representatives covering 28 countries. See "Business of the Company-Sales and Marketing."

Demand for the Company's products and services is principally influenced by the expansion, modernization and maintenance of the manufacturing infrastructure in the segments of the rubber and plastics processing industries served by the Company. Equipment purchases in each of these segments are especially influenced by capital expenditures resulting from manufacturing requirements, capacity utilization, the age of the installed equipment and related replacement rates. Purchases of spare parts and repair, refurbishment and equipment upgrade services are also influenced by the age of the installed equipment and equipment replacement rates, with equipment generally requiring greater levels of repair and maintenance the longer it is left in service.

The Company was formed by its current stockholders in 1986 to acquire certain assets and to assume certain liabilities of the former Farrel Company, an unprofitable division of USM, a subsidiary of Emhart, in a leveraged buyout. The total purchase price paid in the acquisition was $18.8 million, which included the payment of $1.8 million in cash and the assumption of $17.0 million in balance sheet liabilities of the business acquired. The Company's current stockholders contributed $1.0 million to the capital of the Company. The Company incurred $3.1 million of indebtedness at the time of the acquisition to fund the balance of the cash portion of the purchase price, to pay expenses relating to the acquisition and for working capital, all of which has since been repaid. See "Legal Proceedings" for a description of certain material provisions of the agreements among the parties to the acquisition, as well as certain actions pending among the parties. Based on the initial public offering price of $9.50 per share, the value of the Common Stock of the Company owned by its current stockholders, excluding the shares related to the Purchase Option and the shares to be acquired pursuant to the Liebergesell

Purchase, is equal to approximately $36,500,000. Based on the initial public offering price of $9.50 per share, the value of the Common Stock of the Company owned by its current stockholders, including the shares related to the Purchase Option and the Liebergesell Purchase, is equal to approximately $52,097,000.

Management believes that the Company's financial performance since 1986 is attributable to, among other factors, a strategic focus on the rubber and plastics processing industries where the Company's market position had historically been strong, the divestiture of unrelated machinery product lines, production efficiencies resulting from outsourcing of selected machine components and more efficient purchasing practices, an increase in the portion of the Company's revenues derived from aftermarket products and services which generally carry higher margins than new equipment sales, and in years prior to fiscal 1991, the amortization of the excess of acquired assets over cost.

The Company's business strategy focuses on continuing the technological development of its products, improving its global market position, reducing the manufacturing cost of its products and pursuing new market opportunities as they develop. Currently, the Company is working with certain customers to develop equipment that can reduce the level of volatile gases found in plastics and is exploring applications for the Company's equipment in the plastics recycling industry.

The Company's principal executive offices are located a t 25 Main Street, Ansonia, Connecticut 06401. Its telephone number is (203) 736-5500.

RISK FACTORS

In addition to the information set forth elsewhere in this Prospectus, prospective investors should carefully evaluate the following risk factors before purchasing the Shares offered hereby.

Cyclical Business. The Company primarily sells its products to participants in the rubber and plastics processing industries, which are cyclical in nature. Orders for the Company's products have fluctuated based upon its customers' capital expenditure budgets, demand for such customers' end products, the need for upgraded or retooled equipment, competition within the Company's and customers' respective industries, general economic conditions and other factors. There can be no assurance that orders from any one or more of the Company's customers will not decline in the future. Principally as a result of the continuing economic slowdown and consolidation in the primary industries served by the Company, conditions of overcapacity exist in the Company's primary markets, and the Company has experienced a decline in the level of new orders compared to levels experienced in previous years. The Company's ability to maintain and increase sales levels will depend upon a recovery in these markets and a corresponding increase in order activity. There can be no assurance that such a recovery will occur, or that such a recovery will lead to increased orders for the Company's products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Orders and Backlog."

Dependence on Tire and Plastics Industries. During the fiscal year ended April 30, 1991 approxi- mately 40% of the Company's net sales of new capital equipment and project engineering services was to tire manufacturers, and 35% was to customers in the plastics industry. Many tire manufacturers are highly leveraged as a result of industry consolidation, and the industry is currently operating at less than full capacity largely as a result of recessionary forces. In the plastics industry, which is also currently operating at less than full capacity, many manufacturers have been impacted by recessionary forces and relatively depressed prices for their products. New capital expenditures by customers in both industries will depend, in large part, on the ability of manufacturers to increase capacity utilization above current levels and on the need for more efficient machinery. There can be no assurance that such new capital expenditures will occur or result in increased orders for the Company's products. Substantially all of the Company's customers are in the rubber and plastics processing industries, which effectively limits the number of potential customers for the Company's products. While there are customers for the

Company's products outside of the rubber and plastics processing industries, the number of such customers is also limited.

Fluctuations in Operating Results. The Company's customers often purchase equipment in significant quantities for new plants, plant expansion or plant modernization. The dollar value of purchases by any single customer from year to year may vary significantly according to that customer's capital equipment needs. The composition of the Company's largest customers will vary from year to year, and the timing of purchase orders and product shipments can cause backlog and operating results to fluctuate significantly from fiscal period to fiscal period. Some of the Company's products have higher profit margins than others, and a change in the Company's product mix could contribute to fluctuating operating results.

Decline in Orders and Backlog. During each of the past three fiscal years, the Company has experienced a decline in orders received. The Company's fiscal year end backlog of unfilled orders has also declined in each of the past three fiscal years. The Company believes that the decline in orders and backlog is a reflection of the cyclical nature of the markets it serves, the general economic slowdown in the United States and Western Europe, political and economic unrest in Eastern Europe, the Middle East and China and consolidation in the primary industries sewed by the Company, leading to conditions of overcapacity in the Company's primary markets. In addition, in fiscal 1991, the decline was due in part to the Company's strategic decision to emphasize product line profitability over aggregate sales levels, thereby reducing sales efforts associated with lower margin products. The Company's ability to increase sales levels will depend upon a recovery in the Company's primary markets and a corresponding increase in order activity. During the first six months of fiscal 1992, orders increased to $45.7 million from $39.3 million during the comparable period in fiscal 1991. However, as of October 27, 1991, the backlog of orders considered to be firm decreased to $52.9 million from $57.3 million at October 28, 1990. There can be no assurance that this increase in order activity is indicative of a recovery in the Company's primary markets, or that orders and backlog will increase in the future or that they will not continue to decline.

Foreign Operations. The Company's sales outside the United States, which accounted for approxi- mately 62% of net sales for fiscal 1991, may be subject to special risks inherent in doing business outside the United States, including risks of war, civil disturbance and government activities, which may limit or disrupt the Company's operations. Some of the Company's major foreign equipment sales are conducted on the basis of documentary letters of credit assuring payment in U.S. dollars or British pounds sterling at the time of export. Where appropriate and available, foreign credit insurance is secured by the Company and the Company's practice has been to hedge against foreign currency fluctuations when it has deemed such hedging appropriate. No assurance can be given as to the adequacy or availability of such insurance or as to the success of any such hedging activities.

Competition. The Company competes on a global basis with other companies, many of whom are divisions or subsidiaries of larger companies with greater financial and other resources than those of the Company. The Company's ability to compete also can be affected by the relative strength of different currencies.

Environmental Matters. The Company's United States operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling and transportation of certain materials and the discharge of these materials into the environment. The Company's operations outside the United States are also subject to extensive requirements governing environmental protec- tion. Environmental requirements are constantly changing and it is difficult to predict the effect of future requirements on the Company. Future developments, including the discovery of existing condi- tions not currently known by the Company or changes in existing regulations, could require the significant expenditure of funds for capital improvements or require the clean-up of sites not currently subject to such requirements. For a description of potential environmental liabilities of the Company relating to conditions presently known to the Company, see "Business of the Company-Legal

Proceedings- Environmental." While under certain circumstances the Company could be required to incur significant costs in complying with environmental laws and regulations relating to conditions presently known to the Company, the Company does not currently believe that such costs will have a material adverse effect on its financial condition. The Company's belief is based upon, among other things, (i) the advice of the Company's special environmental counsel, Murtha, Cullina, Richter and Pinney, concerning the status of and the legal bases for environmental litigation with USM and Emhart; (ii) the Company's understanding of the underlying facts which give rise to its claims against USM; and (iii) technical advice received from outside consultants relating to the presence and/or nature and scope of subsurface contamination a t the Ansonia and Derby properties and possible remediation options which could be required by the Connecticut Department of Environmental Protection and the United States Environmental Protection Agency with respect thereto. There is no assurance, however, that the Company will prevail in its suit against USM for indemnification under the Environmental Indemnifi- cation Agreement or for strict liability under the Connecticut Transfer Act, or that, if it should prevail, USM will be able to meet its obligations thereunder or that any such recovery from USM would cover all such costs.

No Prior Public Market. Prior to this offering, there has been no public market for the Common Stock, and there is no assurance that following this offering a significant public market for the Common Stock will develop or be sustained. The initial p1;blic offering price has been determined by negotiation between the Company and the Underwriters. See "Underwriting."

Dilution. The purchase price per share paid by investors in this offering will be substantially in excess of the net tangible book value per share of Common Stock outstanding immediately after the offering. Accordingly, the purchasers of Common Stock will experience immediate and substantial dilution. See "Dilution."

Products Liability. The Company faces an inherent business risk of exposure to products liability claims. There can be no assurance that the Company's insurance coverage will be adquate in all events, that such insurance will he available in all future periods a t an acceptable cost or that a future products liability claim will not materially adversely affect the business or financial condition of the Company. Management believes that the outcome of existing products liability claims will not have a material adverse effect on the financial condition of the Company based upon (i) the current status of the proceedings, (ii) liability insurance carried by the Company, (iii) the fact that the Company specifically did not assume or agree to be responsible for product liability claims arising out of products shipped prior to the closing date of the 1986 asset acquisition and (iv) review of attorneys' letters with respect to such proceedings. See "Business of the Company."

Shares Eligible for Future Sale. Upon completion of this offering, 3,842,106 shares of Common Stock owned by existing stockholders will be eligible for sale in the public market, subject to the restrictions of Rule 144 promulgated under the Securities Act of 1933 The prevailing market price of the Common Stock after the offering could be adversely affected by future sales of Common Stock by existing stockholders. See "Shares Eligible for Future Sale."

Control of the Company. Upon completion of this offering, after taking into account the purchase by the Company of 1,483,870 shares of Common Stock pursuant to an option (the "Purchase Option") and assuming the purchase by the Company of 157,894 shares from Rolf K. Liebergesell (the "Liehergesell Purchase"), the current stockholders of the Company will beneficially own approximately 66% of the outstanding Common Stock (approximately 63% if the Underw:iters' over-allotment option is exercised in full) and will be able to control the affairs of the Company and the vote on any action requiring stockholder approval, including the election of directors, other than an amendment to the provisions of the Company's Certificate of Incorporation relating to its classified board. See "Certain Transactions" and "Principal Stockholders."

Certain Transactions. The Company intends to use $3.8 million of the net proceeds to be received in this offering to repay indebtedness relating to the purchase by the Company of 1,483,870 shares of

Common Stock from existing stockholders pursuant to the Purchase Option. The Company has also agreed to purchase shares of Common Stock from Mr. Liebergesell pursuant to the Liebergesell Purchase. The Company will purchase from Mr. Liebergesell that number of shares equal to $1.5 million divided by the initial public offering price set forth on the cover page of this Prospectus. The Company will pay the purchase price by cancellation of Mr. Liebergesell's indebtedness to the Company in the amount of $1.5 million. Based on the initial public offering price of $9.50, the Company would purchase 157,894 shares from Mr. Liebergesell. See "Use of Proceeds," "Certain Transactions" and "Indebtedness of Management; Liebergesell Purchase." The Company has entered into an agreement with a related corporation providing for certain financial advisory services to the Company that requires payment of an annual retainer of $450,000, plus certain other fees. See "Certain Transactions." Other than the transactions referred to under "Certain Transactions," the Company has no current intention of entering into any material transaction with any of its affiliates.

Anti-takeover Eflects of the Certificate of Incorporation and Delaware Law. The Company's Certificate of Incorporation and the Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of the Company. These provisions (i) classify the Company's Board of Directors into two classes, each of which serves for a staggered two-year term, (ii) require a 2/3 vote of stockholders for certain changes to directors and/or directorships and (iii) authorize only the Board of Directors to fill vacant directorships. The Company's Certificate of Incorporation also authorizes the Board of Directors to issue one or more series of preferred stock without stockholder approval, which stock could have voting and conversion rights that adversely affect the voting power of the holders of Common Stock. The Delaware General Corporation Law also imposes conditions on certain business combination transactions with "interested stockholders" (as defined therein). See "Description of Capital Stock."

Limitation on Dividends. The Company has not paid any dividends on its Common Stock since its incorporation. The Company intends to pay a quarterly cash dividend subject to the discretion of the Board of Directors. The Company's ability to pay dividends will be limited by a credit agreement to 50% of cumulative consolidated net income during specified periods. See "Dividend Policy."

USEOFPROCEEDS

The net proceeds to be received by the Company from the sale of the 2,000,000 Shares offered by the Company will be $16.2 million ($18.9 million if the Underwriters' over-allotment option is exercised in full), after payment of the underwriting discount and estimated offering expenses.

The Company intends to use the net proceeds of the offering to upgrade and expand the Company's U.S. and foreign facilities and to acquire new machinery and additional facilities (approximately $10.1 million in the aggregate), to establish research and development facilities for new or improved products (approximately $2.1 million) and to repay indebtedness relating to the purchase by the Company of 1,483,870 shares pursuant to the Purchase Option ($3.8 million), with the balance for working capital and other general corporate purposes. See "Certain Transactions" for a description of the Purchase Option. The acquisition of additional facilities may be in the form of an acquisition of an existing business with such facilities. However, no negotiations are currently being undertaken by the Company in respect of any such acquisition.

Until the net proceeds of the offering are fully used, the Company intends to invest such proceeds in investment grade, short-term, interest-hearing obligations or U.S. government obligations.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of October 27, 1991, and as adjusted as of that date to give effect to the issuance and sale by the Company of 2,000,000 Shares (at the initial offering price of $9.50 per share and after deducting underwriting discounts and estimated offering expenses) and the purchase of shares pursuant to the Purchase Option and the Liebergesell Purchase. See "Use of Proceeds" and "Certain Transactions." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this Prospectus.

At October 27, 1991 Actual Pm Forma(1) As Adjmted

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term debt Stockholders' equity:

Preferred stock, par value $100, 1,000,000 shares authorized, no shares issued and outstanding

Common stock, par value $.01, 10,000,000 shares authorized, 5,483,870 shares issued and outstanding (actual) . . . . . . . . 5,842,106 shares issued and outstanding (as adjusted) . . . .

Paid incapital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings. Loans to stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . Total capitalization . . . . . . . . . . . . . . . . . . . . . . .

(In thousands) (Unaudited)

% 856 $ 856 $ 856 - --

(1) Represents actual capitalization, adjusted to reflect $1.5 million of loans to a stockholder as a reduction of stockholders' equity, inasmuch as it is the intention of the Company to consummate the Liebergesell Purchase by cancellation of such stockholder's indebtedness to the Company.

In addition, 600,000 shares of Common Stock have been reserved for issuance upon exercise of options which may be granted under the Company's 1992 Stock Option Plan for Key Employees and Non-Employee Directors. An additional 500,000 shares of Common Stock have been reserved for issuance pursuant to the Company's 1992 Employees' Stock Purchase Plan. See "Management of the Company-Stock Option Plan" and "-Stock Purchase Plan."

DIVIDEND POLICY

Since its incorporation, the Company has not declared or paid any dividends on the Common Stock. Following the offering, the Company intends to pay a quarterly cash dividend on the Common Stock, subject to the discretion of the Board of Directors after consideration of the Company's operating results, financial condition, cash requirements, general business conditions and such other factors as the Board of Directors deems relevant. No assurance can be given as to the timing, payment or amount of such dividends.

Effective upon the sale of the Shares, the Company's ability to pay dividends will be limited by a credit agreement to 50% of the Company's cumulative consolidated net income during the 8 fiscal quarters preceding the date of the dividend or since May 1, 1991, whichever period is shorter (after deducting distributions previously made during the period).

DILUTION

At October 27, 1991, the net tangible book value of the Common Stock was $2.34 per share, after taking into account the purchase of shares pursuant to the Purchase Option and assuming consumma- tion of the Liebergesell Purchase. Net tangible book value per share represents the tangible assets (total assets less intangible assets) of the Company, minus liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 2,000,000 Shares offered hereby at the initial public offering price of $9.50 per share (less underwriting discounts and estimated offering expenses), the pro forma net tangible book value of the Common Stock at October 27, 1991 would have been $4.31 per share. This represents an immediate increase in net tangible book value of $1.97 per share to existing stockholders and an immediate dilution of $5.19 per share to purchasers in this offering.

The following table illustrates the per share dilution:

Initial public offering price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.50 Pro forma net tangible book value before the offering after taking into account

the purchase of shares pursuant to the Purchase Option and assuming consummation of the L~ebergesell Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.34

Increase attributable to the sale by the Company of the 2,000,000 Shares offered hereby to new investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.97 -

.. . . . . . . . . . . . . . . . . . . . . . . . . Pro forma net tangible book value after the offering 4.31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilution to new investors.. $5.19 -

Assuming that the Underwriters' over-allotment option is exercised in full, such pro forma net tangible book value would be $4.54 per share, the immediate increase in pro forma net tangible book value of shares owned by existing stockholders would be $2.20 per share, and the immediate dilution to new investors would be $4.96 per share.

The following table illustrates on a pro forma basis for existing stockholders (after taking into account the purchase of shares pursuant to the Purchase Option and assuming consummation of the Liebergesell Purchase) and new investors. the number of shares purchased from the Company, the total consideration paid and the average price paid per share (assuming no exercise by the Underwriters of the over-allotment option):

Shares Purchased Average Consideration Paid Price

-- Amount Percent Per Share Number Percent

Existing stockholders . . . . . . . . . . . . . . . . . . . . . . 3,842,106 66% $ 700,619 4% $ .18 New investors.. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 34% $19,000,000 96% $9.50

Rolf K. Liebergesell acquired his shares of Common Stock in April 1986 for a price of approxi- mately 6.16 per share; other existing stockholders acquired their shares in April 1986 for a price of approximately $.22 per share.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for, and a t the end of, each of the years in the five- ear period ended April 30, 1991 have been derived from the consolidated financial statements of the C! ompany, which financial statements have been audited by Cooper, Selvin and Strassberg, independent auditors. The selected consolidated financial data presented below for the six-month periods ended October 28,1990 and October 27,1991, and at October 27,1991, have been derived from the unaudited consolidated financial statements of the Company included elsewhere in this Prospectus. In the opinion of management, the interim data include all ad'ustments (consistin only of normal recurring adjustments) necessary for a fair presentation of such d ata at and for such ates and periods. The results of operations for the six-month period ended October 27, 1991 are not necessarily indicative of the results for the entire year. The selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Prospectus.

Six Mootha Ended

Fi-l Year Ended April 30, October October

1987 1988 1990 1991 283 27,

1990 1991 - Statement of Oprations Data: (h thousands, e-t per shiat.) - - Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,650 $71.425 $92,382 $121,147 $104,686 $54,327 $46,547 Cost of sa les . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,862 56,714 75,113 . 103,075 78,128 41,572 33.498 - - - - - - - Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,788 14,711 17,269 18,072 26,558 12,755 13,049

As a percent of net sales . . . . . . . . . . . . . . . . . 15.8% 20.6% 18.7% 14.9% 25.4% 23.5% 28.0% Operating expenses:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,886 6,429 6,119 6.532 7,989 3,739 3,793 General and administrative. . . . . . . . . . . . . . . . 6,447 7,217 7,880 10,124 11,155 4.887 5,220 Research and development . . . . . . . . . . . . . . . . 822 1,056 1,203 1,277 2,034 926 1,097 - - - - - - -

Total operating expenses:. . . . . . . . . . . . . . . . 12,155 14,702 15,202 17,933 21,178 9,552 10,110 Operating income (loss) . . . . . . . . . . . . . . . . . . . . (3,367) 9 2,067 I39 5,380 3.203 2,939 Other income (ex ense):

Amortization a! excess of acquired assets over cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,792 1.890 1,889 1,730 - - -

Gain (loss) on disposal of investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 549 (874) 350 -

Exchange gain on remeasurement of subsidiary . . . . . . . . . . . . . . net assets into U.S. dollars - 1,341 - - - - -

Gain an disposition of product line assets. . . . . . 2,583 559 - - - - - Interest income . . . . . . . . . . . . . . . . . . . . . . . . 101 1.005 144 258 333 299 194

. . . . . . . . . . . . . . . . . . . . . . . . Interestexpense (750) (590) (538) (791) (260) (129) (412) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807 330 555 220 39 (159)- ------ 8

Income before provision for income taxes . . . . . . . 1,166 5,093 3,243 1,906 5,492 3,214 2,729 Provision for income taxes . . . . . . . . . . . . . . . . . . 441 1,466 1087 373 1,981 1,130 1,045 --L---- Net income.. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 725 $ 3,627 $ 2,156 $ 1,533 $ 3.511 $ 2,084 $ 1,684 - - - - - - - - - - - - - - Net income per share of Common Stock(l) . . . . . $ . I3 $ .66 $ .39 $ .28 $ .64 $ $ ,31 - - - - - - - - - Pro forma net income per share of Common

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock(2) $ .80 $ .47 $ .38 --- April 30. October Oclober

28. 27, 1987 1988 1989 1990 1991 19% 1991 - - - - - -

Balance Sheet Data: (I" t=nds) Working capital. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,608 $ 7,666 $12,652 $ 5,935 $ 8,129 $ 7,385 $ 9,476 Totalassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,209 43,916 57,789 45,211 49,897 50,453 49,721 Current maturities of long-term debt . . . . . . . . . . 393 2,007 - - - - - Long-term debt (less current portion) . . . . . . . . . . 2,080 - 5,980 - 865 - 856 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . 2.001 6,418 8,090 9,412 12,768 12,504 14.396

Other Data: Capital expenditures(3) . . . . . . . . . . . . . . . . . . . . $ 1.088 $ 2,256 $ 2,009 $ 1,085 $ 3,660 $ 1,757 $ 977 Depreciation(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 15 281 333 627 901 388 583 Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,511 68,673 99,929 72,325 54,166 57,301 52,900

( I ) Based upon 5,483,870 shares outstanding during the period. (2) Based on 4,310,953 shares outstanding, after taking into account a stock split effective October 24, 1991 and the

urchase by the Company of 1,483,870 shares pursuant to the Purchase Option and after giving effect to the purchase !y the Company of 157,894 shares upon consummation of the Liebergesell Purchase and to the issuance of 468,847 shares pursuant to this offering (representing that number of shares, the roceeds of the sale of which will be utilized by the Company to re ay indebtedness relating to the purchase by the Eompany of 1.483.870 shares pursuant to the Purchase Option). Euch calculation excludes interest income to the Company earned in respect of the $1.5 million in stwkholder loans to be cancelled in connection with the Liebergesell Purchase. See "Certain Transactions."

(3) For the period ended.

12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements of the Company and related notes thereto appearing elsewhere in this Prospectus.

Overview

The Company was formed by its current stockholders in 1986 to acquire certain assets and to assume certain liabilities of the former Farrel Company, an unprofitable division of USM, a subsidiary of Emhart. Management believes that the Company's performance since 1986 is attributable to a number of factors including:

Strategic Focus. The Company's predecessor manufactured a number of product lines for the metal working industry. These product lines were divested to facilitate the Company's strategic focus on the rubber and plastics processing industries where management felt that the Company's prospects for a successful turnaround were high due to the Company's strong historical market position in these industries.

Production Eficiencies. Where possible, the Company has subcontracted the manufacture of certain components to lower cost vendors without diminishing the quality of the components. Increased outsourcing and more efficient purchasing practices have been factors in the improvement in the Company's performance.

More Profitable Product Mix. The Company has emphasized product line profitability over aggregate sales levels, putting greater effort behind those products expected to deliver higher margins. The Company has also increased the portion of its revenues derived from its aftermarket business, which generally carries higher margins..

General

The assets acquired in 1986 from USM were recorded on the books of the Company at their estimated fair market values. The value of the net assets acquired by the Company in 1986 exceeded the wst of the acquisition by approximately $20.0 million. A portion of this excess was accounted for as a reduction of the acquired non-current asset values to zero. The remainder, approximately $7.3 million, was accounted for as a credit on the balance sheet of the Company. This credit was deemed to represent primarily discounts from the inventory values acquired, and was amortized to income over the four-year period ended April 30, 1990.

As a result of the aforementioned reduction of the acquired non-current asset values to zero, the non-current assets, including property, plant and equipment acquired from USM in 1986, are carried on the Company's consolidated balance sheet at zero value. Property, plant and equipment values carried on the Company's April 30, 1991 consolidated balance sheet represent the values, net of depreciation, of property, plant and equipment acquired after May 1986. As a consequence, the Company's level of depreciation has been less than if such depreciation had been based on historic carrying values or on fair market values.

The Company recognizes revenue and associated costs of manufacturing at the time it ships its products. In order to manage working capital more efficiently, the Company generally receives down payments and progress payments in order to finance the cost of product completion. Due to the large dollar value and long lead times (up to twelve months or more) associated with revenues derived from major equipment orders, the Company's financial results may fluctuate widely depending upon the timing of the actual shipment of such orders.

See Note 15 to the Company's Consolidated Financial Statements included elsewhere in this Prospectus for financial information relating to the Company's foreign operations and export sales. Due to the global nature of the business of many of the Company's customers, the Company operates under a global management structure with interdependent domestic and foreign operations. The Company's domestic and foreign sales, engineering and research and development groups are each supervised by a single group executive, and Mr. Liebergesell serves as chief executive officer of both domestic and foreign operations. In appropriate circumstances, the Company's domestic operations subcontracts with the Company's U.K. subsidiary to manufacture component parts of equipment ordered by a U.S. customer, or vice versa. Based upon plant utilization, interest rates, production capacity, currency fluctuations and exchange rates, shipping costs, tax considerations, the availability of credit insurance and other factors, management has discretion with respect to the place of manufacture irrespective of the location from which an order originates or to which the equipment is to he delivered.

Results of Operations

The following table sets forth the statement of operations items as a percentage of net sales for each of the fiscal periods shown:

Fiscal Year Ended Six Months Ended April 30, October 28, October 27,

1989 - 1990 - 1991 - 1990 1991

Net sales.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 81.3 85.1 74.6

Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 18.7 14.9 25.4 Operating expenses:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 5.4 7.7 General and administrative . . . . . . . . . . . . . 8.6 8.3 10.7 Research and development . . . . . . . . . . . . . 1.3 - 1.1 - 1.9

Total operating expenses. . . . . . . . . . . . . . . . . 16.5 14.8 20.3 Operating income . . . . . . . . . . . . . . . . . . . . . . 2.2 0.1 5.1 Other income (expense):

Amortization of excess of acquired assets over cost. . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 1.4 -

Gain (loss) . . on disposal of investment in subs~d~ary . . . . . . . . . . . . . . . . . . . . . . . . . (0.9) 0.3 -

Interest income . . . . . . . . . . . . . . . . . . . . . . 0.2 0.2 0.3 Interest expense.. . . . . . . . . . . . . . . . . . . . . (0.6) (0.6) (0.2) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 0.2 - - - -

Income before provision for income taxes . . . 3.5 1.6 5.2 Provision for income taxes . . . . . . . . . . . . . . . 1.2 0.3 - 1.8 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3% 1.3% 3.4% - - - - - -

(Unaudited)

Six Months Ended October 27, 1991 Compared to Six Months Ended October 28, 1990

Net sales for the first six months of fiscal 1992 were $46.5 million, down from $54.3 million reported for the same period of fiscal 1991. Sales of new machinery and process engineering services of $26.5 million for the first six months of fiscal 1992 were $6.3 million lower than the comparable period of the prior year, due primarily to lower overseas sales levels resulting from the continuing worldwide recession, and political and economic unrest in Eastern Europe, the Middle East and China. The Company believes that the worldwide recession has caused its customers to experience a general decline

in the demand for their products, and has resulted in postponement of expenditures by such customers for new equipment and a corresponding decline in sales of the Company's products. The Company has closely monitored operating costs and hiring levels to bring them in line with such lower sales levels. Aftermarket sales were $18.0 million for the first six months of fiscal 1992, or $1.5 million lower than the comparable period of the prior year. Aftermarket sales were less significantly affected by the worldwide recession as customers continued to have needs for the repair and service of presently owned equipment. Orders received by the Company during the first six months of fiscal 1992 were $45.7 million, a 16.3% increase over the first six months of fiscal 1991. Backlog at the end of the six-month period ended October 27, 1991 was $52.9 million, compared to $57.3 million at October 28, 1990. Of the backlog of orders considered to be firm as of October 27, 1991, the Company expects to fill approximately $40.7 million during the current fiscal year.

Gross margin increased to $13.0 million in the first six months of fiscal 1992 from $12.8 million in the first six months of fiscal 1991 and gross margin as a percentage of net sales increased to 28.0% from 23.5%. During the last six months of fiscal 1991, the Cornpafly's gross margin as a percentage of sales was 27.4%. The increase in gross margin was due to several factors, including higher margins on new equipment sales, more efficient purchasing practices and a more profitable product mix, as aftermarket sales represented a higher percentage of total sales in fiscal 1992. These gains were offset in part by higher warranty and installation expenses.

Selling expenses increased $54,000 primarily due to participation in trade shows. Selling expenses increased to 8.1% of net sales compared to 6.9% in the comparable prior year period due principally to the fixed nature of many of the Company's selling expenses and lower sales levels. General and administrative expenses increased $333,000 in the first six months of fiscal 1992 compared to the first six months of fiscal 1991. Higher salaries and related fringe benefit expenses accounted in large part for the increase. Due to the fixed nature of these expenses and lower sales levels, general and administrative expenses as a percentage of net sales increased from 9.0% in the first six months of fiscal 1991 to 11.2% in the first six months of fiscal 1992. Research and development expense increased $171,000 reflecting the Company's ongoing development efforts.

Other income, exclusive of interest income and interest expense, increased by $167,000 in the first six months of fiscal 1992 compared to the comparable prior year period due to reductions in foreign exchange losses and miscellanwus other expenses.

Interest income decreased by $105,000 to $194,000. Interest expense increased by $283,000 to $412,000 in the first six months of fiscal 1992 compared to the first six months of fiscal 1991. The increase was due to interest charges associated with the sale of certain receivables under the terms of a credit facility with a major U.K. bank. See "Liquidity and Capital Resources; Capital Expenditures."

Income tax expense as a percentage of pre-tax income increased to 38.3% in the first six months of fiscal 1992 from 35.2% in the first six months of fiscal 1991.

Fiscal 1991 Compared to Fiscal 1990

Net sales for fiscal 1991 were $104.7 million, which was 13.6% lower than the $121.1 million reported for fiscal 1990. In fiscal 1990, the Company experienced a very significant increase in sales ($28.8 million) over the prior year, in part due to significant capacity additions by plastics manufactur- ers, which additions did not recur in fiscal 1991. The $16.5 million decrease in net sales from fiscal 1990 to 1991 was attributable to a $17.7 million decline in sales of new machines and process engineering services, offset, in part, by a $1.2 million increase in aftermarket sales from $37.2 million to $38.4 million. The decline in sales of new equipment and process engineering services was primarily due to lower sales to plastics manufacturers that were absorbing significant capacity additions made in prior years, and to the general economic slowdown, which caused a reduction in the manufacturing activity of

the Company's customers, and a corresponding postponement of capital expenditures for new equip ment. The decline also resulted from an emphasis by the Company on higher margin business, which led the Company to reduce sales efforts associated with lower margin products. During fiscal 1991, net sales were favorably affected by $7.9 million due to the devaluation of the U.S. dollar relative to the pound sterling. Revenues and expenses of the Company's U.K. subsidiary are denominated in pounds sterling, and significant movements in the value of the pound sterling relative to the U.S. dollar can affect the operating results of the Company. Orders received by the Company during fiscal 1991 were $86.5 million, 7.5% less than orders received of $93.5 million during fiscal 1990. Backlog at the end of fiscal 1991 was $54.2 million, compared to $72.3 million at the end of fiscal 1990.

Gross margin increased from $18.1 million in fiscal 1990 to $26.6 million in 1991. Gross margin as a percentage of net sales increased from 14.9% in fiscal 1990 to 25.4% in fiscal 1991. The significant increase in the gross margin percentage was attributable to a number of factors. First, the Company's 14.9% gross margin percentage in fiscal 1990, which was significantly lower than the 18.7% gross margin percentage achieved in fiscal 1989, was negatively affected by several low margin orders accepted by the Company as a means of gaining market acceptance for a newly developed continuous mixer targeted for the plastics industry. This discounting allowed the Company to establish several installations of the new machine in the field, and such installations are expected to facilitate future sales. In fiscal 1991, the Company did not pursue a discounting strategy for this product. Second, in fiscal 1991 the percentage of the Company's net sales derived from aftermarket sales, which generally carry higher margins than new equipment sales, increased to 37%. from 31% in fiscal 1990. Third, gross margin was favorably affected in fiscal 1991 by effective cost controls resulting in more efficient purchasing practices, greater adherence to manufacturing delivery schedules and lower warranty and installation expenses. Fourth, gross margin was favorably affected by the aforementioned favorable impact of the devaluation of the U.S. dollar relative to the pound sterling.

Selling expenses increased $1.5 million to 7.7% of net sales in fiscal 1991 compared to 5.4% in fiscal 1990, primarily due to increased staffing levels, including the opening of a new sales ofice in Charlotte, North Carolina, in anticipation of future growth. In addition, expenses associated with an industry trade show accounted for a portion of the difference. General and administrative expenses increased $1.0 million to 10.7% of net sales in fiscal 1991 compared to 8.3% in fiscal 1990. The increase in general and administrative expenses was primarily due to increased legal fees relating to commercial disputes in fiscal 1991 and increased staffing levels, offset by a bonus paid in fiscal year 1990 to an officer of the Company in recognition of past services. Research and development expense increased $757,000 to 1.9% of net sales in fiscal 1991 from 1.1% of net sales in fiscal 1990 in part due to costs associated with the Company's emphasis on development of improved and new products and the appointment of a vice president of technology.

Other income, exclusive of interest income and interest expense, decreased by $2.3 million to $39,000. The principal reason for this decrease was the absence in fiscal 1991 of income from the amortization of the excess of acquired assets over cost relating to the 1986 acquisition. This excess of acquired assets over cost became fully amortized in fiscal 1990, and in that fiscal year, the Company recognized income from such amortization of $1.7 million. Also contributing to the decrease in other income was the recognition in fiscal 1990 of a gain on the disposal of a subsidiary in the amount of $350,000.

Interest income increased from $258,000 in fiscal 1990 to $333,000 in fiscal 1991 due in large part to a higher average balance of cash available for investment. Interest expense decreased from $791,000 in fiscal 1990 to $260,000 in fiscal 1991 due principally to lower average borrowings.

Income tax expense as a percentage of pre-tax income increased from 19.6% in fiscal 1990 to 36.0% in fiscal 1991. The percentage was lower in fiscal 1990 primarily because a tax provision was not

16

required to be made on the amortization of the excess of acquired assets over cost relating to United Kingdom net assets.

Fiscal 1990 Compared to Fiscal 1989

Net sales were $121.1 million for fiscal 1990 or $28.8 million higher than fiscal 1989, a 31.1% increase. New machines and process engineering sales for fiscal 1990 were $83.9 million or $23.0 million higher than the prior year. Aftermarket sales for fiscal 1991 were $37.2 million or $5.8 million higher than the prior year. Deliveries relating to several large orders accepted as a strategic means of entering new markets accounted for a significant portion of the increase in new machine sales. Orders received by the Company during fiscal 1990 were $93.5 million, a 24.3% decrease from fiscal 1989. Backlog at the end of fiscal 1990 was $72.3 million, compared to $99.9 million at the end of fiscal 1989.

Gross margin increased from $17.3 million in fiscal 1989 to $18.1 million in fiscal 1990. Gross margin as a percentage of net sales decreased from 18.7% in fiscal 1989 to 14.9% in fiscal 1990 due in part to lower than expected margins on several large orders that were accepted at relatively low margins as a strategic means of entering new markets. In addition, higher than anticipated warranty and installation expenses contributed to the decline in gross margin.

Selling expenses increased $413,000 to $6.5 million in fiscal 1990 hut declined as a percentage of net sales from 6.6% in fiscal 1989 to 5.4% in fiscal 1990. Such increase was generally due to normal growth in anticipation of future increases in sales. General and administrative expenses increased $2.2 million in fiscal 1990 to $10.1 million due, in large part, to a bonus paid to an officer of the Company in recognition of past services and to increased recruiting and legal expenses. However, general and administrative expenses decreased as a percentage of net sales to 8.3% compared to 8.6% in fiscal 1989 due to the greater percentage increase in net sales. Research and development expenses increased $74,000 to $1.3 million and declined as a percentage of net sales to 1.1% in fiscal 1990 from 1.3% in fiscal 1989.

Other income, exclusive of interest income and interest expense, increased by $730,000 in fiscal 1990, principally due to a gain of $350,000 on the disposal of a subsidiary. The investment in this subsidiary had been written off in fiscal 1989 at a cost of $874,000 and thereby generated a year-to-year galn. The write-off in fiscal 1989 and the gain on disposal in fiscal 1990 related to the closure and subsequent sale of the Company's Brazilian subsidiary. The Company decided to divest this subsidiary due to adverse economic conditions in Brazil. The Company continues to service that market through its U.S. operations. Partially offsetting the increase in other income in fiscal 1990 was a $335,000 decrease due principally to a reduction in royalty income.

Interest income increased from $144,000 in fiscal 1989 to $258,000 in fiscal 1990, primarily due to interest earned on stockholder loans. Interest expense increased from $538,000 to $791,000 due to higher average borrowings.

Income tax expense as a percentage of pre-tax income decreased from 33.5% in fiscal 1989 to 19.6% in fiscal 1990. The percentage was higher in fiscal 1989 primarily because a tax benefit was not recorded in that fiscal year on a portion of the write-off of the investment in the Brazilian subsidiary which was made in that fiscal year. The portion of the write-off on which a tax benefit was not recorded was that portion which represented previously recognized, but undistributed, income for which a U.S. tax expense had not been previously provided.

Orders and Backlog

During each of the past three fiscal years, the Company has experienced a decline in orders received. In fiscal 1989, the Company received several large orders from plastics manufacturers planning significant capacity additions, and orders totalled $123.5 million. In fiscal 1990, orders

decreased from the fiscal 1989 level to $93.5 million in part due to the general economic slowdown in the United States and Western Europe, which caused certain of the Company's customers to reduce or postpone planned capacity additions. Orders received in fiscal 1991 were $86.5 million. The further decline in orders resulted from continuing recessionary conditions in the Company's markets in the United States and Western Europe. Moreover, political and economic unrest in Eastern Europe, the Middle East and China caused certain of the Company's customers in those regions to postpone capital spending programs. In addition, the decline in orders since fiscal 1989 is due in part to reduced capital spending by plastics manufacturers that have been absorbing significant capacity additions made in prior periods.

A decline in orders in any fiscal period may result in a decline in sales in the same or a subsequent fiscal period. The Company recognizes revenue at the time it ships its products and in the case of major equipment orders often up to 12 months or more is required to complete the manufacturing process. Accordingly, the revenue from an order may be recognized in a later accounting period than the one in which the order was received.

The Company has experienced a decline in net sales in its 1991 fiscal year. Net sales in fiscal 1991 were $104.7 million, as compared to $121.1 million in fiscal 1990. Similarly, net sales during the first six months of fiscal 1992 declined to $46.5 million from $54.3 million in the first six months of fiscal 1991. The decline in net sales is due in part to the decline in orders over the past three fiscal years. The decline is also due in part, however, to the Company's strategic decision to emphasize product line profitability over aggregate sales levels. The emphasis on higher margin business has led the Company to reduce sales efforts associated with lower margin products.

The Company's ability to increase net sales levels will depend upon a recovery in the Company's primary markets and a corresponding increase in order activity. During the first six months of fiscal 1992, orders increased to $45.7 million from $39.3 million during the comparable period in fiscal 1991. This increase was primarily attributable to an increase in orders from the Company's customers in the plastics industry, particularly in the value-added mixing segment of the market. There can be no assurance that this increase in order activity is indicative of a recovery in the Company's primary markets or that orders and backlog will increase in the future or that they will not again decline.

The Company's backlog has declined as of the end of each of the past three fiscal years. Backlog at the end of fiscal years 1989, 1990 and 1991 was $99.9 million, $72.3 million and $54.2 million, respectively. Backlog has declined, in part, due to the decline in orders received. Of the backlog of orders considered to be firm as of April 30, 1991, the Company expects to fill approximately $52.6 million during the current fiscal year.

Over the past three years, the Company has shortened the lead time required to deliver certain new equipment from over one year to approximately six months, resulting in individual equipment orders generally spending less time in backlog. The Company has also increased the portion of its revenues derived from aftermarket sales, which have significantly faster turnaround times than new equipment sales. The effect of these two trends, assuming a level volume of net sales, is to reduce average backlog. Assuming no significant worsening of political and economic conditions, the Company believes that the decline in backlog from the 1989 level to the current level will not have a material adverse effect on the Company.

Environmental

The Company's United States operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, handling and transportation of certain materials and the discharge of these materials into the environment. The Company's operations outside the United States

18

are also subject to extensive requirements governing environmental protection. Environmental require- ments are constantly changing and it is difficult to predict the effect of future requirements on the Company. Future developments, including the discovery of existing conditions not currently known by the Company or changes in existing regulations, could require the significant expenditure of funds for capital improvements or require the clean-up of sites not currently subject to such requirements. While under certain circumstances the Company could be required to incur significant costs in complying with environmental laws and regulations relating to conditions presently known to the Company, the Company does not currently believe that such costs will have a material adverse effect on its financial condition. For a description of potential environmental liabilities of the Company relating to conditions presently known to the Company, including preliminary estimates as to the costs of remediation, see "Business of the Company-Legal Proceedings-Environmental."

Liquidity and Capital Resources; Capital Expenditures

Working capital at October 27, 1991 was $9.5 million, or $2.1 million higher than at October 28, 1990. The ratio of current assets to current liabilities was 1.3 to 1.0 at Octoher 27, 1991 and 1.2 to 1.0 at October 28, 1990. Due to the nature of the Company's business, many sales are of a large dollar amount. Consequently, accounts receivable and/or inventory may be temporarily at high levels which may result in a temporary decline 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 and with borrowings under its bank credit facilities. The Company currently has individual credit facilities in the U.S. and the U.K. The principal reason the Company incurs indebtedness under these facilities is to fund working capital requirements. The Company's credit agreement in the U.S. is with a major U.S. hank under which it is authorized to borrow up to the lesser of $10 million or an amount equal to the sum of stipulated percentages of eligible real property, receivables and inventory. This credit facility may also be utilized for letters of credit and acceptances. At October 27, 1991, letters of credit outstanding under this agreement amounted to approximately $1.7 million. Interest is payable monthly and accrues on the outstanding loan balance at the bank's prime rate plus one percent. At October 27, 1991, there were no loans outstanding under this agreement.

The credit agreement has been amended, as of November 27, 1991, to increase the amount available thereunder by an additional $5 million for the sole purpose of making available to the Company a sufficient amount of funds to purchase the 1,483,870 shares of Common Stock under the Purchase Option. The amendment requires a nonrefundable commitment fee of $15,000 and a fee of $35,000 in connection with borrowings ($3.8 million) to purchase shares pursuant to the Purchase Option. The interest provisions were not amended. The increased commitment expires on February 28, 1992. The Company intends to repay any borrowings thereunder out of the proceeds of this offering.

Outstanding amounts are secured by a pledge of substantially all of the U.S. assets of the Company, including mortgages on real property. The agreement contains certain restrictions on the making of investments, loans and capital expenditures, on borrowings, on the sales of assets and on the payment of dividends. The agreement requires the maintenance of minimum levels of net worth, as defined, and maximum ratios of total liabilities, as defined, to net worth, as well as the maintenance of stipulated levels of operating profit and backlog. The agreement terminates on December 31, 1992.

The Company's credit facility in the U.K. is with a major U.K. hank and is for a total of 6.5 million pounds sterling (or $11.1 million at Octoher 27, 1991) under which it may borrow up to 2.5 million pounds sterling (or $4.3 million a t October 27, 1991) for working capital requirements. The balance of the facility is available in the form of bank guarantees. Interest is charged a t the bank's base rate plus 1% percent. The facility is secured by the fixed assets and receivables of the Company's U.K. subsidiary. At October 27, 1991, there were no loans outstanding under this arrangement. Letters of

credit amounted to 3.2 million pounds sterling (or $5.5 million at October 27, 1991). The agreement terminates on April 23, 1992.

The Company has a long-term loan in the amount of 500,000 pounds sterling (or $856,000 at October 27, 1991). from the same U.K. bank, which matures in January 1999 with semiannual principal payments commencing in 1995. The proceeds were used to refurbish the Company's U.K. facilities. The interest on this loan is 10% per annum except that, for the first five years of the term, certain rebates of interest may be granted by the bank under certain circumstances.

The Company anticipates that its operating cash flows, available lines of credit and the net proceeds of this offering will be adequate to fund its anticipated capital commitments and working capital requirements for at least the next twelve months.

During fiscal years 1990 and 1991, the Company had capital expenditures of $1.1 million and $3.7 million, respectively. Through the six months ended October 27, 1991 the Company had capital expenditures of $977,000.

FASB No. 106

In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FASB No. 106"). FASB No. 106 will significantly change the prevailing practice of accounting for postretirement benefits on a cash basis by requiring accrual of the expected cost of these benefits during the years that the employees render services. The Company is required to adopt the new accounting and disclosure rules no Later than its 1994 fiscal year, although earlier adoption is permitted. The Company may adopt the new standard prospectively or via a catch-up adjustment. The Company has not yet determined when it will adopt FASB No. 106, nor has the Company completed the analysis required to estimate the impact of the new standard.

BUSINESS OF THE COMPANY General

The Company designs, manufactures, sells and services capital equipment used to process rubber and plastics materials. The Company's principal products are BANBURY Mixers, continuous mixers, extruders, compact processors, pelletizers, gear pumps, calenders and mills. In conjunction with sales of capital equipment, the Company provides process engineering, process design and related services for rubber and plastics processing systems. The Company's aftermarket business consists primarily 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.

Sales of new capital equipment and process engineering services accounted for approximately 63% of the Company's net sales in fiscal 1991. Sales of aftermarket products and services accounted for approximately 37% of net sales in fiscal 1991. In fiscal 1991, approximately 65% of the Company's sales of new capital equipment and process engineering services was to customers in the rubber industry and 35% was to customers in the plastics industry.

The Company's customers include tire manufacturing and petrochemical firms. The Company's rubber processing equipment is primarily sold to tire manufacturers and manufacturers of rubber goods, such as sheet products, molded products, footwear and wire and cable. In the plastics processing industry, the Company's equipment is primarily sold to commodity plastics producers and value-added mixers of plastics materials. The Company markets its products through an international sales and service organization which includes four offices in the United States, one in Canada, six in other countries, and independent sales representatives covering 28 countries.

Sales outside of the United States accounted for approximately 62% of the Company's net sales during fiscal 1991. The Company's sales outside the U.S. are subject to certain risks inherent in doing business outside the U.S., including risks of war, civil disturbance and government activities, which may limit or disrupt the Company's activities. Where appropriate and available, the Company secures foreign credit insurance for sales outside the U.S. Some of the Company's major foreign equipment sales are conducted on the basis of documentary letters of credit assuring payment in U.S. dollars or British pounds sterling at the time of export. During fiscal 1991, net sales were favorably affected by the devaluation of the U.S. dollar. It has been the Company's practice to hedge against foreign currency fluctuations when it has deemed such hedging appropriate.

The Company was formed by its current stockholders in 1986 to acquire certain assets and to assume certain liabilities of the former Farrel Company, an unprofitable division of USM, a subsidiary of Emhart, in a leveraged buyout. Immediately following the acquisition, the Company's operating strategy concentrated on: reducing the operating losses which had been incurred by the Farrel Company; focusing on the rubber and plastics processing markets; increasing sales; achieving profitabil- ity; and repaying indebtedness incurred in the acquisition. Management believes that the Company's financial performance since 1986 is attributable to, among other factors, a strategic focus on the rubber and plastics processing industries where the Company's market position had historically been strong, the divestiture of unrelated machinery product lines, production efficiencies resulting from outsourcing of selected machine components and more efficient purchasing practices, an increase in the portion of the Company's revenues derived from aftermarket products and services which generally carry higher margins than new equipment sales, and in years prior to fiscal 1991, the amortizat~on of the excess of acquired assets over cost.

The Farrel name was initially used by the Company's predecessor, Almon Farrel & Company, in 1848.

Company Strategy The Company's business objectives are to continue the technological development of its products,

strcngthcn its position in markets outside the United States, reduce the manufacturing costs of its products and pursue new sales opportunities as they develop.

The Company conducts an ongoing research and development effort intended to advance the capabilities of its equipment. In particular, the ongoing development by plastics manufacturers of highly engineered plastics is creating demand for more sophisticated processing equipment.

The Company seeks to improve its position in markets outside the United States, especially in continental Europe and the Pacific Rim . In order to enhance its ability to compete in these geographic markets, the Company believes it will need to improve its local sales and service capabilities, which may require, among other steps, the acquisition of additional facilities.

The Company will continue to seek manufacturing cost reductions by, for example, purchasing rather than manufacturing equipment components. The Company also intends to invest in new capital equipment to improve its manufacturing capabilities.

The Company also intends to pursue new market opportunities as they develop. In the plastics processing industry, the Company's customers are demanding higher standards for the extraction of volatile gases from plastics during the manufacturing process ("devolatilization"). Certain of the Company's products have devolatilizing capabilities, and the Company is able to retrofit some of its installed equipment to improve this capability. In addition, the Company is exploring new applications for some of its processing equipment in the recycling industry, where the Company's equipment can be used to recycle plastics. The Company also intends to review possible acquisition opportunities as they are presented. However, the Company is not engaged in any formal negotiations with respect to any acquisition.

Industry Overview

The Company's products are used primarily by manufacturers of rubber and plastics products. Both industries are cyclical in nature, with capital equipment needs characterized by long lead times between orders and shipments. Machine sales to these industries are affected by, among other factors, capital spending levels, interest rates and currency exchange rates. The rubber and plastics processing industries are global in nature and intensely competitive.

Rubber Industry Background; Manufacturing Process The major users of the Company's machinery in the rubber industry are tire manufacturers and

manufacturers of rubber goods such as sheet products, molded products, footwear and wire and cable.

Six tire manufacturers accounted for a majority of total worldwide tire production in 1990. Many of the manufacturers are highly leveraged as a result of consolidation in this industry. Furthermore, the tire industry is currently operating a t less than full capacity. New capital expenditures will depend, in part, on the ability of tire manufacturers to increase capacity utilization above current levels and on the tire industry's need for more cost efficient machinery. Demand in the tire and rubber industry is influenced by, among other things, growth in sales of automobiles and trucks, as well as overall truck tonnage and mileage driven. Manufacturers of mechanical rubber goods are influenced by general economic conditions.

The following representative process flow diagram highlights the use of FARREL machinery in the rubber industry.

TIRE MANUFACTURING/ RUBBER PRODUCTS

PROCESSES m a

FARREL MACHINERY

mmER PKLLBRZING SHEmlNC

PRELIMINARY M T E R U L

PREPAPATION STAGE

FINAL MATERIAL

PREPARATION STAGE

PIN BARREL

TIRE BUILDINO MACHINE

PRODUCTS

CURING PRESS

Plastics Industry Background; Manufacturing Process

The Company serves two primary groups of customers in the plastics industry: commodity plastics producers and value-added mixers of plastics.

Commodity plastics processed using machinery manufactured by the Company are primarily polyethylene, polypropylene, polyvinyl chloride ("PVC") and polystyrene. A large portion of the market is controlled by a few major plastics producers who license their technology worldwide. Licensees of this technology are potential customers of the Company's products and services. Industry performance is related to, among other things, consumer spending and general economic conditions. The plastics mixing market is driven largely by the manufacturing of commodity plastics. This market consists of those companies that mix large volumes of plastics in a 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 these plastics industries have been impacted by recessionary forces and relatively depressed prices for their products. Furthermore, the plastics industry is currently operating at less than full capacity. New capital expenditures will depend, in large part, on the ability of plastics manufacturers to increase capacity utilization above current levels and on plastics manufacturers' need for more efficient machinery.

The following representative process flow diagram highlights the use of FARREL machinery in the plastics industry.

PLASTIC PRODUCTION PROCESSING

OID1G

FARREL MACHINERY POLYMER-

HOUSING CABLE PARTS PIPES COVERING

FIXlbRES STRUCTURA

Products and Senices

Capital Equipment Sales of new capital equipment and process engineering services accounted for 63% of the

Company's net sales in fiscal 1991. The Company's principal capital equipment product lines are BANBURY Mixers, continuous mixers, extruders, pelletizers, mills, calenders and gear pumps.

BANBURY Mixers. The BANBURY Mixer, the first intensive internal batch mixer for rubber, was patented in 1916. BANBURY Mixers are used in the rubber industry to prepare and mix natural and synthetic rubber with various additives in preparation for subsequent processing steps. In the plastics industry, BANBURY Mixers are used to mix a wide variety of plastics including vinyl, polyethylene, polypropylene, acrylonitrile butadiene styrene and polystyrene. BANBURY Mixers are sold in 10 different sizes, with the largest model having a batch size of approximately 1,100 pounds. A typical batch is produced in three to four minutes. The most recent innovation in the BANBURY Mixer has been development of a new patented rotor design and configuration known as the ST technology.

FARREL Continuous Mixers. FARREL Continuous Mixers are an adaptation of the BANBURY Mixer from batch processing to continuous materials processing where there exists a constant inflow and discharge of materials. FARREL Continuous Mixers are sold primarily to the plastics industry where the characteristics of raw materials facilitate continuous processing. The FARREL Continuous Mixer was first developed in the late 1950's. and the Company currently sells models with capacities ranging from 25 to 75,000 pounds per hour. In the 1980's, the FARREL Continuous Mixer product line was expanded to include the side discharge continuous mixer to meet customers' higher quality requirements and demands for greater effective capacity utilization.

Extruders. The Company's extruders are typically located downstream from its mixers to process the mixer output into the physical form required for the next processing stage, such as sheet or pellet form. The Company's extruders are single screw-type, with the screw enclosed in a cylinder such that the screw rotation moves the material through the length of the cylinder. The Company is currently developing an extruder with enhanced devolatilizing capabilities and has manufactured and begun testing a prototype. Types of extruders manufactured by the Company include mixer-fed, hot and wld-fed, strip-fed, reactor-fed, roller die, pin barrel, and PVC strainers.

Pelletizers. Pelletizers transform rubber and plastics into pellets to facilitate handling and process- ing. Pelletizers generally include a die through which the rubber or plastic material is forced and a rotating knife set which cuts the compound into pellets. The Company's pelletizer line includes underwater, water ring and dry face pelletizers.

Mills. The two-roll mill was the first machine used by the rubber industry to mix rubber materials prior to the invention of the BANBURY Mixer and is still used in some segments of the rubber processing industry. The mills manufactured by the Company today are used to process both plastics and rubber and are usually sold in cornbination with its mixers and extruders where the specific processes require mills.

Calenders. The Company's calenders process a wide variety of rubber and plastics materials for such end uses as industrial sheeting (roofing, moisture barriers, medical sheeting), coated fabrics (rainwear, fuel and fluid cells, valve diaphragms), tapes (duct, medical/surgical, electrical) and tires.

CP-SERIES Processor. The CP-SERIES Processor incorporates the Company's mixing and extruding technology into a single unit. The unit includes a continuous mixer mounted on a stand directly above a hot melt-fed extruder. The CP-SERIES Processor is manufactured in six different models with processing capacities ranging from 25 to 6,000 pounds per hour.

Gear Pumps. Gear pumps move molten plastics from a processing machine to the next process step, typically a pelletizer. Gear pumps are more efficient machines than extruders due to shorter

residence time, minimal back flush and lower energy consumption. The Company's gear pumps are usually sold in combination with continuous mixers.

MVX Extruder. The M V X Extruder was developed for the continuous processing of particulate rubber, including mixing, venting and extruding of finished materials previously possible only through the use of two or more machines. The MVX Extruder is targeted for tire production facilities which require continuous processing of rubber at high output rates.

DISKPACK Processor. The DISKPACK Processor is based upon innovative rubber and plastics processing technology. The DISKPACK Processor allows for a shorter, more controllable residence time than conventional machinery, preventing material degradation in highly sensitive rubber and plastics materials. The DISKPACK Processor is used for specialty process applications including heat exchange, devolatilization and reactive processing.

Laboratory-size machines. Laboratory-size machines are scaled-down versions of the Company's production-size equipment and are used by rubber and plastics processors to test polymer mixes and equipment configurations prior to full scale production runs. The Company's laboratory equipment line is known as its TECNOLAB line, and includes laboratory-size BANBURY Mixers, continuous mixers, extruders, calenders, mills and presses. Some of these machines are sold by the Company under a distribution arrangement with a European manufacturer and others are designed and manufactured by the Company.

Process Engineering Services

The Company's process engineering group provides engineering, design, equipment procurement and related services for the installation of new rubber and plastics processing lines. Some of the Company's customers require significant process engineering services to prepare their facilities for the installation of the Company's equipment. In certain instances, the process engineering group will also specify, purchase and supervise installation of the equipment to be used upstream or downstream from the Company's equipment in a particular processing line.

Aftermarket Sales and Services The Company's customer service division provides aftermarket products and services for the

installed base of the Company's machines worldwide. Aftermarket products and services accounted for approximately 37% of the Company's net sales in fiscal 1991, and consist principally of repair, refurbishment and equipment upgrade services, spare parts sales and field services.

Repair, Refurbishment and Equipment Upgrade Services. The Company provides repair, refur- bishment and equipment upgrade services from dedicated facilities in Ansonia, Connecticut, Deer Park, Texas, and Rochdale, England. Each of the facilities has the capability to service the full line of the Company's equipment. Machinery refurbishment and upgrades generally carry the same warranty as the Company's new equipment.

Spare Parts Sales. The Company's service facilities maintain a supply of high quality, original specification machine components and spare parts including bearings, rotors, cylinders, seals and mixer chambers. The Company's customer service representatives provide parts stocking recommendations to customers in order to facilitate planned repairs and minimize machine downtime.

Field Services. Field services are carried out around the world by a staff of highly trained and skilled personnel qualified in the servicing of the Company's equipment. Typical services offered include start-ups, installations, training, repairs and machine inspections and warranty services. The Com- pany's warranty policy for new equipment protects against defects in title, materials and workmanship and is effective for one year from acceptance but in no event to exceed 18 months following delivery and, for replaced parts, one year from the date of replacement. In the event of a defect, the Company has the obligation, in its discretion, to repair or replace the equipment.

The following table illustrates the sales of the Company's products over the past three fiscal years categorized by dollar amount and percent of net sales.

F i d Yesr Ended April 30, 1989 1990 1991

Amouat Percent Amount Percent Amout Percent -- -- -- (Dollan in thouamds)

BANBURY Mixers . . . . . . . . . . . . . . . . . . . . . . . . $20,674 22% $ 23,665 20% 16 21.789 21% Extruders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.481 16 23.305 19 13.848 13

. . . . . . . . . . . . . . . . . . . . . . . Mills and Calenders. . . . . . . . . . . . . . . . . . Process Engineering Services

CP-SERIES Processor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FARREL Continuous Mixers

. . . . . . . . . . . . . . . . . . . . . . DISKPACK Processors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gearpumps

MVX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aftermarket Sales and Services . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . .

Prices for the Company's capital equipment range from approximately $40,000 to more than $1 million. The Company does not publish a standard price list. Based upon a customer's product specifications, the Company prepares a cost estimate for the specified product and quotes a price therefor to the customer. Any such price quote would generally be for a fixed price which the Company anticipates will result in a profit.

Customers The Company's principal customers are domestic and foreign manufacturers of rubber and

plastics. The Company's customers often purchase equipment in significant quantities for new plants, plant expansion or plant modernization. Purchases by any single customer will vary significantly from year to year according to such customer's capital equipment needs. The composition of the Company's customers may vary from year to year.

None of the Company's customers accounted for over 10% of the Company's net sales during any of the last three fiscal years.

Sakes and Marketing The Company's products are sold to customers worldwide, primarily by its direct sales and support

staff. The Company's sales organization is headquartered in Ansonia, Connecticut, and the Company has additional sales and senrice offices in Akron, Ohio; Charlotte, North Carolina; Deer Park, Texas; and in Canada, England, France, Germany, Austria, Belgium and Hong Kong. In certain geographic areas outside the United States, sales are made by independent representatives who are assisted and supported by employees of the Company.

The Company's sales force is divided into field sales and product sales specialists. Members of the field sales force are assigned to specific customers to assist with all of the Company's equipment purchased by that customer. Product sales specialists are assigned to a specific product line and assist all customers of that specific product. All products are supported by direct sales personnel, specialized technical sales personnel with in-depth product knowledge and by in-house sales personnel who prepare quotations and provide customers with delivery and specification information.

Backlog As of April 30, 1991, the Company had a backlog of orders considered to be firm of $54.2 million,

of which approximately $52.6 million is expected to be filled within the current fiscal year. The Company had a backlog of $72.3 million and $99.9 million at April 30, 1990 and 1989, respectively. Over the past three years, the Company has shortened the lead time required to deliver certain new equipment, resulting in individual equipment orders generally spending less time in backlog. The

27

Company has also increased the portion of the Company's net revenues which are derived from aftermarket sales. Certain components of aftermarket sales, in particular, spare parts sales and repair services, have significantly faster turnaround times than new equipment sales. The effect of these two trends, assuming a level volume of net sales, would tend to reduce the average backlog.

As of October 27, 1991 and October 28, 1990, the backlog of orders considered to be firm was equal to $52.9 million and $57.3 million, respectively.

Manufacturing The Company manufactures equipment principally at its facilities in Derby, Connecticut and

Rochdale, England. Each of these facilities has fully-integrated manufacturing processes including a complete range of machining and fabrication equipment used to produce products. All final assembly, product testing and quality control are performed principally by Company personnel at these two facilities.

The Company attempts to manufacture, in whole or part, in the lowest cost environment, whether internally manufactured at the Company's U.S. or U.K. facilities, or externally subcontracted, with proper assessment of freight, tax, foreign exchange, capacity utilization, availability of raw material and direct costs.

Components and Raw Materials The Company purchases many of the components used in manufacturing its machines. Such

components include primarily gear units, electric motors and drives, bearings, hydraulic units and electrical/mechanical systems. The basic raw materials used in the parts the Company manufactures for its products are steel plates, bars, castings 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.

Research and Development and Engineering At October 27, 1991, the Company's research and development and engineering staff consisted of

121 employees located in Ansonia, Connecticut and Rochdale, England. Substantially all of the Company's products are custom engineered, and engineering hours are a major component of manufac- turing lead times. A summary of research and development and engineering expenditures for the last five years is set forth in the table below:

Fiscal Year Ended April 30, 1987 - 1988 - 1989 1990 - 1991 -

(lo thousands)

Research and development expense pertaining to new products or significant improvement to existing

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . oroducts $ 822 $1.056 $1.203 $1.277 $2.034 A I ~ other product development and engineering

expenditures related to ongoing refinements, improvements of existing products, and custom engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,105 3,420 5,288 5,203 5,162 -----

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,927 $4,476 $6,491 $6,480 $7,196 ----- Percent of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1% 6.3% 7.0% 5.3% 6.9%

Process Laboratory Services

The Company maintains process laboratories in Ansonia, Connecticut and Rochdale, England to demonstrate recent developments in processing equipment and to provide customers with production- size equipment in order to experiment with new processing techniques and rubber and plastics products and formulations. Use of the process laboratories is offered on either a complimentary or a fee basis, depending upon specific circumstances. The Company considers its process laboratories to be essential

components of its customer service effort and continuing technology development. As such, the Company may make periodic capital investments to maintain and upgrade its process laboratories.

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 250 patents which cover technology utilized in its products and currently has approximately 110 patents pending. The Company considers its patents to be important in the operation of its business. The Company's patents have expiration dates ranging from 1992 to 2007. The Company believes that, while the loss of one patent would not be material to the Company, the loss of a significant number of patents would have a material adverse effect on the conduct of its business.

The Company considers the following trademarks to be material to its business: FARREL; BANBURY; DISKPACK; TECNOLAB; ST; MVX; and CP-SERIES.

Competition

The Company's products are sold in highly competitive worldwide markets. A number of compa- nies 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. Over the past five years, a number of the Company's U.S. competitors have been acquired by larger international competitors. A number of the Company's competitors are divisions or subsidiaries of larger companies with financial and other resources greater than those of the Company. 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 the markets for spare parts, repair and refurbishment services due to its knowledge of original equipment specifications and technology.

Employees

As of October 27, 1991, the Company had 625 full-time employees, including 121 engaged in research and development and engineering, 333 in manufacturing and technical services, 102 in marketing and sales and 69 in administrative functions. In Derby and Ansonia, Connecticut, the Company is a party to a collective bargaining agreement with the United Steel Workers of America, Local 3571. The contract expires in June 1994. As of October 27, 1991, there were 97 union employees covered by this collective bargaining agreement. The employees are not unionized at the Deer Park, Texas facility. In the United Kingdom, the Company is a party to a collective bargaining agreement which is not legally binding. The agreement consists of a national agreement between the Engineering Employers Federation and the Confederation of Shipbuilding and Engineering Unions and a local agreement between the Company and the Amalgamated Engineering Union. The local agreement is subject to annual negotiation with changes effective on August 1 of each year but terms may be renegotiated at the request of either party at other times. As of October 27, 1991, there were 84 union employees in the United Kingdom entitled to he members of the Amalgamated Engineering Union but, irrespective of actual membership in the Union, all 84 employees are covered by this collective bargaining agreement.

For a period of approximately six weeks in 1988 the Company experienced a work stoppage by its United States union employees. The strike had no material adverse effect on the Company. There has

been no work stoppage since that time. Management believes the Company's relationship with its employees is satisfactory.

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, repair 520,000

and storage Derby, Connecticut . . . . . . . . . . . . . . . . . Manufacturing and storage 225,000 Deer Park, Texas . . . . . . . . . . . . . . . . . . Repair 22,000 Rochdale, England . . . . . . . . . . . . . . . . . Office, research, laboratory, 210,000

manufacturing and storage

The Company believes that the facilities used in its operations are in satisfactory condition and adequate for its present operations. The Company presently utilizes approximately 70% of the single- shift productive capacity of its facilities.

In addition to the facilities listed above, the Company leases space in various locations in the United States and overseas for use as offices. In connection with the 1986 acquisition, the Company acquired certain real estate, including land and buildings, which is not currently being used.

As collateral security for indebtednzss incurred by the Company under its U.S. credit facility, the Company has executed an Open-end Mortgage in favor of the lender covering its facilities in Ansonia and Derby, Connecticut. A mortgage debenture in favor of the Company's U.K. lender has been granted in respect of the facility located in Rochdale, England.

Legal Proceedings

Commercial

In June 1988, the Company instituted an action against Pomini-Farrel S.p.A. ("Pomini") and Pomini Inc. in the United States District Court, Northern District of Ohio alleging unfair competition and trademark infringement. The claim was dismissed in 1990 pursuant to an order compelling arbitration of the dispute. In February 1991 the Company instituted an action against Pomini before the International Chamber of Commerce (ICC) Court of Arbitration. The Company alleges that Pomini failed to return and improperly continued to use the Company's technology after expiration of a license and trademark agreement. The Company seeks damages of not less than $12 million and punitive damages of not less than $2 million and treble damages where authorized. The Company is also seeking an injunction against Pomini's further use of the Company's technology. Pomini has counter- claimed seeking damages of approximately $7.9 million alleging that the Company, while owned by Emhart, failed to make certain technical information available, damaged Pomini's commercial reputa- tion and engaged in abuse of process by filing lawsuits against Pomini in the United States, Scotland and Italy. In 1990, the Company filed a complaint with the International Trade Commission ("ITC") against Pomini alleging unfair competition. The Company sought an order from the ITC barring Pomini from importing certain competitive products into the United States. The complaint was dismissed pursuant to an order compelling arbitration of the dispute. In November 1991, the United States Court of Appeals for the Federal Circuit remanded the case to the ITC for determination of the merits of the complaint.

In January 1991, the Company was named as an additional defendant in a pending action, subsequently withdrawn, brought by more than 200 current and former employees of Cooper Tire & Rubber Company. The plaintiffs were seeking damages from the Company and 25 other defendants in the aggregate amount of $26 million. This action in the Circuit Court of Miller County, Arkansas,

alleged that equipment manufactured by the Company and the other defendants caused personal injury from excessive noise. The Company answered the complaint, denying the allegations. The Company's insurance carrier assumed the defense of this action on behalf of the Company. In December 1991 the court granted the plaintiffs' motion to withdraw the action without prejudice, meaning that the plaintiffs could reassert their claim.

In July 1991, the Company was named as one of three third-party defendants in an action brought by Temple Associates, Inc. ("Temple") against John Brown Engineering & Construction, Inc. ("Brown") and Mobil Oil Corporation ("Mobil"), which action is pending in the U.S. District Court for the Eastern District of Texas, Beaumont Division. Temple was a subcontractor on a construction project involving the modernization of Mobil's low density polyethylene plant, located in Beaumont, Texas. Temple claims damages against defendant Brown, the general contractor and engineer, and Mobil, the owner of the plant. Temple alleges that Brown caused delays in the work schedule, interfered with Temple's work on the project and significantly increased the scope of Temple's work under four separate subcontracts, all of which allegedly caused actual damages to Temple in excess of $7 million, plus attorneys' fees and costs. Temple has alleged breach of contract, breach of warranty, negligence and negligent misrepresentation causes of action under the four subcontracts awarded to it by Brown. Additionally, Temple has alleged that Brown breached the duty of good faith and fair dealing with respect to one of the subcontracts, and it requests an unspecified amount of exemplary damages as a result of that breach. Temple further seeks to enforce a mechanic's lien against Mobil. On July 31, 1991, Brown filed a third-party action against the Company and two others seeking an unspecified amount of damages under the theory of equitable contribution. It alleges that the Company failed to deliver certain machinery and certified drawings to the project in a timely manner, and that the Company negligently designed, engineered or fabricated the machinery it sold to Brown. In its original answer, the Company denied the allegations in the third-party complaint and raised twelve affirmative defenses. Certain of the Company's affirmative defenses are based upon an agreement between the Company and Brown which purported to settle their dispute over alleged damages caused by alleged late deliveries of machinery and drawings by the Company. This agreement was reached before the Company was made a party to the lawsuit, and the Company has moved for summary judgment on that basis.

Under the Purchase and Sale Agreement (the "Purchase Agreement") pursuant to which the Company purchased the assets of the former Farrel Company from USM in 1986 (the "Acquisition"), the Company did not assume or agree to be responsible for any product liability claims with respect to machinery that was manufactured and shipped prior to the date of the Acquisition, including liability for personal injury. The Company and/or its predecessors have been named as defendants in 23 actions pending in various state and federal courts alleging that machinery manufactured and shipped prior to the date of the Acquisition was defective and resulted in personal injuries to the plaintiffs. The aggregate amount of damages sought by the plaintiffs in these actions is not determinable at this time. USM has assumed the defense of each of these suits on behalf of the Company. While the Company does not believe that it will incur any material liability in these actions, no assurance can be given that the Company will not have any successor liability in any of these actions or that the aggregate amount of liability assessed against the Company, if any, will not be material. In the event of any such liability, the Company would seek to recover any losses in connection therewith from USM, although no assurance can be given that the Company would be successful.

Environmental

In June 1988, the Company and approximately 196 other entities were named as third-party defendants in an action captioned B.F. Goodrich Company, et al. v. Harold Murtha, et al. v. Risdon Corporation, et al., Doc. No. N-87-52 (PCD), Consolidated Cases, U.S. District Court, District of Connecticut. The primary defendants are alleging that the Company is jointly and severally liable under the federal Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. 9601 et seq.) ("Superfund") for monies expended or expected to be expended for the control and clean-

up of the Beacon Heights and Laurel Park landfills located in Beacon Falls, Connecticut and Nau- gatuck, Connecticut, respectively. The Company's predecessor is alleged to have arranged for the disposal of wooden patterns used in its foundry business, some of which may have been painted with materials containing hazardous substances. The Company never disposed of or arranged for the disposal of any waste or hazardous substances a t either the Beacon Heights landfill, which closed in 1979, or the Laurel Park landfill, which closed in 1987. The Company's liability, if any, would be based on a finding that the Company is liable as a successor to USM.

Emhart, the current successor to USM, along with 18 other companies, has entered into a Consent Decree, subject to the Court's approval, with the federal and state governments pertaining to the Laurel Park landfill. Emhart has made payment of approximately $20,000 representing its share of the responsibility for the clean-up, which effectively resolves the Company's liability with respect to the Laurel Park facility. The federal and state governments have also entered into a Consent Decree with certain companies pertaining to the Beacon Heights landfill, which Consent Decree has been approved by the Court. Neither Emhart nor the Company are parties to the Beacon Heights Consent Decree. The Beacon Heights landfill matter is expected to terminate without material liability to the Company. Emhart is defending the Company in the action.

In 1986, in connection with the Acquisition, the Company and USM entered into an Environmen- tal Indemnification Agreement dated as of May 12, 1986 (the "Environmental Indemnification Agreement"). The Environmental Indemnification Agreement contains a provision pursuant to which USM agreed to indemnify the Company for losses resulting from environmental claims, up to an aggregate of $5 million, arising out of or based upon the acts or omissions of USM and its predecessors prior to the Acquisition. An environmental claim is defined in terms of a regulatory requirement or demand by a third party for damages arising from environmental contamination at the former Farrel Division facilities. The aereement reuuircs the Comoanv to notifv USM of all claims for inden~nifica- . ~ - ~ ~ - ~ ~ - ~ ~ ~~

tinn pursuant thereto w i t i n 10 years, br prior to May 12, 1996. In addition, the agreement provides for apportionment of claims by persons other than employees for events occurring both prior to and subsequent to the date of the Acquisition. Such apportionment is to be based upon a fair and equitable assessment of various factors, including the time of the occurrence and its magnitude and severity. Such assessment will be based upon an agreement between the parties or, in the absence of agreement, by a court of competent jurisdiction. A separate apportionment provision based on length of service for claims by employees is also included in the agreement.

In view of the terms of the Environmental Indemnification Agreement, including the ten-year time limit for making claims thereunder, as well as the results of an environmental study commissioned by a potential purchaser of real estate from the Company, which revealed contamination at that site, the Company retained HRP Associates, Inc. ("HRP"), environmental consultants, to investigate subsur- face contamination at its facilities in Derby and Ansonia, Connecticut. HRP's investigation included the collection of soil samples, the installation of ground water monitoring wells, identification of underground storage tanks, inspection of transformers and capacitors, review of available files of the State of Connecticut Department of Environmental Protection (the "DEP) , interviewing of facility employees, research of historical background and a visual inspection of the properties. HRP's investigation found the existence of subsurface contamination at the Company's Ansonia and Derby properties, which findings were summarized in reports prepared by HRP. On the basis that HRP found evidence of historical spills and discharges, the Company transmitted several of the HRP reports to the DEP and the Region I Office of the United States Environmental Protection Agency (the "EPA") in 1989. To date, the Company has incurred costs of $250,000, exclusive of attorneys' fees, for environmental investigation and remediation voluntarily undertaken a t Derby and Ansonia. At the Company's request, HRP has identified additional investigations and remedial work that may be required to comply with present laws and regulations. The nature and extent of such future remedial work could include: ground water monitoring, the removal and/or remediation (such as soil venting) of contaminated soil, the remediation of ground water and the removal of underground storage tanks.

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In May 1989, the Company instituted a suit against USM, Emhart and certain affiliates, which was originally brought in Connecticut state court and is now pending in the United States District Court for the District of Connecticut at Hartford, with respect to the Company's Ansonia and Derby facilities. The complaint includes counts based on Superfund and other related counts as follows: a count alleging USM's noncompliance with the Connecticut Transfer Act (Conn. Gen. Stat. $22a-134 et seq.) (the "Transfer Act") in conveying the Ansonia and Derby properties (the Company believes the required filing was not made for the Ansonia property and a filing which the Company believes may have been defective was made in respect of the Derby property); counts based upon fraud and misrepresentation based on USM's representations as to the environmental conditions at the Ansonia and Derby facilities; a contract count based on the Environmental Indemnification Agreement; a count based on the Connecticut Unfair Trade Practices Act (Conn. Gen. Stat. $ 42-1 10h et seq.) alleging USM made misleading and fraudulent representations as to the environmental conditions a t the Ansonia and Derby facilities; a count seeking reimbursement of costs expended by the Company to mitigate the effects of contamination at the Ansonia and Derby facilities pursuant to Conn. Gen. Stat. $ 22a-452 and a count seeking the same relief pursuant to Conn. Gen. Stat. $ 22a-451.

The Superfund counts, the Transfer Act count and the statutory cost recovery count under Conn. Gen. Stat. § 22a-452 are premised on strict liability and any relief under said counts would be independent of the Company's rights under the Environmental Indemnification Agreement. Under the Superfund statutes, the owner or operator of a site a t the time hazardous substances are released to the environment is jointly and severally liable with the current owner and operator of the site for remediation costs which are consistent with the National Contingency Plan. In addition, the current owner or operator is entitled to seek contribution from the previous owner or operator for such remediation costs. Under Conn. Gen. Stat. $ 22a-452, any person who mitigates contamination caused by the negligence or other actions of another party is entitled to reimbursement from such party of reasonable costs expended for such mitigation.

The relief sought in the suit against Emhart is the recovery of all expenditures for investigation and remediation and a declaratory judgment that USM and related defendants are liable for any required remediation in the future in connection with the sites located in Ansonia and Derby. To date, Emhart has generally denied the allegations in the Company's complaint and the parties are proceeding with discovery. The Company intends to prosecute the action vigorously. There is no assurance, however, that the Company will prevail in its suit against USM or that, if it should prevail, USM will be able to meet its obligations thereunder or that any such recovery from USM would cover all remediation costs incurred by the Company.

HRP has preliminarily advised the Company that, in its opinion, the initial capital cost (exclusive of ongoing monitoring and maintenance) related to further investigating and remediating known conditions identified to date at the Company's Ansonia and Derby properties, other than the Parking Lot (discussed below), would more likely than not be less than $2,000,000. HRP's cost estimate is based upon current information available to date, is subject to further remedial investigations and assumes that ground water remediation will not be required and that certain remedial techniques recommended by HRP, such as soil-gas venting, will be included in a remediation plan approved by governmental authorities.

The Parking Lot is a surfaced parking lot located in Ansonia that has been used solely for parking while owned by the Company. The Parking Lot site was formerly a reservoir which the Company believes was filled in during the late 1940's or early 1950's. HRP's testing conducted during its investigation revealed that soil beneath the Parking Lot contains metal contaminants, though not at levels that exceeded federal thresholds for hazardous waste contamination, and that there has been no evidence of significant ground water contamination beneath the Parking Lot. Although current DEP informal guidelines regarding the removal and disposal of contaminated soils would require removal of the contaminated soil beneath the Parking Lot, HRP has recommended that the Company seek appropr~ate governmental approvals to leave the contaminated soil in place, to install a permanent impermeable cap on the property complying with federal regulat~ons under the Resource Conservation

Recovery Act ("RCRA") and to conduct on-going monitoring of ground water. HRP's recommenda- tion as to the appropriateness of pursuing this alternative is based upon the industrial/wmmercial nature of the site, the availability of public water to the property and the lack of any evidence at this time of a significant impact of the site on ground water quality. HRP estimates that the cost of designing, installing, and certifying the "RCRA" cap (exclusive of on-going monitoring and mainte- nance) to range from $1,300,000 to $2,000,000. Should removal and off-site disposal of wntaminated soil he required, it is HRP's opinion that the disposal of the wntaminated soil to a local landfill or an out-of-state secure landfill, or a combination thereof, would be more likely than not approved by governmental authorities. HRP's estimates of the wsts of excavating, sampling, transporting and disposing of the contaminated soil to a local landfill would range from $5,000,000 to $8,000,000 and to an out-of-state secure landfill to be $8,000,000 to $10,000,000. However, should additional soil testing identify metal contaminants at hazardous levels, HRP estimates that the costs of removing, transport- ing and disposing of the contaminated soil to a hazardous waste facility to be $18,000,000. HRP's recommendations and cost estimates are based on current information regarding the site and are subject to further testings, input from regulatory agencies and confirmation of certain information such as soil weight and unit disposal wsts.

The Company does not currently believe that costs to be incurred to comply with environmental laws and regulations relating to conditions at the Company's Connecticut facilities identified to date will have a material adverse effect on its financial condition. The Company's belief is based upon, among other things, (i) the advice of the Company's special environmental counsel, Murtha, Cullina, Richter and Pinney, concerning the status of and the legal bases for environmental litigation with USM and Emhart; (ii) the Company's understanding of the underlying facts which give rise to its claims against USM; and (iii) technical advice received from HRP relating to the presence and/or nature and scope of subsurface contamination at the Ansonia and Derby properties and possible remediation options which could be required by the DEP and EPA with respect thereto. The wst of any actual remediation will r depend on a plan of remediation approved by the appropriate governmental authorities in the future, and accordingly the precise wsts thereof cannot be determined at this time. No assurance can be given, however, that the Company will not be required to incur significant costs with respect to conditions presently known to the Company, existing conditions not currently known by the Company or changes in existing regulations.

MANAGEMENT OF THE COMPANY Directors and Executive Officers

The Company's Certificate of Incorporation provides for a Board of Directors of two classes as nearly equal in number as practicable with directors elected for two-year terms. Acting under the provisions of the Company's by-laws, the Board has fixed the number of directors at seven. Joseph R. Carvatko, Jr. and James A. Purdy currently serve as Class I directors for a term expiring at the annual meeting of stockholders to be held in 1992. Rolf K. Liebergesell, Glenn J. Angiolillo, Charles S. Jones and Alberto Shaio currently serve as Class I1 directors for a term expiring at the annual meeting of stockholders to be held in 1993.

Mr. Carvalko has expressed his intention to resign as a director as of the closing of the sale of the Shares offered hereby. The Board of Directors has elected John G. Onto to become a director of the Company for a term expiring at the 1992 annual meeting of stockholders to become effective as of the resignation of Mr. Carvalko from the Board. The Board of Directors has authorized its Chairman to seek a candidate for election to the Board as a Class I director for a term expiring at the annual meeting of stockholders to be held in 1992.

The directors, persons selected to become directors, and executive officers of the Company, their respective ages and positions with the Company are as set forth below. For information concerning beneficial ownership of the Common Stock by Messrs. Liebergesell, Jones, A. Shaio and Victor Shaio, see "Principal Stockholders." No other director or executive officer beneficially owns any of the Common Stock.

Rolf K. Liebergesell . . . . . . . . . . . . . . . . . . . . 59 Chairman of the Board, President and Chief Executive Officer

Glenn J. Angiolillo . . . . . . . . . . . . . . . . . . . . . 38 Director

Joseph R. Carvalko, Jr. ................. 49 Director, Vice President, General Counsel and Secretary

Bjorn Iwarsson . . . . . . . . . . . . . . . . . . . . . . . . 52 Vice President-International Operations

....................... Kurt P. Johnson 53 Group Vice President-Engineering

Charles S. Jones . . . . . . . . . . . . . . . . . . . . . . . 43 Director and to become Chairman of the Executive Committee

. . . Joseph M. Milano. 39 Vice President-Finance, Treasurer and Chief Financial Officer

. . . . . . . . . . . . . . . . . . . . . . . . . John G. Onto 5 1 To become a Director

. . . . . . . . . . . . . . . . . . . . . . . James A. Purdy 69 Director

Alherto Shaio . . . . . . . . . . . . . . . . . . . . . . . . . 43 Director, Senior Vice PresidentSales

. . . . . . . . . . . . . . . . . . . . . . Karl N. Svensson 56 Senior Vice President-Operations

Rolf K. Liebergesell, Chairman of the Board, President, Chief Executive Officer and a director since May 1986. Prior to joining the Company, Mr. Liebergesell was Chairman and Chief Executive Officer of Bailey Company, a manufacturer of extruded rubber and molded plastics for the automobile industry, which he acquired along with a group of investors from Emhart in 1982.

Mr. Liebergesell held various positions, including Product Line Manager for the Worldwide Automotive Group, with ITT Corporation from 1973 to 1979. Mr. Liebergesell also sewed in various positions at Chrysler Corporation from 1959 to 1973, including Director, Planning and Development, of

Chrysler International, and Deputy Managing Director of Mitsuhishi Motors, a joint venture of Mitsuhishi Heavy Industries, Ltd. and Chrysler Corporation.

Glenn J. Angiolillo, Esq., director since July 1990. Mr. Angiolillo has been a partner in the law firm of Cummings & L o c k w d since 1987 and was associated with the firm prior to becoming a partner.

Joseph R. Carvalko, Jr., Esq., director since July 1990, Vice President, General Counsel and Secretary, joined the Company in 1987. Prior to joining the Company, Mr. Carvakko was a partner at the law firm of Dice, Maloney and Carvalko, P.C. from 1981 to 1987.

Bjorn Iwarsson, Vice President-International Operations, joined the Company in July 1991. Prior to joining the Company, Mr. Iwarsson was Group Vice President of SPX Corporation, a manufacturing company, commencing in 1988. From 1985 to 1987, Mr. Iwarsson was President of Doehler-Jarvis, an aluminum die casting company.

Kurt P. Johnson, Group Vice President-Engineering, joined the Company in 1990. Prior to joining the Company, he was Director, Laser Communications Systems, at McDonnell Douglas Electronics Systems Co., an aerospace and defense company, from 1989 to 1990. Prior to that position, he was employed by McDonnell Douglas Astronautics Co., also an aerospace and defense company, from 1986 to 1988 in several senior management positions including Director, Engineering and Operations.

Charles S. Jones, director since 1987 and is expected to become Chairman of the Executive Committee. Mr. Jones joined the Board of Directors while Managing Director of First Funding Corporation; he lead the negotiating and financing effort to acquire the Farrel business from USM. In September 1987, Mr. Jones became President and Chief Executive Officer of Shandwick, N.A. and in 1990 was promoted to Group Managing Director and Chief Operating Officer of Shandwick plc, a London stock exchange listed company and the world's largest public relations firm. In May 1991, Mr. Jones rejoined First Funding Corporation to become its Chairman and Chief Executive Officer. Mr. Jones is a director of New Energy Corporation of Indiana.

Joseph M. Milano, Vice President-Finance, Treasurer and Chief Financial Officer, joined the Company in 1989. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer of Pryor Corp., a distribution and manufacturing company, from June 1988 to November 1988 and Vice President and Chief Financial Officer for EMCA, a start-up venture involved in the telecommunications industry, from 1984 to 1988. He was employed by American Can Company from 1976 to 1984 in several senior management positions including Managing Director-Finance. World- wide Packaging.

John G. Onto is expected to become a director upon the consummation of the offering. Mr. Onto is Associate Dean of the Graduate Business Program of Georgetown University, a position he has held since June 1990. Since 1987, Mr. Onto has been employed by Georgetown University where he has held various positions including Director, Center of International Business and Trade, a position he still holds. From 1986 to 1987, Mr. Onto was Department Chairman of the Management Department, David Squire School of Business, Monash University, Melbourne, Australia.

James A. Purdy, director of the Company since 1986. Mr. Purdy is retired. He has performed consulting and advisory services for the Company since 1986 and for the State of Connecticut Department of Economic Development in 1991. Formerly, Mr. Purdy was a Senior Vice President of ITT Corporation responsible for all Asian, Pacific and Latin American activities. Mr. Purdy is also a director of the Greenwich Chapter of the American Red Cross.

Alberto Shaio, director since May 1986. Mr. Shaio served as Vice PresidentSales of the Company from 1986 to 1987 when he became Senior Vice President-Sales. Mr. Shaio is a director of New Energy Corporation of Indiana.

Karl N. Svensson, Senior Vice President-Operations, joined the Company in 1988. From 1973- 1988, Mr. Svensson was employed by Bird Machine Company, a manufacturer of capital equipment for the petrochemical and coal industries and held various executive positions, including Vice President.

Director Compensation

Directors who are officers or employees of the Company receive no additional compensation for service as members of the Board of Directors or committees thereof. Directors who are not officers or employees of the Company receive such compensation for their services as the Board of Directors may from time to time determine. Non-employee directors do not currently receive compensation for their services. It is anticipated that non-employee directors will receive a fee of $950 for each Board meeting attended and $750 for each Committee meeting attended. For a description of options to be granted to non-employee directors under the Company's 1992 Stock Option Plan for Key Employees and Non- Employee Directors (the "Stock Option Plan"), see "Management of the Company-Stock Option Plan."

Committees of the Board

The Board of Directors has established a Compensation Committee. The Compensation Commit- tee is composed of non-employee directors. It reviews and recommends to the Board of Directors all forms of remuneration and perquisites for the directors and senior management of the Company. The Compensation Committee also administers the Stock Option Plan and the Company's 1992 Employees' Stock Purchase Plan (the "Stock Purchase Plan"). Currently, the members of the Compensation Committee are Messrs. Jones and Purdy. Upon completion of the offering, the Compensation Commit- tee will initially be composed of two non-employee directors, Messrs. Onto and Purdy.

The Board of Directors has established an Executive Committee and an Audit Committee. The Executive Committee will initially be composed of two members, Messrs. Liebergesell and Jones, who will assume office upon the consummation of this offering. The Executive Committee will have the authority during the intervals between meetings of the Board of Directors to exercise the powers of the Board (except for certain powers reserved solely to the Board under the by-laws of the Company or the Delaware General Corporation Law).

The Audit Committee will initially be composed of two non-employee directors, Messrs. Angiolillo and Purdy, who will assume office upon the consummation of the offering. The Audit Committee will recommend to the Board of Directors the selection of independent accountants, will review the annual financial statements of the Company, will review the scope and performance of audit and non-audit services provided by the independent auditor, will review internal accounting controls and will review the fees for audit and non-audit services provided by the independent auditor.

Executive Compensation

The following table sets forth the aggregate cash compensation paid by the Company to each of its five most highly compensated executive officers whose total cash compensation exceeded $60,000 and for all executive officers as a group for the fiscal year ended April 30, 1991:

Name of Iodividlul or Cash Number of Persons I n Croup Capacities in which Served Compensation

Rolf K. Liebergesell . . . . . . . . . . . . . . . Chief Executive Officer, President and $1,002,000(1) Chairman of the Board

Alberto Shaio . . . . . . . . . . . . . . . . . . . . Senior Vice President--Sales $ 297,108 Karl N. Svensson . . . . . . . . . . . . . . . . . Senior Vice President-Operations $ 150.000 Joseph R. Carvalko, Jr. . . . . . . . . . . . . Vice President, General dounsel and $ 130;000

Secretary Joseph M. Milano . . . . . . . . . . . . . . . . . Vice President-Finance. Treasurer $ 120,333

and Chief Financial Officer All executive officers as a group

(6 in number) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,806,808

(1) Pursuant to the employment agreement described below, Mr. Liebergesell's annual base salary as of November 1, 1991 is $550,000.

The value of personal benefits for executive officers of the Company during fiscal 1991 did not exceed $25,000 for Mr. Liebergesell or 10% for any other individual named in the cash compensation table and, with respect to all executive officers as a group, did not in the aggregate exceed 10% of the compensation reported in the cash compensation table.

Employment Agreements

The Company has entered into an employment agreement with Mr. Liebergesell. This agreement is dated as of November 1, 1991. In addition, the Company has entered into employment agreements with Messrs. Milano and Iwarsson. The Compensation Committee has been authorized by the Board of Directors to negotiate employment agreements with Mr. A. Shaio and other officers.

The employment agreement with Mr. Liebergesell provides for his employment as Chairman of the Board, President and Chief Executive Officer of the Company from December 1, 1991 through November 30, 1994. The agreement automatically renews for an additional three-year period unless six months' prior notice of termination is given by either party. During his employment, Mr. Liebergesell is entitled to receive an annual base salary of $550,000, subject to annual increases as may be recommended by the Compensation Committee and approved by the Board of Directors. Mr. Liebergesell shall also be entitled to receive during the term of his employment agreement, options to purchase shares of Common Stock as provided under the Stock Option Plan. See "Stock Option Plan." In addition to participation in benefit plans available generally to its executive employees, Mr. Liebergesell will be entitled to the use of a car provided by the Company and will be provided with a life insurance policy in the amount equal to three times his annual base salary. Following Mr. Liebergesell's termination as an employee of the Company for any reason and in consideration of his agreement not to compete with the Company for a period of two years following such termination, Mr. Liebergesell will be entitled to receive, for the period while the non-compete provision remains in effect, payments equal to his then most recent annual base salary. In the event of his death, such consideration is payable to his estate.

The Company is a party to an agreement, dated July 1, 1991, with Mr. Milano which provides for his employment by the Company as its Treasurer, Vice President and Chief Financial Officer, for a term ending June 30, 1992 at an annual salary of $1 13,000, plus discretionary increases and bonuses. The agreement also provides that in the event Mr. Milano is terminated from such position, the Company shall pay an amount equal to the greater of his current annual salary or his annual salary on the date of

termination. The Company's obligations are conditioned upon Mr. Milano's agreement not to compete with the Company for a period of one year following such termination of employment.

The Company is a party to an employment agreement with Bjorn Iwarsson, dated July 15, 1991, pursuant to which Mr. Iwarsson is employed by the Company as Vice President, International Operations and as Managing Director of Farrel Limited. During his employment, Mr. Iwarsson is entitled to receive an annual base salary of $200,000, subject to increase by the Board of Directors. Mr. Iwarsson was paid a bonus of $35,000 under this agreement to cover moving expenses and is guaranteed a bonus of $50,000 for the first year of his employment. In addition to his participation in benefit plans available generally to executive employees, Mr. Iwarsson is entitled to four annual home visits and the use of a car provided by the Company. Following his termination of employment with the Company, Mr. Iwarsson has agreed not to become employed by, or provide consulting services for, specified competitors of the Company for a period of one year. Mr. Iwarsson's employment agreement is terminable at will by either party, for any reason.

Stock Option Plan

General

The Company has approved the establishment of the Stock Option Plan for key employees of the Company and non-employee directors of the Company and designated subsidiaries. The Stock Option Plan was designed to promote the interests of the Company and its stockholders by providing eligible employees and non-employee directors with incentives so that the Company is able to attract and retain qualified personnel and directors. Any employee of the Company or a subsidiary of the Company designated by the Compensation Committee who has demonstrated significant potential to contribute to the successful performance of the Company or such subsidiary is eligible to participate in the Stock Option Plan. In addition, non-employee directors of the Company and Mr. Liebergesell will participate in the Stock Option Plan.

Under the Stock Option Plan, awards of incentive stock options (as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code")) and non-qualified stock options may be granted to eligible employees. Only non-qualified stock options may be granted to non- employee directors. The Stock Option Plan authorizes the granting of options to purchase up to 600,000 shares of Common Stock.

The Stock Option Plan is administered by the Compensation Committee of the Board of Directors, which determines the employees to whom options are granted, the number of shares of Common Stock covered by options and the terms of such options and the exercise price of stock options, which may not be less than fair market value as of the date of grant of the option (or 110% in the case of an incentive stock option granted to a 10% stockholder). The vesting period for stock options will be accelerated upon the death, disability or retirement of the grantee or other circumstances which the Compensation Committee deems appropriate.

Participation by employees is determined by the Compensation Committee of the Board of Directors on the basis of the criteria set forth above.

Each non-employee director, including members of the Compensation Committee, will be granted each year a non-qualified stock option to purchase 3,000 shares of Common Stock on the closing of the sale of the Shares offered hereby and on each anniversary thereof. Mr. Liebergesell will be granted a non-qualified stock option to purchase 40,000 shares of Common Stock on the closing of the sale of the Shares offered hereby, and on the 30th day after the end of each fiscal year of the Company during the term of his employment agreement.

No options have been granted to date under the Stock Option Plan.

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Options granted to employees under the Stock Option Plan will have a term not in excess of 10 years (or five years in the case of an incentive stock option granted to a 10% stockholder) as may be determined by the Compensation Committee. Options granted to non-employee directors and Mr. Liebergesell will have a term of 10 years.

Each option granted under the Stock Option Plan to an employee will provide that it is exercisable in whole or in part in cumulative installments as to one-fourth of the total number of shares covered by such option after the optionee has completed a t least one year of continuous service after the date of grant of the option. Such options are to be exercisable as to an additional one-fourth of such shares after the completion of at least two, three and four years, respectively, of such continuous service. Options granted to non-employee directors, and those granted to Mr. Liebergesell under his employment agreement, will become exercisable as to all shares covered by the option after one year of continuous service after the date of grant of the option.

Options are not transferable otherwise than by will or the laws of descent and distribution, and an option may be exercised during the lifetime of the optionee only by such optionee.

If an optionee's employment or service is terminated based upon the optionee's disability, his options are exercisable, to the extent that the optionee would be entitled to do so at the termination of his employment or service, (a) in the case of incentive stock options, for 90 days after such termination, but not later than the expiration of the term of the option or (b) in the case of non-qualified options, not later than the expiration of the term of the option.

If a person to whom an option has been granted under the Stock Option Plan shall retire at normal retirement date, options held by him may be exercised in full without regard to the period of continuous employment with the Company or one of its subsidiaries after the option was granted at any time (a) in the case of an incentive stock option, for 90 days after such retirement or (b) in the case of non-qualified options, within three years after such retirement, but in no event after the expiration of the term of the option; provided, however, that if such retirement is earlier than the optionee's normal retirement date, such retirement must be with the consent of the Company prior to acceleration of the rate of exercise of otherwise unexercisable options.

If an optionee shall die while he is serving the Company or one of its subsidiaries, options held by him may be exercised to the extent the optionee was entitled to do so at the date of his death by his executor or administrator or other person a t the time entitled by law to the optionee's rights under the option, at any time within such period, not exceeding one year, as shall be prescribed in the option agreement, but in no event after the expiration of the term of the option.

If an optionee's employment or service is terminated other than because of disability, retirement or death, his options are exercisable, to the extent that the optionee would be entitled to do so at the termination of his employment or service, at any time within 30 days after such termination but in no event after the expiration of the term of the option. Notwithstanding the foregoing, if such termination is with cause (as defined in the Stock Option Plan), all outstanding options will terminate on the date employment or service is terminated.

Options are not affected by changes of duties or position. Nothing in the Stock Option Plan or in any option agreement confers upon any optionee any right to continue in the service of the Company or interferes in any way with any right of the Company or its stockholders to terminate his service at any time.

In the case of incentive stock options, the aggregate fair market value (determined as of the date of grant of an option) of the stock with respect to which incentive stock options granted under the Stock Option Plan and all other stock option plans of the Company are exercisable for the first time by any specific individual during any calendar year shall not exceed $100,000.

The purchase price of the shares as to which an option is exercised must be paid in full a t the time of exercise at the election of the holder of an option (a) in cash or currency of the United States of

America, (b) by tendering to the Company shares of Common Stock then owned by him having a fair market value equal to the cash exercise price or (c) partly in cash and partly in shares of Common Stock valued at fair market value. In its discretion, the Compensation Committee may amend or cancel the right to pay the option price other than in full in cash by giving prior notice to each holder of an option.

The Stock Option Plan provides that the option agreements may contain such provisions as the Compensation Committee determines to be appropriate for the adjustment of the number and class of shares covered by the option agreements, the option prices and the number of shares as to which the options are to be exercisable at any time in the event of stock dividends, stock splits and other changes in the capitalization of the Company, and further provides that, in the event of any such change in capitalization, the aggregate number and class of shares available under the Stock Option Plan will be appropriately adjusted. The Stock Option Plan provides that in the event of a dissolution or liquidation of the Company or upon a merger or consolidation or other reorganization of the Company, then at the discretion of the Board of Directors and as permitted by law, (a) any surviving corporation will assume any options outstanding under the Stock Option Plan or will substitute similar options for those outstanding under the Stock Option Plan, (b) the time during which options may be exercised shall be accelerated and the options terminated if not exercised prior to such event or (c) options shall continue in full force and effect.

The Stock Option Plan provides that the Board of Directors may amend or terminate the Stock Option Plan in any respect except that, without further approval of the stockholders, the Board of Directors may not increase the maximum number of shares for which options may be granted (other than adjustments based on stock dividends, stock splits and other changes in the capitalization of the Company), either in the aggregate or to any individual, change the manner of determining the minimum option prices, extend the period during which an option may be granted or exercised, amend the provisions of the Stock Option Plan as to the class of employees eligible to receive options, or amend the provisions of the Stock Option Plan governing the grant of options to non-employee directors or to Mr. Liebergesell.

The holder of an option shall have none of the rights of a stockholder with respect to the shares covered by an option until such shares shall have been registered on the transfer books of the Company in the name of the person or persons exercising the option upon the exercise of the option.

No options may be granted under the Stock Option Plan after the fifth anniversary of the sale of Shares in this offering.

U.S. Federal Income Tax Consequences

The grant of an incentive stock option has no immediate tax consequences to the Company or to the employee. A holder of shares purchased pursuant to the exercise of an incentive stock option realizes no taxable income at the time of exercise although the amount by which the fair market value at the time of exercise exceeds the option price would be an item of "tax preference" for purposes of computing the alternative minimum tax on individuals. If the employee holds his shares for a t least two years from the date of the grant of the option and a t least one year from the date of exercise, he will realize taxable long-term capital gain or long-term capital loss upon a subsequent sale of the shares a t a price different from the option price. In either of these events, no deduction would be allowed to the Company for federal income tax purposes.

If the employee disposes of his shares within the holding periods described above, (i) the employee will recognize taxable ordinary income in the year of such disposition, provided that if the disposition is a sale or exchange with an unrelated party, then the ordinary income will be limited to the excess of the amount realized upon the sale or exchange of the shares over the option price, (ii) the Company will be entitled to a deduction for such year equal to the amount of taxable ordinary income recognized by the employee, (iii) the employee will recognize capital gain or loss, short-term or long-term, as the case may be, in an amount equal to the difference between (a) the amount realized by him upon such sale or exchange of the shares and (b) the option price paid by him increased by the amount of ordinary income, if any, recognized by him upon such disposition.

If shares acquired through exercise of any incentive stock options are exchanged for other shares during the holding period described, the exchange will be a taxable transaction with respect to the shares given up in thc exchange, and thc transaction will constitute a disqualifying dispi t ion of those shares.

The grant of a non-qualified stock option would have no immediate tax consequences to the Company or the optionee. A holder of shares acquired upon exercise of such an option would recognize taxable ordinary inwme at the time of exercise of the option in the amount of the excess of the fair market value on the date of exercise over the option price, and such amount,vould he deductible for federal inwme tax purposes by the Company. The holder of such shares will upon a subsequent disposition realize a short-term or long-term capital gain or loss, depending on the holding period of the shares.

An optionee who is subject to taxation in a jurisdiction other than the United States may be liable for taxation in accordance with the laws of that jurisdiction and is encouraged to seek independent tax advice.

Stockholder Approval The Stock Option Plan was approved by the Board of Directors and the stockholders in January

1992.

Statements herein with respect to the Stock Option Plan are qualified in their entirety by reference to the Stock Option Plan, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part.

Stock Purchase Plan

General The Company has approved the establishment of the Stock Purchase Plan for employees of the

Company. On the annual offering date in May 1992 and in May of the next succeeding four years, each employee of the Company would be eligible to purchase that number of shares of Common Stock having a purchase price equal to not more than 5% of the employee's annual compensation, subject to the maximum numbcr of shares authorized by the Board of Directors for such annual grant. The price would be the lower of 85% of the fair market value of the Common Stock on the day the right is granted or 85% of the fair market value of the Common Stock on the date the 24-month purchase period applicable to each right to purchase terminates.

The principal features of the Stock Purchase Plan may be summarized as follows: a right to purchase shares of Common Stock of the Company may be granted, subject to the discretion of the Board of Directors, to Eligible Employees (as defined in the Stock Purchase Plan) within the first 15 days of May in each of the years 1992 through 1996, but not more than an aggregate of 500,000 shares of Common Stock may be purchased pursuant to such grants, which shares may be newly issued shares, treasury shares or shares purchased by the Company in the open market. Any person who is an employee of the Company or of a designated majority-owned subsidiary as of the date of each offering shall be eligible to participate in the Stock Purchase Plan except directors who are not officers of the Company and any person who, after grant of a right to purchase, would hold 5% or more of the Common Stock of the Company. In addition, the granting of a right to any employee to purchase shares under the Stock Purchase Plan is limited to $25,000 in fair market value of such shares (determined as of the date of grant of such right) for each calendar year.

The purchase price of the shares of Common Stock covered by the right to purchase granted by the Company will be the lower of 85% of the fair market value of the Common Stock on the respective date of grant of the rights or the respective ending date of the applicable 24-month purchase period. Therefore, if the purchase price under a particular grant becomes 85% of the fair market value on the

ending date of the applicable purchase period, this will result in the issuance of more shares under that grant than would have been the case if this feature were not included in the Stock Purchase Plan. However, the total number of shares eventually issued in respect of a particular annual grant will in no event exceed the number of shares originally subscribed for by all eligible employees accepting rights to purchase pursuant to that grant. The total purchase price of the shares of stock covered by the grants will be paid through payroll deductions over a 24-month period. A participating employee will have none of the rights or privileges of a stockholder of the Company (including rights to dividends) until the shares are fully paid for and issued. An Eligible Employee's rights under the Stock Purchase Plan are exercisable during his lifetime only by him and may not be transferred other than by will or the laws of descent and distribution.

At any time prior to the last payroll deduction, the employee will be entitled to cancel his right to buy shares of stock and receive a cash refund of his entire payroll deductions, without interest, unless the employee waives such right. In the event an employee's payroll deductions are discontinued at the request of the employee, or temporarily discontinued because of leave of absence, layoff, temporary disability or other similar reasons, the number of shares subject to purchase under his option shall be automatically reduced to that number of whole shares which his aggregate payroll deductions actually made are sufficient to purchase. However, the employee may make payment to the Company (through increased payroll deductions during the remainder of the 24-month purchase period) in an amount equal to the amount which was not subject to payroll deductions because of the temporary discontinu- ance thereof, and thereby be entitled to purchase the total number of shares covered by the original grant. In addition, an employee who has accepted a grant may, at any time prior to his last scheduled payroll deduction, direct the Company to make no further payroll deductions on his behalf. In such case, the amount theretofore deducted under the grant shall be retained by the Company until the end of the purchase period, at which time the employee shall receive that number of whole shares which can be purchased with the amount so retained, and any remaining balance shall be paid to the employee in cash. Upon death, total and permanent disability or retirement, the employee or his legal representative will have the privilege of canceling the right to purchase and receiving a cash refund, without interest, of his entire payroll deductions, or purchasing at the conclusion of the applicable purchase period the whole number of shares of stock which such payroll deductions will purchase, any excess being refunded in cash. Upon resignation or discharge, the employee will receive a cash refund of his payroll deductions, without interest.

U.S. Federal Income Tax Consequences

It is intended that the rights to purchase shares of stock to be granted by the Company shall constitute options issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. If such shares of the Common Stock of the Company are issued to a participating employee upon his exercise of a right to purchase granted under the Stock Purchase Plan, and if no disposition of such shares is made by him within two years of the granting of the right to purchase, nor within one year after the transfer to him of such shares, (a) no income will be realized by the employee at the time of the transfer of the shares to him and (b) when he sells such shares (or dies holding the shares), ordinary income will be realized to the extent of the lesser of (i) the amount by which the fair market value of the shares on the Date of Offering (as defined in the Stock Purchase Plan) exceeds the purchase price for the shares or (ii) the amount by which the fair market value at time of disposition exceeds the purchase price. Any further gain will be treated for tax purposes as long-term capital gain, provided the employee holds the shares for more than one year after the last day of the purchase period applicable to such shares. No deduction will be allowed to the Company for federal income tax purposes in connection with the granting or exercise of any right to purchase under the Stock Purchase Plan if there is no disposition of the shares within either the two-year or the one-year periods referred to above. If there is a disposition of shares within either of those periods, the employee will realize ordinary income in the year of the disposition in an amount equal to the difference between the purchase price and the fair market value of the shares at the time of exercise of the grant, and the

43

Company will be entitled to a deduction in the same amount. Any difference between the amount realized by an employee upon such a disposition and the fair market value of the shares at the time of exercise of the right to purchase will be capital gain or loss, as the case may be.

The number and class of shares covered by the rights to purchase granted by the Company will be subject to adjustment to avoid dilution upon changes in capitalization, provided that the Company is satisfied that any such adjustment will not have the effect of disqualifying the Stock Purchase Plan as an "employee stock purchase plan" under the Internal Revenue Code.

The Stock Purchase Plan will be administered by the Compensation Committee of the Board of Directors of the Company. The Compensation Committee, whose members are not eligible to partici- pate in the Stock Purchase Plan, will be authorized to determine any questions arising in the administration, interpretation and application of the Stock Purchase Plan, except that certain amend- ments, including an amendment to increase the number of shares reserved under the Stock Purchase Plan, would require stockholder approval. The Company will pay all costs and expenses of administra- tion and recordkeeping under the Stock Purchase Plan as well as original issue taxes on the shares of stock issued pursuant to the exercise of rights to purchase under the Stock Purchase Plan. Shares issued pursuant to the Stock Purchase Plan may be treasury shares, newly issued shares or shares purchased by the Company in the open market.

An individual who is subject to taxation in a jurisdiction other than the United States may be liable for taxation in accordance with the laws of that jurisdiction and is encouraged to seek independent tax advice.

Stockholder Approval

The Stock Purchase Plan was approved by the Board of Directors and the stockholders in January 1992.

Statements herein with respect to the Stock Purchase Plan are qualified in their entirety by reference to the Stock Purchase Plan, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part.

Savings Plan

The Farrel Corporation Salary Retirement Program (the "Savings Plan") allows a participating employee to reduce his annual compensation, as defined in the Savings Plan, by up to 8% and have such amount contributed on his behalf to the Savings Plan. For each participant, the first 4% of contributions is matched 50% by the Company. In addition, the Company may contribute employer discretionary contributions to the Savings Plan for each calendar quarter in an amount to be determined by the Company. Employer discretionary contributions will be allocated on behalf of active participants in accordance with the formula set forth in the Savings Plan. As required by Internal Revenue Service regulations, salary deferral contributions are limited to $7,000 per year (set in 1987) as indexed annually and the Savings Plan excludes any participant's annual compensation that is over a specified limit (set in 1989 at $200,000 and indexed annually thereafter).

Upon termination of a participant's employment, the participant may, under varying circurn- stances, elect to receive installment payments for a specified period of time or may elect to receive benefits in a single sum. In the event of the participant's death, the participant's spouse or designated beneficiary will receive all remaining benefits in a single sum. A participant's salary deferral contribu- tions are 100% vested and nonforfeitable at all times. A participant vests in Company matching contributions and employer discretionary contributions at a rate of 20% for each year of qualifying service beginning with the third year of qualifying service so that upon completion of seven years of qualifying service he is 100% vested. Upon death, attainment of age 65, or retirement, a participant will become 100% vested regardless of his years of qualifying service. Generally, salaried employees are eligible for participation in the Savings Plan upon the completion of 60 days of service. For the three

fiscal years ended April 30, 1991, the Company's contributions with respect to all current executive officers as a group amounted to $56,855 and its contributions with respect to Messrs. Liebergesell, A. Shaio, Svensson, Carvalko and Milano amounted to $0, $28,021, $10,041, $14,003, $4,791, respec- tively. Contributions on behalf of all participants for the three fiscal years ended April 30, 1991, were $1,444,224.

CERTAIN TRANSACTIONS

Option Agreement

Charles S. Jones, a director of the Company and owner of over 5% of its outstanding Common Stock, has entered into an Option Agreement dated August 22, 1991 (the "Option Agreement") with Soli Shaio, the cousin of Victor Shaio ("S. Shaio") and Interamerican Investment Group Limited Partnership, an affiliate of Victor Shaio ("Interamerican," together with S. Shaio, the "Sellers"), stockholders of the Company, pursuant to which Mr. Jones was granted the Purchase Option to purchase an aggregate of 1,483,870 shares of Common Stock (451,613 shares from S. Shaio and 1,032,257 shares from Interamerican), for a purchase price of $3.9 million, which amount includes $100,000 paid by Mr. Jones to purchase the Purchase Option from the Sellers. The Purchase Option covers all shares of Common Stock owned directly by the Sellers. Exercise of the Purchase Option is subject to a right of first refusal to the Company.

The Company exercised its right of first refusal under the Purchase Option and paid Mr. Jones $100,000, the amount paid by him to acquire the Purchase Option, plus legal fees of $10,000 incurred by Mr. Jones in connection therewith. On December 31, 1991, the Company gave notice of exercise of the Purchase Option. The purchase price under the Purchase Option to Interamerican and Mr. S. Shaio is approximately $2.6 million and $1.2 million, respectively. Indebtedness relating to the purchase of shares by the Company pursuant to the Purchase Option will be repaid out of the proceeds of this offering. See "Use of Proceeds." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources; Capital Expenditures."

Upon the purchase of shares pursuant to the F'urchase Option, the Option Agreement provides that the Company shall indemnify the Sellers and Victor Shaio for claims by reason of the fact that they were directors of the Company. The Option Agreement also contains several provisions concerning the release of potential claims, acknowledgment of conflicts and the waiver of certain rights, and various representations and covenants.

Upon the purchase by the Company of the shares covered by the Purchase Option, the Company intends to retire such shares and return them to the status of authorized but unissued shares. The number of shares of outstanding Common Stock will be reduced accordingly.

Indebtedness of Management; LiebergeseU Purchase

Rolf K. Liebergesell, Chairman, President and Chief Executive Officer of the Company, is indebted to the Company in the aggregate principal amount of $1.5 million. Mr. Liebergesell has executed two promissory notes in favor of the Company; a note for $1 million, dated December 5, 1989, is payable on demand and a note for $500,000, dated October 17, 1989, is payable on February 2, 1993. The loans were extended to Mr. Liebergesell for personal purposes. Mr. Liebergesell pays the Company interest at an annual fixed rate of 8.13% on both loans. The entire amount has been outstanding since the making of the loans. A mortgage executed by Mr. Liebergesell in favor of the Company as collateral security for the $500,000 loan was assigned to the Company's bank as collateral security for indebted- ness of the Company incurred under its credit agreement. Pursuant to the Liebergesell Purchase, the Company has agreed to purchase from Mr. Liebergesell that number of shares of Common Stock equal to $1.5 million divided by the public offering price set forth on the cover page of this Prospectus. The Company will pay such purchase price by cancellation of Mr. Liebergesell's indebtedness to the

Company. Upon such purchase, the Company intends to retire such shares and return them to the status of authorized but unissued shares.

Agreement with First Funding Corporation

First Funding Corporation ("First Funding") acted as financial advisor to the Company in connection with initiating, financing and negotiating the purchase agreement between the Company and USM in 1986. Since the acquisition, First Funding has continued to act as a financial advisor to the Company.

The Company is a party to an agreement with First Funding dated June 17,1986, as amended by a letter agreement dated November 1, 1991 (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 its outstanding Common Stock, is an executive officer of First Funding and owner of a majority of its outstanding capital stock. The Financial Services Agreement may be terminated by either party upon twelve months' prior written notice to the other. The agreement is also terminable 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 will pay First Funding an annual retainer of $450,000 in respect of Mr. Jones' commitment to spend a majority of his normal working time each year on behalf of the Company. Mr. Jones has agreed to serve as Chairman of the Company's Executive Committee and to provide certain other services as requested by the Company including financial advisory services, strategic planning, budgeting and forecasting and advice relating to the establishment and/or modification of the Company's corporate goals and objectives. The Company is billed on an hourly basis for other First Funding employees who work on the Farrel account and will pay a transaction fee to First Funding in the event of certain transactions, such as acquisitions, divestitures, mergers, joint ventures and debt or equity investments.

The compensation paid or accrued to First Funding for services under the Financial Services Agreement during the fiscal year ended April 30,1991 was approximately $91,000. From May 1,1991 to October 27, 1991, the Company has paid or accrued to First Funding approximately $458,000 for services performed under the Financial Services Agreement, including $205,000 for services performed by Mr. Jones and $125,000 for services performed by other employees of First Funding in connection with this offering. First Funding has waived its right to receive a transacton fee from the Company that would otherwise be due with respect to this offering, although First Funding will be entitled to receive a transaction fee in the amount of $138,000 for services rendered in connection with the Company's acquisition of the Purchase Option.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial ownership of the Common Stock as of October 27, 1991 after taking into account the purchase of shares by the Company pursuant to the Purchase Option, and as adjusted to reflect the sale of Shares offered by this ~ ro s~ec tu s , and consummation of the Liebergesell Purchase. The business address of each stockholder is 25 Main Street, Ansonia, Connecticut 06401.

Name - Rolf K. Liebergesell . . . . . . . Charles S. Jones.. . . . . . . . . Alberto Shaio . . . . . . . . . . . .

. . . . . . . . . . . . Total

Sbares Beneficially Owned Prior to

OlTering(1) Number Percenl - -

3,225,806 80.6% 451,613 11.3% 322,581 - 8.1%

4,000,000 100%

Sbares to be BeneReially Owned After Ofiering(2)

Number Percent - - 3,067,912 52.5%

451,613 7.7% 322,581 - 5.5%

3,842,106 65.7%

(1) After taking into account the purchase of shares pursuant to the Purchase Option. Without giving effect to the purchase of shares pursuant to the Purchase Option, Messrs. Liebergesell, Jones and A. Shaio would beneficially own 58.8%. 8.2% and 5.9% of the outstanding Common Stock, respectively.

(2) Based upon 5,842,106 shares outstanding after taking into account the purchase of shares pursuant to the Purchase Option, and assuming consummation of the Liebergesell Purchase and no exercise by the Underwriters of the over-allotment option.

As of October 27, 1991, Interamerican Investment Group Limited Partnership and Soli Shaio, whose addresses are 999 Summer Street, Stamford, Connecticut 06905 and 10A Transversal de Altimira and Avenida San Juan Bosco, Edificio Altimira Crystal, Caracas, Venezuela, respectively, beneficially owned 1,032,257 shares (or 18.8%) and 451,613 shares (or 8.2%), respectively. These shares are the subject of the Purchase Option.

All stockholders have sole voting and investment power over the shares owned by them.

Upon completion of the offering of Shares described in this Prospectus and after giving effect to the purchase of shares pursuant to the Purchase Option and assuming consummation of the Liebergesell Purchase, the current stockholders of the Company will beneficially own approximately 66% of the outstanding Common Stock (approximately 63% if the Underwriters' over-allotment option is exercised in full) and will be able to control the affairs of the Company and the vote of any action requiring stockholder approval, including the election of directors, other than an amendment to the provisions of the Company's Certificate of Incorporation relating to its classified board.

DESCRIPTION OF CAPITAL STOCK Common Stock and Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $100 per share (the "Preferred Stock"). As of December 30, 1991, there were 5,483,870 shares of Common Stock issued and outstanding held of record by five stockholders. No shares of Preferred Stock are outstanding. After giving effect to the purchase of shares pursuant to the Purchase Option and assuming consummation of the Liebergesell Purchase and without giving effect to the issuance of the Shares offered by the Company, there will be 3,842,106 shares of Common Stock issued and outstanding held of record by three stockholders.

Holders of Common Stock are not entitled to any preemptive rights. The Common Stock is neither redeemable nor convertible into any other securities. Upon liquidation, dissolution or winding up of the Company, holders of shares of Common Stock are entitled to share ratably in the net assets of the

Company, after payment in full of all liabilities of the Company and such amounts, if any, as may be due to holders of any Preferred Stock hereafter issued and then outstanding. All outstanding shares of Common Stock are, and all Shares offered hereby when issued will be, fully paid and nonassessable. Holders of Common Stock have no fixed dividend rights; the holders thereof are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. Any declaration of dividends by the Board of Directors is dependent on several factors including earnings, capital requirements and financial condition of the Company and other relevant facjors. There is also a limitation on the declaration of dividends contained in the Company's U.S. revolving credit facility. See "Dividend Policy."

Each holder of Common Stock is entitled to one vote for each share of Common Stock held of record on all matters submitted to a vote of stockholders, including the election of directors. Stockhold- ers do not have cumulative voting rights. As a result, a person or entity controlling the vote of a majority of the shares of Common Stock outstanding can elect all the directors. Following completion of the offering described herein, Messrs. Liebergesell, Jones and A. Shaio will own an aggregate of approxi- mately 66% of the outstanding Common Stock after giving effect to the purchase of shares pursuant to the Purchase Option and assuming consummation of the Liebergesell Purchase. See "Principal Stockholders."

Shares of the authorized Preferred Stock, when and as issued by the Board of Directors from time to time, will have a claim on the net earnings of the Company for the payment of such Preferred Stock dividends as are called for by the terms under which such shares are issued, prior to the right of the holders of the Common Stock to receive dividends. Likewise, in the event of the dissolution or liquidation of the Company, shares of Preferred Stock will be entitled to such preference in any distribution of the net assets of the Company, prior to any distribution to holders of shares of the Common Stock, as may be provided for by the terms under which such Preferred Stock may be issued from time to time. The Board of Directors of the Company is authorized, without stockholder approval, to determine the preferences, voting rights and other terms applicable to the Preferred Stock; to issue the Preferred Stock in series; and to fix the dividend rate, the price and terms of redemption, sinking fund provisions, if any, terms and conditions upon which the shares of any series may be converted and other variations which may be permitted among series of Preferred Stock.

The authority possessed by the Board of Directors to issue Preferred Stock and the classification of the Board of Directors into Class I and Class I1 directors could potentially be used to discourage attempts by others to obtain control of the Company through merger, tender offer, proxy, consent or otherwise by making such attempts more difficult to achieve or more costly, or by delaying their achievement. The Board of Directors may issue Preferred Stock and the remaining authorized but unissued shares of Common Stock without stockholder approval and may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of holders of Common Stock. There are no agreements or understandings for the issuance of Preferred Stock, and the Board of Directors has no present intention to issue any shares of Preferred Stock. The classification of the Board of Directors into two classes of directors sewing two-year staggered terms could have the effect of delaying the election of a majority of the directors serving on the Board of Directors. The Certificate of Incorporation provides that a director may be removed only for cause by the affirmative vote of at least two-thirds of the voting power of all shares having the right to vote for the election of directors and that the number of directorships may be increased by the Board of Directors or by the affirmative vote of a t least two-thirds of the voting power of all shares entitled to vote thereon. These provisions, when coupled with the provision of the Company's Certificate of Incorporation authorizing only the Board of Directors to fill vacant directorships, will preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. Amendment of the provisions of the Company's Certificate of Incorporation relating to the classified board requires the affirmative vote of the holders of at least two-thirds of the voting power of all shares then having the right to vote thereon.

48

At present, there is no established trading market for the Common Stock. The Company's Common Stock has been approved for quotation on the NASDAQ National Market System.

Limitation of Liability of Directors and Indemnification

The Company's Certificate of Incorporation provides that no director of the Company shall he liable to the Company or its stockholders for monetary damages for breach of the director's fiduciary duty as a director, except in certain limited circumstances. The by-laws of the Company contain provisions requiring the indemnification of the Company's directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary. The Company has also agreed to indemnify each director and officer pursuant to an Indemnification Agreement with such director or officer from and against any and all expenses, losses, claims, damages and liabilities incurred by such director or officer for or as a result of actions taken or not taken while such director or officer was acting in his capacity as a director, officer, employee or agent of the Company.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may he permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Certain Provisions of Delaware Law

As a Delaware corporation, the Company is subject to Section 203 of the Delaware General Corporation Law. In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of the corporation's outstanding voting stock) from engaging in a "business wmbination" (as defined) with a Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business wmbination; (ii) upon consummation of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owned a t least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by certain employee stock plans); or (iii) following the transaction in which such person became an interested stockholder, the business wmbination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of two-thirds of the outstanding voting stock of the wrporation not owned by the interested stockholder. Under Section 203, the restrictions described above also do not apply to certain business combinations proposed by an interested stockholder following the public announcement or notification of one of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of the corporation's board of directors and if such business wmbination is approved by a majority of the board members who were directors prior to any person's becoming an interested stockholder. The provisions of Section 203 requiring a supermajority vote to approve certain corporate transactions could enable a minority of the Company's stockholders to exercise veto power over such transactions.

Transfer Agent and Registrar

State Street Bank and Trust Company of Boston, Massachusetts will act as transfer agent and registrar for the Company's Common Stock.

SHARES ELIGIBLE M)R FUTURE SALE Upon completion of the offering after taking into account the purchise of shares by the Company

pursuant to the Purchase Option and assuming consummation of the Liebergesell Purchase. the Company will have outstanding 5,842,106 shares of Common Stock (6,142,106 shares if the over- allotment option is exercised in full). Of these shares, all of the 2,000,000 Shares (2,300,000 Shares if the over-allotment option is exercised in full) sold in the offering will be freely transferable by persons other than "affiliates" of the Company, without restriction or further registration under the Securities Act.

The remaining 3,842,106 shares of Common Stock outstanding will be "restricted securities" within the meaning of Rule 144 ("Rule 144") promulgated under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. The holders of all 3,842,106 shares have agreed, subject to certain exceptions, not to sell or otherwise dispose of such shares, for at least 180 days after the commencement of this offering, without the prior written consent of the Representative of the Underwriters (as hereinafter defined).

In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned hi or her shares for at least two years, including an "affiliate" of the Company (as that term is defined under the Securities Act), is entitled to sell, within any three-month period, that number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Common Stock or (ii) the average weekly trading volume of the then outstanding shares during the four calendar weeks preceding each such sale. A person (or persons whose shares are aggregated) who is not deemed an "affiliate" of the Company and who has beneficially owned shares for at least three years is entitled to sell such shares under Rule 144 without regard to the volume limitations described above.

Prior to this offering, there has been no market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices.

UNDERWRITING The U.S. Underwriters named below. for whom PaineWebber Incorporated and First Albany

Corporation are acting as representatives (the "Representatives"). have severally agrccd. subject to thc terns and conditions of the U.S. Underwriting Agreement by and between the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"). to purchase from the Company. and the Com- pany has agreed to sell to the U.S. Underwriters. the number of U.S. Shares as set forth opposite their names below:

Number of U.S. Underwriters Shares

PaineWebber Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430. 000 First Albany Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430. 000

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bear. Stearns & Co Inc 40, 000 The First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Alex . Brown & Sons Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Dillon. Read & Co . Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 A.G. Edwards & Sons. Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000 Kidder. Peabody & Co . Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Lazard Freres & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Prudential Securities Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000 Shearson Lehman Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Dean Witter Reynolds Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. 000 Advest. Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000 Cowen & Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000 Howard. Weil. Labouisse. Friedrichs Incorporated . . . . . . . . . . . . . . . 20. 000 Janney Montgomery Scott Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000 Ladenburg. Thalmann & Co . Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000 Needham & Company. Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Neuberger & Berman 20. 000 . . . . . . . . . . . . . . . . . . . . Stifel. Nicholaus & Company. Incorporated 20. 000

Sutro & Co . Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. 000 Branch. Cabell and Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 000 Brean Murray. Foster Securities Inc . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 000

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Chicago Corporation 10. 000 Doft & Co.. Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 000

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gahelli & Company. Inc 10. 000 C.L. King & Associates. Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.500. 000

In addition. the several International Underwriters (the "International Underwriters. " together with the U.S. Underwriters. the "Underwriters") have agreed to purchase in the aggregate 500. 000 Shares (the "International Shares") . The U.S. Underwriting Agreement provides that the obligations of the U.S. Underwriters to purchase the U.S. Shares are subject to certain conditions . The Underwrit- ers are committed to purchase all the Shares offered hereby. if any are purchased .

The Company has been advised by the Representatives that the Underwriters propose to offer the Shares to the public at the public offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $0.36 per share. and that the Underwriters may allow. and such dealers may reallow. a concession not in excess of $0.10 per share to certain other dealers. including any Underwriters . After the initial public offering. the public offering price and concessions and discounts may be changed by the Representatives .

Each U.S. Underwriter has agreed that. as a part of the distribution of the U.S. Shares. (a) it is not purchasing any U.S. Shares for the account of anyone other than a U.S. Person and (b) it has not

offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute this Prospectus relating to the U.S. offering to any person outside the U.S. or to anyone other than a U.S. Person. Each International Underwriter has agreed that, as part of the distribution of the International Shares, (a) it is not purchasing any International Shares for the account of any U.S. Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any International Shares to any person within the U.S. or to any U.S. Person or distribute this Prospectus to any person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. Underwriters and International Underwriters. As used herein, "U.S. Person" means any individual who is resident in the US. , or any corporation, pension, profit-sharing or other trust or other entity organized under or governed by the laws of the U.S. or any political subdivision thereof (other than a foreign branch of any U.S. Person), and includes any U.S. branch of a non-U.S. Person.

Sales may be made between the U.S. Underwriters and the International Underwriters of such number of Shares as may be mutually agreed. The per share price of any Shares so sold shall be the initial public offering price less an amount not greater than the per share amount of the concession to dealers set forth above.

The Underwriters have obtained an option from the Company, exercisable during the 30-day period after the date of this Prospectus, for the purchase of up to an aggregate of 300,000 additional Shares at the price set forth on the cover page hereof less the underwriting discount. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional Shares as the percentage it was obligated to purchase pursuant to the Underwriting Agreement. The Underwriters may exercise this option solely for the purpose of covering over-allotments.

The Representatives have informed the Company that they do not expect the U.S. Underwriters to confirm sales of U.S. Shares to accounts over which they exercise discretionary authority.

Reference is made to "Certain Transactions-Agreement with First Funding Corporation" for information in respect of an agreement pursuant to which First Funding provides certain financial advisory services to the Company. Certain of such services (and a portion of the compensation paid to First Funding under such agreement) have been provided in connection with the offering made hereby.

The Company and each of the executive officers and directors of the Company have agreed, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares without the prior written consent of the Representatives for a period of 180 days after the date of this Prospectus.

Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiation between the Company and the Representatives. Among the factors that were considered in determining the initial public offering price was an assessment of the Company's results of operations, an evaluation of the Company's management, the future prospects of the Company and its industry in general, market prices of securities of companies engaged in activities similar to those of the Company and the prevailing conditions in the securities markets.

The Company has agreed to indemnify the Underwriters against certain liabilities under the Securities Act or to contribute to payments the Underwriters may be required to make in respect thereof.

EXPERTS

The consolidated financial statements included in this Prospectus, except as they relate to the unaudited six-month periods ended October 28, 1990 and October 27, 1991, have been so included in reliance upon the report of Cooper, Selvin and Strassberg, independent auditors, given on the authority of said firm as experts in accounting and auditing.

LEGAL MATTERS The validity of the authorization and issuance of the Shares offered hereby will be passed upon for

the Company by Cummings & Lockwood, Ten Stamford Forum, Stamford, Connecticut 06904. Glenn J. Angiolillo, a director of the Company, is a partner of Cummings & Lockwood. Olshan Grundman Frome & Rosenzweig has acted as counsel for the Underwriters.

OTHER INIWRMATION The Company has filed with the Securities and Exchange Commission in Washington, D.C. a

Registration Statement under the Securities Act with respect to the Common Stock offered by this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. The Registration Statement and the exhibits and schedules forming a part thereof may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 75 Park Place, 14th Floor, New York, New York 10007 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 6061 1. Copies of such material may also be obtained from the public reference facilities of the Commission, upon payment of prescribed fees.

Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

(THIS PAGE INTENTIONALLY LEFT BLANK)

FARREL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Financial Statements:

Consolidated Balance Sheets as of April 30, 1990 and 1991 and October 27, 1991 . . . . . . F-3

Consolidated Statements of Operations for the Years Ended A ril 30, 1989, 1990 and 8 1991 and for the Six Months Ended October 28, 1990 and ctober 27, 1991 . . . . . . . . F-4

Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 1989, 1990 and 1991 and for the Six Months Ended October 27, 1991 . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Cash Flows for the Years Ended A ril 30, 1989, 1990 and B 1991 and for the Six Months Ended October 28, 1990 and ctober 27, 1991 . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Farrel Corporation

Ansonia, Connecticut

We have audited the accompanying consolidated balance sheets of Farrel Corporation and its subsidiary as of April 30, 1990 and 1991 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended April 30,1991. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those stan- dards 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 aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of Farrel Corporation and its subsidiary as of April 30, 1990 and 1991 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1991 in conformity with generally accepted accounting principles.

COOPER, SELVIN A N D STRASSBERG Great Neck, New York August 9, 1991, except as to Notes 9(b), 10 and 17 for which the date is January 10, 1992

FARREL CORPORATION CONSOLIDATED BALANCE SHEETS

A s s E T S (Notes 2 and 8) Current Assets:

. . . . . . . . . . . Cash and cash equivalents (Note 3) Accounts receivable, net of allowance for doubtful

accounts of $203, $129 and $513, respectively . Inventory (Notes 3 and 4) . . . . . . . . . . . . . . . . . . . Loans to stockholder (Note 5) . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment-net of accumulated

de reciation of $1,282, $2,026 and $2,341, respectively (dotes 3 and 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

April 30, October 21, 1991 1990 - 1991 Actual Pro forms -

(Note 16) (Unaudited)

(In thousands)

L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y Current Liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,947 Accrued expenses and taxes payable (Note 7) . . . . . . . 5,170 Advances from customers (Note 3) . . . . . . . . . . . . . . . . 11,951 Accrued installation and warranty costs . . . . . . . . . . . . 5,212

Total current liabilities . . . . . . . . . . . . . . . . . . . . 35,280 Long-term debt (Note 8 ) . . . . . . . . . . . . . . . . . . . . . . . . . . - Deferred income taxes (Notesi-3 and 13) . . . . . . . . . . . . . 519 Commitments and contingencies (Note 9) Stockholders' equity (Note 10):

Preferred stock, par value $100, 1,000,000 shares authorized, no shares issued . . . . . . . . . . . . . . . . . . . . -

Common stock, par value S.01, 10,000,000 shares authorized, 5,483,870 shares issued and outstanding . 55

Paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 Cumulative translation adjustment (Note 3) . . . . . . . . . 372 Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,040 Loans to stockholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . -

Total stockholders' equity . . . . . . . . . . . . . . . . . . 9,412 $45,211 -

See Notes to Consolidated Financial Statements.

FARREL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended Endedt00,r 28, October 27,

I989 - 1990 - 1991 - 1990 1991

(Umuudited) (In thousands)

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of sales (Note 11) . . . . . . . . . . . . . . . Gross margin.. . . . . . . . . . . . . . . . . . . . . . Operating expenses:

Selling . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . Research and development . . . . . . . . . .

Total operating expenses. . . . . . . Operating income . . . . . . . . . . . . . . . . . . . Other income (expense):

Amortization of excess of acquired assets over cost (Note 2) ..........

(Loss) ain on disposal of investment in sufkidiary.. . . . . . . . . . . . . . . . . . .

Interest income . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . Other (Note 14) . . . . . . . . . . . . . . . . . .

Income before provision for income taxes. Provision for income taxes

(Notes 3 and 13): Current . . . . . . . . . . . . . . . . . . . . . . . . . 915 547 1,444 919 96 1 Deferred ......................... 172 (174) 537 21 1 84 --

Total . . . . . . . . . . . . . . . . . . . . . . 1,087 373 1.98 1 1,130 1,045 -- Netincome . . . . . . . . . . . . . . . . . . . . . . . . $ 2 1 5 6 $ 1,533 $ 3,511 $2 ,084 $ 1,684 A -- -- Net income per share, based on 5,483,870

shares outstanding (Note 10) . . . . . . . . $ $ $28 $ .64 $ - $ $31 --

See Notes to Consolidated Financial Statements.

FARREL CORPORATION CONSOLIDATED STATEMENTS 'OF STOCKHOLDERS' EQUITY

Paid Cumulative Common Stock

Total In Tramlation Retained Stockholders'

Shares Amount Capital Adjustment E.mings Equity - -- (In thousands)

. . . . . . . . . . . . . . . . Balance, May 1, 1988 8,500 8 8 $992 $1,066 $ 4,351 $ 6,417 Stock split (Note 10). . . . . . . . . . . . . . . . . 5,475,370 47 (47) - - Foreign currency translation . . . . . . . . . . . - - - (483) - (483) Net income - - - - .. . . . . . . . . . . . . . . . . . . . . . . 2,156 2,156

Balance April 30, 1989 . . . . . . . . . . . . . . . 5,483,870 55 945 583 6,507 8,090 Foreign currency translation . . . . . . . . . . . - - (211) - (211) Net income - - - - 1,533 1,533 . . . . . . . . . . . . . . . . . . . . . . . . Balance April 30, 1990 . . . . . . . . . . . . . . . 5,483,870 55 945 372 8,040 9,412 Foreign currency translation . . . . . . . . . . . - - - (155) - (155) Net income - - - - 3511 3,511 . . . . . . . . . . . . . . . . . . . . . . . . ---A-

Balance April 30, 1991 . . . . . . . . . . . . . . . 5,483,870 55 945 217 11,551 12,768 Foreign currency translation (unaudited) . - - - (56) - (56) Net income (unaudited) . . . . . . . . . . . . . . - - ----A - - - 1,684 1684

Balance October 27, 1991 (unaudited) . . . 5,483,870 $55 $945 $ 161 $13,235 $14,396

See Notes to Consolidated Financial Statements.

FARREL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended Year Ended April 30, October 28, October 27,

1989 - 1990 1991 - 1990 1991 - (Unaudited)

(In thousands) Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,156 $ 1,533 $ 3,511 $ 2,084 $ 1,684 Adjustments to reconcile net income to net cash

provided by (used in) operating activities: Amortization of excess of acquired assets

over cost . . . . . . . . . . . . . . . . . . . . . . . . . . (1,889) (1,730) - - - Loss (eain) on disposal of investment in

subs~diary . . . . . . . . . . . . . . . . . . . . . . . . . 874 (350) - - -

(Profit) loss on disposal of fixed assets. . . . . (91) (138) 30 - Depreciation and amortization . . . . . . . . . . . 333 627 901 388

(77) 583

(Increase) decrease in accounts receivable. . (7,428) 6,895 (3,408) (3,410) (3,152) (Increase) decrease in inventory. . . . . . . . . . (10,675) 7,993 3,171 3,245 1,894 Increase (decrease) in accounts payable ... 4.317 (2,780) 1,551 2,041 (58) Increase (decrease) in customer advances . . 4,941 (478) (964) (3,621) (744) Increase (decrease) in accrued expenses and

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 745 505 (594) 239 (Increase) decrease in prepaid income taxes - (663) (406) 3

(753) 1,067

Increase (decrease) in accrued installation and warranty costs . . . . . . . . . . . . . . . . . . (632) 1,407 (812) (319) (270)

Increase (decrease) in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 (187) 538 224 84

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 (316) 894 153 (779) Total adjustments . . . . . . . . . . . . . . . 901 (1,057) (9,167) 10,785 (2,205) Net cash provided by (used in)

operating activities.. . . . . . . . . . . . (7,011) 12,318 4,412 1,027 (521) -- Cash flows from investing activities:

Loans to stockholder . . . . . . . . . . . . . . . . . . . . . . (1,250) (250) - - - ... . . . . . Proceeds from disposal of fixed assets. 9 1 138 153 - 83

Purchases of property, plant and equipment . . . . (2,009) (1,085) (3,660) (1,757) (977) Investment in (proceeds from sale of) subsidiary (261) 350 - - - --

Net cash . . . (used in) investing . . . . . . . . . . . . . . . . . . . . . actlvltles

Cash flows from financing activities: . . . Net proceeds from (repayment of) bank loans

Net cash provided by (used in) financing activities. . . . . . . . . . . . . .

. . . . . . . . Effect of exchange rate changes on cash Net increase (decrease) in cash and cash equivalents Cash and cash equivalents-

. . . . . . . . . . . . . . . . . . . . . . . Beginning of period Cash and cash equivalents-

End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

See Notes to Consolidated Financial Statements.

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 1-Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Farrel Corporation, a United States corporation, and those of its wholly-owned subsidiary, Farrel Limited, a United Kingdom corporation, together called the "Company." The statements exclude the accounts of insignificant subsidiaries.

All material intercompany balances and transactions have been eliminated in consolidation.

Note 2-Acquisitions

In May, 1986, the Company acquired the business of the Farrel Company. a division of USM Corporation ("USM), a subsidiary of Emhart Corporation ("Emhart") in the United States and the United Kingdom. The assets acquired were recorded at their estimated fair market values.

The net asset values acquired exceeded the cost of ihe a'cquisition and this excess was accounted for first as a reduction of the non-current asset values acquired. Of the remainder, approximately $7.3 mil- lion was accounted for as a credit on the balance sheet of the Company. The credit was deemed to primarily represent discounts from the inventory values acquired and was amortized to income over a four-year period ended April 30, 1990.

Note 3-Significant Accounting Policies

(a) Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers cash and cash equivalents to

include cash on hand, amounts due from banks, and any other highly liquid debt instruments purchased with a maturity of three months or less.

(b) Inventory: Inventory acquired in the May, 1986 acquisition is valued at its estimated fair market value as of

that date. Inventory acquired since that date is valued at cost. Should fair market values fall below these valuations, inventory would be reduced accordingly. Inventory is accounted for on the last-in, first-out (LIFO) basis in the United States and on an average cost basis in the United Kingdom.

(c) Property. Plant and Equipment: Property, plant and equipment is stated a t cost. As a result of the reduction of the non-current asset

values described in Note 2, values related to property, plant and equipment acquired in the May, 1986 acquisition are not shown.

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 3 to 40 years.

(d) Revenue Recognition: Revenue is recognized at the time of shipment of the product.

(e) Advances from Customers: Advances from customers represent advance or progress payments received on customer orders.

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 3-Significant Accounting Policies-(Continued)

(f) Product Installation and Warranty Obligations: Estimated costs to be incurred under product installation and warranty obligations relating to

products which have been sold are provided for on a current basis.

(g) 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 the translation are included in the cumulative translation adjustment in stockholders' equity. Transaction gains and losses are included in earnings.

(h) Income Taxes: The tax effect of timing differences between amounts reported for financial statement purposes and

for tax returns is recognized in the provisions for income taxes of each of the consolidated companies. Provision is not made for United States income taxes on the undistributed earnings of foreign subsidiaries because it is expected that those earnings will be reinvested indefinitely.

Note 4-Inventory

lnventorv is com~rised of the followina : - April 30, October 27,

1990 1991 1991 - -

Stock and raw materials Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods.. . . . . . . . . . . . . . . . . . . . . . . . . .

(In thousands) $ 5.474 $ 9.424 $ 7.117

Of the above inventories, $13,872 and $14,673 at April 30, 1990 and 1991, respectively, and $12,108 at October 27, 1991 are valued using the LIFO method. Current replacement costs of those inventories as of those dates were greater than the LIFO carrying amounts by approximately $410, $1,797 and $1,174, respectively.

Reductions of inventory quantities during the year ended April 30, 1990 resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the costs prevalent in fiscal year 1990. The effect of these reductions was to increase net earnings by approxi- mately $56 thousand in 1990. Liquidations of lower cost LIFO inventory quantities have also occurred during the six months ended October 27, 1991. However, these inventories are expected to be replaced in the second half of the fiscal year ending April 30, 1992 and the liquidations have been valued at the expected cost of replacement. Had the lower cost amounts been used, the effect would have been to increase net earnings by approximately $55 thousand in the six months ended October 27, 1991.

Note 5-Loans to Stockholder

The President, and majority stockholder, of the Company has borrowed $1.5 million from the Company bearing interest at the rate of 8.13 percent per annum; $1.0 million is payable on demand and $500 thousand is payable February 2, 1993. A mortgage executed by the President in favor of the Company as collateral security for the $500 thousand loan was assigned to the Company's bank as collateral security for indebtedness incurred under its credit agreement. The $500 thousand has been

F-8

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 5-Loans to Stockholder-(Continued)

classified as a current receivable because the entire $1.5 million will be repaid from the proceeds of the sale by him to the Company of a portion of his stockholdings in the Company concurrent with the initial public offering of the Company's stock which is expected to occur prior to April 30, 1992.

Note 6-Property, Plant and Equipment

Property, plant and equipment is comprised of the following :

Land and buildings . . . . . . . . . . Machinery, equipment and other Construct~on in progress . . . . . . .

Accumulated depreciation . .

April 30, October 27, 1990 1991 1991 -

(In thousands)- $ 404 $ 1,904 $ 1,916 . . . . . . . . . . . .

. . . . . . . . . . . . 4,409 6,582 6,590

. . . . . . . . . . . . 465 99 748 --- 5,278 8,585 9,254

. . . . . . . . . . . . (1,282) (2,026) (2,341) $ 3,996 $ 6,559 $ 6,913 --- ---

Estimated lives of buildings are 33%-40 years. Estimated lives of machinery, equipment and other assets are 3-10 years. As per Note 3(c), values related to property, plant and equipment acquired in the May 1986

acquisition are not shown on the balance sheet.

Note 7-Accrued Expenses and Taxes Payable

Included in accrued expenses and taxes payable are accrued salaries, wages and benefits (including vacation) totaling $2.3 million at April 30, 1990 and $2.4 million at April 30, 1991 and income taxes payable of $ 3 million at April 30, 1990 and $1.2 million at April 30, 1991. At October 27, 1991, accrued salaries, wages and benefits were $2.3 million and income taxes payable were $ 3 million.

Note 8-Bank Credit Arrangements

The Company maintains a credit agreement with a major U.S. bank under which it is authorized to borrow up to the lesser of $10 million or an amount equal to the sum of stipulated percentages of eligible real property, receivables and inventory. This credit facility may also be utilized for letters of credit and acceptances. At April 30 and October 27, 1991, letters of credit outstanding under this agreement amounted to $2.3 million and $1.7 million, respectively. Interest is payable monthly and accrues on the outstanding loan balance at the bank's prime rate plus one percent. At April 30 and October 27, 1991, there were no loans outstanding under this agreement.

The credit agreement has been amended, as of November 27, 1991, to temporarily increase the amount available thereunder by an additional $5,000,000 for the sole purpose of making available to the Company a sufficient amount of funds to purchase its common stock under the Purchase Option described in Note 10(c). The interest provisions were not amended. The increased commitment expires on February 28, 1992. See Note 17-Subsequent Event.

Outstanding amounts are secured by a pledge of substantially all of the U.S. assets of the Company, including mortgages on real property. The agreement contains certain restrictions on the making of investments, loans and capital expenditures, on borrowings, on the sales of assets and on the payment of dividends. The agreement requires the maintenance of minimum levels of net worth, as defined, and maximum ratios of total liabilities, as defined, to net worth, as well as the maintenance of stipulated levels of operating profit and backlog. The agreement terminates on December 31, 1992.

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 8-Bank Credit Arrangements-(Continued)

The Company has a credit facility of 6.5 million pounds (or $11.1 million at October 27, 1991) with a major U.K. bank, under which it may borrow up to 2.5 million pounds (or $ 4.3 million a t October 27, 1991) for working capital requirements. The balance of the facility is available in the form of bank guarantees. Interest is payable on the outstanding loan balance a t the bank's base rate plus 1% percent. The facility is secured by the fixed assets and receivables of the Company's U.K. subsidiary. At April 30 and October 27, 1991, there were no loans outstanding under this arrangement; however, letters of credit amounted to 3.2 million pounds (or $5.5 million a t October 27, 1991). The agreement terminates on April 23, 1992.

The Company has a long-term loan in the amount of .5 million pounds (or $856 thousand a t October 27, 1991). from the same U.K. bank, which matures in January 1999 with semiannual principal payments of approximately .I million pounds commencing in 1995. The proceeds were used to refurbish the Company's U.K. premises. The interest on this loan is 10 percent per annum except that for the first five years of the term a rebate of interest of approximately 2.2 percent per annum may be granted by the bank under certain circumstances.

The Company had an additional facility with the same U.K. bank under which it could sell 90% of the value of certain receivables to the bank. During the time that the sold receivables remained outstanding, the Company's U.K. subsidiary was charged interest by the bank a t a rate of 1 percent over the bank's base rate. This facility was available up to a maximum outstanding amount of 3.7 million pounds (or $6.3 million at October 27, 1991) a t any one time. This facility was terminated effective November 19, 1991.

Note 9-Commitments and Contingencies

(a) Commitments: Aggregate future lease commitments, principally for office space, equipment and vehicles, are as

follows: Year Ending

April 30, lln thousands)

1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 -- -

$748 -

Rental expense for the years ended April 30, 1989, 1990 and 1991 was $325 thousand, $403 thousand and $304 thousand, respectively. Rental expense for the six months ended October 28, 1990 and October 27, 1991 was $146 thousand and $161 thousand, respectively.

(b) Contingencies-Environmental: In 1988, the Company and approximately 196 other entities were named as third party defendants

in United States District Court under the federal Superfund recovery statutes. The primary defendants are seeking to recover monies expended or expected to be expended for the control and clean-up of two landfills located in Connecticut. The matters are expected to terminate in the Company's favor and the Company believes it is unlikely that it will incur any material liability in respect of these landfills.

In 1986, in connection with the Acquisition, the Company and USM entered into an Environmen- tal Indemnification Agreement dated as of May 12, 1986 (the "Environmental Indemnification Agreement"). The Environmental Indemnification Agreement contains a provision pursuant to which

F-10

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of Oetober 27, 1991 and for the six-month periods

ended Oetober 28, 1990 and Oetober 27, 1991 is unaudited)

Note 9-Commitments and Contingencies-(Continued)

USM agreed to indemnify the Company for losses resulting from environmental claims, up to an aggregate of $5 million, arising out of or based upon the acts or omissions of USM and its predecessors prior to the Acquisition. An environmental claim is defined in terms of a regulatory requirement or demand by a third party for damages arising from environmental contamination at the former Farrel Division facilities. The agreement requires the Company to notify USM of all claims for indemnifica- tion pursuant thereto within 10 years, or prior to May 12, 1996. In addition, the agreement provides for apportionment of claims by persons other than employees for events occurring both prior to and subsequent to the date of the Acquisition. Such apportionment is to be based upon a fair and equitable assessment of various factors, including the time of the occurrence and its magnitude and severity. Such assessment will he based upon an agreement between the parties or, in the absence of agreement, by a court of competent jurisdiction. A separate apportionment provision based on length of service for claims by employees is also included in the agreement.

In view of the terms of the Environmental Indemnification Agreement, including the ten-year time limit for making claims thereunder, as well as the results of an environmental study commissioned by a potential purchaser of real estate from the Company, which revealed contamination at that site, the Company retained HRP Associates, Inc. ("HRP), environmental consultants, to investigate subsur- face contamination a t its facilities in Derby and Ansonia, Connecticut. HRP's investigation included the collection of soil samples, the installation of ground water monitoring wells, identification of underground storage tanks, inspection of transformers and capacitors, review of available files of the State of Connecticut Department of Environmental Protection (the "DEP"), interviewing of facility employees, research of historical background and a visual inspection of the properties. HRP's investigation found the existence of subsurface contamination at the Company's Ansonia and Derby properties, which findings were summarized in reports prepared by HRP. On the basis that HRP found evidence of historical spills and discharges, the Company transmitted several of the HRP reports to the DEP and the Region I Office of the United States Environmental Protection Agency (the "EPA") in 1989. To date, the Company has incurred costs of $250,000, exclusive of attorneys' fees, for environmental investigation and remediation voluntarily undertaken at Derby and Ansonia. At the Company's request, HRP has identified additional investigations and remedial work that may be required to comply with present laws and regulations. The nature and extent of such future remedial work could include: ground water monitoring, the removal and/or remediation (such as soil venting) of contaminated soil, the remediation of ground water and the removal of underground storage tanks.

In May 1989, the Company instituted a suit against USM, Emhart and certain affiliates, which was originally brought in Connecticut state court and is now pending in the United States District Court for the District of Connecticut a t Hartford, with respect to the Company's Ansonia and Derby facilities. The complaint includes counts based on Superfund and other related counts as follows: a count alleging USM's noncompliance with the Connecticut Transfer Act (Conn. Gen. Stat. 5 22a-134 et seq.) (the "Transfer Act") in conveying the Ansonia and Derby properties (the Company believes the required filing was not made for the Ansonia property and a filing which the Company believes may have been defective was made .in respect of the Derby property); counts based upon fraud and misrepresentation based on USM's representations as to the environmental conditions at the Ansonia and Derby facilities; a contract count based on the Environmental Indemnification Agreement; a count based on the Connecticut Unfair Trade Practices Act (Conn. Gen. Stat. $42-110b et seq.) alleging USM made misleading and fraudulent representations as to the environmental conditions at the Ansonia and Derby facilities; a count seeking reimbursement of costs expended by the Company to mitigate the effects of

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 9-Commitments and Contingencies-(Continued)

contamination a t the Ansonia and Derby facilities pursuant to Conn. Gen. Stat. 5 22a-452 and a count seeking the same relief pursuant to Conn. Gen. Stat. 3 22a-451.

The Superfund counts, the Transfer Act count and the statutory cost recovery a u n t under Conn. Gen. Stat. 5 22a-452 are premised on strict liability and any relief under said counts would be independent of the Company's rights under the Environmental Indemnification Agreement. Under the Superfund statutes, the owner or operator of a site at the time hazardous substances are released to the environment is jointly and severally liable with the current owner and operator of the site for remediation costs which are consistent with the National Contingency Plan. In addition, the current owner or operator is entitled to seek contribution from the previous owner or operator for such remediation costs. Under Conn. Gen. Stat. 8 22a-452, any person who mitigates contamination caused by the negligence or other actions of another party is entitled to reimbursement from such party of reasonable costs expended for such mitigation.

The relief sought in the suit against Emhart is the recovery of all expenditures for investigation and remediation and a declaratory judgment that USM and related defendants are liable for any required remediation in the future in connection with the sites located in Ansonia and Derby. To date, Emhart has generally denied the allegations in the Company's complaint and the parties are proceeding with discovery. The Company intends to prosecute the action vigorously. There is no assurance, however, that the Company will prevail in its suit against USM or that, if it should prevail, USM will be able to meet its obligations thereunder or that any such recovery from USM would cover all remediation costs incurred by the Company.

HRP has preliminarily advised the Company that, in its opinion, the initial capital cost (exclusive of ongoing monitoring and maintenance) related to further investigating and remediating known conditions identified to date at the Company's Ansonia and Derby properties, other than the Parking Lot (discussed below), would more likely than not be less than $2,000,000. HRP's cost estimate is based upon current information available to date, is subject to further remedial investigations and assumes that ground water remediation will not be required and that certain remedial techniques recommended by HRP, such as soil-gas venting, will be included in a remediation plan approved by governmental authorities.

The Parking Lot is a surfaced parking lot located in Ansonia that has been used solely for parking while owned by the Company. The Parking Lot site was formerly a reservoir which the Company believes was filled in during the late 1940's or early 1950's. HRP's testing conducted during its investigation revealed that soil beneath the Parking Lot contains metal contaminants, though not at levels that exceeded federal thresholds for hazardous waste contamination, and that there has been no evidence of significant ground water contamination beneath the Parking Lot. Although current DEP informal guidelines regarding the removal and disposal of contaminated soils would require removal of the contaminated soil beneath the Parking Lot, HRP has recommended that the Company seek appropriate governmental approvals to leave the contaminated soil in place, to install a permanent impermeable cap on the property complying with federal regulations under the Resource Conservation Recovery Act ("RCRA") and to conduct on-going monitoring of ground water. HRP's recommenda- tion as to the appropriateness of pursuing this alternative is based upon the industrial/commercia1 nature of the site, the availability of public water to the property and the lack of any evidence at this time of a significant impact of the site on ground water quality. HRP estimates that the cost of designing, installing, and certifying the "RCRA" cap (exclusive of on-going monitoring and mainte- nance) to range from S1,300,000 to S2,000,000. Should removal and off-site disposal of contaminated

F-12

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 9-Commitments and Contingencies-(Continued)

soil be required, it is HRP's opinion that the disposal of the contaminated soil to a local landfill or an out-of-state secure landfill, or a combination thereof, would be more likely than not approved by governmental authorities. HRP's estimates of the costs of excavating, sampling, transparting and disposing of the contaminated soil to a local landfill would range from $5,000,000 to $8,000,000 and to an out-of-state secure landfill to be $8,000,000 to $10,000,000. However, should additional soil testing identify metal contaminants at hazardous levels, HRP estimates that the costs of removing, transport- ing and disposing of the contaminated soil to a hazardous waste facility to be $18,000,000. HRP's recommendations and wst estimates are based on current information regarding the site and are subject to further testings, input from regulatory agencies and confirmation of certain information such as soil weight and unit disposal costs.

The Company does not currently believe that costs to be incurred to comply with environmental laws and regulations relating to conditions at the Company's Connecticut facilities identified to date will have a material adverse effect on its financial condition. The Company's belief is based upon, among other things, (if the advice. of the Company's special environmental counsel, Murtha, Cullina, Richter and Pinney, concerning the status and the legal bases for environmental litigation with USM and Emhart; (ii) the Company's understanding of the underlying facts which give rise to its claims against USM; and (iii) technical advice received from HRP relating to the presence and/or nature and scope of subsurface contamination at the Ansonia and Derby properties and possible remediation options which could be required by the DEP and EPA with respect thereto. The wst of any actual remediation will depend on a plan of remediation approved by the appropriate governmental authorities in the future, and accordingly the precise costs thereof cannot be determined at this time. No assurance can be given, however, that the Company will not be required to incur significant costs with respect to conditions presently known to the Company, existing conditions not currently known by the Company or changes in existing regulations.

(c) Contingencies-Other: In July 1991, the Company was named as one of three third-party defendants in an action brought

by Temple Associates, Inc. ("Temple") against John Brown Engineering & Construction, Inc. ("Brown") and Mobil Oil Corporation ("Mobil"), which action is pending in the U.S. District Court for the Eastern District of Texas, Beaumont Division. Temple was a subcontractor on a construction project involving the modernization of Mobil's low density polyethylene plant, located in Beaumont, Texas. Temple claims damages against defendant Brown, the general contractor and engineer, and Mobil, the owner of the plant. Temple alleges that Brown caused delays in the work schedule, interfered with Temple's work on the project and significantly increased the scope of Temple's work under four separate subcontracts, all of which allegedly caused actual damages to Temple in excess of $7 million, plus attorneys' fees and costs. Temple bas alleged breach of contract, breach of warranty, negligence and negligent misrepresentation causes of action under the four subcontracts awarded to it by Brown. Additionally, Temple has alleged that Brown breached the duty of good faith and fair dealing with respect to one of the subcontracts, and it requests an unspecified amount of exemplary damages as a result of that breach. Temple further seeks to enforce a mechanic's lien against Mobil. On July 31, 1991, Brown filed a third-party action against the Company and two others seeking an unspecified amount of damages under the theory of equitable contribution. It alleges that the Company failed to deliver certain machinery and certified drawings to the project in a timely manner, and that the Company negligently designed, engineered or fabricated the machinery it sold to Brown. In its original answer, the Company denied the allegations in the third-party complaint and raised twelve affirmatice defenses. Certain of the Company's affirmative defenses are based upon an agreement between the

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Fur the years ended April 30, 1989, 1990 and 1991 (Information as of Oetober 27, 1991 and for the six-month periods

ended Oetober 28, 1990 and October 27, 1991 is unaudited)

Note 9-Commitments and Contingeneies-(Continued)

Company and Brown which purported to settle their dispute over alleged damages caused by alleged late deliveries of machinery and drawings by the Company. This agreement was reached before the Company was made a party to the lawsuit, and the Company has moved for summary judgment on that basis.

At the time the Company purchased the assets of Farrel Company, the Company specifically did not assume or agree to be responsible for claims asserted with respect to machinery that was manufactured and shipped prior to the date of the acquisition. The Company, or its predecessors, has been named as a defendant in 23 personal injury matters alleging that machinery manufactured and shipped prior to the Company's acquisition of assets from USM was defective. The aggregate amount of damages sought by the plaintiffs in these actions is not determinable at this time. USM has assumed the defense of each of these suits on behalf of the Company. While the Company does not believe that it will incur any material liability in these actions, no assurance can be given that the Company will not have any successor liability in any of these actions or that the aggregate amount of liability assessed against the Company, if any, will not be material. In the event of any such liability, the Company would seek to recover any losses in connection therewith from USM, although no assurance can be given that the Company would be successful.

The Company is a complainant against a former licensee before the International Chamber of Commerce Court of Arbitration in connection with the continued use by the licensee of technology of the Company upon expiration of a license and trademark agreement. The Company seeks damages of not less than $12 million and punitive damages of not less than $2 million and treble damages where authorized. The Company is also seeking to enjoin the licensee from further use of its technology. The licensee has counterclaimed and requests damages of approximately $7.9 million alleging that the Company, while owned by USM, failed to make certain technical information available, damaged the licensee's commercial reputation and engaged in abuse of process by filing lawsuits against it. The Company has also filed a complaint with the U.S. International Trade Commission seeking to bar the licensee from importing certain products into the United States.

In January 1991, the Company was named as an additional defendant in a pending action, subsequently withdrawn, brought by more than 200 current and former employees of Cooper Tire 8r Rubber Company. The plaintiffs were seeking damages from the Company and 25 other defendants in the aggregate amount of $26 million. The action in the Circuit Court of Miller County, Arkansas, alleged that equipment manufactured by the Company and the other defendants caused personal injury from excessive noise. The Company answered the complaint, denying the allegations. The Company's insurance carrier assumed the defense of this action on behalf of the Company. The court granted the plaintiffs' motion to withdraw the action without prejudice, meaning that the plaintiffs could reassert their claim.

Management believes that the outcome of the foregoing proceedings will not have a material adverse effect on the financial condition of the Company based upon (i) the current status of the proceedings, (ii) liability insurance carried by the Company, (iii) certain indemnifications from USM and (iv) review of attorneys' letters with respect to such proceedings.

Note 10-Stockholders' Equity

(a) Stock Split: Effective October 24, 1991, the Company amended its certificate of incorporation to increase the

number of authorized shares of common stock from 10,000 to 10,000,000. Simultaneously, the

F-14

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended Aprii 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 10-Stockholders' huity-(Continued)

Company declared a 645.16129 for 1 stock split resulting in 5,483,870 shares being outstanding. Effect has been given to the split in the accompanying financial statements by a transfer of $47 thousand from paid in capital to common stock. All share and per share amounts in the accompanying financial statements have been adjusted to give retroactive effect to the split.

(b) Stock Option and Stock Purchase Plans:

On October 23, 1991, the Company approved in principle the establishment of a Stock Option Plan and a Stock Purchase Plan. It is anticipated that these plans will be approved by the Board of Directors and the stockholders of the Company prior to the initial public offering of the Company's stock.

The Stock Option Plan would authorize the granting of incentive stock options and non-qualified stock options to purchase up to 600,000 shares of common stock. Option awards may be granted to eligible employees and non-employee directors. The exercise price of the options may not be less than fair market value as of the date of grant (or 110% in the case of an incentive stock option granted to a 10% stockholder). Options granted would become exercisable by employees in cumulative installments over a four year period of employment after the date of grant. Each non-employee director would be granted each year a non-qualified stock option to purchase 3,000 shares. The President of the Company would be granted non-qualified stock options to purchase 40,000 shares at the closing of the initial public offering and 40,000 shares per year in 1992, 1993 and 1994. No options have been granted to date.

The Stock Purchase Plan would give each employee of the Company the right to purchase, in each of the years 1992 through 1996, 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. The purchase price will be the lower of 85% of the fair market value of the common stock on the date the right is granted 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 would be ineligible.

(c) Purchase Option:

On October 23,1991, the Company approved the acquisition of an option to purchase an aggregate of 1,483,870 shares of its common stock from certain stockholders. The exercise price of the option is $3.8 million. For the acquisition of the option, the Company paid $100,000 to one of its stockholders. On December 31, 1991, the Company exercised this option. See Note 17-Subsequent Event.

(d) Purchase from Stockholdec

Also on October 23, 1991, the Company approved the purchase, from its President and majority stockholder, concurrent with the initial public offering of the Company's stock and subject to the exercise of the aforementioned purchase option, that number of shares of common stock equal to $1.5 million divided by the public offering price of the common stock. The Company will pay such purchase price by cancellation of the President's indebtedness to the Company (Note 5).

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 11 -Cost of Sales

Sales have been made of items that had been included in the inventory acquired by the Company in May, 1986 (Note 2) but that had not been assigned inventory values by the Company because they were deemed at the time of the acquisition to be unsalable. Thus, the statements of operations do not include cost of sales amounts reflecting acquisition inventory values associated with these sales. Had values been assigned to these inventory items at their acquisition, cost of sales would have been approximately $1.0 million, $.3 million, and $.I million higher in the years ended April 30, 1989, 1990, and 1991, respectively.

Note 12-Pension Plans

The Company has retirement plans covering most domestic and foreign employees.

The Company has a defined benefit plan for domestic hourly employees which provides benefits based on employees' years of service and earnings. Plan assets are invested in short-term securities. The annual contribution to the plan will equal the amounts accrued. Aggregate pension expense of the plan is comprised of the following:

Year Ended April 30, 1989 1990 1991 -

(In thousands)-

Current period service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 11 $ 86 $ 85 Interest accrued on pension obligations. . . . . . . . . . . . . . . . . . . . . . . . 30 41 38 Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (20) (26) Amortization of deferred items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9 (4) ---

$141 $116 $93 - -- The Company has two foreign pension plans which provide stipulated amounts at retirement based

upon years of service. Plan assets are invested in securities, real estate and cash. Contributions are based on actuarial calculations. Pension expense (credit) for the year ended April 30, 1991 is as follows:

(In thousands)

Current period service costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325 Interest accrued on pension obligations . . . . . . . . . . . . . . . . . . . . . . . 557 Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (838) Amortization of deferred items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122)

%(78) -

Pension expense was not provided in the years ended April 30, 1989 and 1990 for the foreign plans because the return on plan assets exceeded the plan's service and interest cost for those periods.

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 12-Pension Plans-(Continued)

The funded status of the domestic and foreign defined benefit plans is as follows:

April 30, 1990 1991 (In thousads)

Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,715 $ 7,672 Actuarial present value of vested and nonvested accumulated

and projected benefit obligations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,402 6,355 -- Excess of plan assets over projected benefit obligations . . . . . . . . . . . . . . . . . . . . 1,313 1.3 17 Unrecognized net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (156) (178) Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 33 Unrecognized net transition asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,305) (1,227) - Net pension liability ..................

The assumed rates of return used in determining the actuarial present values of benefit obligations and the expected long-term rates of return on plan assets was 9 percent for the domestic plan and 10 percent for foreign plans.

The Company has a domestic 401(k) retirement plan which includes matching and nonmatching contributions by the Company. Approximately $465 thousand, $481 thousand, and $466 thousand are included in pension expensein 1989,1990, and 1991, respectively, and $132 thousand and $42 thousand are included in accrued expenses in 1990 and 1991, respectively, relating to the plan.

Approximately $336 thousand and $329 thousand are included in pension expense for all plans for the six months ended October 28, 1990 and October 27, 1991, respectively. Accrued pension expense was $393 thousand at October 27, 1991.

In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FASB No. 106"). FASB No. 106 will significantly change the prevailing practice of accounting for postretirement benefits on a cash basis by requiring accrual of the expected cost of these benefits during the years that the employees render service. The Company is required to adopt the new accounting and disclosure rules no later than its 1994 fiscal year, although earlier adoption is permitted. The Company may adopt the new standard prospectively or via a catch-up adjustment. The Company has not yet determined when it will adopt FASB No. 106, nor has the Company completed the analysis required to estimate the impact of the new standard.

FARREL CORPORATION

NWES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For the years ended April 30, 1989, 1990 and 1991

(Information as of October 27, 1991 and for the six-month periods ended October 28, 1990 and October 27, 1991 is unaudited)

Note 13-Provision for Income Taxes

The provision for income taxes consists of the following : Six Months Ended

Year Ended April 30. - Octaber 28, October 27, 1989 1990 1991 1990 1991 - - -

(In thousands) Current:

United States . . . . . . . . . . . . . . . . . . . $ 215 $ 50 $ 110 $ 258 $1,134 United Kingdom . . . . . . . . . . . . . . . . 622 496 1,312 610 State taxes . . . . . . . . . . . . . . . . . . . . . 78 1 22 51

(397) ---- 224

915 547 1,444 919 ---- 96 1 - Deferred:

United States United Kingdom . . . . . . . . . . . . . . . . 168 (i lOj 108 - - State taxes . . . . . . . . . . . . . . . . . . . . . (17) (10) 71 35 - - 14 -

172 (174) 537 21 1 - -- - 84 $1,087 $ 373 $1,981 $1,130 $1,045 ---- - ---- -

The domestic and foreign components of income before provision for income taxes are as follows:

Year Ended April 30, 1989 - 1990 - 1991 -

(In thousands)

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90 $ 27 $1,470 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom 3,153 1,879 4,022

$3,243 $1,906 $5,492 --- ---

A reconciliation of the statutory U.S. federal income tax rate and the effective income tax rate is as follows:

Year Ended April 30, 1989 1990 1991 - - -

Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent differences resulting from purchase

accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Write-off of equity in foreign subsidiary. . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . U.S.-U.K. rate differential State income taxes, net of federal benefit . . . . . . . . . . . . . . Other, including . . adjustment in 1990 of prior year

overprovls~on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective rate

FARREL CORPORATION NOTES TO CONSOLIDATE0 FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, f991 and for the six-month periods

ended October 28. 1990 and Octvber 27, 1991 is unaudited)

Note 13-Provision for Income Taxes-(Continued)

The following are the principal sources of timing differences : Year Ended April 30,

1989 1990 1991 - - (In tGds)

Excess of tax over-book depreciation ....................... Installation and warranty cost accruals ..................... Inventory valuation ..................................... Amortization of excess of acquired assets over cost.. . . . . . . . . . . Vacation accrual ....................................... Other ................................................

Note 14-Other Income (Expens*)

The other categpry of other income (expense) is comprised of the following:

Six Months Ended October m, October 27,

1989 1990 1991 - - - 1990 1991 (In thousands)

Royalty income (expense), net . . . . . . . . . $274 S(86) $ 45 $ 33 $40 Gain (loss) on disposal of equipment .... 91 138 (30) 9 5 Equipment and other rentals . . . . . . . . . . 24 28 87 42 36 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 140 (63) (243) - - 111)

$555 $220 $ 39 $(159) - -- --- - -

Note 15-Foreign Operations and Export Sales

Total sales to unaffiliated customers, operating income (loss) and assets of the domestic and United Kingdom operations for each of the three years in the period ended April 30,1991 and for the six-month periods ended October 28, 1990 and October 27, 1991 are as follows:

United United Stales Kingdom Consolidated - -

(In thousands) Year Ended April 30, 1989:

Sales to unaffiliated customers . . . . . . . . . . . . . . . . . . . $57,649 $34,733 $ 92,382 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . (1,122) 3,189 2,067 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,690 25,099 57,789

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30, 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27, 1991 is unaudited)

Note 15-Foreign Operations and Export Sales-(Continued) ....... ....... States Kingdom Consolidated -

(In thousands) Year Ended April 30, 1990:

Sales to unaffiliated customers . . . . . . . . . . . . . . . . . . . $79,886 $41,261 $121,147 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . (1,736) 1,875 139 Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,948 20,263 45.21 1

Year Ended April 30, 1991: Sales to unaffiliated customers . . . . . . . . . . . . . . . . . . . $55,590 $49,096 $104,686 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746 4,634 5,380 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,297 24,600 49,897

Six Months Ended October 28, 1990: Sales to unaffiliated customers . . . . . . . . . . . . . . . . . . . $29,618 $24,709 % 54,327 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051 2,152 3,203 Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,184 25,269 50,453

Six Months Ended October 27, 1991: Sales to unaffiliated customers . . . . . . . . . . . . . . . . . . . $36,699 $ 9,848 $ 46,547

. . . . . . . . . . . . . . . . . . . . . . . . Operating income (loss) 3,357 (418) 2,939 Assets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,273 18,448 49,721

The Company operates a global business with interdependent operations and employs a global management approach. In consideration of certain economic factors, the recognition of elements of revenues and expenses in either the United States or the United Kingdom is at the discretion of management. As such, the above analyses should not be construed as indicative of United Ststes and United Kingdom operating results were the Company not to operate in such a manner.

The breakdown of domestic export sales by geographic area is as follows:

Six Months Ended Year Ended April 30, October 28, October 27,

1989 - 1990 - 1991 1990 1991 (~nthousands)

Far Eastllndia . . . . . . . . . . . . . . . . $ 9.979 $15,049 $ 6,760 $ 65 $3.188 North America, other than the

. . . . . . . . . . . . . . . Unitedstates 3,139 2,002 3,883 2,994 1,247 Europe . . . . . . . . . . . . . . . . . . . . . . 149 141 190 138 340 Russia - - 2,134 - - . . . . . . . . . . . . . . . . . . . . . . .

1,654 2,841 2,185 All other . . . . . . . . . . . . . . . . . . . . . 1,031 440 $14,298 $18,846 $15,808 $5,382 $5,215 --- --- -

Note 16-Pro Forma Balance Sheet

The unaudited pro forma balance sheet as of October 27, 1991 presents the actual balance sheet at such date adjusted to reflect the $1.5 million of loans to stockholder as a reduction of stockholders' equity inasmuch as the Company has agreed to purchase from the stockholder that number of shares of

F-20

FARREL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

For the years ended April 30. 1989, 1990 and 1991 (Information as of October 27, 1991 and for the six-month periods

ended October 28, 1990 and October 27. 1991 is unaudited)

Note 16-Pro Forma Balance Sheet-(Continued)

Common Stock equal to $1.5 million divided by the public offering price of the Company's initial public offering. The Company will pay such purchase price by cancellation of the stockholder's indebtedness . . to the company.

Note 17-Subsequent Event

On December 31, 1991, the Company exercised its option, described in Note 10(c), to purchase 1,483,870 shares of its common stock from certain stockholders. The Company is to pay the exercise price of $3.8 million by January IS, 1992 and has obtained a temporary %5,000.000 increase in its U.S. bank credit facility to be used solely for this purpose (Note 8). This temporary borrowing, if made, is to be repaid by February 28. 1992. The Company intends to utilize anticipated proceeds from its planned initial public stock offering to fund the repayment.

(THIS PAGE INTENTIONALLY LEFT BLANK)

This CP-SERIES 11 Processor, the culmination of a year-long design effort, is capable of processing a large variety of plastics, additives and color concentrates.

This TECNOLAB mill is part of a new line of laboratory machines that includes mixers, calenders, extruders and presses.

This four roll calender, 136 inches wide

No person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus and, if given or made, such other information and representa- tions must not be relied upon as having been authorized by the Company or the Underwrit- ers. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any cir- cumstances, create any implication that there has been no change in the affairs of the Com- pany since the date hereof or that the informa- tion contained herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the registered securities to which it relates. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful.

TABLE OF CONTENTS

. . . . . . . . . . . . . . . . . . Prospectus Summary The Company . . . . . . . . . . . . . . . . . . . . . . Risk Factors.. . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . Capitalization

. . . . . . . . . . . . . . . . . . . . . Dividend Policv . . . . . . . . . . . . . . . . . . . . . . . . . Dilution

. . . . Selected Consolidated Financial Data Management's Discussion and Analysis of

Financial Condition and Results of . . . . . . . . . . . . . . . . . . . . . . . Operations

. . . . . . . . . . . . . . Business of the Company . . . . . . . . . . . Management of the Company

Certain Transactions . . . . . . . . . . . . . . . . . . Principal Stockholders . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . Description of Capital Stock . . . . . . . . . . Shares Eligible for Future Sale.

. . . . . . . . . . . . . . . . . . . . . . . Underwriting Experrs . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . Legal Marters Orher Information . . . . . . . . . . . . . . . . . . . Index to Consolidated Financial Sraremcnts , . .

The Company intends to furnish its stock- holders with annual reports containing audited financial statements and quarterly reports con- taining unaudited financial statements.

Until February 11, 1992 all dealers effect- ing transactions in the registered securities, whether or not participating in this distribu- tion, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Under- writers and with respect to their unsold allot- ments or subscriptions.

2,000,000 Shares

C a J

Farrel Corporation

Common Stock

P R O S P E C T U S

PaineWebber Incorporated

First Albany Corporation

January 17, 1992