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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to_____
Commission file number 0-18083
Williams Controls, Inc.
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No____
(2) Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of November 30, 1998, 18,468,788 shares of Common Stock were outstanding and
the aggregate market value of the shares (based upon the closing price of the
shares on the NASDAQ National Market) of Williams Controls, Inc. held by
nonaffiliates was approximately $27,399,000.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the 1999 Annual Meeting of
Stockholders to be filed not later than January 28, 1999 are incorporated by
reference in Part III hereof.
Williams Controls, Inc.
Index to 1998 Form 10-K
Part I Page
Item 1. Description of Business 2-7
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 8. Financial Statements and Supplementary Data 17-49
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
Part III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 50
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 50
Signatures 51
WILLIAMS CONTROLS, INC.
Form 10-K
Part I
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
acquires, disposition of any current business of the Company, including its
Automotive Accessories and Agricultural Equipment segments. These
forward-looking statements are subject to the business and economic risks faced
by the Company. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described above and other factors described elsewhere in this report.
Item 1. Description of Business (Dollars in thousands)
- ------------------------------------------------------
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to as the "Company" or
"Registrant."
General
- -------
The Company is a Delaware corporation formed in 1988. The Company's primary
business segment was founded by Norman C. Williams in 1939 and acquired by the
Company in 1988. The Company's operating subsidiaries, which are all Delaware
corporations except GeoFocus, Inc. which is a Florida corporation, are as
follows:
Williams Controls Industries, Inc.: Manufactures vehicle components sold
primarily in the transportation industry.
Aptek Williams, Inc.: Develops and produces sensors, microcircuits, cable
assemblies and other electronic products for the telecommunications and the
transportation industry, and conducts research and development activities to
develop commercial applications of sensor related products for the subsidiaries
of the Company.
Premier Plastic Technologies, Inc.: Manufactures plastic components for the
automotive industry and manufactures prototype and production molds using rapid
prototyping processes.
NESC Williams, Inc.: Installs conversion kits to allow vehicles to use
compressed natural gas and provides natural gas well metering services.
Williams Automotive, Inc.: Markets the Company's products to the automotive
industry.
GeoFocus, Inc.: Develops train tracking and cyber-farming systems using global
positioning systems ("GPS") and geographical information systems ("GIS").
Williams Technologies, Inc.: Supports all subsidiaries of the Company by
providing research and development and developing strategic business
relationships to promote "technology partnering."
2
Williams World Trade, Inc.: WWT manages foreign sourcing for all subsidiaries of
the Company, affiliates and third party customers through its wholly owned
subsidiary located in Kuala Lumpur, Malaysia.
Kenco/Williams, Inc.: Manufactures, assembles, packages and distributes truck
and auto accessories for the aftermarket parts industries. Kenco is reported as
a discontinued operation.
Techwood Williams, Inc.: Manufactured and distributed commercial wood chippers
used in landscaping and farming. Techwood ceased manufacturing operations in
fiscal 1997. Techwood is reported as a discontinued operation.
Agrotec Williams, Inc.: Manufactures spraying equipment for the professional
lawn care, nursery and pest control industries. Agrotec is reported as a
discontinued operation.
Hardee Williams, Inc.: Manufactures equipment used in farming, highway and park
maintenance. Hardee is reported as a discontinued operation.
Waccamaw Wheel Williams, Inc.: Manufactures solid rubber tail wheels and other
rubber products used on agricultural equipment, from recycled truck and bus
tires. Waccamaw is reported as a discontinued operation.
As discussed in note 12 to the Notes to Consolidated Financial Statements, the
Company's operations are divided into four industry segments.
Vehicle Components - The Company's transportation component product lines
include electronic throttle control systems ("ETC"), exhaust brakes and
pneumatic and hydraulic controls. These products are used in applications which
include trucks, utility and off-highway equipment, transit buses and underground
mining machines. Markets for the Company's electronic throttle controls are
developing in smaller classes of trucks and diesel powered pick up trucks. The
Company believes that gasoline powered automobiles and pick up trucks may
convert to ETC, although such conversion requires engine redesign by the
automotive manufacturers which is presently ongoing. The Company estimates that
it has over 65% domestic market share of ETC for Class 7 & 8 trucks. The
majority of these products are sold directly to original equipment manufacturers
such as Freightliner, Navistar, Volvo, Isuzu, Motor Coach Industries and Blue
Bird Corporation. The Company also sells these products through a
well-established network of independent distributors. The major competitors in
one or more product lines include Allied Signal, Morris Controls and Furon.
Automotive Accessories - The automotive accessories product lines include bug
and stone deflectors, running boards, side steps and bed mats for light trucks
and sport-utility vehicles. These products are sold in the aftermarket to mass
merchants and auto supply stores such as Kmart, WalMart, Pep Boys and Western
Auto. The major competitors include Lund, Deflecta Shield, GT Styling and Auto
Vent Shade. The automotive accessories segment is reported as a discontinued
operation.
Agricultural Equipment - The agricultural equipment product lines include rotary
cutters, discs, harrows and sprayers. These products are sold to independent
equipment dealers located primarily in the Southeastern United States. The major
competitors include Wood Brothers, Taylor Industries, Inc. and Alamo Group.
Agricultural equipment is reported as a discontinued operation.
Electrical Components and GPS - The electrical components product line includes
the design and production of microcircuits, cable assemblies and other
electronic products used in telecommunication, computer and transportation
industries. Major customers include Allied Signal, Raychem and Eaton Corp. Major
competitors include CTS, AMP and Nethode. The GPS product line includes commuter
railroad train tracking and agricultural cyber-farming using global positioning
and geographic information systems. Major customers include Tri-Rail, Florida
Department of Transportation and Via Tropical Fruit.
3
Acquisitions and Dispositions
- -----------------------------
Through fiscal 1996, the Company pursued an acquisition strategy to diversify
its operations. During fiscal 1997, the Company discontinued its diversification
acquisition strategy in order to focus its corporate and financial resources on
opportunities emerging in the vehicle components and GPS train tracking markets
and also for the development of commercial applications of sensor related
products. The Company may consider additional acquisitions in the future that
are strategically related to these opportunities.
On March 16, 1998, the Company completed the sale of the company comprising the
Automotive Accessories segment.
On December 16, 1998 the Company announced a plan of disposition for the
Agricultural Equipment segment and retained an investment banking firm to advise
the Company on the sale and solicit potential purchases for the companies
comprising this segment.
Competition
- -----------
In general, the Company's products are sold in highly competitive markets to
customers who are sophisticated and demanding concerning price, performance and
quality. Products are sold in competition with other independent suppliers (some
of which have substantial financial resources and significant technological
capabilities), and many of these products are, or could be, produced by the
manufacturers to which the Company sells these products. The Company's
competitive position varies among its product lines.
In the Vehicle Components segment the Company is the dominant producer of ETCs
sold in the heavy truck ETC market. The Company has only one primary competitor
in the diesel heavy truck market. The Company also manufactures pneumatic and
air control systems for the heavy truck market, which is comprised of numerous
highly fragmented competitors. The Company believes the principal method of
competition for ETC in the trucking industry is quality and engineering added
value and reputation. In addition, attainment of the ISO 9001 and QS 9000
quality certifications is critical to qualifying as a supplier to the automotive
industry and certain manufacturers in the truck industry. The Company's two
manufacturing facilities in its Vehicle Components segment have attained these
certifications. In the automotive market, ETCs are not yet a well established
product line; however, the Company believes that there are approximately five
major competitors currently supplying foot peddles to the major automobile
manufacturers and competing for the automotive ETC market. These companies are
substantially larger than the Company and have longstanding relationships with
their customers, which could be a significant barrier to the Company entering
into this market.
In the agricultural equipment segment, for which the Company has announced a
plan of disposition, the Company competes primarily against four competitors,
three of which are substantially larger than the Company. The principal methods
of competition in this segment are price, delivery and payment terms.
Competitors in this industry currently provide seasonal dating for payment of
accounts receivable, in some cases up to 180 days for payment of invoices.
The primary revenues from the Company's Electrical Components and GPS segment
are derived from sales of thick film hybrids. This industry has numerous
competitors, which compete primarily on engineering capability and price.
Although a GPS product designed for freight train tracking is currently
available on the market, the Company does not believe there are any major
competitors for its commuter train-tracking product.
Entrance Into New Markets. The Company plans to introduce its ETC product into
new markets including international markets, higher-volume small truck markets,
and gasoline engine automotive markets. Although the Company's ETC product has
been successful in the domestic heavy-duty truck market, there is no assurance
that this product will be accepted in these new markets. Additional penetration
of the Company sales into the diesel ETC market will be dependent upon
conversion of smaller diesel engines to electronic engines which is controlled
by the engine manufacturers in the United States. Conversion of diesel engines
to ETC that are not yet electronic in Western Europe is dependent upon
compliance with and tightening of air control standards in this region.
4
Introduction of ETC into Gasoline Engines. Introduction of ETC into gasoline
engines will require modification or redesign of engine Components that will
depend upon the timing of development by the automotive manufacturers and their
original equipment manufacturers. The Company has no control over the timing of
the introduction of ETC into the automotive or higher-volume truck markets. The
Company will be competing against much larger competitors in these markets with
financial resources much greater than those of the Company and with existing
long term supplier relationships with the automotive industry.
Marketing and Distribution
- --------------------------
The Company sells its products to customers in the truck, automotive, heavy
equipment, telecommunication and other diversified industries worldwide;
approximately 94% of its sales from continuing operations are to customers in
the Vehicle Components segment and 63% of its sales from continuing operations
are from sales of ETC products.
For the years ended September 30, 1998, 1997 and 1996, Freightliner accounted
for 21%, 16% and 17%, Navistar accounted for 16%, 16%, and 13%, and Volvo
accounted for 9%, 8%, and 10% of net sales from continuing operations,
respectively. Approximately 15%, 14% and 19% of net sales from continuing
operations in fiscal 1998, 1997 and 1996, respectively, were to customers
outside of the United States, primarily in Canada and Sweden, and, to a lesser
extent, in Europe, South America and Australia. See note 13 of Notes to
Consolidated Financial Statements.
The Company has retained a marketing representative in Japan for the purpose of
servicing existing customers selling in the United States and to solicit new
business opportunities.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. Actual losses
and allowances have been within management's expectations.
Existing Future Sales Orders
- ----------------------------
Future sales orders for the Company's products were approximately $16,100 at
September 30, 1998, compared to approximately $11,300 at September 30, 1997.
These are orders for which customers have requested delivery at specified future
dates within one year. The Company has not experienced significant problems
delivering products on a timely basis.
Environment
- -----------
The Company's operations result in the production of small quantities of
materials identified by the Environmental Protection Agency of the United States
Government as "hazardous waste substances" which must be disposed of in
accordance with applicable local, state and federal guidelines. Substantial
liability may result to a company for failure, on the part of itself or its
contractors, to dispose of hazardous wastes in accordance with the established
guidelines, including potential liability for the clean up of sites affected by
improper disposals. The Company uses its best efforts to ensure that its
hazardous substances are disposed of in an environmentally sound manner and in
accordance with these guidelines.
The Company has identified certain contaminants in the soil of its Portland,
Oregon manufacturing facility, which the Company believes was disposed on the
property by a previous property owner. The Company intends to seek
indemnification from such party for the costs of permanent monitoring, or
cleanup if required. The Company has retained an environmental consulting firm
that has conducted tests to determine the extent of any contamination. Based on
the results of the tests and current regulations, the contamination is not a
reportable event. The Company believes that it can enforce available claims
against the prior property owner for any costs of monitoring or cleanup. The
Company believes it is currently in compliance with environmental regulations.
5
Government Regulation
- ---------------------
The Company's vehicle component products must comply with the National Traffic
and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated
thereunder which are administered by the National Highway Traffic Safety
Administration ("NHTSA"). If, after an investigation, NHTSA finds that the
Company is not in compliance with any of it's standards or regulations, among
other things, it may require the Company to recall its products which are found
not to be in compliance and repair or replace such products. The Company
believes it is currently in compliance with NHTSA.
Product Research and Development
- --------------------------------
The Company's operating facilities engage in engineering, research and
development and quality control activities to improve the performance,
reliability and cost-effectiveness of the Company's product lines. The Company's
engineering staff works closely with its customers in the design and development
of new products and adapting products for new applications. During 1998, 1997
and 1996, the Company spent $2,778, $1,832 and $2,077 respectively, on these
activities for continuing operations. The Company intends to increase its
research and development expenditures in 1999 to design ETC products compatible
with gasoline powered vehicles, develop commercial applications for inertia
tilt, Hall effect, and optical sensor products, and further develop train
tracking products. The Company is in early stages of development of these
programs and expects to increase research and development spending by
approximately $1,000 in fiscal 1999. The majority of the additional expense will
be spent on developing a low cost ETC foot pedal, which is in early stages of
development.
Patents and Trademarks
- ----------------------
The Company's product lines generally have strong name recognition in the
markets which they serve. The Company has a number of product patents obtained
over a period of years which expire at various times. The Company considers each
patent to be of value and aggressively protects its rights against infringement
throughout the world. The Company owns two patents (expiring in 2009) which it
believes improved the marketability of the electronic product line of the heavy
vehicle components segment. The Company does not consider that the loss or
expiration of either patent would materially adversely affect the Company;
however, competition in the electronic product line could increase without these
patents. The Company owns numerous trademarks which are registered in many
countries enabling the Company to market its products worldwide. These
trademarks include "Williams" "Aptek" and "Hardee". The Company believes that in
the aggregate, the rights under its patents and trademarks are generally
important to its operations, but does not consider that any patent or trademark
or group of them related to a specific process or product is of material
importance in relation to the Company's total business except as described
above.
Raw Materials; Reliance on Single Source Suppliers
- --------------------------------------------------
The Company produces its products from raw materials, including brass, aluminum,
steel, plastic, rubber and zinc, which currently are widely available at
reasonable terms. The Company relies upon, and expects to continue to rely upon,
CTS Corporation, Robertshaw and Caterpillar, Inc. as single source suppliers for
critical components and/or products as these suppliers are currently the only
manufacturers of sensors made specifically for the Company's ETC. The Company
manufactures a foot pedal using a contact position sensor manufactured by
Caterpillar, Inc. used exclusively on Caterpillar engines. Caterpillar supplies
this sensor and requires that its sensor be used on all Caterpillar engines;
therefore, the Company does not consider the Caterpillar sensor supply to be at
risk. Although these suppliers have been able to meet the Company's needs on a
timely basis, and appear to be willing to continue being suppliers to the
Company, there is no assurance that a disruption in a supplier's business, such
as a strike, would not disrupt the supply of a component. Although the Company
has recently experienced stable prices, prices for aluminum zinc, rubber, steel,
and mechanical components such as gearboxes, hydraulics, and contact position
sensors could fluctuate and affect profitability.
6
Product Warranty
- ----------------
The Company warrants its products to the first retail purchaser and subsequent
owners against malfunctions occurring during the warranty period resulting from
defects in material or workmanship, subject to specified limitations. The
warranty on vehicle components is limited to a specified time period, mileage or
hours of use, and varies by product and application. The Company has established
a warranty reserve based upon its estimate of the future cost of warranty and
related service costs. The Company regularly monitors its warranty reserve for
adequacy in response to historical experience and other factors.
Employees
- ---------
The Company employs approximately 511 employees, including 134 union employees.
The non-union employees of the Company are engaged in sales and marketing,
accounting and administration, product research and development, production and
quality control. The union employees are engaged in manufacturing vehicle
components in the Portland, Oregon facility and are represented by the
International Union, United Automobile Workers of America and Amalgamated Local
492 (the "Union"). The Company and the Union have a collective bargaining
agreement that expires in September 2002, which provides for wages and benefits
(including pension, death, disability, health care, unemployment, vacation and
other benefits) and contains provisions governing other terms of employment,
such as seniority, grievances, arbitration and union recognition. Management of
the Company believes that its relationships with its employees and the Union are
good. The Company could experience changes in non-union labor costs as a result
of changes in local economies and general wage increases.
7
Item 2. Properties
- ------------------
The following table outlines the principal manufacturing and other facilities
owned by the Company, subject to mortgages on all facilities except Agrotec.
Entity Facility Location Type and Size of Facility
- ------ ----------------- ------------------------
Kenco Middlebury, Indiana Manufacturing and offices
139,000 square feet
Hardee Loris, South Carolina Manufacturing and offices
101,000 square feet
Aptek Deerfield Beach, Florida Manufacturing and offices
48,000 square feet
Agrotec Pendleton, North Carolina Manufacturing and office
43,000 square feet
The Company's manufacturing facilities are equipped with the machinery and
equipment necessary to manufacture and assemble its products. Management
believes that the facilities have been maintained adequately, and that the
Company could increase its production output significantly at any of its
facilities with minimal expansion of its present equipment and work force. In
addition, the Company leases a 160,000 square foot manufacturing facility in
Portland, Oregon, pursuant to a sale and leaseback transaction. See Note 17 of
Notes to Consolidated Financial Statements. The Kenco manufacturing facility was
retained and not sold as part of the disposal of the Automotive Accessories
segment. The Hardee and Agrotec properties are classified as assets held for
disposition.
The Company's facilities that are encumbered by mortgages at September 30, 1998
are as follows: Kenco - $1,020,000, Hardee - $675,000 and Aptek - $2,514,000.
Item 3. Legal Proceedings
- -------------------------
The Company and its consolidated subsidiaries are parties to various pending
judicial and administrative proceedings arising in the ordinary course of
business. The Company's management and legal counsel have reviewed the probable
outcome of these proceedings, the costs and expenses reasonably expected to be
incurred, the availability and limits of the Company's insurance coverage, and
the Company's established reserves for uninsured liabilities. While the outcome
of the pending proceedings cannot be predicted with certainty, based on its
review, management believes that any liabilities that may result are not
reasonably likely to have a material effect on the Company's liquidity,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Company did not submit any matters to a vote of its security holders during
the fourth quarter of the year ended September 30, 1998.
8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The Company's common stock is traded on the over-the-counter market of the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol "WMCO."
The range of high and low bid closing quotations for the Company's common stock
for each fiscal quarter for the past two fiscal years is as follows:
1998
----
High Low
---- ---
Quarter
-------
October 1 - December 31 $2.50 $1.94
January 1 - March 31 2.78 2.22
April 1 - June 30 3.34 2.59
July 1 - September 30 2.94 2.03
1997
----
High Low
---- ---
Quarter
-------
October 1 - December 31 $ 2.78 $ 1.97
January 1 - March 31 2.84 2.19
April 1 - June 30 2.59 1.94
July 1 - September 30 2.41 2.13
There were 524 record holders of the Company's common stock as of November 30,
1998. The Company has never paid a dividend with respect to its common stock and
has no plans to pay a dividend in the foreseeable future.
9
Item 6. Selected Financial Data
- -------------------------------
(Dollars in thousands - except per share amounts)
Statement of Income Data:
Year ended September 30, 1998 1997 1996* 1995** 1994***
- ------------------------ -------- -------- -------- ---------- -----------
Net sales from continuing operations $ 57,646 $ 46,671 $ 40,253 $ 37,968 $ 29,954
Earnings from continuing operations 4,611 2,515 2,975 4,812 3,520
Net earnings (loss) 312 (2,037) (561) 4,512 3,641
Earnings from continuing operations per common
share - basic $ .24 $ .14 $ .18 $ .28 $ .22
Earnings from continuing operations per common
share - diluted $ .23 $ .14 $ .17 $ .27 $ .21
Net earnings (loss) per common share - basic $ .00 $ (.12) $ (.03) $ .27 $ .23
Net earnings (loss) per common share - diluted $ .00 $ (.12) $ (.03) $ .26 $ .22
Cash dividends per common share $ - $ - $ - $ - $ -
Balance Sheet Data
September 30, 1998 1997 1996* 1995** 1994***
- ------------- -------- -------- -------- ---------- -----------
Current assets $ 31,087 $ 25,156 $ 30,926 $ 25,788 $ 20,874
Current liabilities 11,901 9,028 29,600 7,881 10,012
Working capital 19,186 16,128 1,326 17,907 10,862
Total assets 66,359 48,313 53,049 47,182 32,159
Long-term liabilities 30,047 22,450 4,726 20,244 9,699
Minority interest in consolidated subsidiaries - - 713 764 -
Shareholders' equity $ 24,411 $ 16,835 $ 18,010 $ 18,293 $ 12,448
Note: Balance sheet amounts for 1996, 1995 and 1994 have not been
reclassified to reflect the discontinued operations of the Automotive
Accessories and Agricultural Equipment segments as net assets held for
disposition.
* 1996 data includes acquisitions made in Apri1 and July 1996. Net sales, loss
from operations and total assets related to these acquisitions were $2,782,
$(46) and $2,869, respectively. See note 16 to the Notes to Consolidated
Financial Statements for information regarding these acquisitions.
** 1995 data includes an acquisition made in April. Net sales, income from
operations and total assets related to this acquisition were $2,863, $182 and
$7,544, respectively.
*** 1994 data includes a small acquisition made in January 1994. Net sales,
earnings from operations and total assets related to this acquisition were not
material.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands except per share amounts)
- -------------------------------------------------------------
See "Cautionary Statement" contained at the beginning of this report.
Liquidity and Capital Resources
The Company's principal sources of liquidity are borrowings under its credit
facilities, leases for equipment purchases from various leasing companies and
funds generated from operations. The Company anticipates that cash generated
from operations, bank borrowings and leases will be sufficient to satisfy
working capital and capital expenditure requirements for current operations for
the next twelve months. In addition, the Company expects to increase research
and development spending by approximately $1,000 in fiscal 1999. At September
30, 1998, the Company's working capital improved to $19,186 compared to $16,128
at September 30, 1997 and the current ratio was 2.6 at September 30, 1998
compared to 2.8 at September 30, 1997. Cash flow from continuing operations
declined to $2,430 for the year ended September 30, 1998 compared to $3,327 for
the prior fiscal year primarily as a result of increased inventory and accounts
receivable required to sustain increasing sales from continuing operations. The
Company's discontinued operations used cash of $4,094 and $10 for the years
ended September 30, 1998 and 1997, respectively.
At September 30, 1998 accounts receivable increased to $11,765, compared to
$6,726 at September 30, 1997. The increase was primarily as a result of
increased sales in the Vehicle Components segment including sales of production
tooling which typically have a longer payment period and from increased
receivables from sales of inventory to the purchaser of Kenco. At September 30,
1998 property, plant and equipment increased $5,480 to $20,013, compared to
$14,533 at September 30, 1997 due primarily to capital equipment purchases and
building improvements at the Company's plastic injection molding facility. At
September 30, 1998 long term debt and capital leases increased $6,365 to
$29,027, compared to $22,662 at September 30, 1997 due primarily to capital
leases for capital equipment purchases and building improvements at the
Company's plastic injection molding facility and increased borrowings on the
Company's revolving credit facility. At September 30, 1998, stockholder's equity
increased $7,576 to $24,411, compared to $16,835 at September 30, 1997 due
primarily to a preferred stock private placement completed during fiscal 1998.
During the three fiscal years ended September 30, 1998, the Company's Automotive
Accessories and Agricultural Equipment segments reported a net loss from
operations of approximately $4,131 and $3,263, respectively and reported losses
on disposal of $3,590 and $1,403, respectively. The combined discontinued
operations used cash of $11,935 for the three years ended September 30, 1998.
Excluding the Automotive Accessories and Agricultural Equipment segments, the
Company reported a cumulative profit from continuing operations of $10,101 and
cash provided by operations of $9,860 during that period. As a result of the
sale, the Company will not incur future uses of cash from the Automotive
Accessories segment. The Company anticipates that the Agricultural Equipment
segment will use cash during the period until it is sold or otherwise disposed.
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524, which was accounted for as a financing
transaction. The Company loaned the purchaser $3,200 in April 1998 as required
under the terms of the agreement. The Company has notified the purchaser that it
intends to repurchase the property with an expected closing on or before January
31, 1999. The Company's bank has agreed to provide additional term loans to
finance the transaction. If the Company repurchases the property, the note will
be repaid upon the purchase.
Year 2000 Conversion. The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using the Year
2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of the
operational systems. The Company has established processes for evaluating and
managing the risks and cost associated with this problem, including
communicating with suppliers, dealers and others with which it does business to
coordinate Year 2000 conversion. The total cost of compliance and its effect on
the Company's future results of operations is being determined as part of the
detailed conversion planning process. During 1998, the Company began
implementing the installation of new financial software that is Year 2000
compliant for the purpose of improving operations and service to its existing
and prospective truck and automotive customers. The decision to upgrade the
Company's software was made irrespective of Year 2000 compliance issues. The
system is expected to be fully operational in the summer of 1999. The Company
has contingency plans in place in the event that the software implementation is
delayed.
11
Since January 1998 the Company has been engaged in achieving Year 2000
compliance. The Company's Year 2000 project is divided into several phases and
is progressing with corrective actions for major systems well under way. All
hardware, software, services and business relationships with trading partners
which could be affected by Year 2000 issues are being audited for Year 2000
compliance.
The Company relies on computer systems and software to operate its business,
including applications used in sales, purchasing, inventory management, finance
and various administrative functions. The Company has determined that certain of
its software applications will be unable to interpret appropriately the calendar
Year 2000 and subsequent years. As of September 30, 1998, 60% of the Company's
systems are Year 2000 compliant. The target date for full compliance is June 30,
1999.
The Company's total budget for its Year 2000 project is $150, approximately half
of which amount will be spent through March 1999. This amount represents
approximately 17 percent of total IT expenditures budgeted for the period from
October 1998 through September 1999. The Company continues to manage total IT
expenses by re-prioritizing or curtailing less critical investments,
incorporating Year 2000 readiness into previously planned system enhancements
and by using existing staff to implement its Year 2000 program. The Company has
hired outside consultants for its Year 2000 project, and it may need to purchase
additional hardware or software.
The Company acquires a majority of its inventory from approximately 22 vendors.
If these vendors have unresolved Year 2000 issues which affect their ability to
supply merchandise, the Company could be adversely affected. The Company plans
to complete a Year 2000 readiness survey of its top vendors by March 1999. In
the event that it appears a vendor will be adversely affected by Year 2000
issues, the Company believes that it will be able to find alternative suppliers.
Should the company not achieve full compliance in a timely manner or complete
its Year 2000 project within its current cost estimates, the Company's business,
financial condition and results of operations could be adversely affected.
However, in the event that the Company fails to meet the deadlines above, the
Company believes that the financial impact will not be material since all
systems believed by the Company to be critical are expected to be Year 2000
compliant.
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
- --------------------------
recently issued SFAS No.'s 130 and 131, "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. Both of these statements are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes requirements for disclosure of
comprehensive income which includes certain items previously not included in the
statement of income including minimum pension liability adjustments and foreign
currency translation adjustments, among others. Reclassification of earlier
financial statements for comparative purposes is required. SFAS No. 131 revises
existing standards for reporting information about operating segments and
requires the reporting of selected information in interim financial reports.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Management believes that
implementation of SFAS No. 130 and No. 131 will not materially affect the
Company's financial statements.
In June 1998 the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
12
Results of Operations
- ---------------------
Year ended September 30, 1998 compared to September 30, 1997
- ------------------------------------------------------------
Overview
- --------
Net sales from continuing operations increased 24% to $57,646 in fiscal 1998
from $46,671 in fiscal 1997 due to higher unit sales volumes in the Company's
Vehicle Components segment.
Earnings from continuing operations increased $2,599, or 41%, to $8,991 in
fiscal 1998 from $6,392 in fiscal 1997. The increase was due to increased
earnings from continuing operations of $3,383 in the Company's Vehicle
Components segment due to higher unit sales, which was offset by higher losses
from continuing operations of $784 in the Electrical Components and GPS segment
due to increased operating expenses for research and development and
administration incurred for sensor development. Net earnings from continuing
operations increased 83%, or $2,096 in fiscal 1998, primarily as a result of
increased earnings from continuing operations of $2,599 and a lower effective
tax rate as a result of anticipated and realized state tax refunds from prior
years.
Net earnings were $42 in fiscal 1998 compared to a net loss of $2,037 in the
prior fiscal year due to increased net earnings from continuing operations
offset by losses in the Company's discontinued Automotive Accessories and
Agricultural Equipment segments.
Net Sales
- ---------
Net sales from continuing operations in the Vehicle Components segment increased
$11,157, or 26%, to $54,071 in fiscal 1998 over levels achieved in fiscal 1997
due to higher ETC unit sales volumes in the Class 7 and 8 truck OEM markets. Net
sales from continuing operations in the Company's Electrical Components and GPS
segments decreased $182, or 5%, due to lower unit sales of electrical
components. Sales of vehicle components and electrical components accounted for
94% and 6% as a percent of total net sales from continuing operations for the
year ended September 30, 1998 compared to 92% and 8% for the prior year.
Gross margin
- ------------
Gross margin from continuing operations increased $4,820, or 38%, to $17,517
compared to $12,697 in fiscal 1997. Gross margins increased 41% in fiscal 1998
in the Vehicle Components segment due to higher unit sales volumes of ETC
products and improved margins at the Company's plastic injection molding
facility. Increases in this segment were offset by a decrease in gross margin of
3% in the Electrical Components and GPS segment. Decreased gross margin in this
segment is attributed to lower unit sales volumes. Gross margins as a percent of
sales increased to 30% in fiscal 1998 compared to 27% in fiscal 1997 primarily
as a result of improved operating margins at the Company's plastic injection
molding facility in the Vehicle Components segment.
Operating expenses
- ------------------
Operating expenses for continuing operations increased $2,221, or 35%, during
fiscal 1998 compared to amounts in fiscal 1997. Operating expenses as a
percentage of net sales from continuing operations increased to 15% in fiscal
1998 compared to 14% in fiscal 1997. Operating expenses increased $1,459, or
34%, in fiscal 1998 in the Vehicle Components segment and $762, or 38%, in the
Electrical Components and GPS segment compared to 1997 levels. Increases in
operating expenses were attributed to higher research and development expenses
related to new product development and increased selling and administration
costs to support the increased sales levels.
Research and development expenses for continuing operations increased $946, or
52%, to $2,778 during fiscal 1998 compared to amounts in fiscal 1997. As a
percentage of net sales from continuing operations, research and development
expenses increased from 4% to 5%. Research and development expenses were
increased in fiscal 1998 to support new product development for existing
customers, for development of the automotive ETC product and for development of
sensor-related products.
13
Selling expenses for continuing operations increased 22% to $2,065 in fiscal
1998 compared to 1997 levels. Selling expenses as a percentage of net sales from
continuing operations were 4% in fiscal 1997 and 1998. Selling expenses
increased to support increased sales volumes in the Vehicle Components segment.
Administration expenses for continuing operations increased $908, or 33%, in
fiscal 1998 to $3,683 compared to fiscal 1997 amounts. Administration expenses
were 6% of net sales from continuing operations in fiscal 1998 and 1997.
Increases in dollar amount in fiscal 1998 were attributed to additional
administrative personnel required to support increased sales volumes.
Interest and Other Expenses
- ---------------------------
Interest expenses increased $257, or 21%, to $1,508 in fiscal 1998 from $1,251
in fiscal 1997 due to increased borrowings. Allocated interest expense included
in discontinued operations for the years ended September 30, 1998 and 1997 was
$279 and $723, respectively. Equity interest in loss of affiliate increased
$122, or 32% to $506 in fiscal 1998 from $384 in fiscal 1997 due to increased
equity interest in losses of Ajay.
Discontinued operations
- -----------------------
The Company reported a net loss from discontinued operations of $4,299 in fiscal
1998 compared to a net loss of $4,552 in fiscal 1997. The Company adopted a plan
of disposal for the Automotive Accessories segment in fiscal 1997 and for the
Agriculture Equipment segment in fiscal 1998.
The 1998 loss from discontinued operations of the Agriculture Equipment segment
consisted of pre-measurement net losses of $1,271 net of income tax benefits of
$959 and an estimated loss on disposal of $1,403, net of income tax benefits of
$972. The estimated loss on disposal includes an estimated loss during the
phase-out period of $496 net of income tax benefits of $304. The pre-measurement
loss of $1,271 in fiscal 1998 compares to a loss from operations of $1,380 in
fiscal 1997. Net sales from the Agriculture Equipment business declined $1,081,
or 11% to $8,500 in fiscal 1998 compared to $9,581 in fiscal 1997. The decline
in sales was due to lower unit sales attributable primarily to a poor farm
economy in 1998.
The 1998 loss from discontinued operations of the Automotive Accessories segment
was $1,625 net of income tax benefits of $1,001. The additional loss in 1998
resulted from the loss on the actual disposition of the Automotive Accessories
segment in 1998 as compared to the estimated loss in 1997.
14
Results of Operations
- ---------------------
Year ended September 30, 1997 compared to September 30, 1996
- ------------------------------------------------------------
Overview
- --------
Net sales from continuing operations increased $6,418, or 16%, to $46,671 in
fiscal 1997 from $40,253 in fiscal 1996 due to higher unit sales volumes in the
Company's Vehicle Components segment.
Earnings from continuing operations increased $220, or 4%, to $6,392 in fiscal
1997 from $6,172 in fiscal 1996. The increase was due to increased earnings from
continuing operations of $778 in the Company's Vehicle Components segment due to
higher unit sales, which was offset by higher losses from continuing operations
of $558 in the Electrical Components and GPS segment due to increased operating
expenses. Net earnings from continuing operations decreased $460, or 15%, in
fiscal 1997 primarily as a result of higher interest, other expenses and taxes.
Net loss was $2,037 in fiscal 1997 compared to a net loss of $561 in the prior
fiscal year due to decreased earnings from continuing operations of $460 and an
increase in the loss from discontinued operations of $1,016.
Net Sales
- ---------
Net sales from continuing operations for the year ended September 30, 1997
increased $6,418, or 16%, to $46,671 compared to $40,253 for the prior year due
to higher ETC unit sales volumes in the Class 7 and 8 truck OEM markets. Sales
of vehicle components and electrical components accounted for 92% and 8% as a
percent of total sales for the year ended September 30, 1997 compared to 90% and
10% for the prior year. Vehicle components sales were $42,914 for the year ended
September 30, 1997 compared to $36,141 for the prior year, an increase of 19%
due to higher ETC unit sales volumes in the Class 7 and 8 truck OEM markets.
Sales of electrical components were $3,757 for the year ended September 30, 1997
compared to $4,112 for the prior year, a decrease of 9% due to lower unit sales
of electrical components.
Gross margin
- ------------
Gross margin as a percentage of sales for the year ended September 30, 1997 was
27% compared to 30% for the prior year. The decrease in gross margin percentage
resulted from low gross margins in the Company's Vehicle Components segment's
plastic injection molding operation. Gross margins increased 8% in fiscal 1997
in the Company's Vehicle Components segment due to higher unit sales volumes.
Gross margins decreased 17% in the Company's Electrical Components and GPS
segments.
Operating Expenses
- ------------------
Operating expenses for the year ended September 30, 1997 were $6,305 or 14% of
sales compared to $5,756 or 14% of sales for the same period in the prior year.
Research and development expenses for continuing operations decreased 12% to
$1,832 during fiscal 1997 compared to amounts in fiscal 1996. As a percentage of
net sales from continuing operations, research and development expenses
decreased from 5% to 4%. Decreases in dollar amount were due to curtailments of
research and development activities in all business segments during the
Company's bank refinancing negotiations in fiscal 1997.
Selling expenses for continuing operations increased 27% to $1,698 in fiscal
1997 compared to 1996 levels. Selling expenses as a percentage of net sales from
continuing operations increased from 3% in fiscal 1996 to 4% in 1997. Selling
expenses increased $212 due to increased sales volumes in the Vehicle Components
segment and $146 due to additional sales and marketing activities in the
Electrical Components and GPS segments.
Administration expenses for continuing operations increased 19% in fiscal 1997
to $2,775 compared to $2,339 in fiscal 1996. Administration expenses as a
percentage of net sales from continuing operations were 6% in fiscal 1997 and
1996. Increases in dollar amount were attributed primarily to higher sales
levels in the Company's Electrical Components and GPS segment. General and
administrative expenses also increased due to the acquisition of businesses
within the Vehicle Components and Electrical Components and GPS segments.
15
Interest and Other Expenses
- ---------------------------
Interest expense included in continuing operations for the year ended September
30, 1997 increased to $1,251 compared to $1,087 for the year ended September 30,
1996 due to increased interest rates associated with the Company's borrowing
activities. Allocated interest expense included in discontinued operations for
the years ended September 30, 1997 and 1996 was $723 and $842, respectively.
Equity interest in loss of affiliate increased $209, or 119% to $384 in fiscal
1998 from $175 in fiscal 1997 due to increased equity interest in losses of
Ajay.
Discontinued operations
- -----------------------
The Company reported a net loss from discontinued operations of $4,552 in fiscal
1997 compared to a net loss of $3,536 in fiscal 1996. The Company adopted a plan
of disposal for the Automotive Accessories segment in fiscal 1997 and for the
Agriculture Equipment segment in fiscal 1998. All prior year reported operating
results have been restated to show the discontinued segments separately from
continuing operations.
Net sales from the Agriculture Equipment segment declined $1,445, or 13% to
$9,581 in fiscal 1997 compared to $11,026 in fiscal 1996. The decline in sales
was due to lower unit sales attributable primarily to increased competition. The
loss from operations before allocated interest expense and income tax benefits
increased $1,572, or 221%, to $2,284 in fiscal 1997 compared to $712 in the
prior fiscal year.
Net sales from the discontinued Automotive Accessories segment declined $7,377,
or 46%, in fiscal 1997 to $8,666 from $16,043 in fiscal 1996. The decline in
automotive accessory sales were due to lower unit sales and lower prices
resulting from strong downward price pressure generated by competitors who are
more vertically integrated and have lower cost structures than the Company's
Automotive Accessories segment.
Net losses from the discontinued Automotive Accessories segment were $3,172 net
of tax benefits of $2,121 for fiscal 1997, compared to $2,924 net of tax
benefits of $1,885 in fiscal 1996. The fiscal 1997 net loss includes operations
through the measurement date of May 8, 1997. All losses incurred after the
measurement date are reported as losses on disposal of discontinued operations.
The 1996 losses include a pre-tax operating restructuring charge of $2,250.
The estimated loss on disposal of the Automotive Accessories segment of $1,965
consists of estimated future operating losses net of tax benefits of $1,311.
16
Item 8. Financial Statements and Supplementary Data
- ------------------------------------------------------
Williams Controls, Inc.
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets at September 30, 1998 and 1997 18
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1998, 1997 and 1996 19
Consolidated Statements of Operations for the years
ended September 30, 1998, 1997 and 1996 20
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997 and 1996 21
Notes to Consolidated Financial Statements 22-47
Report of Independent Public Accountants 48
Independent Auditors' Report 49
See page 52 for Index to Schedules and page 56 for Exhibit Index.
17
Williams Controls, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
September 30, September 30,
1998 1997
------------- -------------
ASSETS
- ------
Current Assets:
- ---------------
Cash and cash equivalents $ 1,281 $ 700
Trade and other accounts receivable, less allowance of
$325 and $86 in 1998 and 1997, respectively 11,765 6,726
Inventories 10,693 11,186
Deferred taxes and other 2,231 1,539
Net assets held for disposition 5,117 5,005
------------- -------------
Total current assets 31,087 25,156
------------- -------------
Property plant and equipment, net 20,013 14,533
Investment in and note receivable from affiliate 6,140 4,204
Note receivable 3,200 -
Net assets held for disposition 1,847 3,112
Other assets 4,072 1,308
============= =============
Total assets $ 66,359 $ 48,313
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
- --------------------
Accounts payable $ 4,771 $ 4,619
Accrued expenses 3,399 2,482
Current portion of long-term debt and capital leases 1,181 1,427
Estimated loss on disposal 2,550 500
------------- -------------
Total current liabilities 11,901 9,028
Long-term debt and capital lease obligations 27,846 21,235
Other liabilities 2,201 1,215
Commitments and contingencies (Note 19)
Shareholders' equity:
- ---------------------
Preferred stock ($.01 par value, 50,000,000 authorized; 80,000 issued
and outstanding at September 30, 1998) 1 -
Common stock ($.01 par value, 50,000,000 authorized; 18,311,288 and
17,912,240 issued at September 30, 1998 and 1997, respectively) 183 179
Additional paid-in capital 17,917 9,822
Retained earnings 7,444 7,402
Unearned ESOP shares (73) (191)
Treasury shares (130,200 shares at September 30, 1998 and 1997) (377) (377)
Note Receivable (500) -
Pension liability adjustment (184) -
------------- -------------
Total shareholders' equity 24,411 16,835
------------- -------------
Total liabilities and shareholders' equity $ 66,359 $ 48,313
============= =============
The accompanying notes are an integral part of these balance sheets.
18
Williams Controls, Inc.
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
Issued Issued Additional Unearned Pension Share
Preferred Stock Common Stock Paid in Retained ESOP Treasury Note Liability Holders'
Shares Amount Shares Amount Capital Earnings Shares Shares Receivable Adjustment Equity
------ ------ ---------- ------ ---------- -------- -------- -------- ---------- ---------- --------
Balance, September
30, 1995 - $- 17,264,987 $173 $9,023 $10,000 $(630) $ - $ - $(273) $18,293
Net loss - - - - - (561) - - - - (561)
Issuance of shares
upon exercise of
stock options and
warrants - - 455,000 4 231 - - - - - 235
Common stock issued
pursuant to
acquisitions - - 150,000 2 288 - - - - - 290
Reduction of
unallocated ESOP
shares - - - - 129 - 119 - - - 248
Change in pension
liability
adjustment - - - - - - - - - 45 45
Cost of treasury
shares acquired - - - - - - - (540) - - (540)
------ ------ ---------- ------ ---------- -------- -------- -------- ---------- ---------- --------
Balance, September
30, 1996 - - 17,869,987 179 9,671 9,439 (511) (540) - (228) 18,010
Net loss - - - - - (2,037) - - - - (2,037)
Issuance of
contingent
shares for - - 42,253 - 106 - - - - - 106
for acquisition
Treasury stock
issued for - - - - - - - 163 - - 163
acquisition
services
Reduction of
unallocated - - - - 45 - 320 - - - 365
ESOP shares
Change in pension
liability
adjustment - - - - - - - - - 228 228
------ ------ ---------- ------ ---------- -------- -------- -------- ---------- ---------- --------
Balance, September
30, 1997 - - 17,912,240 179 9,822 7,402 (191) (377) - - 16,835
Net earnings - - - - - 312 - - - - 312
Issuance of
preferred
stock 80,000 1 - - 7,336 - - - - - 7,337
Dividends on
preferred
stock - - - - - (270) - - - - (270)
Common stock issued
in satisfaction
of note payable - - 42,329 1 99 - - - - - 100
Issuance of stock
upon exercise of
stock options - - 150,000 1 61 - - - - - 62
Common stock issued
to affiliate for
note receivable - - 206,719 2 498 - - - (500) - -
Reduction of
unallocated
ESOP Shares - - - - 7 - 118 - - - 125
Change in pension
liability
adjustment - - - - - - - - - (184) (184)
Income tax benefit
of non-qualified
stock option
exercises - - - - 94 - - - - - 94
------ ------ ---------- ------ ---------- -------- -------- -------- ---------- ---------- --------
Balance, September
30, 1998 80,000 $1 18,311,288 $183 $17,917 $7,444 $(73) $(377) $(500) $(184) $24,411
====== ====== ========== ====== ========== ======== ======== ======= ========== ========== ========
The accompanying notes are an integral part of these statements.
19
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
For the year ended September 30,
1998 1997 1996
Sales $ 57,646 $ 46,671 $ 40,253
Cost of sales 40,129 33,974 28,325
-------- -------- ---------
Gross margin 17,517 12,697 11,928
Operating expenses:
Research and development 2,778 1,832 2,077
Selling 2,065 1,698 1,340
Administration 3,683 2,775 2,339
-------- -------- ---------
Total operating expenses 8,526 6,305 5,756
Earnings from continuing operations 8,991 6,392 6,172
Other expenses:
Interest expense, net 1,508 1,251 1,087
Equity interest in loss of affiliate 506 384 175
-------- -------- ---------
Total other expenses 2,014 1,635 1,262
Earnings from continuing operations
before income tax expense 6,977 4,757 4,910
Income tax expense 2,366 2,242 1,935
-------- -------- ---------
Earnings from continuing operations 4,611 2,515 2,975
Discontinued operations:
Net loss from operations of the
agricultural segment (1,271) (1,380) (612)
Net loss on disposal of the
agricultural segment, including $496
for operating losses during
phase-out period (1,403) - -
Net loss from operations of automotive
accessories segment - (1,207) (2,924)
Net loss on disposal of automotive
accessories segment, including $387
and $1,965 for operating losses
during phase-out period,respectively (1,625) (1,965) -
-------- -------- ---------
Net loss from discontinued operations (4,299) (4,552) (3,536)
-------- -------- ---------
Net earnings (loss) 312 (2,037) (561)
Dividends on preferred stock (270) - -
-------- -------- ---------
Net earnings (loss) allocable to common
shareholders $ 42 $ (2,037) $ (561)
======== ======== =========
Earnings per common share from
continuing operations - basic $ 0.24 $ 0.14 $ 0.18
-------- -------- ---------
Loss per common share from
discontinued operations - basic $ (0.24) $ (0.26) $ (0.21)
-------- -------- ---------
Net earnings (loss) per common
share - basic $ 0.00 $ (0.12) $ (0.03)
-------- -------- ---------
Weighted average shares used in per
share calculation - basic 17,922,558 17,656,900 17,186,646
========== ========== ==========
Earnings per common share from
continuing operations - diluted $ 0.23 $ 0.14 $ 0.17
-------- -------- ---------
Loss per common share from
discontinued operations - diluted $ (0.23) $ (0.26) $ (0.20)
-------- -------- ---------
Net earnings (loss) per common
share - diluted $ 0.00 $ (0.12) $ (0.03)
-------- -------- ---------
Weighted average shares used in per
share calculation - diluted 19,808,460 18,001,799 17,461,885
========== ========== ==========
The accompanying notes are an intergral part of these statements.
20
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
For the year ended September 30,
1998 1997 1996
----------- ---------- ---------
Cash flows from operating activities:
Net earnings (loss) $ 312 $(2,037) $ (561)
Adjustments to reconcile net earnings
(loss) to net cash from continuing operations:
Loss from discontinued operations 4,299 4,552 3,536
Depreciation and amortization 1,406 1,071 1,675
Equity interest in loss of affiliate 506 384 175
Deferred income taxes (96) (1,368) (491)
Changes in working capital of continuing
operations, net of acquisitions:
Receivables (3,739) (486) 1,193
Inventories (2,213) (105) (1,333)
Accounts payable and accrued expenses 1,069 1,452 1,041
Other 886 (136) (1,132)
----------- ---------- ---------
Net cash provided by operating activities
of continuing operations 2,430 3,327 4,103
Cash flows from investing activities:
Investment in and loans to affiliate (2,292) (3,645) -
Proceeds from sale of automotive
accessories segment 1,124 - -
Investment in note receivable (3,200) - -
Payments for acquisitions - - (1,220)
Payments for property, plant and equipment (2,685) (675) (578)
----------- ---------- ---------
Net cash used for investing activities of
continuing operations (7,053) (4,320) (1,798)
Cash flows from financing activities:
Proceeds from long-term debt and capital
lease obligations 4,201 16,681 6,000
Repayments of long-term debt and capital
lease obligations (2,032) (20,631) (443)
Proceeds from sale/leaseback
transaction - 4,274 -
Proceeds from issuance of common stock 62 - 235
Repurchase of common stock - - (540)
Preferred dividends (270) - -
Issuance of preferred stock 7,337 - -
----------- ---------- ---------
Net cash provided by financing activities
of continuing operations 9,298 324 5,252
Net cash used in discontinued operations (4,094) (10) (7,831)
Net increase (decrease) in cash and cash
equivalents 581 (679) (274)
Cash and cash equivalents at beginning of
period 700 1,379 1,653
----------- ---------- ---------
Cash and cash equivalents at end of
period $ 1,281 $ 700 $ 1,379
=========== ========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 2,189 $ 2,275 $ 1,800
Income taxes paid, net of refund $ 90 $ (424) 1,200
=========== ========== =========
The non-cash activity related to the Company's investing activity is described
in notes 4 and 11, non-cash activity related to the Company's financing activity
is described in note 5, and non-cash activity related to the Company'
acquisitions is described in note 16.
The accompanying notes are an integral part of these statements.
21
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 1. Summary of Operations
- -----------------------------
Williams Controls, Inc, including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is herein referred to as the "Company" or
"Registrant". The subsidiaries are detailed as follows:
Vehicle Components
- ------------------
Williams Controls Industries, Inc.: Manufactures vehicle components sold
primarily in the transportation industry.
- --------------------------------------------------------------------------------
Premier Plastic Technologies, Inc.: Manufactures plastic components for the
automotive industry and manufactures prototype and production molds using rapid
prototyping processes.
NESC Williams, Inc.: Installs conversion kits to allow vehicles to use
compressed natural gas and provides natural gas well metering services.
Williams Automotive, Inc.: Markets the Company's products to the automotive
industry.
Electrical Components and GPS
- -----------------------------
Aptek Williams, Inc.: Develops and produces sensors, microcircuits, cable
assemblies and other electronic products for the telecommunications and the
transportation industry, and conducts research and development activities to
develop commercial applications of sensor related products for the subsidiaries
of the Company.
GeoFocus, Inc.: Develops train tracking and cyber-farming systems using global
positioning systems ("GPS") and geographical information systems ("GIS").
Agricultural Equipment
- ------------------------
The subsidiaries comprising the Agricultural Equipment segment are reported as
discontinued operations.
Agrotec Williams, Inc.: Manufactures spraying equipment for the professional
lawn care and nursery and pest control industries.
Hardee Williams, Inc.: Manufactures equipment used in farming, highway and park
maintenance.
Waccamaw Wheel Williams, Inc.: Manufactures solid rubber tail wheels and other
rubber products, used on agricultural equipment, from recycled truck and bus
tires.
Techwood Williams, Inc.: Manufactured and distributed commercial wood chippers
used in landscaping and farming. Techwood ceased manufacturing operations in
fiscal 1997.
22
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Automotive Accessories
- ----------------------
Kenco/Williams, Inc.: Manufactures, assembles, packages and distributes truck
and auto accessories for the after market parts industries. Kenco is reported as
a discontinued operation.
Other Subsidiaries
- ------------------
Williams Technologies, Inc.: Supports all subsidiaries of the Company by
providing research and development and developing strategic business
relationships to promote "technology partnering."
Williams World Trade, Inc.: Located in Kuala Lumpur, Malaysia, WWT manages
foreign sourcing for subsidiaries of the Company, affiliates and third party
customers.
Note 2. Significant Accounting Policies
- ---------------------------------------
Principles of Consolidation - The consolidated financial statements include all
of the accounts of Williams Controls, Inc. and its majority owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - All short-term highly liquid investments purchased
with maturity at purchase of three months or less are considered to be cash
equivalents.
Inventories - Inventories are valued at the lower of cost (first-in, first-out)
or market.
Property, Plant and Equipment - Land, buildings, equipment and improvements to
existing facilities are recorded at cost. Maintenance and repairs are expensed
as incurred. Depreciation has been computed using the straight-line method over
the estimated useful lives of property and equipment as follows: buildings 31.5
years, furniture, machinery and equipment 3 to 12 years. Capitalized leases are
amortized using the same method over the shorter of the estimated useful lives
or the lease term.
Goodwill - The excess of cost over net assets of acquired companies is being
amortized using the straight-line method over periods not exceeding 40 years. At
each balance sheet date, management assesses whether there has been an
impairment in the carrying value of cost in excess of net assets of businesses
acquired, primarily by comparing current and projected sales, operating income
and annual cash flows, on an undiscounted basis, with the related annual
amortization expenses as well as considering the equity of such companies.
Concentration of Risk - The Company invests a portion of its excess cash in debt
instruments of financial institutions with strong credit ratings and has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company has not experienced any losses on its cash
equivalents.
The Company sells its products to customers in diversified industries worldwide;
however, approximately 94% of its sales from continuing operations are to
customers in the Vehicle Components segment. Approximately 63% of the Company's
sales from continuing operations are electronic throttle controls ("ETC").
For the years ended September 30, 1998, 1997 and 1996, Freightliner accounted
for 21%, 16% and 17%, Navistar accounted for 16%, 16% and 13%, and Volvo
accounted for 9%, 8% and 10% of net sales from continuing operations
respectively. Approximately 15%, 14% and 19% of net sales from continuing
operations in fiscal 1998, 1997 and 1996, respectively, were to customers
outside of the United States, primarily in Canada, and, to a lesser extent, in
Europe and Australia. See note 13 of Notes to Consolidated Financial Statements.
23
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Debt Issuance Costs - Costs incurred in the issuance of debt financing are
amortized over the term of the debt agreement.
Product Warranty - The Company provides a warranty covering defects arising from
products sold. The warranty is limited to a specified time period, mileage or
hours of use, and varies by product and application. The Company has provided a
reserve, which in the opinion of management is adequate to cover such warranty
costs.
Research and Development Costs - Research and development costs are expensed as
incurred.
Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment
date.
Post-retirement Benefits - Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers' Accounting for Post Retirement Benefits Other than
Pensions" requires the Company to accrue retiree insurance benefits over the
period in which employees become eligible for such benefits. The Company
implemented SFAS No. 106 by amortizing the transition obligation over twenty
years.
Earnings per Share - Beginning in the Company's fiscal year ending September 30,
1998, basic earnings per share ("EPS") and diluted EPS are required to be
computed using the methods prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is calculated using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior year EPS have been restated
to conform with SFAS No.
128.
24
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Following is a reconciliation of basic EPS and diluted EPS from continuing
operations:
Year Ended Year Ended
September 30, 1998 September 30, 1997
---------------------------------- -----------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ -------
Income from continuing
Operations $4,611 $2,515
Less- Preferred stock dividends (270) -
----------- ---------
Basic EPS-
Income available to common
Shareholders 4,341 17,922,558 $0.24 2,515 17,656,900 $0.14
----- -----
Effect of dilutive securities-
Stock options and warrants - 564,766 - 344,899
Convertible preferred stock 270 1,321,136 - -
----------- ------------ --------- --------------
Diluted EPS-
Income available to common
Shareholders $4,611 19,808,460 $0.23 $2,515 18,001,799 $0.14
------ ---------- ----- ------ ---------- -----
Year Ended
September 30, 1996
------------------------------------
Per
Share
Income Shares Amount
------ ------ ------
Income from continuing
Operations $2,975
Less- Preferred stock -
dividends
----------
Basic EPS-
Income available to common
Shareholders 2,975 17,186,646 $0.18
-----
Effect of dilutive
securities- - 275,239
Stock options and warrants - -
Convertible preferred
stock
---------- --------------
Diluted EPS-
Income available to common
Shareholders $2,975 17,461,885 $0.17
------ ---------- -----
At September 30, 1998, 1997 and 1996, the Company had options and warrants
covering 582,236, 336,600 and 288,600 shares, respectively of the Company's
common stock outstanding that were not considered in the respective diluted EPS
calculations since they would have been antidilutive.
25
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Reclassifications - Certain amounts previously reported in the 1996 and 1997
financial statements have been reclassified to conform to 1998 financial
statement classifications.
Fair Value of Financial Instruments - The carrying values of the Company's
current assets and liabilities approximate fair values primarily because of the
short maturity of these instruments. The fair values of the Company's long-term
debt approximated its carrying values based on borrowing rates currently
available to the Company for loans with similar terms. The fair value of
preferred stock and receivables from an affiliate is not practicable to estimate
due to the related party nature of the underlying transaction.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") allows companies to choose whether to account for
stock-based compensation on a fair value method, or to continue accounting for
such compensation under the method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has chosen to continue to account for stock-based compensation using APB
25 (see Note 9).
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
recently issued SFAS No.'s 130 and 131, "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information,"
respectively. Both of these statements are effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes requirements for disclosure of
comprehensive income which includes certain items previously not included in the
statement of income including minimum pension liability adjustments and foreign
currency translation adjustments, among others. Reclassification of earlier
financial statements for comparative purposes is required. SFAS No. 131 revises
existing standards for reporting information about operating segments and
requires the reporting of selected information in interim financial reports.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. Management believes that
implementation of SFAS No. 130 and No. 131 will not materially affect the
Company's financial statements.
In June 1998 the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and accordingly, the
adoption of SFAS 133 will not impact the Company's financial position or results
of operations.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the estimates are
made; however, actual results could differ materially from these estimates.
26
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 3. Inventories
- -------------------
Inventories consisted of the following at September 30:
1998 1997
---- ----
Raw material $ 5,152 $ 2,958
Work in process 1,333 1,799
Finished goods 4,208 6,429
------------ ------------
$ 10,693 $ 11,186
============ ============
Finished goods include component parts and finished product ready for shipment.
Note 4. Investment in and Receivables from Affiliate
- ----------------------------------------------------
At September 30, 1998 the Company had an investment in and notes receivable from
Ajay Sports, Inc. ("Ajay") in the amount of $6,640, including a $500 note
receivable reflected as a reduction in the Company's shareholders' equity
relating to the issuance of 206,719 shares of the Company's common stock to
Ajay. Ajay manufactures and distributes golf accessories and outdoor leisure
furniture primarily to retailers in the United States. The Company also has
manufacturing rights in certain Ajay facilities through 2002, under a joint
venture agreement.
The Company's investment in and note receivable from affiliate at September 30,
1998 is comprised of an investment in common and preferred stock of Ajay in the
amount of $53 and $5,000, respectively and a secured note receivable in the
amount of $1,087. In addition, the Company could be obligated to advance to Ajay
up to an additional $2,015 under the terms of an Intercreditor Agreement with a
prior bank. The chairman of the Company has provided a guarantee of the
investments in and loans to Ajay. At September 30, 1997, the Company had an
investment in Ajay common stock in the amount of $559 and a receivable from Ajay
in the amount of $3,645.
Prior to July 11, 1997, the Company had guaranteed Ajay's $13,500 credit
facility and charged Ajay a fee of 1/2 of 1% per annum on the outstanding loan
amount for providing this guaranty. From July 11, 1997 through June 30, 1998,
the Company and Ajay had a joint and several loan obligation to a bank. On June
30, 1998, the Company restructured its investment in Ajay (the "Ajay
Restructuring".) The objective of the Ajay Restructuring is to separate the
Company's and Ajay's financing, eliminate Ajay's dependency on the Company for
capital and provide Ajay with adequate working capital to grow its operations
and improve shareholder value which would benefit the Company. The restructuring
provides Ajay three years to improve shareholder value at which time the notes
receivable become due and payable. No dividends are accrued and payable on the
preferred stock through July 31, 2001. The preferred stock dividend rate
increases to an annual rate of 17% in 2001 and 24% in 2002, rates which the
Company believes would require Ajay to raise capital from new sources to redeem
the preferred stock.
As a result of the Ajay Restructuring, the bank provided separate loan
facilities to the Company and Ajay. As consideration to the bank for the
separate loan facilities, the Company provided Ajay $2,000 in additional capital
during 1998 which included the purchase of Ajay notes payable of $948 previously
provided by affiliated parties of the Company, and agreed to convert $5,000 of
advances to Ajay into a new cumulative convertible preferred stock. The
preferred stock is convertible into 3,333,333 shares of Ajay common stock.
The secured promissory notes bear an annual interest rate of 16% payable
monthly. In addition, Ajay has agreed to pay the Company annual administrative
fees of $90,000 and a management fee for sourcing products overseas in the
amount of $80,000 annually.
27
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The Company owns 686,274 shares of common stock in Ajay which represents
approximately 18% of Ajay's outstanding common stock. The investment is recorded
on the equity method of accounting due to the common ownership of Ajay and the
Company by the chairman of the Company who is also the chairman of Ajay. For the
three years ended September 30, 1998, 1997 and 1996, the Company reported losses
on its investment in Ajay in the amount of $506, $384 and $175, respectively. In
addition, the company has options to purchase 1,851,812 shares of common stock
at an exercise price of $1.08. The investment in Ajay common stock is recorded
as an investment in affiliate in the Consolidated Balance Sheet net of the
Company's equity interest in Ajay's losses since acquisition
Based upon the closing bid price, the market value of the investment in Ajay
common shares was approximately $494 at September 30, 1998.
Following is a summary of condensed unaudited financial information of Ajay as
of and for the twelve months ended September 30, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
(unaudited) (unaudited) (unaudited)
Current assets $ 9,584 $ 14,264 $ 13,951
Other assets 4,212 4,449 4,101
-------- -------- --------
$ 13,796 $ 18,713 $ 18,052
======== ======== ========
Current liabilities $ 2,030 $ 5,031 $ 14,207
Other liabilities 8,003 12,061 17
Common and preferred shareholders'
equity 3,763 1,621 3,828
-------- -------- --------
$ 13,796 $ 18,713 $ 18,052
======== ======== ========
Net sales $ 27,094 $ 29,063 $ 24,669
======== ======== ========
Gross margin $ 3,581 $ 3,772 $ 4,412
======== ======== ========
Net loss $(2,858) $ (2,133) $ (985)
======== ======== ========
At September 30, 1998, Ajay had approximately 3,957,000 common shares
outstanding. In addition to the Company's options and convertible preferred
stock at September 30, 1998, Ajay had approximately $4,272 of outstanding
preferred stock that is convertible to approximately 1,798,000 shares of Ajay
common stock and outstanding options and warrants to purchase approximately
946,000 shares of Ajay common stock at prices ranging from $1.08 to $6.00 per
share (unaudited). An officer of Ajay provided management services to the
company as an officer of the Company. Ajay was reimbursed approximately $95 in
total for his 1998 and 1997 time and services. The Company accepted the
officer's resignation in December 1998.
28
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 5. Financing Arrangements
- ------------------------------
Long-Term Debt - On June 30, 1998, the Company restructured its credit facility
with a bank (the "Bank") to consist of a revolving credit facility of up to
$16,500, a $3,100 term loan and a $2,700 real estate loan. Under the revolver,
the Company can borrow up to $16,500 based upon a borrowing base availability
calculated using specified percentages of eligible accounts receivable and
inventory. The revolver bears interest at the Bank's prime rate (8.25% at
September 30, 1998.) The real estate and term loans bear interest at the Bank's
prime rate plus .25%. At the Company's option, the Company may borrow funds at
the London InterBank Offering Rate ("Libor") plus 2.25%. The loans mature on
July 11, 2001 and are secured by substantially all of the assets of the Company.
The real estate term loan is being amortized over twenty years and the term loan
is being amortized over seven years with all remaining principal outstanding due
at July 11, 2001.
The loan agreement prohibits payment of dividends by the Company except for the
Series A Preferred dividend, and requires the Company to maintain minimum
working capital of $12,000 and minimum tangible net worth, as defined, of
$18,000. The loan also prohibits additional indebtedness and common stock
repurchases, and restricts capital expenditures to an amount not to exceed
$6,000 for the two years ended September 30, 1999 and not to exceed $2,500
annually thereafter. In addition, the loan limits incremental operating lease
obligations to $600 annually. Fees under the loan agreement include an unused
revolver fee of .25% and a prepayment penalty fee declining from 3% in 1998 to
.5% in the year 2001. The prepayment fee is waived if the loan is repaid with
proceeds from the sale of assets or is refinanced with an affiliate of the Bank.
At September 30, 1998, the Bank waived compliance with the capital expenditure
limitation which the Company had exceeded during fiscal 1998.
From July 11, 1997 through June 30, 1998, the Company and Ajay had a joint and
several loan with the Bank. Under the restructured facility, all joint and
several liability, cross collateral agreements and guarantees of the Company
with respect to the Ajay portion of the credit facility prior to the
restructuring have been terminated. In consideration to the Bank for the
restructured facility, the Company agreed to invest $2,000 in Ajay and convert
$5,000 of advances to Ajay into preferred stock.
Prior to July 11, 1997, the Company had guaranteed the bank debt of Ajay with a
previous lender which debt was in default under Ajay's loan agreement. The
Company and Ajay refinanced their bank debt on July 11, 1997 with the Bank under
a $34,088 three-year revolving joint and several liability credit and term loan
agreement. As a result of a shortfall in Ajay's available collateral, the
previous lender provided bridge financing of $2,340 to Ajay under an
intercreditor agreement. The bridge loan is to be repaid from any proceeds from
the sale of Kenco, the sale of other assets, from a specified percentage of
future Ajay and Company cash flow and from monthly principal payments by Ajay.
The Balance of the bridge loan was $2,015 at September 30, 1998.
29
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The Company's long-term debt consists of the following: 1998 1997
---- ----
Bank revolving credit facility due on July 11, 2001; $5,686 bearing $13,686 $ 9,498
interest at prime rate (8.25% at September 30, 1998) and $8,000 at
variable interest rates (7.94% - 8.0% at September 30, 1998). The
1997 credit facility which bore interest at the prime rate plus .5%
was restructured in 1998.
Bank Term Loan I, due on July 11, 2001, variable interest rate 8.5% at 3,011 3,818
September 30, 1998, payable in monthly installments of $42, with a
remaining balance due of $1,583 at maturity. The 1997 loan was
refinanced in 1998 with the restructured credit facility.
Bank Term Loan II, repaid on June 30, 1998 - 958
Real Estate loan, due on July 11, 2001, variable interest rate 8.5% at 2,514 2,647
September 30, 1998, payable in monthly installments of $11, with a
remaining balance due of $2,140 at maturity. The 1997 loan was
refinanced in 1998 with the restructured credit facility.
Sale and leaseback financing, due in 2003, interest payable monthly 4,600 4,526
at 9.75%
Mortgage loan, due in 2003, payable in monthly installments of $21 1,020 1,178
including interest (8.8% at September 30, 1998)
Other 50 37
------- -------
24,881 22,662
Less current portion 847 1,427
------- -------
$24,034 $21,235
======= =======
Maturities of long-term debt are as follows:
1999 $ 847
2000 837
2001 18,146
2002 4,826
2003 225
-------
$24,881
=======
30
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Capital Leases- The Company has acquired certain assets, primarily machinery and
equipment, through capital leases. The leases have terms ranging from three to
seven years, and are payable in monthly and quarterly installments with interest
(at rates ranging from 8.52% to 11.7%).
Future minimum lease payments under capital leases are as follows for the years
ending September 30:
1999 $718
2000 954
2001 946
2002 1,051
2003 730
Thereafter 1,131
------
Total future minimum lease payments 5,530
Less- Amount representing interest 1,384
------
Present value of future minimum lease payments 4,146
Less - Current portion 334
------
$3,812
======
Note 6. Pension Plans
The Company maintains two pension plans; one plan covers the salaried employees
and the other plan covers the Company's hourly employees. Annual net periodic
pension costs under the pension plans are determined on an actuarial basis. The
Company's policy is to fund these costs accrued over 15 years and obligations
arising due to plan amendments over the period benefited. The assets and
liabilities are adjusted annually based on actuarial results. Net pension cost
is computed as follows for the years ending September 30:
1998 1997 1996
---- ---- ----
Service cost $234 $227 $226
Interest cost 479 451 450
Actual return on plan assets (580) (476) (477)
Other components 29 21 21
---- ---- ----
$162 $223 $220
==== ==== ====
The expected long-term rate of return on plan assets is 9.0%. The discount rate
and rate of increase in future compensation levels used in determining the
actuarial present value of projected benefit obligations was 6.75% and 4.0% in
1998, 7.5% and 5.0% in 1997, and 8.0% and 5.0% in 1996, respectively. Plan
assets consist substantially of equity and fixed income securities.
31
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
SFAS No. 87 requires recognition in the balance sheet of a minimum pension
liability for underfunded plans. The minimum liability that must be recognized
is equal to the excess of the accumulated benefit obligation over plan assets
and accrued pension cost. At September 30, 1998 and 1997 the additional minimum
liability recognized for the Company's underfunded plan was $631 and $0,
respectively. The additional minimum pension liability resulted in a decrease in
shareholders' equity, net of tax benefit, of $184, which represents the excess
of the minimum pension liability over unamortized prior service costs.
The funded status as of September 30 is as follows:
Salaried Hourly
Employees Employees
1998 Plan Plan
---- --------- ---------
Actuarial present value of vested benefits $2,999 $3,356
Actuarial present value of non-vested benefits 63 259
--------- ---------
Accumulated benefits obligation $3,062 $3,615
========= =========
Actuarial present value of projected benefits
obligation $(3,300) $(3,792)
Plan assets at fair market value 2,916 3,180
--------- ---------
Funded status $ (384) $ (612)
========= =========
Unrecognized net losses $ (303) $ (475)
Prior service costs 126 (333)
Prepaid (accrued) pension cost (207) 196
--------- ---------
Funded status $ (384) $ (612)
========= =========
Salaried Hourly
Employees Employees
1998 Plan Plan
---- --------- ---------
Actuarial present value of vested benefits $ 2,418 $ 2,792
Actuarial present value of non-vested benefits 112 534
--------- ---------
Accumulated benefits obligation $ 2,530 $ 3,326
========= =========
Actuarial present value of projected benefits
obligation $(2,901) $(3,606)
Plan assets at fair market value 3,091 3,379
--------- ---------
Funded status $ 190 $ (227)
========= =========
Unrecognized net (losses) gain $ 226 $ (99)
Prior service costs 138 (374)
Prepaid (accrued) pension cost (174) 246
--------- ---------
Funded status $ 190 $ (227)
========= =========
32
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 7. Property, Plant and Equipment
- -------------------------------------
At September 30, 1998 and 1997, property, plant and equipment consist of the
following:
1998 1997
---- ----
Land and land improvements $ 2,695 $ 2,705
Buildings 8,748 7,777
Machinery and equipment 12,099 7,888
Office furniture and equipment 3,255 1,580
-------- --------
26,797 19,950
Less accumulated depreciation (6,784) (5,417)
-------- --------
$ 20,013 $ 14,533
======== ========
Net property, plant and equipment of $20,013 and $14,533 at September 30, 1998
and 1997, respectively, excludes certain machinery, equipment and office
equipment held for disposition. Machinery and equipment and office furniture and
equipment under capital leases are included above and were $5,200 and $512 at
September 30, 1998 and 1997, respectively. Accumulated depreciation on assets
under capital leases was $542 and $217 at September 30, 1998 and 1997,
respectively.
Note 8. Income Taxes (Benefit)
- ------------------------------
The provision for income taxes (benefit) is as follows for the years ending
September 30:
1998 1997 1996
---- ---- ----
Continuing operations:
Current $ 2,462 $ 3,610 $ 2,426
Deferred (96) (1,368) (491)
--------- -------- --------
2,366 2,242 1,935
Discontinued operations (2,932) (3,208) (2,315)
--------- -------- --------
$ (566) $ (966) $ (380)
========= ======== ========
The reconciliation between the effective tax rate and the statutory federal tax
rate on earnings from continuing operations as a percent is as follows:
1998 1997 1996
---- ---- ----
Statutory federal income
tax rate 34.0 34.0 34.0
State taxes, net of federal
income tax benefit tax 4.0 4.0 4.0
Credits for state income
tax refunds (8.4) - -
Effect of change in
valuation allowance 3.2 7.4 -
Other 1.1 1.7 1.4
---- ---- ----
33.9 47.1 39.4
==== ==== ====
33
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1998
and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Inventories, due to obsolescence
reserve and additional costs
inventoried for tax purposes
pursuant to the Tax Reform
Act of 1986 $ 203 $ 260
Warranty reserves 313 171
Accrual for compensated absences 125 145
Accrual for retiree medical benefits 522 383
Accounts receivable reserves 117 138
Estimated loss on disposal 1,266 189
Equity interest in loss on affiliate 517 320
Tax gain on sale/leaseback 628 659
Accrued other reserves 12 144
Pension liability adjustment 114 -
State net operating loss
carryforwards 873 727
------ ------
Total gross deferred tax assets 4,690 3,136
Less valuation allowance 840 620
------ ------
Net deferred tax assets 3,850 2,516
====== ======
Deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation and amortization 1,588 1,485
Intangible asset recorded for books 58 -
------ ------
Net deferred income tax assets $2,204 $1,031
====== ======
Current deferred income tax assets $2,069 $1,098
Long-term deferred income tax assets 1,781 1,418
Long-term deferred income tax
liabilities (1,646) (1,485)
------ ------
$2,204 $ 1,031
====== ======
At September 30, 1998, the Company has approximately $14,900 of state net
operating loss carry forwards, which are available to the Company in certain
state tax jurisdictions and expire in 2006 through 2012. During the year ended
September 30, 1998, the Company increased its valuation allowance against
certain state net operating loss carryforwards it does not expect to utilize.
34
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 9. Shareholders' Equity
- ----------------------------
Preferred Stock - On April 21, 1998, the Company completed a private placement
of 80,000 shares of Series A convertible redeemable preferred stock at $100 per
share, or $8,000 in gross proceeds and received net proceeds of $7,337. The
preferred stock bears a dividend rate of 7.5%, which is payable quarterly, and
is convertible at the option of the holder into 2,909,091 shares of the
Company's common stock. The preferred stock is redeemable at the Company's
option anytime after April 21, 2001 at $100 per share. The preferred stock is
not mandatorily redeemable. In addition, the Company can force conversion of the
preferred stock into common shares if the Company's common stock trades at or
above $4.125 for twenty out of thirty consecutive trading days. Holders of the
Series A preferred stock are entitled to a number of votes equal to those they
would have assuming conversion into common stock, without taking into account
fractional shares. In connection with the private placement, and as partial
compensation for services, the Company issued to the placement agent warrants to
purchase 203,637 shares of the Company's common stock at an exercise price of
$3.30 per share.
Commencing with the quarterly period beginning July 1, 2001, the annual dividend
rate will increase each quarter by 2.5% up to a maximum dividend of 24% per
annum. The Company used the proceeds of the offering to provide $3,200 of debt
financing to the purchaser of the Portland, Oregon manufacturing facility,
repayment of a bank term loan of $667 and an investment of $1,500 in Ajay. The
remaining balance was used for general working capital purposes.
Stock Options and Warrants - The Company has issued stock options and warrants
at exercise prices ranging from $.34 - 3.63 per share, the market value at the
date of issuance. These options and warrants expire between 1998 and 2000.
This stock option activity during the periods indicated are as follows:
Shares
Subject to
Options Option Prices
---------- -------------
Outstanding at September 30, 1995 795,000 $.34 - 3.63
Granted - -
Exercised (455,000) .52
Canceled
- -
---------- -------------
Outstanding at September 30, 1996 340,000 .41 - 3.63
Granted - -
Exercised - -
Canceled
- -
---------- -------------
Outstanding at September 30, 1997 340,000 .41 - 3.63
Granted - -
Exercised (150,000) .41
Canceled - -
---------- -------------
Outstanding at September 30, 1998 190,000 $.41 - 3.63
========== =============
During the year ended September 30, 1997, the Company extended the expiration
date of 150,000 options held by Acrodyne Corporation, a related party, from
November 8, 1997 to November 8, 1999.
35
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
In addition to the stock options noted above, the Company has two other
qualified stock option plans. The Company adopted the 1993 Stock Option Plan
("the 1993 Plan") which reserves an aggregate of 1,500,000 shares of the
Company's common stock for the issuance of stock options which may be granted to
employees, officers and directors of and consultants to the Company. Under the
terms of the 1993 Plan, the Company may grant "incentive stock options" or
"non-qualified options" at not less than the fair market value on the date of
grant. Options granted under the 1993 Plan are exercisable as to 25 percent of
the shares covered thereby commencing six months after the earlier of the date
of grant or the date of employment, and as to an additional 25%, cumulatively,
on the first, second and third anniversaries of the date of grant, and expire
ten years after the date of grant. In January 1998 the Company reserved an
additional 1,500,000 shares of the Company's common stock for the issuance of
stock options under the 1993 Plan. At September 30, 1998, the Company had
901,875 shares available for future grants. Stock option activity during the
periods indicated under the 1993 Plan are as follows:
Shares Shares
Available Subject to
for Options Option Prices
Grant
----------- --------- -------------
Outstanding at September 30, 1995 1,032,000 468,000 $1.63 - $3.23
Granted - - -
Exercised - - -
Canceled 68,000 (68,000) 1.94 - 3.63
----------- --------- -------------
Outstanding at September 30, 1996 1,100,000 400,000 1.94 - 3.63
Granted (1,078,800) 1,078,800 1.94 - 2.63
Exercised - -
Canceled 366,925 (366,925) 1.94 - 3.63
----------- --------- -------------
Outstanding at September 30, 1997 388,125 1,111,875 1.94 - 3.63
Additional shares reserved 1,500,000 - -
Granted (1,104,225) 1,104,225 2.31 - 3.00
Exercised - - -
Canceled 117,975 (117,975) 1.94 - 2.94
----------- --------- -------------
Outstanding at September 30, 1998 901,875 2,098,125 $1.94 - $3.63
=========== ========= =============
During 1996 the shareholders of the Company approved a stock option plan which
reserves an aggregate of 200,000 shares of the Company's stock for non-employee
Directors of the Company (the "1995 Plan"). The 1995 Plan provides for automatic
granting of 10,000 options to each non-employee director of the Company at a
price equal to the market value on the date of grant which is the date of the
annual shareholders' meeting each year, exercisable for 10 years after the date
of the grant. These options are exercisable as to 25% of the shares thereby on
the date of grant and as to an additional 25%, cumulatively on the first, second
and third anniversaries of the date of grant. At September 30, 1998 there were
80,000 shares available for grant under the 1995 Plan.
36
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Stock option activity during the periods indicated under the 1995 Plan are as
follows:
Shares Shares
Available Subject to
for Options Option Prices
Grant
----------- --------- -------------
Outstanding at September 30, 1995 170,000 30,000 $3.66
Granted (30,000) 30,000 3.63
Exercised - - -
Canceled - - -
----------- --------- -------------
Outstanding at September 30, 1996 140,000 60,000 3.63-3.66
Granted (30,000) 30,000 2.66
Exercised - - -
Canceled - - -
----------- --------- -------------
Outstanding at September 30, 1997 110,000 90,000 $2.66-3.66
Granted (30,000) 30,000 2.44
Exercised - - -
Canceled - - -
----------- --------- -------------
Outstanding at September 30, 1998 80,000 120,000 $2.44-3.66
=========== ========= =============
Statement of Financial Accounting Standards No. 123
- ---------------------------------------------------
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
earnings (loss) and, if presented, earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the company has computed, for pro forma disclosure purposes,
the value of all options granted during the years ended September 30, 1998, 1997
and 1996, using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following weighted average assumptions for grants:
Year Ended September 30,
-------------------------------------
1998 1997 1996
---------- -------- ---------
Risk-free interest rate 6.00% 6.00% 6.00%
Expected dividend yield 0% 0% 0%
Expected lives 7 years 7 years 7years
Expected volatility 57.1% 57.1% 57.1%
37
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Using the Black-Scholes methodology, the total value of options granted during
the years ended September 30, 1998, 1997 and 1996, was $1,458, $1,357 and $142,
respectively, which would be amortized on a pro forma basis over the vesting
period of the options (typically three years). The weighted average per share
fair value of options granted during the years ended September 30, 1998, 1997
and 1996, was $1.60, $1.27 and $1.77, respectively. If the Company had accounted
for its stock-based compensation plans in accordance with SFAS 123, the
Company's net earnings (loss) and net earnings (loss) per share would
approximate the pro forma disclosures below:
Year Ended Year Ended Year Ended
September 30, 1998 September 30, 1997 September 30, 1996
------------------ ------------------ -------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- ------
Net earnings (loss) $312 ($176) ($2,037) ($2,284) ($561) ($584)
Basic net earnings
(loss) per share 0.00 (0.02) (0.12) (0.13) (0.03) (0.03)
Diluted net earnings
(loss) per share 0.00 (0.02) (0.12) (0.13) (0.03) (0.03)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to award prior to the year ended
September 30, 1996, and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
September 30, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------
Weighted Number of
Number Average Weighted shares Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices September Life-Years Price September Price
30, 1998 30, 1998
- ------------ ----------- ---------- -------- ----------- --------
$0.41 150,000 4.0 $0.41 150,000 $0.41
1.94-2.66 2,038,525 8.9 2.25 833,396 2.20
2.91-3.66 219,600 6.8 3.20 187,725 3.23
- ------------ ----------- ---------- -------- ----------- --------
$0.41-3.66 2,408,125 8.4 $2.22 1,171,121 $2.13
At September 30, 1997 and 1996, 774,000 and 451,575 options, respectively, were
exercisable at weighted average exercise prices of $1.68 per share and $1.32 per
share, respectively.
38
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 10. Stock Repurchase Program
- ---------------------------------
In January 1996 the Company initiated a stock repurchase program of up to
1,000,000 shares of its common stock. Under this program the Company has
acquired 195,200 shares during fiscal 1996 at an average price of $2.77 per
share, which include 100,000 shares of common stock at $2.75 per share
representing the market price on the date purchased from Enercorp, Inc., a
publicly-held business development company which beneficially owns approximately
11% of the Company's stock. The Chairman and President of the Company is a
significant shareholder of Enercorp. During the year ended September 30, 1997,
the Company issued 65,000 treasury shares at $2.50 per share to Enercorp and a
consultant for acquisition advisory work. The Loan prohibits further purchases
under this program.
Note 11. Discontinued Operations
- --------------------------------
Automotive Accessories Segment - On March 16, 1998, the Company completed the
sale of a substantial portion of the assets of Kenco, to Kenco Products, Inc.
("KPI"). The principal owner of KPI is Colfax Group, Inc., a Delaware
corporation. One of the principal owners of Colfax Group, Inc. had been acting
as general manager in charge of operating the business of Kenco. Colfax Group,
Inc. is unrelated to the Company.
Consideration to the Company consisted of $1,000 cash, $430 of receivables,
assumption of $1,000 of liabilities and 2,000 shares of non-voting convertible
preferred stock of KPI. Under the agreement, KPI agreed to purchase $2,600 of
Kenco inventory during the six months following the sale. Approximately $430 of
inventory was unsold at September 30, 1998 which was purchased subsequent to
year-end. The sale was recorded based upon the estimated fair market value of
the assets disposed of. The Company previously reported Kenco as a discontinued
operation beginning with the measurement date of May 8, 1997. The 1997 estimated
pre-tax loss on disposal of $3,276 represented estimated future operating losses
of which $500 remained as an estimated liability at September 30, 1997. For the
year ended September 30, 1998, the Company reported an additional loss on the
sale of Kenco in the amount of $2,626 before income tax benefit resulting in an
additional net loss on disposal of discontinued operations of $1,625.
Colfax and one of the principal owners of Colfax Group, Inc. has guaranteed the
obligations of KPI to Kenco. At September 30, 1998 the Company has preferred
stock and receivables from the sale of Kenco of $750 and $2,783 (including
$1,500 recorded as other non-current assets in the accompanying balance sheets),
respectively. The Company has a security interest in all of the assets of KPI
subordinate to the security interest of KPI's bank.
39
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The summarized results for Kenco for the years ended September 30 are as follows
reflecting operating losses through the measurement date:
1998 1997 1996
---- ----- ----
Net sales $ 4,964 $ 8,666 $ 16,043
======= ======= ========
Loss from operations before
allocated interest expense
and income tax benefit $ - $(1,727) $(4,353)
Allocated interest expense - (290) (456)
------- -------- --------
Loss from operations before
income tax benefit - (2,017) (4,809)
Income tax benefit - 810 1,885
------- -------- --------
Loss from operations - (1,207) (2,924)
Loss on disposal before
interest and income taxes (2,428) (2,771) -
Allocated interest expense (198) (505) -
------- -------- --------
Loss on disposal before
income tax benefit (2,626) (3,276) -
Income tax benefit 1,001 1,311 -
------- -------- --------
Loss on disposal (1,625) (1,965) -
------- -------- --------
Total loss on discontinued
operations $(1,625) $(3,172) $(2,924)
======== ======== ========
The net assets and liabilities of the Automotive Accessories segment held for
disposition included in the accompanying balance sheet as of September 30, 1997,
are as follows:
Current assets (liabilities):
Accounts receivable $1,673
Prepaid assets 257
Accounts payable (970)
Accrued expenses and other (322)
-------
Net current assets $ 638
=======
Long term assets (liabilities):
Machinery and equipment, net $1,185
Office equipment, net 254
Other assets 183
Long term liabilities (12)
-------
Net long term assets $1,610
=======
Agricultural Equipment Segment- The Company adopted a plan of disposal for the
Agriculture Equipment segment effective September 30, 1998 and retained an
investment banker to advise the Company on the sale, solicit potential buyers
for the companies comprising this segment and assist in negotiations. The
Company has reported the Agriculture Equipment segment as a discontinued
operation at September 30, 1998. The Company has provided for an estimated net
loss on disposal of $1,403 which includes an estimated pre-tax operating loss
through the estimated date of disposition in the amount of $800 and estimated
pre-tax loss on disposal of $1,750.
40
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The summarized results for the Agriculture
Equipment segment for the years ended September 30 are as follows:
1998 1997 1996
---- ----- ----
Net sales $ 8,500 $ 9,581 $ 11,026
======== ======== ========
Loss from operations before
allocated interest
expense and income tax benefits (2,239) (2,284) (712)
Allocated interest expense (279) (433) (386)
-------- --------- ---------
Loss from operations before income
tax benefit (2,518) (2,717) (1,098)
Income tax benefit 959 1,087 430
Loss allocable to minority interest 288 250 56
-------- --------- ---------
Loss from operations (1,271) (1,380) (612)
Loss on disposal before interest
and income taxes (2,273) - -
Allocated interest expense (277) - -
-------- --------- ---------
Loss on disposal before income tax
benefit (2,550) - -
Income tax benefit 972 - -
Loss allocable to minority interest 175 - -
-------- --------- ---------
Loss on disposal (1,403) - -
-------- --------- ---------
Total loss on discontinued operations $(2,674) $(1,380) $ (612)
======== ========= =========
The net assets and liabilities of the Agriculture Equipment segment held for
disposition included in the accompanying balance sheet as of September 30, 1998,
are as follows:
1998 1997
---- ----
Current assets (liabilities):
Accounts receivable $ 2,098 $ 1,742
Inventory 3,689 3,331
Prepaid assets - 272
Accounts payable (356) (451)
Accrued expenses and other (314) (527)
-------- --------
Net current assets $ 5,117 $ 4,367
======== ========
Long term assets (liabilities):
Property, plant and equipment, net $3,429 $ 3,547
Other liabilities (5) -
Long term liabilities (1,577) (2,045)
-------- --------
Net long term assets $ 1,847 $ 1,502
======== ========
The Company has elected to allocate interest expense to discontinued operations
based upon the net assets of the segment being disposed of at each respective
year-end.
41
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 12. Business Segment Information
- -------------------------------------
1998 1997 1996
---- ---- ----
Net sales by classes of similar products
from continuing operations
- ----------------------------------------
Vehicle Components $54,071 $42,914 $36,141
Electrical Components and GPS 3,575 3,757 4,112
------- ------- -------
$57,646 $46,671 $40,253
======= ======= =======
Earnings (loss) from continuing operations
- ------------------------------------------
Vehicle Components $10,992 $ 7,609 $ 6,831
Electrical Components and GPS (2,001) (1,217) (659)
------- ------- -------
$ 8,991 $ 6,392 $ 6,172
======= ======= =======
Identifiable assets
- -------------------
Vehicle Components $47,079 $26,017 $22,522
Electrical Components and GPS 8,353 7,728 7,381
------- ------- -------
Total assets - continuing operations 55,432 33,745 29,903
Automotive accessories - discontinued
operations 3,963 8,699 12,986
Agricultural equipment - discontinued
operations 6,964 5,869 7,056
------- ------- -------
Total assets $66,359 $48,313 $49,945
======= ======= =======
Capital expenditures
- --------------------
Vehicle Components $ 6,446 $ 420 $ 532
Electrical Components and GPS 386 246 218
------- ------- -------
Total capital expenditures - continuing
operations 6,832 666 750
Automotive accessories - discontinued
operations - 330 358
Agricultural equipment - discontinued
operations 191 145 487
------- ------- -------
Total capital expenditures $ 7,023 $ 1,141 $ 1,595
======= ======= =======
Depreciation and amortization
- -----------------------------
Vehicle Components $ 1,077 $ 756 $ 1,436
Electrical Components and GPS 329 315 239
------- ------- -------
Total depreciation and amortization -
continuing operations 1,406 1,071 1,675
Automotive accessories - discontinued
operations 179 231 257
Agricultural equipment - discontinued
operations 309 304 224
------- ------- -------
Total depreciation and amortization $ 1,894 $ 1,606 $ 2,156
======= ======= =======
42
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 13. Net Sales from Continuing Operations - Geographic Region
- -----------------------------------------------------------------
1998 1997 1996
---- ---- ----
Canada $ 3,377 $ 2,795 $ 4,570
Sweden 2,073 1,439 1,720
Other 3,236 2,121 1,541
-------- --------- ---------
Net sales-export 8,686 6,355 7,831
United States 48,960 40,316 32,422
-------- --------- ---------
Net $ 57,646 $ 46,671 $ 40,253
======== ========= =========
Note 14. Other Benefit Plans
- ----------------------------
The Company maintains an Employee Stock Ownership Plan (ESOP) for non-union
employees. The ESOP may buy shares of the Company's stock from time to time on
the open market or directly from the Company. The ESOP has been authorized to
borrow up to $1,000 from the Company or financial institutions to finance its
purchases. At September 30, 1998 the outstanding balance of the loan was
approximately $73 which has been used to finance the purchase of approximately
424,000 shares of common stock. The Company is required to make contributions to
the ESOP to repay the loan including interest.
The Company sponsors salaried employees and union employees matching 401(k)
plans, in which eligible employees may elect to contribute a portion of their
compensation.
Note 15. Post Retirement Benefits other than Pensions
- -----------------------------------------------------
The Company provides health care and life insurance benefits for certain of its
retired employees ("Post Retirement Plan"). These benefits are subject to
deductibles, co-payment provisions and other limitations. The Company may amend
or change the Post Retirement Plan periodically. The cost of these benefits is
expensed as claims are paid.
Effective October 1, 1993 the Company adopted SFAS No. 106, Employers'
Accounting for Post Retirement Benefits other than Pensions ("SFAS 106"). SFAS
106 requires companies to accrue the cost of post retirement health care and
life insurance benefits within employees' active service period rather than
recognizing these costs on a cash basis as had been prior practice.
The Company elected to amortize the Accumulated Post Retirement Benefit
obligation at October 1, 1993 over twenty years as a component of post
retirement benefits expense.
43
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
In September 1997, the Company concluded negotiations of a five-year union
contract, which was ratified by union members and received final signatures. As
a part of the contract, the Company has reduced its retiree health care
obligations and obtained cost sharing between the retired employees and the
Company for future cost increases. The following table provides information on
the post retirement plan status at September 30, 1998:
Accumulated Post Retirement Benefit Obligation
1998 1997
---- ----
Retirees $1,592 $1,293
Fully eligible active participants 660 579
Other active Plan participants 1,333 1,094
----- -----
3,585 2,966
Plan assets - -
----- -----
Accumulated post retirement benefit
obligation in excess of Plan assets 3,585 2,966
Unrecognized gain 147 687
Unrecognized prior service cost (649) (810)
Unrecognized transition obligation (1,720) (1,835)
----- -----
Accrued post retirement benefit cost
in the consolidated balance sheet $1,363 $1,008
====== ======
Post retirement benefits expense included the following components for the years
ended September 30:
1998 1997 1996
---- ---- ----
Service cost $ 92 $ 74 $ 65
Interest cost 239 218 219
Amortization of unrecognized net obligation
at transition 190 165 139
------ ------ -----
Post retirement benefits expense $ 521 $ 457 $ 423
====== ====== =====
The assumed health care cost trend rate used in measuring the accumulated post
retirement benefit obligation (APBO) ranged between 4.5%-10% in the first year,
declining to 4.5% - 5.0% after 8 years. The discount rate used in determining
the APBO was 6.75% and 7.5% for the years ended September 30, 1998 and 1997,
respectively.
If the assumed medical costs trends were increased by 1%, the APBO as of
September 30, 1998 would increase by $289, and the aggregate of the services and
interest cost components of the net annual post retirement benefit cost would be
increased by $30. If the assumed medical costs trends were decreased by 1%, the
APBO as of September 30, 1998 would decrease by $388, and the aggregate of the
services and interest cost components of the net annual post retirement benefit
cost would be decreased by $42.
44
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 16. Acquisitions
- ---------------------
In April 1996, the Company acquired the assets of the Burda Group of Companies
located in West Linn, Oregon, a distributor of a commercial chipper line, for
$20. This company was operated as Techwood Williams, Inc. and ceased operations
in fiscal 1997.
In April 1996, the Company also acquired the assets of Neumann Manufacturing and
Engineering, Inc. located in Madison Heights, Michigan, a manufacturer of
plastic components for the automotive industry, for $1,200. This company is
being operated as Premier Plastics Technologies, Inc.
In July 1996, the Company completed the acquisition of GeoFocus, Inc. located in
Gainesville, Florida for 150,000 shares of the Company's common stock valued at
$290. GeoFocus develops train tracking and cyber-farming systems using global
positioning systems ("GPS") and geographical information systems ("GIS").
These acquisitions were accounted for using the purchase method of accounting
and the results of operations of these businesses have been included in the
consolidated results of operations of the Company from the acquisition dates.
The Techwood operating results are reported as discontinued operations.
Note 17. Sale Leaseback
- -----------------------
In April 1997 the Company sold a manufacturing facility in a sale-leaseback
transaction for $4,524. Immediately prior to the date of sale, the Company
identified certain contaminants in the soil and groundwater which the Company
believes may have been disposed on the property by the previous property owner
and other parties. An environmental escrow fund in the amount of $250 for
environmental investigation and cleanup costs, if any, was established from the
proceeds of the sale under the agreement. The Company is required to repurchase
the property on April 15, 2000 if the Company does not obtain a no further
action letter from the state environmental regulatory department. The Company
does not intend to seek a no further action letter and has advised the purchaser
that it intends to repurchase the property.
The transaction was accounted for as a financing where the property is recorded
as an asset and continues to be depreciated and the capitalized lease
obligations are recorded as long term liabilities. The lease has a term of
fifteen years and requires minimum annual payments of $450 with rental increases
every two years equal to the increase in the consumer price index for the
Portland, Oregon area but not greater than a 5% nor less than a 3% increase for
every two-year period. In April 1998, under the terms of the agreement, the
Company provided a mortgage note to the purchaser in the amount of $3,200 which
is reported as a note receivable at September 30, 1998. If the Company
repurchases the property, the note will be repaid upon the purchase.
45
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 18. Quarterly Data (unaudited)
- -----------------------------------
First Second Third Fourth
1998 (2) (3) Quarter Quarter Quarter Quarter (1) Annual
------------ ------- ------- ------- ----------- -------
Continuing operations:
Net sales $12,698 $15,613 $14,767 $14,568 $57,646
======= ======= ======= ======== =======
Gross margin $ 3,873 $ 4,965 $ 4,818 $ 3,861 $17,517
======= ======= ======= ======== =======
Operating expenses $ 1,869 $ 2,303 $ 2,443 $ 1,911 $ 8,526
======= ======= ======= ======== =======
Earnings from continuing
operations 851 1,393 1,465 902 4,611
Loss from discontinued
operations (157) (306) (336) (3,500) (4,299)
------- ------- ------- -------- -------
Net earnings (loss) $ 694 $ 1,087 $ 1,129 $(2,598) $ 312
======= ======= ======= ======== =======
Earnings (loss) per common
share from continuing
operations - basic $ 0.05 $ 0.08 $ 0.08 $ 0.04 $ 0.24
(Loss) per common share
from discontinued
operations - basic (0.01) (0.02) (0.02) (0.19) (0.24)
------- ------- ------- -------- -------
Earnings (loss) per common
share - basic $ (0.04) $ 0.06 $ 0.06 $ (0.15) $ 0.00
======= ======= ======= ======== =======
Earnings (loss) per common
share from continuing
operations - diluted 0.05 0.08 0.07 0.04 0.23
(Loss) per common share from
discontinued operations -
diluted (0.01) (0.02) (0.02) (0.19) (0.23)
------- ------- ------- -------- -------
Earnings (loss) per common
share - diluted $ 0.04 $ 0.06 $ 0.05 $ (0.15) $ 0.00
======= ======= ======= ======== =======
First Second Third Fourth
1997 (2) (3) Quarter Quarter Quarter Quarter (1) Annual
------------ ------- ------- ------- ----------- -------
Continuing operations:
Net sales $10,416 $11,839 $12,184 $ 12,232 $46,671
======= ======= ======= ======== =======
Gross margin $ 2,768 $ 3,004 $ 3,130 $ 3,795 $12,697
======= ======= ======= ======== =======
Operating expenses $ 1,409 $ 1,498 $ 1,660 $ 1,738 $ 6,305
======= ======= ======= ======== =======
Earnings from continuing
operations 372 683 669 791 2,515
Loss from discontinued
operations (360) (813) (2,761) (618) (4,552)
------- ------- ------- -------- -------
Net earnings (loss) $ 12 $ (130) $(2,092) $ 173 $(2,037)
======= ======= ======= ======== =======
Earnings (loss) per common
share from continuing
operations - basic $ 0.02 $ 0.04 $ 0.04 $ 0.04 $ 0.14
(Loss) per common share
from discontinued
operations - basic (0.02) (0.05) (0.16) (0.03) (0.26)
------- ------- ------- -------- -------
Earnings (loss) per
common share - basic $ (0.00) $ (0.01) $ (0.12) $ 0.01 $ (0.12)
======= ======= ======= ======== =======
Earnings (loss) per common
share from continuing
operations - diluted $ 0.02 $ 0.04 $ 0.04 $ 0.04 $ 0.14
(Loss) per common share
from discontinued
operations - diluted (0.02) (0.05) (0.16) (0.03) (0.26)
------- ------- ------- -------- -------
Earnings (loss) per
common share - diluted $ 0.00 $ (0.01) $ (0.12) $ 0.01 $ (0.12)
======= ======= ======= ======== =======
(1) The fourth quarter of 1998 loss from discontinued operations includes the
effects of the Company's decision to dispose of its Agricultural
Equipment segment as of September 30, 1998 and an additional loss on the
disposal of its previously disposed of Automotive Accessories segment
which represented an adjustment to the estimated value of non-voting
preferred stock that the Company received in the sale and from additional
liabilities related to the sale.
(2) All quarters prior to the fourth quarter 1998 have been restated to
reflect the Agricultural Equipment segment as a discontinued operation.
(3) Earnings (loss) per share for all periods have been restated for the
provisions of SFAS 128.
46
Notes to Consolidated Financial Statements
Years Ended September 30, 1998, 1997, and 1996
(Dollars in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Note 19. Contingencies
- ----------------------
The Company and its subsidiaries are involved in various lawsuits incidental to
their businesses. It is the opinion of management that the ultimate outcome of
these actions will not have a material effect on the Company's financial
position or results of operations.
The Company has identified certain contaminants in the soil and groundwater of a
manufacturing facility located in an industrial area, which the Company
believes, was disposed of on the property by a previous property owner. The
Company's environmental consulting firm has conducted tests to determine the
levels of contaminants. The Company has been advised by counsel that the
contamination is not a reportable condition under current statutes. In the event
that remediation were required in the future, the Company would seek
indemnification from the prior property owner under the terms of the asset
purchase agreement. The prior property owner has advised the Company that it
would dispute any liability for remediation costs. The Company believes it can
enforce available claims against the prior property owner for any costs of
investigation and remediation.
47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Williams Controls, Inc.:
We have audited the accompanying consolidated balance sheet of Williams
Controls, Inc. and subsidiaries as of September 30, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Williams Controls,
Inc. and subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Portland, Oregon,
December 11, 1998
48
INDEPENDENT AUDITORS' REPORT
Board of Directors
Williams Controls, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Williams
Controls, Inc. and subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the two-year period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Williams Controls,
Inc. and subsidiaries as of September 30, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Horwath Gelfond Hochstadt Pangburn & Co.
- ------------------------------------------------
HORWATH GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
December 18, 1997
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
On July 29, 1998, the company filed a report on Form 8-K announcing a change in
accounting firms from Horwath Gelfond Hochstadt Pangburn & Co. to Arthur
Andersen LLP.
Part III
--------
Item 10. Directors and Executive Officers of the Company
- ----------------------------------------------------------
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 11. Executive Compensation
- ---------------------------------
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
Incorporated by reference from the Company's 1999 Proxy Statement.
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
1. See Exhibit Index on page 56 of this Form 10-K.
2. See Index to Financial Statements in Item 8 of this Form 10-K.
3. See Index to Schedules on page 52 of this Form 10-K.
4. Reports on Form 8-K.
a. Current Report on Form 8-K dated June 30, 1998, as filed with the
Securities and Exchange Commission on July 15, 1998, reporting the
Company's credit agreement amendment and Ajay agreement.
b. Current Report on Form 8-K dated July 29, 1998, as filed with the
Securities and Exchange Commission, announcing a change in accounting
firms from Horwarth Gelfond Hochstadt Pangburn & Co. to Arthur Andersen
LLP.
50
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
Date: December 22, 1998 By: /s/ Thomas W. Itin
------------------------------
Thomas W. Itin,
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: December 22, 1998 By: /s/ Thomas W. Itin
------------------------------
Thomas W. Itin, Director
Date: December 22, 1998 By: /s/ Gerard A. Herlihy
------------------------------
Gerard A. Herlihy
Principal Financial and
Principal Accounting Officer
Date: December 22,1998 By:
------------------------------
R. William Caldwell, Director
Date: December 22, 1998 By: /s/ H. Samuel Greenawalt
------------------------------
H. Samuel Greenawalt, Director
Date: December 22, 1998 By: /s/ Timothy Itin
------------------------------
Timothy Itin, Director
51
Williams Controls, Inc.
Index to Schedules
Page
Report of Independent Public Accountants 53
Independent Auditors' Report 54
Schedule II Valuation and Qualifying Accounts 55
All other schedules are omitted because they are not required, not applicable or
the required information is given in the Consolidated Financial Statements.
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Williams Controls, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements as of and for the year ended September 30,
1998, included in Williams Controls, Inc. and subsidiaries' Form 10-K, and have
issued our report thereon dated December 11, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
of valuation and qualifying accounts for the year ended September 30, 1998
listed in the index to item 14 of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Portland, Oregon,
December 11, 1998
53
INDEPENDENT AUDITORS' REPORT
Board of Directors
Williams Controls, Inc.
Portland, Oregon
We have audited the 1997 and 1996 consolidated financial statements of Williams
Controls, Inc. and subsidiaries, referred to in our report dated December 18,
1997 which is included under Item 8 in this Form 10-K. In connection with our
audit of these financial statements, we audited the 1997 and 1996 financial
statement schedule, listed under Item 14 of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information stated therein, when considered in relation to the financial
statements taken as a whole.
/s/ Horwath Gelfond Hochstadt Pangburn & Co.
--------------------------------------------
HORWATH GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
December 18, 1997
54
Williams Controls, Inc.
Valuation and Qualifying Accounts
Schedule II
(Dollars in thousands)
Beginning Ending
Description balance balance
----------- --------- -------
For Year Ended
September 30, 1998
Total reserves for doubtful accounts
and obsolete inventory $ 855 $ 761
====== =====
For Year Ended
September 30, 1997
Total reserves for doubtful accounts
and obsolete inventory $1,064 $ 855
====== =====
For Year Ended
September 30, 1996
Total reserves for doubtful accounts
and obsolete inventory $2,959 $1,064
======= ======
NOTE: Valuation and qualifying accounts were not individually significant; and,
therefore, additions and deductions information has not been provided in this
schedule. The above accounts include amounts for continued and discontinued
operations.
55
Williams Controls, Inc.
Exhibit Index
-------------
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Registrant as amended.
(Incorporated by reference to Exhibit 3.1 to the Registrants' annual
report on form 10-K for the fiscal year ended September 30, 1995 (the
"1995 form 10-K"))
3.2 By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form S-18, Registration
No. 33- 30601-S, as filed with the Commission on August 18, 1989 (the
"1989 Form S-18"))
4.1 Specimen Unit Certificate (including Specimen Certificate for shares
of Common Stock and Specimen Certificate for the Warrants).
(Incorporated by reference to Exhibits 1.1 and 1.2 to the Registrant's
Registration Statement on Form 8-A, Commission File No. 0-18083, filed
with the Commission on November 1, 1989)
4.2 Form of Placement Agent's Warrant Agreement (Incorporated by reference
to Exhibit 4.2 to the Registrant's Registration Statement on Form S-3,
Registration No. 333-59397 as filed with the Commission on July 20,
1998)
10.1(a) Indemnification Agreement for Thomas W. Itin ("Itin Indemnification
Agreement"). (Incorporated by reference to Exhibit 10.9 to the 1989
Form S-18)
10.1(b) Amendment No. 1 to Itin Indemnification Agreement. (Incorporated by
reference to Exhibit 10.1(b) to the Registrant's Annual Report on form
10-K for the Fiscal Year Ended September 30, 1993 (the "1993
Form-10K"))
10.1(c ) Form of Indemnification Agreement for R. William Caldwell, H.
Samuel Greenawalt and Timothy Itin. (Incorporated by reference to
Exhibit 10.1(c) to the Registrant's 1993 Form 10-K)
10.2(a) Credit Agreement dated July 11, 1997 among Registrant and its
subsidiaries and Ajay Sports, Inc. ("Ajay") and its subsidiaries, all
as borrowers, and Wells Fargo Bank, National Association, as lender
(the "Credit Agreement"). (Incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 (the "June 1997 Form 10-Q"))
10.2(b) Promissory Notes under the Credit Agreement: (a) Revolving Credit
Loans Promissory Note (b) Term Loan I Promissory Note (c) Term Loan II
Promissory Note (d) Real Estate Loan Promissory Note (All incorporated
by reference to Exhibit 10.2 to the Registrant's June 1997 Form 10-Q)
56
Exhibit
Number Description
------- -----------
10.2(c) Mortgage and Security Agreement between Aptek Williams, Inc. and
Wells Fargo Bank. (Incorporated by reference to Exhibit 10.3 to the
Registrant's June 1997 Form 10-Q)
10.2(d) Patent Assignment and Security Agreements for:
(a) Williams Controls Industries, Inc.
(b) Hardee Williams, Inc.
(c) Aptek Williams, Inc.
(All incorporated by reference to Exhibit 10.4 to the
Registrant's June 1997 Form 10-Q)
10.2(e) Trademark Security Agreements for:
(a) Agrotec Williams, Inc.
(b) Hardee Williams, Inc.
(All incorporated by reference to Exhibit 10.5 to the
Registrant's June 1997 Form 10-Q)
10.2(f) Continuing Unconditional Guaranty of Thomas W. Itin in favor of
Wells Fargo Bank. (Incorporated by reference to Exhibit 10.6 to the
June 1997 Form 10-Q)
10.2(g) First Amendment to Credit Agreement dated June 30, 1998
(Incorporated by reference to Exhibit 10.1 to the Registrant's June
30, 1998 Form 8-K)
10.2(h) Replacement Term Loan Promissory Note, dated June 30, 1998 made by
Registrant payable to Wells Fargo Bank (Incorporated by reference to
Exhibit 10.2 to the Registrant's June 30, 1998 Form 8-K)
10.3(a) Intercreditor Agreement dated July 11, 1997 among Registrant and
subsidiaries, Ajay Sports, Inc. and subsidiaries, United States
National Bank of Oregon ("US Bank"), Thomas W. Itin and Wells Fargo
Bank, National Association. (Incorporated by reference to Exhibit 10.7
to the Registrant's June 1997 Form 10-Q)
10.3(b) Consent, Reaffirmation and Release Agreement with US Bank.
(Incorporated by reference to Exhibit 10.8 to the Registrant's June
1997 Form 10-Q)
10.3(c) Promissory Note of Ajay for $2,340,000 to US Bank. (Incorporated by
reference to Exhibit 10.9 to the Registrant's June 1997 Form 10-Q)
10.3(d) Mortgage, Assignment of Rents, Security Agreement and Fixture
Filing by Aptek Williams, Inc. in favor of US Bank. (Incorporated by
reference to Exhibit 10.10 to the Registrant's June 1997 Form 10-Q)
10.3(e) Guaranty to US Bank. (Incorporated by reference to Exhibit 10.11 to
the Registrant's June 1997 Form 10-Q)
10.4(a) The Company's 1995 Stock Option Plan for Non-Employee Directors.
(Incorporated by referenced to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1995 (the
"March 1995 Form 10-Q")
10.4(b) The Registrant's 1993 Stock Option Plan as amended to date. (Filed
herewith)
57
Exhibit
Number Description
------- -----------
10.5 Williams/Ajay Loan and Joint Venture Implementation Agreement dated
May 6, 1994, as amended by letter agreement dated April 3, 1995.
(Incorporated by reference to Exhibit 10.4 to the Registrant's March
1995 Form 10-Q)
10.6(a) Mortgage and Security Agreement, dated August 31, 1988, by
Sparkomatic Corporation in favor of MetLife Capital Credit
Corporation. (Incorporated by reference to Exhibit 10.7(a) to the
Registrant's 1993 Form 10-K)
10.6(b) Mortgage Note in the principal amount of $1,700,000, dated August
31, 1988, from Sparkomatic Corporation to MetLife Capital Credit
Corporation. (Incorporated by reference to Exhibit 10.7(b) to the
Registrant's 1993 Form 10-K)
10.6(c) Loan Assumption, Modification and Extension Agreement (the
"Assumption Agreement"), dated August 12, 1993, among Kenco Williams,
Inc., Sparkomatic Corporation and MetLife Capital Corporation and the
Guaranty given by Williams to MetLife to guaranty the obligations of
Kenco Williams, Inc. to MetLife thereunder. (Incorporated by reference
to Exhibit 10.9 to the Registrant's Post-Effective Amendment No. 1, as
filed with the Commission on September 23, 1993, on Form S-3 to the
1989 Form S-18 (the "Post-Effective Amendment"))
10.6(d) Guaranty dated as of March 31, 1994 made by the Registrant in favor
of MetLife Capital Corporation. (Incorporated by reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1994)
10.7(a) Guaranty dated as of October 2, 1995 by Thomas W. Itin to the
Registrant (the "Itin Guaranty"). (Incorporated by reference to
Exhibit 10.9 to the Registrant's 1995 Form 10-K)
10.7(b) Amendment One to the Itin Guaranty. (Incorporated by reference to
Exhibit 10.7(b) to the Registrant's Annual Report on Form 10-K for the
period ended September 30, 1997 (the "1997 Form 10-K"))
10.8 Security Agreement between Ajay and its subsidiaries, as debtors, and
the Registrant and its subsidiaries, as secured parties. (Incorporated
by reference to Exhibit 10.8 to the 1997 Form 10-K)
10.9 Agreement, dated June 30, 1998, by and among the Registrant and Ajay
Sports, Inc. and its subsidiaries (Incorporated by reference to
Exhibit 10.3 to the Registrant's 6/30/98 Form 8-K)
10.10Asset Purchase Agreement and related Exhibits between Kenco Williams,
Inc. and Kenco Products, Inc. (Incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K, date of report
March 16, 1998)
21.1 List of Subsidiaries. See Item 1 in this report
23.1 Consent of Horwath Gelfond Hochstadt Pangburn & Co. (Filed herewith)
23.2 Consent of Arthur Andersen LLP (Filed herewith)
27.1 Financial Data Schedule. (Filed herewith)
58