UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock
at July 30, 2002: 19,928,522
Williams Controls, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 2002
(unaudited) and September 30, 2001 1
Unaudited Consolidated Statements of Operations,
three and nine months ended June 30, 2002 and 2001 2
Unaudited Consolidated Statements of Cash Flows,
nine months ended June 30, 2002 and 2001 3
Notes to Unaudited Consolidated Financial Statements 4-13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14-23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature Page 25
Part I
Item 1.
Williams Controls, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
June 30,
2002 September 30,
(unaudited) 2001
------------ ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ - $ -
Trade and other accounts receivable,
less allowance of $425 and $379 at
June 30, 2002 and September 30, 2001,
respectively 8,033 8,231
Inventories, net 4,369 4,725
Prepaid and other current assets 1,926 1,222
----------- ----------
Total current assets 14,328 14,178
Property plant and equipment, net 11,322 11,729
Investment in and note receivable from affiliate - 3,065
Other assets, net 916 367
----------- -----------
Total assets $ 26,566 $ 29,339
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 8,520 $ 9,434
Accrued expenses 6,977 9,048
Current portion of long-term debt and
capital leases 10,937 13,146
Convertible subordinated debt, net - 2,082
----------- -----------
Total current liabilities 26,434 33,710
Long-term debt and capital lease obligations 3,609 205
Convertible subordinated debt, net 2,114 -
Other liabilities, Primarily employee
benefit obligations 6,572 6,132
Shareholders' equity (deficit):
Preferred stock ($.01 par value, 50,000,000
authorized; 78,200 issued and outstanding
at June 30, 2002 and 78,400 at
September 30, 2001) 1 1
Common stock ($.01 par value, 50,000,000
authorized; 19,928,522 issued and
outstanding at June 30, 2002 and
19,921,114 at September 30, 2001) 199 199
Additional paid-in capital 24,422 23,069
Accumulated deficit (34,029) (30,721)
Other comprehensive loss -
Pension liability adjustment (2,379) (2,379)
Treasury stock (130,200 shares at
June 30, 2002 and September 30, 2001) (377) (377)
Note receivable - (500)
----------- -----------
Total shareholders' equity (deficit) (12,163) (10,708)
----------- -----------
Total liabilities and shareholders'
equity (deficit) $ 26,566 $ 29,339
=========== ===========
The accompanying notes are an integral part of these balance sheets.
1
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(unaudited)
Three months Three months Nine months Nine months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Sales $13,467 $12,601 $37,733 $42,610
Cost of sales 9,487 10,533 27,572 35,364
----------- ----------- ----------- -----------
Gross margin 3,980 2,068 10,161 7,246
Operating expenses (income):
Research and development 856 1,213 2,515 3,180
Selling 360 292 962 1,058
Administration 1,443 1,970 4,735 6,748
Loss on impairment of investment - Ajay - - 3,565 -
Loss on impairment of assets - PPT - - - 1,996
Loss on impairment of assets - ProActive - - - 4,366
Gain on sale of land and building - Aptek - (1,837) - (1,837)
Gain on sale of Geofocus - (2,486) - (2,486)
----------- ----------- ----------- -----------
Net operating expenses 2,659 ( 848) 11,777 13,025
----------- ----------- ----------- -----------
Income (loss) from operations 1,321 2,916 (1,616) (5,779)
Other (income) expenses:
Interest expense (expense reversal) (73) 1,202 1,499 3,343
Other (income) expense, net 3 (70) ( 41) (95)
----------- ----------- ----------- -----------
Total other (income) expenses (70) 1,132 1,458 3,248
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income tax 1,391 1,784 (3,074) (9,027)
Income tax benefit (231) - (231) -
----------- ----------- ----------- -----------
Net income (loss) from continuing operations 1,622 1,784 (2,843) (9,027)
Discontinued operations:
Gain from exchange of building for debt
of the previously discontinued
agricultural equipment segment - - 417 -
----------- ----------- ----------- ---------
Net income (loss) 1,622 1,784 (2,426) (9,027)
Dividends on preferred stock (348) (147) (882) (896)
----------- ----------- ----------- ----------
Net income (loss) allocable to common
shareholders $ 1,274 $ 1,637 $ (3,308) $(9,923)
=========== ============ =========== ==========
Net income (loss) per common share from
continuing operations - basic $ 0.06 $ 0.08 $ (0.19) $ (0.50)
Net income per common share from
discontinued operations - basic - - 0.02 -
----------- ----------- ----------- ---------
Net income (loss) per common share-basic $ 0.06 $ 0.08 $ (0.17) $ (0.50)
=========== =========== =========== ==========
Weighted average shares used in per share
calculation - basic 19,928,522 19,921,114 19,927,411 19,921,114
=========== =========== =========== ===========
Net income (loss) per common share from
continuing operations - diluted $ 0.06 $ 0.07 $ (0.19) $ (0.50)
Net income per common share from
discontinued operations - diluted - - 0.02 -
----------- ----------- ----------- -----------
Net income (loss) per common share - diluted $ 0.06 $ 0.07 $ (0.17) $ (0.50)
=========== =========== =========== ===========
Weighted average shares used in per
share calculation - diluted 21,037,522 26,356,023 19,927,411 19,921,114
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
2
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months Nine months
Ended Ended
June 30, June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (2,426) $(9,027)
Adjustments to reconcile net loss
to net cash (used in) provided by operations:
Depreciation and amortization 2,143 2,809
Gain from discontinued operations (417) -
Gain from sale of assets ( 45) -
Gain from settlement of interest payable (720) -
Loss from impairment of investment - Ajay 3,565 -
Loss from impairment of assets - PPT - 1,996
Loss from impairment of assets - Proactive - 4,366
Gain on sale of land and building - Aptek - (1,837)
Gain on sale of Geofocus - (2,486)
Changes in working capital:
Receivables, net 198 3,102
Inventories 356 3,393
Accounts payable and accrued expenses (2,306) 744
Other ( 620) 561
-------------- --------
Net cash (used in) provided by operating activities ( 272) 3,621
Cash flows from investing activities:
Payments for property, plant and equipment (854) (804)
Proceeds from sale of land and building - Aptek - 5,750
Proceeds from sale of Geofocus - 2,900
Proceeds from sale of assets 45 -
Increase in investment in and notes
Receivable from affiliate - (1,450)
----------- ---------
Net cash provided by (used in)
investing activities (809) 6,396
Cash flows from financing activities:
Net borrowings (payments) of debt and lease
obligations 1,009 (14,617)
Net change in book overdraft 618 141
Financing costs related to recapitalization (546) -
Net proceeds from secured subordinated debt - 4,576
Preferred dividends - (147)
-------------- ---------------
Net cash provided by (used in) financing
activities 1,081 (10,047)
Net increase (decrease) in cash and cash
equivalents - (30)
Cash and cash equivalents at beginning of
period - 30
------------- --------------
Cash and cash equivalents at end of period $ - $ -
============ =============
Williams Controls, Inc.
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(Unaudited)
Nine months Nine months
Ended Ended
June 30, June 30,
2002 2001
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid $ 504 $ 3,346
-------------- ---------------
Income taxes paid (refund) $ 45 $ (158)
-------------- ---------------
Supplemental disclosure of non-cash investing and financing activities:
Previously accrued dividends
transferred to equity $ 471 $ -
Dividends accrued not paid, 2002 amount
transferred to equity $ 882 $ 294
Reduction of debt in exchange for building $ 417 $ -
Debt modification fee accrued, not paid $ 225 $ 300
Accrued fees/interest converted to debt $ 397 $ -
Dividends for implied returns on preferred stock $ - $ 455
Secured subordinated debt issuance costs $ - $ 57
Secured subordinated debt discount $ - $ 813
The accompanying notes are an integral part of these statements.
3
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 2002 and 2001
(Dollars in thousands, except share and per share amounts)
Cautionary Statement: This report, including these Notes to Unaudited
Consolidated Financial Statements, 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. These forward-looking statements are subject to the business and
economic risks faced by the Company including, its ability to renegotiate its
outstanding debt commitments and its ability to conclude a proposed equity
offering, the ability of the Company to generate or obtain sufficient working
capital to continue its operations. 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.
1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); ProActive Acquisition Corporation
("ProActive"); Waaco-Geo, 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."
2. Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been prepared by
the Company and, in the opinion of management, reflect all material normal
recurring adjustments, except as otherwise disclosed, which are necessary to a
fair statement of results for the interim periods presented. The interim results
are not necessarily indicative of the results expected for the entire fiscal
year. Certain information and footnote disclosures made in the last annual
report on Form 10-K have been condensed or omitted for the interim consolidated
statements. Certain costs are estimated for the full year and allocated to
interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is the Company's
opinion that, when the interim consolidated statements are read in conjunction
with the September 30, 2001 annual report on Form 10-K, the disclosures are
adequate to make the information presented not misleading. The interim
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
3. Subsequent Events - Recapitalization
On July 1, 2002 the Company completed the previously announced recapitalization
transaction with American Industrial Partners (AIP) whereby an affiliate of AIP
invested $13,000, less fees and expenses, into the Company by acquiring 130,000
shares of the Company's new Series B Preferred Stock, 15% Redeemable Convertible
Series (Series B Preferred). As a result of the transaction, AIP will be
entitled to elect a majority of the members of the Company's Board of Directors.
Along with the investment by AIP, an investor group that held $2,000 of the
Company's 12% secured Subordinated Debentures exchanged those securities for
$2,000 of Series B Preferred. As additional elements of the recapitalization
transaction, the Company has (i) entered into a new five-year revolving and term
loan agreement with its existing primary lender, Wells Fargo Credit, Inc.; (ii)
repaid from the cash proceeds of sale of Series B Preferred the remaining $3,000
face amount of 12% secured subordinated debentures, after giving consideration
to the $2,000 of debentures converted to Series B; (iii)eliminated the
conversion feature, increased the interest rate to 12.0% (further increasing to
15.0% in July, 2003) and extended the maturity to July 1, 2004 of approximately
$2,149 face amount of convertible subordinated debentures; (iv) exchanged
approximately $7,755 in Series A Preferred Stock, 7 1/2% Convertible Redeemable
Series, (Series A Preferred) shares for Series A-1 Preferred Stock,
Non-Redeemable Convertible Series, (Series A-1 Preferred); (v) cancelled accrued
but unpaid dividends of $1,413 on Series A preferred exchanged for Series A-1
Preferred which were outstanding as of July 14, 2002 and (vi) will accrue in the
fourth quarter of 2002 a one-time dividend on the new Series A-1 Preferred in an
amount approximating the dividends canceled as a result of the exchange of the
Series A Preferred. The remaining cash proceeds from the recapitalization will
be used for working capital purposes, including the payment of certain past due
accounts payable.
As a result of the recapitalization transaction, the Company has made the
following reclassifications in the accompanying balance sheet at June 30, 2002:
Reclassified from current to long term debt $2,000 of 12% secured
subordinated debentures which were subsequently exchanged for series B
Preferred.
Reclassified to long term debt $1,520 of term amounts due Wells Fargo
Credit, Inc. which had previously been shown as short term debt but
with the new agreement have been refinanced on a long term basis.
Reclassified from current liabilities accrued dividends of $1,353 of
Series A Preferred, which were accrued through June 30, 2002, to
additional paid in capital as they will not be paid in cash.
Reclassified $2,114 of convertible subordinated debt from current
liabilities to long term as a result of debt covenant violations which
have now been cured.
The Series B Preferred is convertible into shares of common stock at $.85 per
share. The shares of Series A-1 Preferred are convertible into shares of common
stock at $.66. Both conversion prices are subject to customary anti-dilution
adjustment. The Series B conversion price may also be adjusted based on certain
future transactions. Series B Preferred is mandatorily redeemable on July 1,
2009 or following a change of control of the Company. Dividends on Series B
Preferred are payable in kind.
The following unaudited pro forma condensed consolidated balance sheet reflects
the effects of the recapitalization as if it had occurred on June 30, 2002.
Williams Controls, Inc.
Pro Forma Condensed Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
June 30 Pro forma June 30
2002 adjustments 2002
(unaudited) (pro forma)
------------ --------- ----------
Current Assets $ 14,328 (1) $10,960 $ 22,288
(2) (3,000)
Long term assets 11,692 - 11,692
Recapitilization costs not allocated 546 (1) 1,123 1,669
----------- ---------- ---------
Total assets $ 26,566 $ 9,083 - $ 35,649
=========== ========== ==========
Current Liabilities excluding debt $ 15,497 - $ 15,497
Current portion of long-term debt and
capital leases 10,937 (2) (3,000) 7,937
----------- -------- --------
Total current liabilities 26,434 (3,000) 23,434
Long-term debt and capital leases 3,609 (3) (2,000) 1,609
Subordinated debt, net 2,114 (4) 35 2,149
Other liabilities, Primarily employee
benefits 6,572 - 6,572
Mandatory redeemable Series B preferred - (3) 2,000 14,150
(1) 12,150
Shareholders' deficit (12,163) (4) ( 102) (12,265)
----------- ------------- -----------
Total liabilities and shareholders'
Deficit $ 26,566 $ 9,083 $ 35,649
========= =========== ==========
Pro forma adjustments
(1) Adjustment to record estimated proceeds from the issuance of Series B
Preferred to AIP and estimated other recapitalization costs. Total
proceeds of $13,000 less fees of $850 paid to AIP are reflected as
mandatory redeemable Series B Preferred of $12,150. Total other
estimated recapitalization costs of $1,669 have not been allocated in
the above pro forma balance sheet as the Company is still determining
the proper allocation. The amounts when finalized will be allocated to
either (a) deferred financing costs and amortized over the related
debt, (b) as additional costs of issuance of the Series B Preferred and
netted against the $12,150 above, (c) charged to the shareholders'
deficit as costs of the exchange of Series A Preferred for Series A-1
Preferred.
(2) Adjustment to reflect the repayment of $3,000 of the 12% secured
subordinated debentures which were not converted to Series B Preferred.
(3) Adjustment to reflect the conversion of $2,000 of 12% secured
subordinated debentures to Series B Preferred.
(4) The exchange of Series A Preferred for Series A-1 Preferred will be
recorded at fair value of the Series A-1 Preferred with any difference
between such fair value and the carrying value of the Series A
Preferred reflected as an increase or decrease in additional paid in
capital and an offsetting amount in accumulated deficit. The amount
paid of $67 to holders of the 12% secured subordinated debentures which
were converted to Series B Preferred will be expensed. Also a loss of
$35 is reflected in the pro forma adjustments to record the
subordinated debt at fair value in accordance with EITF 96-16.
In the notes to the financials in the filings of the Form 10-K and 10-Q for the
periods from March 31, 1999 through the filing as of March 31, 2002 the Company
addressed going concern matters, including significantly past due trade accounts
payable, a working capital deficit, and a deficit in stockholders equity.
Additionally, the Company did not make the principal and interest payments when
due on March 1, 2002, on $5,000 face of secured subordinated debentures. The
Company ceased making payments of preferred stock dividends in the second
quarter of fiscal 2001. Also, as described in Note 8 of Notes to the Unaudited
Consolidated Financial Statements, the Company was not in compliance with the
covenants of its credit agreement with its primary bank at June 30, 2002. The
credit agreement matured on July 11, 2001, and the Company had obtained
extensions on this debt through June 30, 2002.
A key element of management's plans to address the above going concern issue was
the completion of the recapitalization transaction and the obtainment of a new
amended and restated credit agreement with Wells Fargo Credit, Inc. As discussed
above, both of these items have been completed and in the opinion of management,
these financing transactions together with cash flow provided from operations
will be sufficient to meet the cash needs of the Company for the foreseeable
future.
4. Comprehensive Income (Loss)
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income", requires companies to report a measure of all changes in equity except
those resulting from investments by owners and distributions to owners. Total
comprehensive income (loss) for the three months ended June 30, 2002 and 2001
was $1,622 and $1,784, respectively, and for the nine months ended June 30, 2002
and 2001 was ($2,426) and ($9,027) respectively, and consisted solely of net
income (loss). As of June 30, 2002, accumulated other comprehensive loss was
($2,379) and consisted of accumulated benefit obligations in excess of the plan
assets for both the Hourly Employees Pension plan and the Salaried Employees
Pension Plan.
5. Earnings (loss) per Share
Basic earnings per share ("EPS") and diluted EPS are computed using the methods
prescribed by Statement of Financial Accounting Standards 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 computed using the
weighted-average number of common shares and dilutive common equivalent shares
outstanding.
Following is a reconciliation of basic EPS and diluted EPS
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
-------------------------- --------------------------
Per Per
Income Share Income Share
Shares Amount Shares Amount
Net Income $ 1,622 $ 1,784
Less-Dividends on Preferred stock (348) (147)
--------- ---------
Basic EPS-
Net income allocable to
common shareholders $ 1,274 19,928,522 $ 0.06 $1,637 19,921,114 $ 0.08
Effect of dilutive securities -
Stock options and warrants - - - 2,475,000
Convertible preferred stock - - 147 2,850,909
Convertible subordinated debt 40 1,109,000 40 1,109,000
Diluted EPS - -------- ---------- -------- ----------
Net income allocable to
common shareholders $ 1,314 21,037,522 $ 0.06 $ 1,824 26,356,023 $0.07
======== ========== ======== ======== ========== =====
Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001
---------------------------- ---------------------------
Per Per
Loss Share Loss Share
Shares Amount Shares Amount
Net loss $ (2,426) $( 9,027)
Less-Dividends on Preferred stock (882) (896)
--------- ---------
Basic and diluted EPS-
Net loss allocable to
common shareholders $ (3,308) 19,927,411 $ (0.17) $( 9,923) 19,921,114$(0.50)
======= ========== ======= ======== ========== ======
For the nine months ended June 30, 2002 and 2001, the Company had options,
warrants and convertible securities covering 9,702,575 and 10,196,605 shares,
respectively of the Company's common stock that were not considered in the
respective dilutive EPS calculations since they would have been antidilutive.
For the three months ended June 30, 2002 and June 30, 2001, the Company had
options, warrants, and convertible securities covering 8,593,575 and 3,761,879
shares that were not considered in the respective dilutive EPS calculations
since they would have been antidilutive.
6. Inventories
Inventories consisted of the following:
June 30, September 30,
2002 2001
----------- -----------
Raw material $3,202 $3,056
Work in process 742 932
Finished goods 425 737
=========== ===========
$4,369 $4,725
=========== ===========
Finished goods include component parts and finished product ready for
shipment.
7. Agreement to settle accounts payable and interest
On June 28, 2002, in contemplation of the completion of the AIP transaction, the
Company entered into an agreement with a vendor and customer of the Company,
Caterpillar, Inc. (Caterpillar) to remedy past due accounts between the Company
and Caterpillar. The agreement calls for the Company to remit to Caterpillar
$1,250 during the first week of July, 2002 and monthly payments through
December, 2002 for a total of $2,806. Part of this agreement calls for the
Company and Caterpillar to return to normal vendor terms. Also in connection
with the agreement, Caterpillar agreed to a reduction of previously accrued
interest on past due payables. As a result, the Company reduced accrued interest
and interest expense by $720 for the three months ended June 30, 2002. The $720
is shown as a reduction of interest expense in the statement of operations. In
connection with the transaction, the Company adopted early application of
Statement of Financial Accounting Standard No. 145 and accordingly, the $ 720 is
not reflected as an extraordinary item.
8. Debt
This note to Financial Statements should be read in conjunction with Note 3 to
the Interim Financial Statements with reference to Exhibits to this Form 10-Q.
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 (Revolver), a
$3,100 term loan (Term Loan I) and a $2,700 real estate loan (Real Estate Loan).
Under the Revolver, the Company can borrow up to $8,500 (pursuant to the credit
agreement, as amended) 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 plus 2.25%, (7.00% at June 30,
2002). Term Loan I bore interest at the Bank's prime rate plus 2.25%, (7.25% at
June 30, 2002). Term Loan I was paid in full in connection with the Company's
new loan agreement with Wells Fargo Credit, Inc. executed on July 1, 2002. The
Bank loans and the revolving credit facility originally matured on July 11, 2001
and were extended through December 31, 2001. Subsequent to December 31,2001, the
Company obtained an extension of the credit facility under an amended
forbearance agreement until June 30, 2002. In addition to interest payments,
which have been paid monthly, principle payments of $50 commenced on April 1,
2002. As part of the extension through June 30, 2002, the Company converted
certain unpaid fees to the Bank to a $397 Bridge Loan, bearing interest at the
Bank's prime rate plus 3.25%. This Bridge Loan is to be repaid with 18 monthly
payments of $22, plus interest, beginning April 2002. This loan was paid in full
in connection with the Company's new loan agreement with Wells Fargo Credit,
Inc. executed on July 1, 2002. All loans are secured by substantially all of the
assets of the Company.
The terms of the Amended and Restated Credit Agreement (Agreement) entered into
with Wells Fargo Credit, Inc (Wells) on July 1, 2002 call for a total commitment
on the part of Wells of $12,200. The interest rate on the revolver portion of
this loan is the prime rate (4.75% at July 1, 2002) plus 2.00%. Payments on this
portion of the loan are made from the daily collections of accounts receivable
balances. In connection with the Agreement, the Company refinanced $2,200 of
amounts outstanding at June 30, 2002 under the previous loan agreement with
Wells in the form of new term loans. The interest rate on the term loans is the
prime rate (4.75% at July 1, 2002) plus 2.25% and payments on these loans will
be made in the amount of $57 per months plus interest. The Agreement allows the
Company the option of paying interest based on LIBOR rates instead of prime rate
if certain conditions are met. The interest rate on the revolver portion of the
loan is the LIBOR rate plus 4.85% and the interest rate the term portion of the
loan is the LIBOR rate plus 5.10%. The Company is in compliance with the
covenants of the new Agreement and the Company and Wells will determine new
prospective covenants for the five year term of the loan by September 30, 2002
The Company's long term debt and capital leases consisted of the following at
June 30, 2002 and September 30, 2001
June 30, 2002 September 30,2001
------------- -----------------
Bank revolving credit facility originally due July 11, 2001, extended to June
30, 2002, bearing interest at a variable
rate. (7.00% at June 30, 2002 and 8.00% at September 30, 2001 $ 5,692 (1) $ 4,548
Bank Term Loan I, originally due July 11, 2001,
extended to June 30, 2002, bearing interest at a variable
rate. (7.25% at June 30, 2002 and 8.25% at September 30, 2001) 1,844 (1) 1,994
Bank Term Loan (bridge loan) bearing interest at a variable
rate. (8.00% at June 30, 2002) 331 (1) -
Unsecured debt, defaulted and judgment against the Company
granted July 12, 2001, balance currently due, judgment
interest at 14% 799 799
Real estate loan , due October 15, 2001, Default judgment
against Company granted November 2001. - 417
Lease termination settlements payable (various) 472 -
Secured subordinated debentures 5,000 4,677
Capital leases 408 916
-------- -------
14,546 13,351
Less current portion 10,937 13,146
-------- -------
$ 3,609 $ 205
======== =======
(1) Amount refinanced in connection with Amended and Restated Credit
Agreement
The Long term portion of debt at June 30, 2002 includes $1,520 of debt due
Wells which was refinanced on a long term basis and $2,000 of Secured
Subordinated debt which was converted to Series B Preferred Stock (see note
3)
9. Loss on Impairment of Assets - ProActive Pedal (Proactive) and PPT
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the assets.
At March 31, 2001, the carrying value of the goodwill and intangible assets of
ProActive was $4,366. ProActive's sales volumes of adjustable and modular foot
pedal systems are limited to one contract that ProActive has with a third party.
Additionally, as a result of the Company's overall capital constraints, the
Company did not possess the financial resources to further develop additional
sales volumes or to achieve the sales volumes originally projected for
ProActive.
As a result of the above factors, management performed an analysis to assess the
impairment of the long-lived assets of ProActive in accordance with SFAS 121 as
of March 31, 2001. Based on management's analysis it was concluded that the
undiscounted future cash flows of ProActive's current business were less than
the carrying value of the assets of ProActive as of March 31, 2001. This leads
to a fair value assessment to determine impairment. As a result of this
assessment, the Company recorded an impairment charge related to ProActive's
remaining carrying value of the goodwill and intangible assets, totaling $4,366.
This amount has been reflected as a separate line item within the operating
expenses of the consolidated statements of operations for the nine month period
ended June 30, 2001.
PPT operations were terminated, effective March, 2001. Prior to the termination
of operations, management of PPT evaluated the realizability of the assets of
PPT and the Company recorded an impairment charge on PPT's property, plant, and
equipment of $1,996 in the first quarter of fiscal year 2001. This amount has
been reflected as a separate line item within the operating expenses of the
consolidated statements of operations for the nine month period ended June 30,
2001. Management also established additional reserves of $100 and $598 for
obsolete and excess inventory and estimated un-collectible accounts receivable,
respectively. Net sales and loss from operations of PPT were $0, and $(750) for
the three months ended June 30, 2001 and were $4,029 and $(6,854) for the nine
months ended June 30, 2001.
10. Disposition of Geofocus
The company sold its GPS equipment subsidiary, GeoFocus, in the third fiscal
quarter of 2001. The sales price was $3,500 and the proceeds were used to pay
down secured bank debt. The gain recognized on the sale of Goefocus was $2,486.
Excluding the gain on the sale, net sales and (loss) of GeoFocus were $475 and
$(478) for the three months ended June 30, 2001 and were $807 and $(858) for the
nine months ended June 30, 2001. Approximately $100 of the proceeds from the
sale are held in escrow and will be released when the escrow period ends or
certain contingencies are resolved. Any monies received will be recorded as
additional gain when received.
11. Gain from Discontinued Operations
In December 2001, the Company exchanged a building of its previously
discontinued Agricultural Equipment segment with a carrying value of $0 in
satisfaction of mortgage debt of $417. For the nine months ended June 30, 2002,
the resulting gain has been recorded in discontinued operations on the
accompanying statement of operations and reflected as a gain on sale of
buildings, since the fair value of the building was estimated to equal or exceed
the carrying value of the debt.
12. Potential Gain on Settlement of Debt Obligation
Included in Current portion of long-term debt and capital leases at June 30,
2002 is $799 related to an obligation of the parent, Williams Controls, Inc.
arising from the discontinued Agricultural Equipment segment. This obligation is
payable to a former owner of the assets of a portion of the discontinued
Agricultural Equipment segment. In January 2002, the Company entered into a
letter of intent to transfer to the prior owner all remaining machinery and
inventory for a complete release of the $799 obligation. The Company's carrying
value of the inventory and machinery and equipment was $0 at June 30, 2002. The
Company will recognize a gain of $799, or $.04 per share, when the transaction
is completed. Although it is anticipated that this transaction will be
completed, the Company can provide no assurance that such a transaction will
ultimately be completed.
13. Employee Benefit Plans
In the nine months ended June 30, 2002, the Company recorded $170 as an estimate
of additional liability to participants of the Company's Employee Stock
Ownership Plan. As previously disclosed, the Company's benefit plans are
currently under audit by the Department of Labor (DOL). The Company continues to
cooperate fully with the DOL in regards to the audits but Management is unable
to determine if any additional liability will result from the audits.
14. Segment Information
Three months Three Months Nine months Nine months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------- --------- ----------- --------
Net sales by classes of similar products
Vehicle components $13,423 $11,879 $37,414 $40,073
Electrical components and GPS 44 722 319 2,537
------------ ----------- ----------- ----------
$13,467 $12,601 $37,733 $42,610
======== ======== ======== ========
Income (loss) from operations
Vehicle components
Before loss on impairment
and Gain on sale of assets $ 1,368 $ (631) $ 2,772 $(1,389)
Loss on impairment of assets - - (6,362)
Gain on sale of Aptek land/building 1,837 - 1,837
-------- --------- --------- ---------
Total vehicle components 1,368 1,206 2,772 (5,914)
Electrical components and GPS ( 47) (776) (823) (2,351)
Gain on sale of Geofocus - 2,486 - 2,486
Loss on impairment of investment -
Ajay Sports - - (3,565) -
--------- --------- --------- --------
$ 1,321 $ 2,916 $(1,616) $(5,779)
========= ========= ========= =========
Identifiable assets
Vehicle components $24,682 $18,319
Electrical components and GPS 1,753 10,954
Corporate 131 3,207
--------- ---------
Total assets $26,566 $32,480
========= ========
Capital expenditures
Vehicle components $ 409 $ 312 $ 854 $ 795
Electrical components and GPS - - - 9
---------- ----------- ------------ ---------
Total capital expenditures $ 409 $ 312 $ 854 $ 804
=========== ========= ========= ========
Depreciation and amortization
Vehicle components $ 472 $ 511 $ 1,998 $ 2,548
Electrical components and GPS 40 82 145 261
---------- --------- ---------- ---------
Total depreciation and
amortization $ 512 $ 593 $ 2,143 $ 2,809
=========== =========== =========== ===========
15. Investment in and note Receivable from Affiliate
At December 31, 2001, the Company's had notes and accounts receivable from
Ajay Sports, Inc. (Ajay) with a carrying value of $3,565, including a $500
note receivable reflected as a reduction in the Company's shareholders'
equity. The $500 note receivable related to the issuance of 206,719 shares of
the Company's Common stock to Ajay.
The Company's former chief executive officer and current Chairman of the
Board, Thomas W. Itin, who is an officer and shareholder of Ajay, has
guaranteed certain loans and investments made by the Company to Ajay and in
Ajay. Mr. Itin has taken the position that, as a result of his retirement as
President and Chief Executive Officer of the Company, his guarantees of
certain loans and investments in and to Ajay are no longer in effect. The
Company disagrees with the position taken by Mr. Itin. Mr Itin has filed suit
in the Circuit Court for Oakland County, Michigan seeking a determination as
to the enforceability of these guarantees. The Company has filed suit against
Ajay and Mr. Itin in the Multnomah Circuit Court for the State of Oregon
seeking payment of all amounts due from Ajay and Mr. Itin. The Company
believes the guarantees of Mr. Itin are enforceable and if the Company is
unable to collect amounts owed it by Ajay it will seek collections on the
guarantees.
The Company had previously accounted for its investment in Ajay using the
equity method of accounting. As a result of various changes within both the
Company and Ajay, the Company feels it no longer has influence over the
operations of Ajay and accordingly has changed to the cost method of
accounting for its investment in and note receivable from Ajay. Accordingly,
in accordance with the Company's accounting policy for the impairment of long
lived assets, the Company has evaluated the realizability of its investment in
and note receivable from Ajay. Based on the Company's current assessment and
collection efforts against Ajay and Mr. Itin's guarantee, the Company believes
the investment in and note receivable from Ajay have been impaired and
accordingly an impairment loss for the entire carrying value of $3,565 has
been provided in the second quarter of fiscal 2002, reflected on the
Consolidated Statements of Operations as "Loss on impairment of
Investment-Ajay".
The Company has, however, been pursuing, and will continue to pursue
collection efforts against both Ajay and the guarantees of Mr. Itin. Any
recoveries from Ajay or Mr. Itin will be reflected in the financial statements
at the time of collection. During the second quarter of fiscal 2002 the
Company obtained summary judgement against Ajay in the amount of $ 500 for a
portion of the amounts owed by Ajay to the Company.
16. Reclassifications
Certain amounts previously reported in the financial statements for the three
and nine month periods ended June 30, 2001 have been reclassified to conform to
the current year presentation.
Item 2.
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
General
- -------
During the third quarter of 2002 the Company took a number of steps to improve
both its financial condition and operating results. At June 30, 2002 the Company
had total current assets of $14,328 and total assets of $26,566. At September
30, 2001 the Company's total current assets were $14,178 and its total assets
were $29,339. At June 30, 2002 and September 30, 2001, respectively, the Company
had accumulated a shareholders' deficit of $12,163 and $10,708. During the third
quarter, the Company continued with a number of steps begun earlier in the
fiscal year with the goal of strengthening the Company's financial position and
performance including a recapitalization transaction concluded shortly after the
end of the third fiscal quarter as further described in subsequent event
recapitalization transaction below. In the opinion of management, the Company
has taken a number of crucial steps to position the company for improved
operational and financial performance in future periods.
Subsequent Event--Recapitalization
- -----------------------------------
On July 1, 2002, the Company completed a previously announced recapitalization
transaction led by American Industrial Partners. In connection with this
transaction, the Company sold shares of Series B Preferred stock to American
Industrial Partners Capital Fund III, L.P. (AIP) for a purchase price of
$13,000, in connection with which the Company received net cash proceeds, after
payment of fees and expenses, of approximately $11,000. The Company also
converted $2,000 of its secured subordinated debentures due March 1, 2002, into
Series B Preferred stock and repaid the remaining $3,000 of secured subordinated
debentures from the cash proceeds of the Series B Preferred stock to AIP. The
Company exchanged approximately 99% of its Series A Preferred stock for newly
authorized Series A-1 Preferred stock in a transaction that involved the
cancellation of all unpaid dividends accrued on the Series A Preferred stock
being exchanged and the accrual, commencing on the issue date and ending on
September 30, 2002, of an equal amount of dividends on the Series A-1 Preferred
stock, after which the Series A-1 Preferred will not bear dividends. The Company
amended its outstanding convertible subordinated debentures to extend the
maturity date, change the interest rate and eliminate the conversion feature.
The Company obtained a new $12,200 five year secured term loan and revolving
credit facility with the Company's existing lender, Wells Fargo Credit, Inc.
(Wells).
The Series B Preferred stock issued in the recapitalization transaction has a
minimum dividend rate of 15%; the dividend rate may increase to 20% under
certain circumstances. The Series B Preferred stock is convertible into shares
of common stock at a current conversion price of $.85 per share, subject to
adjustment, and is subject to mandatory redemption seven years after issuance or
upon a change in control of the Company. The Series A-1 Preferred stock issued
in the recapitalization transaction does not bear dividends (except for the one
time dividend discussed above and is convertible into common stock at a current
conversion price of $.66 per share, subject to adjustment.
The Company's new credit facility with Wells replaced the Company's prior loan
facility, which matured in July, 2001. Wells continued to lend to the Company
after expiration of the prior loan facility under a series of extension and
forbearance agreements. At June 30, 2002, the Company was out of compliance with
its loan covenants. On July 1, 2002, the Company's existing term loan balances
of $2,175 and the existing revolving credit balance of $5,692 were converted to
the new credit terms. The Company is now in compliance with the financial
covenants in its new credit agreement. The new loan facility with Wells provides
for $12,200 in revolving and term loans. Interest rates under the new agreement
are currently 2.00% in excess of the Bank's prime rate for the revolving debt
and 2.25% in excess of the Bank's prime rate for the term loans.
At June 30, 2002, the Company had a significant amount of past due vendor debt
and was on C.O.D. or prepayment terms with virtually all of its suppliers of
goods and services. The recapitalization transaction has allowed the Company to
make arrangements for payment or compromise of its past due obligations.
Management is currently working with its suppliers to return to normal credit
terms. Management does not anticipate any material future supply disruptions
like the ones discussed in prior reports on Form 10-Q and 10-K.
As a result of the recapitalization transaction, certain amounts owing under the
Company's loans with Wells of $1,520 at June 30, 2002, and the outstanding
balance of the convertible subordinated debentures of $2,114 at June 30, 2002,
classified as current liabilities at September 30, 2001, and March 31, 2002,
were reclassified to long-term obligations at June 30, 2002.
Results of Operations
Three months ended June 30, 2002, compared to the three months ended June 30,
2001.
- --------------------------------------------------------------------------------
Net Sales
- ---------
Total net sales increased by $866 to $13,467 or 6.8% in the third quarter of
fiscal year 2002 from $12,601 in the third quarter of fiscal year 2001.
Excluding the sales in the third fiscal quarter of 2001 of the GeoFocus
subsidiary, which was sold in the third quarter of fiscal 2001, (See Note 10 of
Notes to Consolidated Unaudited Financial Statements) net sales increased $1,341
or 11%. Of this increase $1,218 is attributed to additional volume at the
Portland facility.
Net sales in the Vehicle Components segment increased $1,544, to $13,423 in the
third quarter of fiscal 2002 over the third quarter of fiscal 2001 while the
Electrical Components and GPS business segment experienced a decrease in sales
of $678 to $44 in the third quarter of fiscal 2002. Excluding the sales volumes
of GeoFocus in the third quarter of fiscal 2001, Electrical Components and GPS
segment sales decreased $203, or 82%. In the Electrical Components and GPS
segment, decreased sales resulted from phasing out a number of its traditional
electrical component products and the ceasing of operations of the Geofocus
subsidiary in the second half of fiscal 2001. The Company is committed to the
development and production of sensors and sensor related products, however,
sales from this segment will be significantly lower during fiscal 2002 as a
result of the phase out of the traditional electrical component products in
fiscal 2001. With the ceasing of operations of Geofocus, it is anticipated that
the activity in the Electrical Components and GPS segment will decline to the
extent that segment financial reporting for this activity will not be material,
and be eliminated.
Gross margin
- ------------
Gross margins were $3,980, or 29.6% of net sales, in the third quarter of 2002,
compared to $2,068, or 16.4% of net sales, in the comparable fiscal 2001 period.
Included in the gross margin for the third quarter of fiscal 2001 was a negative
gross margin of $639 related to PPT.
Excluding PPT, gross margins increased $1,273 in the third quarter of fiscal
2002 over the third quarter of fiscal 2001. As a percent of net sales, the gross
margin of 29.6% of sales in the third fiscal quarter of 2002 was higher than the
21.5% of sales, excluding PPT, in fiscal 2001. The lower margin in fiscal 2001
is driven by a negative 21.0% margin shown by the Florida facility. The Florida
facility margin for the same period of 2002 was 0.9%.
The Portland facility, which accounted for over 85% of the sales volume during
the three month period ended June 30, 2002, showed an increase in gross margin
from 30.7% during the three month period ended June 30, 2001 compared to 33.9%
during the comparable period of fiscal 2002. Gross margin for the three-month
period ended June 30, 2002 was increased by a $200 reduction in the previously
provided product recall reserve based on a change in the estimated number of
vehicles to be inspected. Gross margin for the three-month period ended June 30,
2002 was reduced by a $82 adjustment in accounts payable related to the
agreement with Caterpillar.
Operating expenses
- ------------------
Operating expenses were $2,659 for the three months ended June 30, 2002 compared
to $(848) for the three months ended June 30, 2001. Included in the June 30,
2001 operating expenses were gains of $1,837 related to the sale of land and
building at the Aptek subsidiary and $2,486 related to sale of Geofocus assets.
Excluding these gains the operating expenses for the three months ended June 30,
2001 were $3,475. The largest factor in lower operating expenses in fiscal 2002
was a $426 decline in research and development spending at the Florida facility,
which reduced product development activity and also the reduction in
administrative expenses as a result of the consolidation of Florida facilities.
Included in the 2002 operating expenses is a $250 fee payable to a former
investment advisor.
Gain on Sale of Assets
- ----------------------
The Company sold its GPS equipment subsidiary, GeoFocus, in the third fiscal
quarter of 2001. The gain recognized on the sale of Goefocus was $2,486, and is
shown as a separate line in operating expenses for both the three and nine month
periods ended June 30, 2001. Also during the third fiscal quarter of 2001, the
Company sold land and building at the Aptek subsidiary. The gain recognized on
the sale was $1,837 and is shown as a separate line in operating expenses for
both the three and nine month periods ended June 30, 2001.
Interest and Other Expenses
- ---------------------------
Interest expense decreased $1,275 to (73) in the third quarter of fiscal 2002
from $1,202 in the third quarter of fiscal 2001. Excluding the impact of a gain
on the settlement of interest payable of $720 (see note 7 to the financial
statements), interest expense decreased $555, attributable to reduced debt
levels and lower interest rates during the three month period ended June 30,
2002 when compared to the three month period ended June 30, 2001.
Income Taxes
- ------------
The Company is in a net operating loss carry-forward position and is providing a
100% valuation allowance on all deferred tax assets due to the uncertainty
regarding their realization. During July, 2002 the Company received a refund of
$276 on federal taxes from the 1996 fiscal year and reflected this amount as an
income tax benefit for both the three and nine months ended June 30, 2002. This
amount was offset by payments made for certain state taxes during 2002. The
refund was due to a recent change in the tax law which allowed the Company to
carry back certain net operating losses five years as opposed to two.
Net earnings available to common shareholders
- ---------------------------------------------
Net income allocable to common shareholders declined to $1,274 in the quarter
ended June 30, 2002 compared to $1,637 in the comparative prior year period.
There were lower margins and higher interest expense in the three month period
ended June 30, 2001 when compared to the same period of fiscal 2002. These
factors reducing net income were offset by gains from the sale of assets of
Aptek and GeoFocus.
Results of Operations
Nine months ended June 30, 2002 compared to the nine months ended June 30, 2001.
- --------------------------------------------------------------------------------
Net Sales
- ---------
Total net sales decreased $4,877, or 11.4%, to $37,733 for the first nine months
of fiscal 2002 from $42,610 for the first nine months of fiscal 2001, primarily
due to the closing of two of the Company's subsidiaries; PPT (2001 sales of
$4,029) and Geofocus (2001 sales of $807). Excluding the sales of the closed
subsidiaries from the total sales for the nine-month period ended June 30, 2001,
the net sales for the nine month period ended June 30, 2002 declined only $41
from the comparable prior year period.
Net sales in the Vehicle component business segment decreased $2,659 or 6.6% to
$37,414 from the sales levels during the first nine months of fiscal 2001. The
most significant factor in the decline was the absence of the operations of PPT
in 2002. PPT sales for the nine months ended June 30, 2001 were $4,029.
Excluding the PPT sales, this segment had a $1,370 increase in sales for the
nine months ended June 30, 2002 compared to the same period in fiscal 2001.
Portland vehicle component sales increased $1,571 while sales at the other
operating sites declined $201.
The Electrical Components and GPS component business segment sales decreased
$2,218 to $319 for the nine months ended June 30, 2002 compared to the same
period in fiscal 2001. This was primarily a result of lower sales volumes of the
Company's electronic sensors and the sale of its GeoFocus subsidiary in the
third fiscal quarter of 2001. GeoFocus was consolidated in the accompanying
consolidated financial statements at June 30, 2001.
Gross margin
- ------------
Gross Margins from operations were $10,161, or 26.9% of net sales in the first
nine months of fiscal 2002 compared to $7,246, or 17.0% of net sales in the
corresponding nine-month period of 2001. The increased gross profit margins were
mainly due to the closing of the PPT operation, which had a negative margin of
$(2,112) for the nine-month period in 2001. The gross profit margins for the
nine month period in 2001 excluding the PPT sales and margin was 24.3%. Other
factors in the margin differences: The Geofocus operation ceased operations
during the third quarter of fiscal 2001. Geofocus had a $305 margin (37.8%) for
the nine-month period ended June 30, 2001. Gross margin for the nine-month
period ended June 30, 2002 was increased by a $200 reduction in the previously
provided product recall reserve based on a change in the estimated number of
vehicles to be inspected. Gross margin for the nine-month period ended June 30,
2002 was reduced by a $82 adjustment in accounts payable related to the
agreement with Caterpillar.
Operating Expenses
- ------------------
Operating expenses were $11,777 for the nine months ended June 30, 2002 compared
to $13,025 for the comparable fiscal 2001 period, a decrease of $1,248, or 9.6%.
Excluding the impairment losses and gains on sales (nonrecurring events) in both
fiscal 2002 and fiscal 2001, operating expenses declined $2,774, or 25.3% for
the nine month period ended June 30, 2002 compared to the same period of fiscal
2001. The reduction was primarily as a result of elimination of expenses
following the closure of the Company's PPT and Geofocus subsidiaries and also
the reduction in administration expenses as a result of the consolidation of the
Florida facilities.
Research and development expenses decreased $665, to $2,515 during the first
nine months of fiscal 2002 compared to $3,180 in the comparable fiscal 2001
period, a 20.9% decline. The decline in this expense was primarily at the
Florida facility, which reduced product development activity. As a percent of
sales, research and development expenses decreased slightly from 7.5% to 6.7%.
Administrative expenses decreased $2,013 to $4,735 during the first nine months
of fiscal 2002 compared to $6,748 in the comparable fiscal 2001 period due
mainly to the elimination of expenses related to the closed PPT and Geofocus
subsidiaries and the consolidation of the Florida facilities. Included in the
2002 operating expenses is $250 fee payable to a former investment advisor.
Gain on Sale of Assets
- ----------------------
The Company sold its GPS equipment subsidiary, GeoFocus, in the third fiscal
quarter of 2001. The gain recognized on the sale of Goefocus was $2,486, and is
shown as a separate line in operating expenses for both the three and nine month
periods ended June 30, 2001. Also during the third fiscal quarter of 2001, the
Company sold land and building at the Aptek subsidiary. The gain recognized on
the sale was $1,837 and is shown as a separate line in operating expenses for
both the three and nine month periods ended June 30, 2001.
Impairment Losses
- -----------------
The Company had previously accounted for its investment in Ajay using the equity
method of accounting. As a result of various changes within both the Company and
Ajay, the Company feels it no longer has influence over the operations of Ajay
and accordingly has changed to the cost method of accounting for its investment
in and note receivable from Ajay. In accordance with the Company's accounting
policy for the impairment of long lived assets, the Company has evaluated the
realization of its investment in and note receivable from Ajay. Based on the
Company's current assessment and collection efforts against Ajay and Mr. Itin's
guarantee, the Company believes the investment in and note receivable from Ajay
have been impaired and accordingly an impairment loss for the entire carrying
value of $3,565 has been provided in the second quarter of fiscal 2002. This
amount has been reflected as a separate line "Loss on impairment of investment -
Ajay" within the operating expenses of the consolidated statements of operations
for the nine month period ended June 30, 2002.
At March 31, 2001, the carrying value of the goodwill and intangible assets of
ProActive was $4,366. ProActive's sales volumes of adjustable and modular foot
pedal systems are limited to one contract that ProActive has with a third party.
Additionally, as a result of the Company's overall capital constraints, the
Company did not possess the financial resources to further develop additional
sales volumes or to achieve the sales volumes originally projected for
ProActive.
As a result of the above factors, management performed an analysis to assess the
impairment of the long-lived assets of ProActive in accordance with SFAS 121 as
of March 31, 2001. Based on management's analysis it was concluded that the
undiscounted value of future cash flows of ProActive's current business was less
than the carrying value of the assets of ProActive as of March 31, 2001. This
leads to a fair value assessment to determine impairment. As a result of this
assessment, the Company recorded an impairment charge related to ProActive's
remaining carrying value of the goodwill and intangible assets, totaling $4,366.
This amount has been reflected as a separate line "Loss on impairment of asset -
Proactive" within the operating expenses of the consolidated statements of
operations for the nine month period ended June 30, 2001.
PPT operations were terminated, effective March, 2001. Prior to the termination
of operations, management of PPT evaluated the realizability of the assets of
PPT and the Company recorded an impairment charge on PPT's property, plant, and
equipment of $1,996 in the first quarter of fiscal year 2001. This amount has
been reflected as a separate line item within the operating expenses of the
consolidated statements of operations for the nine month period ended June 30,
2001. Management also established additional reserves of $100 and $598 for
obsolete and excess inventory and estimated un-collectible accounts receivable,
respectively. Net sales and loss from operations of PPT were $0 and $(750) for
the three months ended June 30, 2001 and were $4,029 and $(6,854)for the nine
months ended June 30, 2001.
The Company sold its GPS equipment subsidiary, GeoFocus, in the third fiscal
quarter of 2001. The gain recognized on the sale of Goefocus was $2,486, and is
shown as a separate line in operating expenses for both the three and nine month
periods ended June 30, 2001. Also during the third fiscal quarter of 2001, the
Company sold land and building at the Aptek subsidiary. The gain recognized on
the sale was $1,837 and is shown as a separate line in operating expenses for
both the three and nine month periods ended June 30, 2001.
Interest and Other Expenses
- ---------------------------
Interest expense decreased $1,844 or 55.2%, to $1,499 in the first nine months
of fiscal 2002 from $3,343 in the first nine months of fiscal 2001. Lower
interest on reduced debt levels and reduced interest rates were partially offset
by increased costs of amortization of Secured Subordinated Debentures warrant
discounts. In addition, interest expense was reduced by a gain on the settlement
of interest payable of $720 (see note 7 to the financial statements).
Discontinued Operations-Agricultural Segment
- --------------------------------------------
Included in Current portion of long-term debt and capital leases at September
30, 2001 is $417 related to the discontinued Agricultural Equipment segment. The
$417 related to a mortgage payable on a building of the Agricultural Equipment
segment. The building's carrying value was $0 at September 30, 2001. During the
first quarter of fiscal 2002 the mortgage holder sold the building at auction
for approximately the mortgage value and completely and fully released the
Company from the mortgage. The Company recognized a gain from discontinued
operations in the nine month period ended June 30, 2002 of $417 related to the
satisfaction of the mortgage. Since the estimated fair value of the building was
equal to or greater than the debt, the gain was recorded as a gain on sale of
building from discontinued operations.
Income Taxes
- ------------
The Company is in a net operating loss carry-forward position and is providing a
100% valuation allowance on all deferred tax assets due to uncertainty regarding
their realization. During July, 2002 the Company received a refund of $276 on
federal taxes from the 1996 fiscal year and reflected this amount as an income
tax benefit for both the three and nine months ended June 30, 2002. This amount
was offset by payments made for certain state taxes during 2002. The refund was
due to a recent change in the tax law which allowed the Company to carry back
certain net operating losses five years as opposed to two.
Net Income (loss) allocable to common shareholders
- --------------------------------------------------
Net loss allocable to common shareholders improved to $(3,308) in the nine month
period ended June 30, 2002 compared to $(9,923) in the comparative prior year
period primarily due to losses included in fiscal 2001 that were not ongoing in
the corresponding period of fiscal 2002. These losses included losses on
impairment of assets at Proactive and PPT, and other operating losses
attributable to PPT and GeoFocus in fiscal 2001.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The new loan facility with Wells provides for $12,200 of revolving credit and
term loans. Amounts outstanding as of June 30, 2002 under the previous credit
agreement were converted to the new agreement including $2,200 of new term loans
which are payable in the amount of $57 per month plus interest. Interest rates
under the new agreement are currently 6.75% for the revolving credit and 7.00%
for the term loans. It is expected that the Company and Wells will enter into
new covenant requirements by September 30, 2002.
At June 30, 2002, the Company's contractual obligations consisted of bank debt
of $7,867, capital leases of $408, debt of discontinued operations of $799,
secured subordinated debt and convertible subordinated debt, excluding debt
discount, of $5,000 and $2,149, respectively. The Company also has operating
lease commitments, which, at June 30, 2002, are due $176 in 2002, $287 in 2003,
and $93 in 2004. The Company does not have any material letters of credit,
purchase commitments, or debt guarantees outstanding as of June 30, 2002.
Cash flow from operations was a use of $(272) for the nine months ended June 30,
2002, compared to a source of $3,621 for the nine months ended June 30, 2001.
Cash from operations declined despite a large improvement in net loss for the
comparable periods of 2002 and 2001. The significant improvement in the net loss
from 2001 to 2002 was more than offset by changes in working capital. On a cash
basis, the 2001 loss of $9,027 included a $6,362 non-cash loss from the
impairment of assets. In addition, reductions in receivables and inventory and
increases in accounts payable improved cash flow in fiscal year 2001. The
negative cash flow from changes in working capital in 2002 of ($2,372) differs
from the net working capital gain in 2001 of $7,800 mainly in the areas of
inventory, receivable reduction, and payments of accounts payable and accrued
expenses.
Cash flow from investing was negative for the nine months ended June 30, 2002 at
$809, wholly from purchase and sale of property, plant and equipment. This
compares with $6,396 positive cash flow for the nine months ended June 30, 2001,
the result of sale of assets of two subsidiaries and the purchase of property,
plant and equipment.
Cash flow from financing activities was $1,081 for the nine months ended June
30, 2002, compared to a use of $10,047 for the nine months ended June 30, 2001.
The net source of funds for the nine months ended June 30, 2002, was primarily
due to the borrowing of $1,000 at December 31, 2001, under the revolving loan
agreement offset by payments against borrowings and expenses incurred and
deferred related to the recapitalization and the increase in book overdraft. The
net use of funds from financing activities for the nine months ended June 30,
2001 was primarily due to repayment of debt and lease obligations of $14,617
offset by new borrowings of $4,576.
The filings of the Form 10-K and 10-Q for the periods from March 31, 1999
through the filing as of March 31, 2002 the Company addressed going concern
matters, including significantly past due trade accounts payable, a working
capital deficit,and a deficit in stockholders equity. Additionally, the Company
did not make the principal and interest payments when due on March 1, 2002, on
$5,000 face of secured subordinated debentures. The Company ceased making
payments of preferred stock dividends in the second quarter of fiscal 2001.
Also, as described in Note 8 of Notes to the Unaudited Consolidated Financial
Statements, the Company was not in compliance with the covenants of its credit
agreement with its primary bank at June 30, 2002. The credit agreement matured
on July 11, 2001, and the Company had obtained extensions on this debt through
June 30, 2002.
A key element of management's plans to address the above going concern issue was
the completion of the recapitalization transaction and the obtainment of a new
amended and restated credit agreement with Wells. As discussed above in
subsequent event-recapitalization, both of these items have been completed and
in the opinion of management, these financing transactions together with cash
flow provided from operations will be sufficient to meet the cash needs of the
Company for the foreseeable future.
Market Risk
- -----------
The Company is exposed to future interest rate changes on its debt. The Company
does not believe that a hypothetical 100 basis point increase in end of period
interest rates payable to the Company's principal lender would have a material
effect on the Company's cash flow.
Recent FASB Pronouncements
- --------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Accounting Standard (SFAS) No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Use of the pooling-of-interests method will be prohibited on a
prospective basis only. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will cease
upon adoption of that Statement, which for the Company was October 1, 2001. As
of October 1, 2001, the Company did not have any significant remaining goodwill.
The adoption of SFAS 141 and SFAS 142 did not have a significant impact on the
financial condition or results of operations of the Company. Goodwill
amortization was $0 and $30 as of June 30, 2002 and 2001, respectively.
In June and August 2001, the FASB issued SFAS No.'s 143 and 144, "Accounting for
Asset Retirement Obligations" and "Accounting for the Impairment or Disposal of
long-lived Assets." Under SFAS 143, the fair value of a liability for an asset
retirement obligation must be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS 144 retains SFAS 121's ("Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of") fundamental
provisions for the: 1) recognition and measurement of impairment of long-lived
assets to be held and used; and 2) measurement of long-lived assets to be
disposed of by sale. These statements are effective for the Company's fiscal
year ended 2003. The Company has not performed an analysis of the effect of SFAS
143. The Company does not expect the adoption of SFAS 144 to have a material
impact on the Company's financial position or results of operations. As
discussed in Note 7 to the financial statements, the Company elected early
adoption of SFAS No.145.
Labor Negotiations
- ------------------
The Company has approximately 120 employees represented by the International
Union, United Automobile Workers of American and Amalgamated Local 492 (the
"Union"). The current agreement with the Union expires on September 1, 2002. The
Company has entered into discussions with the Union for the purpose of reaching
agreement on a replacement contract. The Company's management believes that its
relationship with the Union and union employees is good. There has never been a
work stoppage at Williams Controls related to a union issue. Management has
committed to working toward a reasonable replacement contract, however, in this
situation there exists a possibility of a work stoppage.
Critical Accounting Policies
- ----------------------------
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company identified the most
critical accounting principles upon which our financial status depends. The
Company determined the critical principles by considering accounting policies
that involve the most complex or decisions or assessments. The Company
identified the most critical accounting policies to be those related to
impairment of long-lived assets, warranty and product recall, and pensions and
post-retirement benefit obligations.
Impairment of Long-Lived Assets
- -------------------------------
We account for the impairment of long-lived assets in accordance with Financial
Accounting Standards Board (FASB) Statement No. 121 and, beginning in fiscal
year 2003, will account for it in accordance with FASB Statement No. 144. The
Company tests for impairment when factors indicate that the asset may not be
recoverable from future undiscounted cash flows and calculates the amount of
impairment using discounted cash flows. Estimates of future cash flows require
judgment and may change based on, among other things, the market for our
products, technology advances, and customer relationships.
Warranty and Product Recall
- ---------------------------
The Company provides a warranty covering defects arising from products sold. The
Company has established a warranty accrual based on historical return rates of
products. In addition, the Company issued a product recall in late fiscal year
2001. The Company recorded an accrual for this product recall based on estimates
of the number of units to be returned and the estimated costs of repair. While
management believes the estimates used are reasonable, they are subject to
change and such change could be material.
Costs associated with returned product and repair and inspection expense have
been less than anticipated through June 30, 2002 and based on a change in the
number of anticipated inspections, costs are expected to continue to be less.
Accordingly, the Company reviewed the adequacy of the product recall accrual at
June 30, 2002, and reduced the accrual by $200, reducing Cost of Sales by $200
for the three and nine month periods ended June 30, 2002.
Pensions and Post-retirement Benefit Obligations
- ------------------------------------------------
The Company accounts for pensions and post-retirement benefits in accordance
with FASB Statement No. 87 and FASB Statement No. 106. FASB Statement No. 87
requires us to calculate our pension expense and liabilities using actuarial
assumptions, including a discount rate assumption and a long-term asset rate
return assumption. Changes in interest rates and market performance can have a
significant impact on our pension expense and future payments. FASB Statement
No. 106 requires the Company to accrue the cost of post-retirement benefit
obligations. The accruals are based on interest rates and the costs of health
care. Changes in interest rates and health care costs could impact
post-retirement expenses and future payments.
23
Part II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
The Company has experienced defaults under certain of its
senior securities. Information above under the heading "Financial
Condition, Liquidity and Capital Resources" is incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6
(a)
3.1 Certificate of Incorporation of the Registrant as
amended. (Incorporated by reference to Exhibit 3.1 to
the Registrant's annual report on form 10-K filed on
December 26, 1995).
3.2 Certificate to Provide for the Designation,
Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series A Preferred Stock,
7 1/2% Redeemable Convertible Series (incorporated by
reference to Exhibit 3.1 to the Registrant's quarterly
report on form 10-Q filed on May 1, 1998).
3.3 Certificate to Provide for the Designation,
Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series A-1 Preferred
Stock, Non-Redeemable Convertible Series.
3.4 Certificate to Provide for the Designation,
Preferences, Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series B Preferred Stock,
15% Redeemable Convertible Series (incorporated by
reference to Exhibit (d)(v) to the Schedule TO-I/A
filed on July 5, 2002).
3.5 Certificate of Elimination for Mandatory Preferred
Stock (incorporated by reference to Exhibit (d)(vi) to
the Schedule TO-I/A filed on July 5, 2002).
3.6 Restated By-Laws of the Registrant as amended July 1,
2002.
4.1 Series B Preferred Stock Purchase Agreement, dated May
31, 2002. (Incorporated by reference to Exhibit (d)(i)
to the Schedule TO-I/A filed on June 11, 2002).
4.2 Series B Preferred Registration Rights Agreement,
dated as of July 1, 2002, by and among the Company,
American Industrial Partners Capital Fund III, L.P.,
and Dolphin Offshore Partners L.P. (incorporated by
reference to Exhibit (d)(vii) to the Schedule TO-I/A
filed on July 5, 2002).
4.3 Series B Preferred Shareholder Agreement, by and among
the Company, American Industrial Partners Capital Fund
III, L.P., Dolphin Offshore Partners L.P. and Eubel,
Brady & Suttman Asset Management, Inc. (incorporated
by reference to Exhibit (d)(viii) to the Schedule
TO-I/A filed on July 5, 2002).
4.4 Taglich Voting Agreement (incorporated by reference to
Exhibit (d)(x) to the Schedule TO-I/A filed on July 5,
2002).
4.5 Series A-1 Preferred Registration Rights Agreement,
dated as of July 15, 2002, by and among the Company
and the holders of Series A-1 Preferred Stock.
4.6 Form of Amended and Restated Subordinated Debenture
Due July 1, 2004 (incorporated by reference to Exhibit
(d)(xii) to the Schedule TO-I/A filed on July 5,
2002).
4.7 Form of warrant (incorporated by reference to Exhibit
(d)(iii) to the Schedule TO-I/A filed on June 11,
2002).
10.1 Preferred Stock Placement Agreement, dated April 17,
1998 (incorporated by reference to Exhibit (d)(ii) to
the Schedule TO-I/A filed on June 11, 2002).
10.2 Master Services Agreement, dated as of July 1, 2002,
by and among American Industrial Partners, a Delaware
general partnership, and the Company (incorporated by
reference to Exhibit (d)(ix) to the Schedule TO-I/A
filed on July 5, 2002).
10.3 Dolphin Side Letter, dated as of July 1, 2002
(incorporated by reference to Exhibit (d)(xi) to the
Schedule TO-I/A filed on July 5, 2002).
10.4 Amended and Restated Credit Agreement, dated July 1,
2002 (incorporated by reference to Exhibit (d)(xiii)
to the Schedule TO-I/A filed on June 11, 2002).
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Eugene Goodson.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Dennis Bunday.
99.3 Press release issued August 15, 2002.
99.4 Press release issued August 16, 2002.
(b) Form 8-K filed June 14, 2002 and July 5, 2002 and July 25, 2002.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Williams Controls, Inc (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, R.
Eugene Goodson, Chairman of the Board and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ R. Eugene Goodson
R. Eugene Goodson
Chief Executive Officer
Williams Controls, Inc
August 19, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Williams Controls, Inc (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis
E. Bunday, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Dennis E. Bunday
Dennis E. Bunday
Chief Financial Officer
Williams Controls, Inc
August 19, 2002
25
Williams Controls, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
By: /s/ R. Eugene Goodson
----------------------------
R. Eugene Goodson
President and
Chief Executive Officer
By: /s/ Dennis E. Bunday
----------------------------
Dennis E. Bunday,
Chief Financial Officer
Date: August 19, 2002
25
Williams Controls, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
/sGENE GOODSON
----------------------------
Gene Goodson
President and
Chief Executive Officer
/s/DENNIS E. BUNDAY
----------------------------
Dennis E. Bunday,
Chief Financial Officer
Date: August 19, 2002