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"); ProActive Acquisition Corporation ("ProActive"); 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 "we" "our" or "us."
General - -------
We are a Delaware corporation formed in 1988. The principal company in our vehicle component segment, our primary business segment, was founded by Norman C. Williams in 1939 and acquired by the Company in 1988. Our operating subsidiaries are divided into three business units (one of which is reported as a discontinued operation).
Vehicle Components - Our vehicle component product lines primarily include electronic throttle control systems, exhaust brakes and pneumatic, hydraulic controls and plastic injection molded products including automotive taillight systems. These products are used in trucks, utility and off-highway equipment, transit buses and underground mining machines. We estimate that we have over a 65% market share of electronic throttle control systems for Class 7 and 8 trucks. The majority of these products are sold directly to original equipment manufacturers such as Freightliner, Navistar, Volvo, Isuzu and Motor Coach Industries. We also sell these products through a well-established network of independent distributors. The major competitors in one or more of our product lines include Morris Controls, Furon, Teleflex, Dura Automotive-Hella and KSR, Inc. Markets for electronic throttle control systems are developing in smaller classes of trucks, diesel-powered pick-up trucks and automobiles. The major car manufacturers are converting gasoline-powered automobiles and pick-up trucks to the electronic throttle control system, although this requires engine redesign by the automotive manufacturers which is presently ongoing. In addition, the passenger vehicles market began the introduction of adjustable foot pedal systems during 1999. We purchased an adjustable foot pedal designer and manufacturer in July 1999.
Electrical Components and Global Positioning System - Our electrical components product line includes the design and production of microcircuits, cable assemblies, position tilt sensors and other electronic products used in the telecommunication, computer and transportation industries. Major customers include Allied Signal, Raychem and Eaton Corp. Major competitors include CTS, Robertshaw Spectrol, AMP and Nethode. The global positioning system product line includes commuter railroad train tracking and agricultural cyber-farming using global positioning and geographic information systems. Our major customers include Chicago Metra, Tri-Rail, the Florida Department of Transportation and Via Tropical Fruit.
Agricultural Equipment - Our 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. Our major competitors include Allied Industries (Bushhog), Wood Brothers, Taylor Industries, Inc. and Alamo Group. This business is reported as a discontinued operation.
These are our operating subsidiaries, all of which are 100% owned, and a brief description of each operating subsidiary's business (the subsidiaries that are reported as discontinued operations or are no longer operating are not listed).
Vehicle Components - ------------------
Williams Controls Industries, Inc.: Manufactures vehicle components sold primarily in the transportation industry.
ProActive Acquisition Corporation.: Conducts research and development activities related to adjustable foot pedals and manufactures adjustable pedal systems.
Premier Plastic Technologies, Inc.: Manufactures plastic components for the automotive industry.
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 our products to the automotive industry.
Williams Technologies, Inc.: Supports all subsidiaries of our company by providing research and development and developing strategic business relationships to promote "technology partnering."
Williams World Trade, Inc.: Manages foreign sourcing for all of our subsidiaries, affiliates and third party customers through its wholly owned subsidiary located in Kuala Lumpur, Malaysia.
Electronic Components and Global Positioning System - ---------------------------------------------------
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 and geographical information systems.
Acquisitions and Dispositions - -----------------------------
From fiscal 1994 through fiscal 1996, we pursued an acquisition strategy to integrate vertically through the acquisition of a sensor manufacturing company and horizontally through the acquisition of companies in similar industries that could benefit from our sensor and control experience. During this period, we acquired several companies with products that could benefit from sensor and control applications.
In fiscal 1997, we changed our diversification acquisition strategy to focus our corporate and financial resources on opportunities emerging in our vehicle components business unit and global positioning system train tracking markets. We may not be able to capitalize on opportunities emerging in vehicle components or global positioning system train tracking markets and/or the development of commercial applications of sensor related products. In addition, if we are successful in one or more endeavors, we cannot be certain that those endeavors will be profitable.
In March 1998, we completed the sale of our subsidiary comprising the automotive accessories business unit. On December 14, 1998, we announced our intention to sell the agricultural equipment business unit, and we retained an investment banking firm to advise us on the sale and solicit potential purchasers for the business unit. In June 1998, we restructured our investment in Ajay Sports, Inc. to provide for a repayment of all loans and an increase in the dividend rate on our preferred stock investment on June 30, 2001. In July 1999, we purchased the ProActive pedals division of Active Tools Manufacturing, Co., Inc. ProActive Pedals is a designer and develop of adjustable foot pedal system and modular pedal systems.
Competition - -----------
In general, our 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 we sell these products. Our competitive position varies among our product lines.
In the vehicle components segment, we are the largest domestic producer of ETCs sold in the heavy truck ETC market. We have only one primary competitor in the diesel heavy truck market. We also manufacture pneumatic and air control systems for the heavy truck market, which is comprised of numerous highly fragmented competitors. We believe 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. Three of our manufacturing facilities in our vehicle components segment have attained these certifications.
During fiscal 1999, we began the introduction of our electronic throttle control systems product into the passenger vehicle market which consists of cars, small trucks, mini vans and sport utility vehicles. Although our electronic throttle control systems product has been successful in the domestic heavy duty truck market, we cannot be sure that it will be fully accepted in these new markets. Introduction of electronic throttle control in gasoline engines will require modification or redesign of engine components that will be dependent upon the timing of development by the automotive manufacturers and their original equipment manufacturers. However, based on initial acceptance, we expect that a substantial number of passenger vehicles will convert to electronic throttle controls over the next five years. Our primary competitors in the United States are Teleflex, Dura Automotive-Hella and KSR, Inc. Each of these companies is substantially larger and has greater financial resources than us. Furthermore, we have no control over the timing of the introduction of the electronic throttle control into the automotive, small truck and sport utility vehicle markets.
We purchased substantially all of the assets and assumed certain liabilities of ProActive Pedals in July 1999. ProActive owns patent rights and designs for adjustable foot pedal systems and currently produces the adjustable foot pedal for the Dodge Viper. We currently compete against Teleflex and KSR, Inc. in the adjustable foot pedal market, and we expect Dura Automotive-Hella to enter the market with adjustable foot pedal designs. Thus, we will be competing against much larger competitors in these markets with financial resources much greater than ours and with existing long-term supplier relationships with the automotive industry.
Marketing and Distribution - --------------------------
We sell our products to customers in the truck, automotive, heavy equipment, telecommunication and other diversified industries worldwide; approximately 95% of its sales from continuing operations are to customers in the vehicle component segment and 63% of its sales from continuing operations are from sales of ETC products. For the years ended September 30, 1999, 1998 and 1997, Freightliner accounted for 27%, 21% and 16%, Navistar accounted for 15%, 16%, and 16%, Volvo accounted for 8%, 9%, and 8% and General Motors accounted for 5%, 3% and 0% of net sales from continuing operations, respectively. Approximately 20%, 15% and 14% of net sales from continuing operations in fiscal 1999, 1998 and 1997, respectively, were to customers outside of the United States, primarily in Canada, Mexico and Sweden, and, to a lesser extent, in Europe, South America and Australia. See note 15 of Notes to Consolidated Financial Statements.
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 our products were approximately $17,625 at September 30, 1999, compared to approximately $16,100 at September 30, 1998. These are orders for which customers have requested delivery at specified future dates within one year. We have not experienced significant problems delivering products on a timely basis.
Environment - -----------
Our 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. We use our best efforts to ensure that any hazardous substances are disposed of in an environmentally sound manner and in accordance with these guidelines.
We have identified certain contaminants in the soil of our Portland, Oregon manufacturing facility, which we believe was disposed on the property by a previous property owner. We intend to seek indemnification from such party for the costs of permanent monitoring, or cleanup if required. We have 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. We believe that we can enforce available claims against the prior property owner for any costs of monitoring or cleanup. We believe we are currently in compliance with environmental regulations.
Government Regulation - ---------------------
Our 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 we are not in compliance with any of it's standards or regulations, among other things, it may require that we recall our products, which are found not to be in compliance, and repair or replace such products. We believe we are currently in compliance with NHTSA.
Product Research and Development - --------------------------------
Our operating facilities engage in engineering, research and development and quality control activities to improve the performance, reliability and cost-effectiveness of our product lines. Our engineering staff works closely with our customers in the design and development of new products and adapting products for new applications. During 1999, 1998 and 1997, the Company spent $3,424, $2,778, and $1,832 respectively, on these activities for continuing operations. We intend to increase our research and development expenditures in fiscal 2000 to design ETC products compatible with gasoline powered vehicles, develop commercial applications for inertia, tilt and position sensor products, and the development of adjustable foot pedal and ETC systems for automotive, sport utility vehicles, light trucks and heavy trucks, and further development of train tracking products. The Company is in the early stages of development of these programs and expects to increase research and development spending by approximately $3,000 in fiscal 2000. The majority of the additional expense will be spent on developing passenger vehicle ETC and adjustable foot pedals.
Patents and Trademarks - ----------------------
Our product lines generally have strong name recognition in the markets in which they serve. We have a number of product patents over a period of years, which expire at various times. We consider each patent to be of value and aggressively protect our rights against infringement throughout the world. We own two patents (expiring in 2009) which we believe improves the marketability of the electronic product line of the heavy vehicle components segment. We do not consider that the loss or expiration of either patent would materially adversely affect us; however, competition in the electronic product line could increase without these patents. We have entered into a royalty bearing patent license agreement with a private inventor, under which we hold an exclusive, worldwide license for three patents covering adjustable foot pedals. The license agreement remains in effect for the life of the patents and requires yearly minimum payments to the inventor. We believe these licensed patents play a significant role in establishing our proprietary position in the adjustable foot pedal market, and the termination of the license or the loss of any of the licensed patents could materially adversely affect our ability to market adjustable foot pedals. We own numerous trademarks, enabling us to market our products worldwide. These trademarks include "Williams" and "Aptek". We believe that in the aggregate, the rights under our patents and trademarks are generally important to our operations, but do 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 our total business except as described above.
Raw Materials; Reliance on Single Source Suppliers - --------------------------------------------------
We produce our products from raw materials, including brass, aluminum, steel, plastic, rubber and zinc, which currently are widely available at reasonable terms. We rely upon, and expect to continue to rely upon CTS Corporation 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 system. We manufacture 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 our needs on a timely basis, and appear to be willing to continue being suppliers there is no assurance that a disruption in a supplier's business, such as a strike, would not disrupt the supply of a component.
Product Warranty - ----------------
We warrant our 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. We have established a warranty reserve based upon our estimate of the future cost of warranty and related service costs. We regularly monitor our warranty reserve for adequacy in response to historical experience and other factors.
Employees - ---------
We employ approximately 514 employees, including 140 union employees. Our non-union employees are engaged in sales and marketing, accounting and administration, product research and development, production and quality control. Our 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"). We have a collective bargaining agreement with the Union 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. Our management believes that our relationship with our employees and the Union are good. We could experience a change in non-union labor costs as a result of changes in local economies and general wage increases.
Item 2.
Item 2. Properties - ------------------ (Dollars in thousands)
The following table outlines the principal manufacturing and other facilities owned by us, subject to mortgages on all facilities except Williams and Agrotec.
Entity Facility Location Type and Size of Facility - ------ ----------------- -------------------------
Williams Portland, Oregon Manufacturing and offices 160,000 square feet
Aptek Deerfield Beach, Florida Manufacturing and offices 48,000 square feet
Hardee Loris, South Carolina Manufacturing and offices 101,000 square feet
Agrotec Pendleton, North Carolina Manufacturing and office 43,000 square feet
Our 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 we could increase our production output significantly at any of our facilities with additional equipment and work force. The Hardee and Agrotec properties are classified as assets held for disposition.
Facilities that are encumbered by mortgages at September 30, 1999 are as follows: Hardee, $570 and Aptek $2,381. A bank holds a deed of trust on the Williams facility.
Item 3.
Item 3. Legal Proceedings - -------------------------
Williams Controls, Inc. and its consolidated subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. Our 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 our insurance coverage, and our established reserves for uninsured liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on our 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.
Item 4. Submission of Matters to a Vote of Security Holders - -----------------------------------------------------------
We did not submit any matters to a vote of its security holders during the fourth quarter of the year ended September 30, 1999.
Part II -------
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - -----------------------------------------------------------------------------
Our 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 our common stock for each fiscal quarter for the past two fiscal years is as follows:
---------------- Quarter High Low ------- ----- ----- October 1 - December 31 $2.50 $2.00 January 1 - March 31 3.00 2.19 April 1 - June 30 3.25 2.19 July 1 - September 30 3.13 2.47
---------------- Quarter High Low ------- ----- ----- 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
There were 488 record holders of our common stock as of November 30, 1999. We have never paid a dividend with respect to our common stock and have no plans to pay a dividend in the foreseeable future.
Item 6.
Item 6. Selected Financial Data - ------------------------------- (Dollars in thousands - except per share amounts)
Note: Except for the balance sheet amounts for 1996 and 1995, the above amounts reflect the Automotive Accessories and Agricultural Equipment segments as discontinued operations. See Note 14 to the Notes to the Consolidated Financial Statements.
*1999 data includes an acquisition made in July. Net sales, loss from operations (including expense of $1,750 for acquired in-process research and development), and total assets related to this acquisition were $55, $(2,066) and $6,320, respectively. The 1999 loss from continuing operations includes a loss from impairment of assets of $5,278. See Notes 10 and 18 to the Notes to Consolidated Financial Statements for information on the acquisition and the impairment loss.
**1996 data includes acquisitions made in April and July 1996. Net sales, loss from operations and total assets related to these acquisitions were $2,782, $(46) and $2,869, respectively.
***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.
Item 7.
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.
Financial Position and Capital Resources Financial Condition, Liquidity and Capital Resources - ------------------------------------------------------
Our principal sources of liquidity are funds generated from operations, borrowings under our credit facilities, and capital leases for equipment purchases from various leasing companies. Primarily as a result of the acquisition of ProActive Pedals in July 1999 (see Note 18 to the Notes to the Consolidated Financial Statements), we have a bridge loan outstanding from our bank at September 30, 1999. This loan, Term Loan III, is due in February 2000. We plan to initiate the process of refinancing this borrowing by raising capital or debt in a private placement, which we expect to complete in February 2000. Should we not be successful in refinancing this borrowing, we would request an extension on the due date of Term Loan III from the bank. We anticipate that cash generated from operations, bank borrowings and capital leases will be sufficient to satisfy our other working capital and capital expenditure requirements for current operations for the next twelve months. At September 30, 1999, the Company's working capital decreased to $9,158 compared to $18,949 at September 30, 1998, and the current ratio was 1.49 at September 30, 1999 compared to 2.48 at September 30, 1998. The decrease in working capital is attributable primarily to the writedown of asset values related to an increase in the estimated loss on disposal for the Agriculture Equipment segment, the $2,500 short term bridge loan for the acquisition of ProActive, and increased accounts payable at September 30, 1999, partly due to significant capital expenditures made during the fourth quarter.
Cash increased $1,042 at September 30, 1999 compared to September 30, 1998 as a result of a large payment from a customer received on September 30. Net deferred income tax assets increased $4,692, from $2,204 at September 30, 1998 to $6,896 at September 30, 1999, primarily due to an increase in the estimated loss on disposal of the Agricultural Equipment segment and the loss from impairment of assets of the Automotive Accessories segment. At September 30, 1999 property, plant and equipment increased $762 to $20,775, compared to $20,013 at September 30, 1998 due primarily to capital equipment purchases for machinery and equipment, offset somewhat by the sale of a building and land which were being leased by a third party and an increase in accumulated depreciation. At September 30, 1999, long-term debt and capital leases decreased $667 to $29,936, compared to $30,603 at September 30, 1998. Repayments of long term debt and capital leases totaling $3,395 and a reduction of capital lease obligations from termination of the sale/leaseback transaction (see discussion below) offset term loan borrowings totaling $5,000 and increased capital leases totaling $1,819. At September 30, 1999, shareholders' equity decreased $6,205 to $18,206, compared to $24,411 at September 30, 1998 due primarily to a net loss of $9,539 for fiscal 1999, partially offset by net proceeds from a private placement of common stock totaling $3,379 completed during fiscal 1999.
Cash flows from continuing operations were $7,664 for the year ended September 30, 1999 compared to $2,083 for the year ended September 30, 1998. During the year ended September 30, 1999, decreased earnings of $9,851 and an increase in deferred income taxes from continuing operations of $2,565 were offset by a charge for acquired in-process research and development of $1,750, and a loss from impairment of assets of the Automotive Accessories segment totaling $5,278. The Company's discontinued operations used cash of $1,998 and $3,700 for the years ended September 30, 1999 and 1998, respectively.
In August, 1999, $500 was paid to a previous lender, on behalf of Ajay, under the terms of an intercreditor agreement. In July, 1999, a building and land were sold with net proceeds of $1,192. The impairment loss of $5,278 includes $528 related to this disposal. During fiscal 1999, $575 of advances were made under a note to Kenco Products, Inc. ("KPI"). The impairment loss of $5,278 includes amounts advanced to KPI under the note.
In April 1997 we sold the Portland, Oregon manufacturing facility in a sale/leaseback transaction for $4,600. The transaction was accounted for as a financing and the capitalized lease obligations of $4,600 were recorded as long-term liabilities. In April 1998, under the terms of the agreement, we provided a mortgage note to the purchaser in the amount of $3,200, which was reported as a note receivable at September 30, 1998. In December 1998, we exercised a repurchase option on the property and repurchased the building for $4,700 consisting of cash of $1,500 and the note receivable of $3,200.
Accordingly, the note receivable of $3,200 and the capital lease obligation of $4,600 have been eliminated from the balance sheet at September 30, 1999. The costs associated with the building repurchase are reported in other expenses during the year ended September 30, 1999.
In July, 1999 we consummated the private placement of common stock with net proceeds of $3,379. In addition, during July, we borrowed $2,500 from our bank under an additional term loan. Proceeds from the common stock offering and the term loan were used to purchase the net assets of ProActive Pedals, a division of Active Tool and Manufacturing. The purchase price of ProActive Pedals was $5,750, plus assumption of approximately $286 in liabilities. In addition, the Company entered into a patent license agreement with the patent holder, which required an initial payment of $600 and minimum annual royalty payments of $95 per year for ten years. The primary assets acquired include tooling designs; technology and patent rights on adjustable foot pedal systems, as well as modular foot pedal systems. The additional bank financing was borrowed under an amendment to the Company's existing financing facility as Term Loan III. The principal amount as Term Loan III is payable in three equal monthly installments of $139 (plus interest) beginning in November 1999 with the remaining balance of $2,083 due in February 2000. Interest on Term Loan III is computed at the prime rate plus 1.25%. (9.5% at September 30, 1999).
In December, 1998 we borrowed $2,500 from our bank under amended term loans to finance the repurchase of the Portland, Oregon manufacturing facility and for working capital purposes. Approximately $1,222 of the additional financing was borrowed under an amendment to our existing Term Loan I, the increased principal amount of which is payable in equal monthly installments of $60 with the remaining balance of the entire Term Loan I of $3,150 due at maturity on July 11, 2001. Approximately $1,278 of the additional financing was provided under an amended Term Loan II which is payable in 18 equal installments of $71, plus variable interest (8.5% at June 30, 1999).
During the three fiscal years ended September 30, 1999, our Agriculture Equipment segment has reported net losses from operations totaling $2,651 and reported a total net loss on disposal of $7,014. In addition, during this same period, our Automotive Accessories segment reported net losses from operations totaling $1,207 and reported a total net loss on disposal of $3,590. During this same three year period ended September 30, 1999, proceeds of $1,124 were received for the sale of the Automotive Accessories segment and $4,273 of cash was used for these two discontinued operations. We anticipate the Agricultural Equipment segment will use cash during the 2000 fiscal year, until it is disposed of.
The Company had $187 available under its revolving credit facility with a bank at September 30, 1999. At September 30, 1999, the bank waived compliance with all financial covenants as the Company was out of compliance at September 30, 1999 with its covenants under its borrowing arrangement. The waivers were obtained in a manner that allows the Company's debt to be classified as current and long-term based on the payment terms of the loans at September 30, 1999.
Market Risk - The Company has not entered into derivative financial instruments. The Company may be exposed to future interest rate changes on its debt. The Company does not believe that a hypothetical 10 percent change in end of period interest rates would have a material effect on the Company's cash flow.
In June, 1999 the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to SFAS 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company does not have any derivative instruments and accordingly, the adoption of SFAS 137 will have no impact on the Company's financial position or results of operations.
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 has addressed the 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 costs associated with this problem, including communicating with suppliers, dealers and others with which it does business to coordinate Year 2000 conversion. 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. This task has been completed in 1999. The decision to upgrade the Company's software was made irrespective of Year 2000 compliance issues.
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 corrective actions for major systems are complete. All hardware, software, services and business relationships with trading partners that could be affected by Year 2000 issues were tested 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 had determined that certain of its software applications would be unable to interpret appropriately the calendar Year 2000 and subsequent years. As of December 15, 1999, 100% of the Company's mission critical systems that may have a material Year 2000 liability are Year 2000 compliant.
The Company's amended budget for its Year 2000 project is $310, all of which had been spent through December 1999. The Company acquires a majority of its inventory from approximately 20% of its vendors. If these vendors have unresolved Year 2000 issues that affect their ability to supply merchandise, the Company could be adversely affected. The Company conducted an assessment of vendors whose potential Year 2000 liability could materially affect operations. Based on this assessment the Company believes that it is not materially at risk from a Year 2000 liability posed by its vendors. In the event a vendor's ability to supply the Company is adversely affected by Year 2000 issues, the Company believes that it will be able to find alternative suppliers.
Should there be a mission critical system, not previously identified as such, that becomes a Year 2000 liability or should a vendor unexpectedly experience Year 2000 issues which adversely affect its ability to supply merchandise, the Company's business, financial condition and results of operations could be adversely affected. However, the Company believes that the financial impact would not be material since all systems believed by the Company to be critical are Year 2000 compliant and the Company believes it is not materially at risk from a negative impact as a result of a Year 2000 liability caused by a vendor.
Risks - Despite the Company's efforts to identify all internal systems with Year 2000 issues, it is likely that unexpected problems will arise. As with most businesses, the Company will also be at risk from external infrastructure failures that could arise from Year 2000 failures. It is possible, for example, that electrical power, telephone and financial networks across the nation will experience breakdowns in the days and weeks following January 1, 2000. There is also a real possibility of failures of key components in the national transportation infrastructure or delays in rail, over-the-road and air shipments due to failures in transportation control systems due to the Year 2000 problem. Investigation and assessment of risks associated with such ubiquitous and interconnected utility systems and transportation systems are beyond the resources of the Company. The failure by the Company or third parties to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain of the Company's normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition.
Results of Operations Year ended September 30, 1999 compared to the year ended September 30, 1998 - ---------------------------------------------------------------------------
Overview - --------
Net sales from continuing operations increased 6.6% to $61,422 in fiscal 1999 from $57,646 in fiscal 1998 due to higher unit sales volumes in the Company's vehicle components segment.
In fiscal 1999, loss from continuing operations was $3,031, compared to earnings from continuing operations of $8,991 in fiscal 1998. The decrease, totaling $12,022, was the result of reduced gross margin of $3,398, primarily due to increased warranty expenses and increased inventory reserves based on events in the fourth quarter of fiscal 1999. Also in fiscal 1999, we expensed $1,750 for research and development efforts in process at the date of acquisition of ProActive and recognized a $5,278 loss from the impairment of assets related to Kenco, our former Automotive Accessories segment.
Net loss allocable to common shareholders was $10,135 in fiscal 1999 compared to net income allocable to common shareholders of $42 in the prior fiscal year due to the factors described above, as well as an increase in the net loss from discontinued operations based upon events and information that resulted in management's revised estimates of the net realizable value of the Agricultural Equipment segment.
Net Sales - --------- Sales from continuing operations increased $3,776, or 6.6%, to $61,422 in the year ended September 30, 1999 from $57,646 in the year ended September 30, 1998 primarily due to higher unit sales volumes in our Vehicle Components segment.
Sales from continuing operations in the Vehicle Components segment increased $4,065, or 7.5%, to $58,136 in the year ended September 30, 1999 over levels achieved in the year ended September 30, 1998 due to higher ETC unit sales. Sales from continuing operations in our Electrical Components and GPS segment decreased $289, or 8.1%, due to lower unit sales of electrical components.
Gross margin - ------------
Gross margin from continuing operations decreased $3,398, or 19.4%, to $14,119 (23.0% of sales) compared to $17,517 (30.4% of sales) in the year ended September 30, 1998. Gross margin decreased $2,091 or 12.9%, in the year ended September 30, 1999 in the Vehicle Components segment due primarily to increased losses at the company's plastic injection molding and tooling subsidiary and increased warranty costs of $781.
Our plastic injection molding and tooling subsidiary, the operating results of which are included in the Vehicle Components segment, reported an increased loss from operations in the year ended September 30, 1999 of $3,673. Sales, gross margin (loss) and operating loss for the year ended September 30, 1999 were $5,253, ($3,083), and ($4,445), respectively, compared to $4,949, $205 and ($772) in the prior fiscal year. The operation moved to a new facility in the fourth quarter of fiscal 1998 that has a higher breakeven sales level and plant capacity than the prior facility. The operation has not achieved breakeven sales to date and is not expected to achieve breakeven sales until the second quarter of fiscal 2000, when a new $16,000 contract is scheduled to begin. In addition, the plastic injection and molding subsidiary has been experiencing operating problems resulting from inefficient production from defective molds supplied by customers and operating problems on the manufacturing floor. The Company is evaluating each of the molds in an effort to reduce the high scrap rate it has experienced. Also, in response to the issues previously mentioned, in the fourth quarter of fiscal 1999, the tooling operation was closed down.
Gross margin at the Electrical Components and GPS segment decreased $852 from $740 for the year ended September 30, 1998 to ($112) for the year ended September 30, 1999 primarily due to fixed expenses and other charges.
Operating expenses - ------------------
In conjunction with the acquisition of the ProActive Pedal Division of Active Tool and Manufacturing Co., Inc. in July, 1999, we expensed $1,750 of the purchase price as acquired in-process research and development during the year ended September 30, 1999. Also, during the year ended September 30, 1999, we recognized a $5,278 loss from the impairment of assets related to Kenco, the Company's former Automotive Accessories segment. The loss consisted of an impairment of non-voting preferred stock and notes and accounts receivable totaling $4,655 and impairment of property totaling $623 (see Note 10 to the Notes to Consolidated Financial Statements).
Operating expenses before the charge for acquired in-process research and development and the loss from impairment of assets increased $1,596, or 18.7%, to $10,122 for the year ended September 30, 1999 compared to $8,526 for the year ended September 30, 1998 primarily as a result of increased research and development expenses of $646 and an increase in administration expenses of $1,018. Research and development expenses were increased to support new product development for development of the automotive ETC product, for development of sensor-related products and for existing customers. Operating expenses before the charge for acquired in-process research and development and loss from impairment of assets as a percentage of sales, was 16.5% and 14.8% in the year ended September 30, 1999 and 1998. Operating expenses before the charge for acquired in-process research and development and loss from the impairment of assets increased $2,269, or 42.6%, in the year ended September 30, 1999 in the Vehicle Components segment and decreased $219, or 8.0%, in the Electrical Components and GPS segment compared to the prior year period.
Selling expenses were reduced $68 for the year ended September 30, 1999 compared to 1998. Selling and expenses as a percent of sales decreased to 3.3% in the year ended September 30, 1999 compared to 3.6% in the prior year.
In addition, administration expenses increased $1,018, primarily to support management information service needs with the recent implementation of new ERP systems, as well an increased bad debt expense, totaling $225, primarily related to closing the tooling operation at the plastic injection molding facility, and increased payroll and related costs totaling $160 to support the sophisticated machinery and expanded operations at our plastic injection molding and tooling subsidiary.
Acquired In-Process Research and Development - In connection with its acquisition of the assets of ProActive Pedals in July, 1999, the Company recorded a pretax charge of $1,750 for research and development efforts in process at the date of the acquisition. See Note 18 to the Notes to Consolidated Financial Statements.
The value assigned to the in-process research and development efforts was determined by independent appraisal and represents those efforts in process at the date of acquisition that had not reached the point where technological feasibility had been established and that had no alternative future uses. Accounting rules require that these costs be expensed as incurred. At September 30, 1999, the Company believes that acquired in-process research and development efforts related to the acquisition will result in commercially viable products during fiscal 2001 at an additional cost of approximately $3,500.
Interest and Other Expenses - ---------------------------
Interest expense increased $349 to $2,154 in the year ended September 30, 1999 from $1,805 in the year ended September 30, 1998. Interest expense increased primarily as a result of increased capital lease obligations that are at a higher average interest rate than bank debt. Allocated interest expense included in discontinued operations for the year ended September 30, 1999 and 1998 was $277 and $477, respectively.
Discontinued operations - -----------------------
The Company reported a net loss from discontinued operations of $5,611 for year ended September 30, 1999 compared to a net loss of $4,299 for the year ended September 30, 1998. The Company adopted a plan of disposal for the Agriculture Equipment segment in late 1998. As a result, a net loss on disposal totaling $1,403 was recorded for this segment. However, during the year ended September 30, 1999, an additional net loss on disposal totaling $5,611 was recorded for the disposal of this segment. The loss in fiscal 1999 is based on events and information, which resulted in management's revised estimate of the net realizable value of the Agricultural Equipment Segment. The revised estimate is based on contract negotiations and lower than anticipated bids for portions or all of the segment.
Net sales from the Agriculture Equipment segment declined $1,275, or 15.0% to $7,225 in the year ended September 30, 1999 compared to $8,500 in the year ended September 30, 1998. The decline in sales was due to lower unit sales attributable primarily to a weak farm economy.
Estimated future losses from discontinued operations for the Automotive Accessories segment were accrued in fiscal 1997. The Automotive Accessories segment was sold in March 1998, and the loss was $1,625 net of income tax benefits of $1,001. The additional loss in fiscal 1998 over that accrued in fiscal 1997 resulted from the loss on the actual disposition of the Automotive Accessories segment which was sold in 1998.
Net earnings (loss) allocable to common shareholders - ----------------------------------------------------
Net earnings (loss) allocable to common shareholders were $10,135 in the year ended September 30, 1999 compared to $42 in the prior fiscal year due to decreased earnings from operations, including the charge for acquired in-process research and development and the loss from impairment of assets as described above.
The effective income tax rate for continuing operations was (27.5)% and 33.9% for the year ended September 30, 1999 and 1998.
Results of Operations Year ended September 30, 1998 Compared to September 30, 1997 - ------------------------------------------------------------
Overview - --------
Net sales from continuing operations increased 23.5% 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 40.7%, 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 lower earnings 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 83.3%, or $2,096 in fiscal 1998 primarily as a result of increased earnings before interest and taxes of $2,220 and a lower effective tax rate as a result of anticipated and realized state tax refunds from prior years.
Net earnings allocable to common shareholders was $42 in fiscal 1998 compared to a net loss allocable to common shareholders of $2,037 in the prior fiscal year due to increased net income 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 26.0%, 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 component and GPS segments decreased $182, or 4.8%, due to lower unit sales of electrical components. Sales of Vehicle Components and electrical components accounted for 93.8% and 6.2% as a percent of total sales for the year ended September 30, 1998 compared to 92.0% and 8.0% for the prior year.
Gross margin - ------------
Gross margin from continuing operations increased $4,820, or 38.0%, to $17,517 compared to $12,697 in fiscal 1997. Gross margins increased 40.6% 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 2.9% in the electrical component and GPS segments. Decreased gross margins in these segments are attributed to lower unit sales volumes. Gross margins as a percent of sales increased to 30.4% in fiscal 1998 compared to 27.2% 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 35.2%, during fiscal 1998 compared to amounts in fiscal 1997. Operating expenses as a percentage of net sales from continuing operations increased to 14.8% in fiscal 1998 compared to 13.5% in fiscal 1997. Operating expenses increased $1,458, or 33.7%, in fiscal 1998 in the Vehicle Components segment and $762, or 38.5%, in the electronic 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 51.6%, 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 3.9% to 4.8%. 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.
Selling expenses for continuing operations increased 21.6% to $2,065 in fiscal 1998 compared to 1997 levels. Selling expenses as a percentage of net sales from continuing operations were 3.6% in fiscal 1997 and 1998. Selling expenses increased to support increased sales volumes in the Vehicle Components segment.
General and administrative expenses for continuing operations increased $908, or 32.7%, in fiscal 1998 to $3,683 compared to fiscal 1997 amounts. General and administrative expenses were 6.4% and 5.9% of net sales from continuing operations in fiscal 1998 and 1997, respectively. 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 $434, or 31.7%, to $1,805 in fiscal 1998 from $1,371 in fiscal 1997 due to increased borrowings. Allocated interest expense included in discontinued operations for the year ended September 30, 1998 and 1997 was $477 and $723, respectively. Other expenses increased $122, or 31.8% 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 late 1998.
The 1998 loss from discontinued operations of the Agriculture Equipment business 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 11.3% 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 business was $1,625 net of income tax benefits of $1,001. The loss resulted primarily from a reduction in the estimated value of non-voting preferred stock received as partial consideration for the sale and from additional estimated retained liabilities related to the sale.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------------------------------------------------------
Williams Controls, Inc. Index to Consolidated Financial Statements
Page ----
Consolidated Balance Sheets at September 30, 1999 and 1998 19
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1999, 1998 and 1997 20
Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 21
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 1999, 1998 and 1997 22
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998 and 1997 23
Notes to Consolidated Financial Statements 24-51
Report of Independent Public Accountants 52
Independent Auditors' Report 53
See page 56 for Index to Schedules and page 60 for Index to Exhibits.
Williams Controls, Inc. Consolidated Balance Sheets (Dollars in thousands, except share and per share information)
Williams Controls, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (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"); ProActive Acquisition Corporation ("ProActive"); 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.
ProActive Acquisition Corporation: Conducts research and development activities related to adjustable foot pedals and manufactures adjustable pedal systems.
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.
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. A significant portion of WWT's revenues are derived from Ajay Sports, Inc., an affiliate.
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.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Techwood Williams, Inc.: Manufactured and distributed commercial wood chippers used in landscaping and farming. Techwood ceased manufacturing operations in fiscal 1997.
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.
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 standard cost, which approximates actual cost, 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 and Intangible Assets - Goodwill, the excess of cost over net assets of acquired companies, is being amortized using the straight-line method over periods from 15 to 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. Other intangible assets includes developed technology which is being amortized on a straight line basis over the estimated useful life of the asset, or seven years. In addition, intangible assets include the cost of a patent license agreement which is being amortized on a straight line basis over the shorter of the legal or estimated useful life of the asset, which is eleven years.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
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 95% of its sales from continuing operations are to customers in the vehicle component segment. Approximately 63% of the Company's sales from continuing operations are electronic throttle controls ("ETC").
For the years ended September 30, 1999, 1998 and 1997, Freightliner accounted for 27%, 21% and 16%, Navistar accounted for 15%, 16% and 16%, Volvo accounted for 8%, 9% and 8% and General Motors accounted for 5%, 3% and 0% of net sales from continuing operations, respectively. Approximately 20%, 15% and 14% of net sales from continuing operations in fiscal 1999, 1998 and 1997, respectively, were to customers outside of the United States, primarily in Canada, Mexico and Sweden, and, to a lesser extent, in Europe, South America and Australia. See note 15 of Notes to Consolidated Financial Statements.
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 (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.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Following is a reconciliation of basic EPS and diluted EPS from continuing operations:
At September 30, 1999, 1998 and 1997, the Company had options and warrants covering 3,548,797, 582,236 and 336,600 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. In 1999, conversion of the preferred shares would have been anti-dilutive and, therefore, was not considered in the computation of diluted earnings per share.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Reclassifications - Certain amounts previously reported in the 1998 and 1997 financial statements have been reclassified to conform to 1999 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 12).
Recent FASB Pronouncements - In June 1999 the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company does not have any derivative instruments and accordingly, the adoption of SFAS 137 will have no impact on 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.
Note 3. Inventories - -------------------
Inventories consist of the following at September 30:
1999 1998 -------- -------- Raw material $ 6,867 $ 5,152 Work in progress 697 1,333 Finished goods 2,264 4,208 -------- -------- $ 9,828 $ 10,693 ======== ========
Finished goods include component parts and finished product ready for shipment.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 4. Investment in and Receivables from Affiliate - ----------------------------------------------------
At September 30, 1999 the Company had an investment in and notes receivable from Ajay Sports, Inc. ("Ajay") in the amount of $6,652, 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 and during 1999, purchased ProGolf Discount, a franchisor of golf equipment and accessories retail stores. The Company 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, 1999 is comprised of an investment in common and preferred stock of Ajay in the amount of $4,565 and a secured note receivable in the amount of $1,587. In addition, the Company could be obligated to advance to Ajay up to an additional $1,515 under the terms of an intercreditor agreement. In August 1999, $500 was paid to a previous lender, on behalf of Ajay, under the terms of an intercreditor agreement and is reflected as an increase in the note receivable from affiliate. The chairman of the Company has provided a guarantee of the investments in and loans to Ajay. Also, at September 30, 1999 the Company had receivables of $245 from Ajay for unpaid interest and fees incurred from May to September, 1999 which is included in trade and other accounts receivable at September 30, 1999. At September 30, 1998, the Company had an investment in Ajay preferred and common stock in the amount of $5,000 and $53, respectively and a secured note receivable from Ajay in the amount of $1,087.
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 and a management fee for sourcing products overseas in the amount of $80 annually.
The Company owns 686,274 shares of common stock in Ajay which represents approximately 16% of Ajay's outstanding common stock at September 30, 1999. 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, 1999, 1998 and 1997, the Company reported losses on its investment in Ajay in the amount of $488, $506 and $384, respectively. In addition, the company has options to purchase 1,851,813 shares of common stock at an exercise price of $1.08. During 1999, the investment in Ajay common stock was reduced to zero in the Consolidated Balance Sheet as a result of the Company's equity interest in Ajay's losses since acquisition. During the year ended September 30, 1999, the Company's investment in Ajay's preferred stock was also reduced by $435 as a result of continuing recognition of the Company's equity interest in Ajay's losses.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Based upon the closing bid price, the market value of the investment in Ajay common shares was approximately $558 at September 30, 1999.
Following is a summary of condensed unaudited financial information of Ajay as of and for the twelve months ended September 30, 1999, 1998 and 1997:
1999 1998 1997 (unaudited) (unaudited) (unaudited) ----------- ----------- -----------
Current assets $ 9,193 $ 9,584 $ 14,264 Other assets 15,243 4,212 4,449 ----------- ----------- ----------- $ 24,436 $ 13,796 $ 18,713 =========== =========== ===========
Current liabilities $ 4,949 $ 2,030 $ 5,031 Other liabilities 18,128 8,003 12,061 Common and preferred shareholders' equity 1,359 3,763 1,621 ----------- ----------- ----------- $ 24,436 $ 13,796 $ 18,713 =========== =========== ===========
Net sales $ 13,629 $ 27,094 $ 29,063 =========== =========== =========== Gross margin $ 1,717 $ 3,581 $ 3,772 =========== =========== =========== Loss before income tax benefit $ (2,713) $ (2,858) $ (2,133) =========== =========== ===========
At September 30, 1999, Ajay had approximately 4,205,000 common shares outstanding. In addition to the Company's options and convertible preferred stock at September 30, 1999, Ajay had outstanding preferred stock that is convertible to approximately 1,686,000 shares of Ajay common stock and outstanding options and warrants to purchase approximately 834,000 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 $114 in total for his fiscal 1999, 1998 and 1997 time and services. The Company accepted the officer's resignation in December 1998.
Note 5. Goodwill and Intangible Assets - --------------------------------------
At September 30, goodwill and intangible assets consist of the following:
1999 1998 ---------- ---------- Goodwill $ 2,955 $ 793 Developed technology 1,820 - Patent and patent license agreement 1,439 200 Less accumulated amortization (450) (277) ---------- ---------- $ 5,764 $ 716 ========== ==========
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Amortization expense on intangible assets was $173, $85 and $85 for the years ended September 30, 1999, 1998 and 1997, respectively.
Note 6. Financing Arrangements - ------------------------------
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. In December 1998, the Company increased its term loan by $2,500. 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 plus .50% (8.25% at September 30, 1999.) The Real Estate, Term Loan I, and Term Loan II bear interest at the Bank's prime rate plus .75%. At the Company's option, the Company may borrow funds at the London InterBank Offering Rate ("Libor") plus 3.00%. The loans under the revolving credit facility mature on July 11, 2001. The Real Estate loan is being amortized over twenty years and the Term Loan I is being amortized over seven years with all remaining principal outstanding due at July 11, 2001. In July 1999, The Company borrowed $2,500 from the Bank under a new term loan ("Term Loan III") under the existing facility. Interest on this term note bears interest at the Bank's prime rate plus 1.25%. This term note matures on February 1, 2000. All loans are secured by substantially all of the assets of the Company.
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 except for through the use of proceeds from stock options exercised, and restricts capital expenditures to an amount not to exceed $10,500 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, 1999, the Bank waived compliance with all financial covenants as the Company was out of compliance at September 30, 1999. The waivers were obtained in a manner which allows the Company's debt to be classified as current and long-term based on the payment terms of the loans at September 30, 1999.
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 inter-creditor 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 $1,515 at September 30, 1999.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Maturities of long-term debt at September 30, 1999 are as follows:
2000 $ 4,188 2001 19,681 2002 - 2003 - 2004 - Thereafter 700 -------- $ 24,569 ========
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 8.8% to 10.5%).
Future minimum lease payments under capital leases are as follows for the years ending September 30:
2000 $ 1,466 2001 1,444 2002 1,498 2003 1,040 2004 721 Thereafter 571 -------- Total future minimum lease payments $ 6,740
Less - Amount representing interest 1,373 -------- Present value of future minimum lease payments 5,367 Less - Current portion 1,005 -------- $ 4,362 ========
During 1999, the Company incurred additional capital leases of $1,819. Capital lease obligations, all of which were incurred in fiscal 1998, totaled $4,146 at September 30, 1998 and $334 was classified as the current portion of capital lease obligations at September 30, 1998.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 7. Patent License Agreement - --------------------------------
In conjunction with the acquisition in 1999 of the ProActive Pedals division of Active Tool & Manufacturing Co., Inc., (Note 18) the Company entered into a patent license agreement with a private inventor, under which the Company holds an exclusive, worldwide license for three patents covering adjustable foot pedals. The license agreement remains in effect for the life of the patents. The Company paid an initial license fee of $600 and the agreement requires yearly minimum payments of $95 to the inventor for a period of approximately ten years. Accrued minimum royalties consist of the following at September 30, 1999:
Minimum future royalties $ 1,045
Less imputed interest (406) -------------- Present value of payments 639 Less current portion included in Accrued expenses (78) --------------
Long-term portion included in Other Liabilities $ 561 ==============
Note 8. Pension Plans - ---------------------
The Company maintains two pension plans; one plan covers 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.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and the fair value of plan assets for the hourly employees plan with accumulated benefit obligations in excess of plan assets were $3,732, $3,637 and $3,608, respectively as of September 30, 1999 and $3,792, $3,614 and $3,180, respectively as of September 30, 1998.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 9. Property, Plant and Equipment - -------------------------------------
At September 30, 1999 and 1998, property, plant and equipment consist of the following:
1999 1998 ---- ---- Land and land improvements $ 2,499 $ 2,695 Buildings 6,241 8,748 Machinery and equipment 15,966 12,099 Office furniture and equipment 4,368 3,255 --------- --------- 29,074 26,797 Less accumulated depreciation (8,299) (6,784) --------- --------- $ 20,775 $ 20,013 ========= =========
Net property, plant and equipment of $20,775 and $20,013 at September 30, 1999 and 1998, respectively, excludes certain machinery, equipment and office equipment held for disposition. Capital leases for machinery and equipment and office furniture and equipment included above were $6,490 and $5,200 at September 30, 1999 and 1998, respectively. Accumulated depreciation on capital leases was $673 and $542 at September 30, 1999 and 1998, respectively.
Note 10. Impairment of Assets - -----------------------------
During the year ended September 30, 1999 the Company recognized a $5,278 loss from the impairment of assets related to Kenco, the Company's former Automotive Accessories business unit, consisting of the following items:
Impairment of non-voting preferred stock and notes and accounts receivable $4,655 Impairment of property 623 ------ Total loss from impairment of assets $5,278 ======
At the date the impairment loss was taken, the Company had non-voting preferred stock and notes and accounts receivable related to Kenco of $797 and $3,858. Since the sale of the operating assets of Kenco to Kenco Products, Inc. ("KPI") in 1998, KPI has reported operating losses and experienced cash flow and other financing difficulties. In addition, KPI has not been able to make payments on its notes and accounts payable to the Company. KPI's bank has notified KPI it is in default under its loan agreement. In consideration of this and after evaluation of the business prospects of KPI and its need for additional capital, the Company determined it was not probable that it would recover the value of the preferred stock and notes and accounts receivable, and an impairment loss totaling $4,655 was recorded for the year ended September 30, 1999.
In addition, the Company recorded an impairment loss related to certain property retained from the Kenco sale. The majority of the impairment loss for property related to the sale in July 1999 of a building and land which were being leased by KPI from the Company. This property was sold, and after retiring $891 of debt secured by the property, resulted in cash proceeds of $1,192. The proceeds to the Company, after deducting approximately $692 of expenses to assist in the relocation of KPI and to ready the building for sale were paid to a previous lender, on behalf of an affiliated company, under the terms of an intercreditor agreement. The estimated loss on the sale of land and building, which has been recorded in loss from impairment of assets, is $528.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 11. Income Tax Expense (Benefit) - -------------------------------------
The provision for income tax expense (benefit) is as follows for the years ended September 30:
1999 1998 1997 ---- ---- ---- Continuing operations: Current $ 1,078 $ 2,462 $ 3,610 Deferred (2,565) (96) (1,368) --------- -------- -------- (1,487) 2,366 2,242
Discontinued operations (3,189) (2,932) (3,208) --------- -------- -------- $ (4,676) $ (566) $ (966) ========= ======== ========
The reconciliation between the effective tax rate and the statutory federal tax rate on earnings (loss) from continuing operations as a percent is as follows:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate (34.0) 34.0 34.0 State taxes, net of federal income tax benefit (4.0) 4.0 4.0 Credits for state income tax refunds - (8.4) - Effect of change in valuation allowance 8.8 3.2 7.4 Other 1.7 1.1 1.7 --------- -------- -------- (27.5) 33.9 47.1 ========= ======== ========
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (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, 1999 and 1998 are as follows:
At September 30, 1999, the Company has approximately $35,000 of state net operating loss carry forwards, which are available to the Company in certain state tax jurisdictions and expire in 2006 through 2013. During the year ended September 30, 1999, the Company increased its valuation allowance against certain state net operating loss and capital loss carry-forwards it does not expect to utilize.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 12. Shareholders' Equity - -----------------------------
Common Stock - In July, 1999, the Company completed a private placement of 1,244,065 shares of common stock of the Company and received net proceeds of $3,379. In addition, 87,084 shares of the Company's common stock was issued in lieu of the underwriting fee, for a total of 1,331,149 shares issued in conjunction with the offering. For every share issued in the private placement, the purchasing shareholders received warrants to purchase .35 common shares or 465,902 additional shares of common stock, at $3.125 per share. In addition, for every share issued to the placement agent, the placement agent received warrants to purchase .35 common shares, or 87,084 additional shares of common stock, at $3.30 per share. The warrants issued may be exercised at any time over the next five years. The fair value of such warrants and the shares in lieu of the underwriting fee, totaling $1,118, is included in "Common stock issued in private placement" with a corresponding charge to "Equity issuance costs" in the accompanying Consolidated Statements of Shareholders' Equity.
Preferred Stock - In April, 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. 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.
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 $.41 - 3.63 per share, the market value at the date of issuance. Any remaining unexercised options and warrants expire in fiscal 2000. The stock option activity during the periods indicated is as follows:
Shares Subject to Options Option Prices ---------- ------------- Outstanding at September 30, 1996 340,000 $0.41 - 3.63
Granted - - Exercised - - Canceled - - -------------------------------- Outstanding at September 30, 1997 340,000 0.41 - 3.63
Granted - - Exercised (150,000) 0.41 Canceled - - -------------------------------- Outstanding at September 30, 1998 190,000 0.41 - 3.63
Granted - - Exercised (150,000) 0.41 Canceled (10,000) - -------------------------------- Outstanding at September 30, 1999 30,000 $3.63 ================================
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
In addition to the stock options noted above, the Company has two 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 each of January, 1998 and in February, 1999, 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, 1999, the Company had 1,767,825 shares available for future grants.
Stock option activity during the periods indicated under the 1993 Plan are as follows:
Shares Shares Available for Subject to Grant Options Option Prices ------------- ---------- ------------- 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 (1,183,887) 1,183,887 2.31 - 3.00 Exercised - - - Canceled 117,975 (117,975) 1.94 - 2.94 -------------------------------------------- Outstanding at September 30, 1998 822,213 2,177,787 1.94 - 3.63
Additional shares reserved 1,500,000 - - Granted (744,000) 744,000 2.06 - 3.00 Exercised 51,750 (51,750) 1.94 - 2.50 Canceled 137,862 (137,862) 1.94 - 2.94 -------------------------------------------- Outstanding at September 30, 1999 1,767,825 2,732,175 $1.94 - 3.00 ============================================
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, 1999 there were 30,000 shares available for grant under the 1995 Plan.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (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 for Subject to Grant Options Option Prices ------------- ---------- ------------- 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
Granted (50,000) 50,000 2.68 Exercised - - - Canceled - - - -------------------------------------------- Outstanding at September 30, 1999 30,000 170,000 $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, 1999, 1998 and 1997, using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants:
Year Ended September 30, ------------------------------------ 1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.13% 6.00% 6.00% Expected dividend yield 0% 0% 0% Expected lives 7 years 7 years 7 years Expected volatility 55.5% 57.1% 57.1%
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (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, 1999, 1998 and 1997, was $1,064, $1,458 and $1,357 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, 1999, 1998 and 1997, was $1.36, $1.60 and $1.27 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:
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards 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, 1999:
At September 30, 1998 and 1997, 1,171,121 and 774,000 options, respectively, were exercisable at weighted average exercise prices of $2.13 per share and $1.68 per share, respectively.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 13. 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 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 except for share repurchases allowed from the proceeds of employee stock option exercise.
Note 14. Discontinued Operations - --------------------------------
Agriculture Equipment Segment - In December 1998, the Company announced its intention to divest its Agriculture Equipment Segment. These operations are reflected as discontinued operations for all periods presented in the Company's Statements of Operations. During 1999, the Company recorded an estimated net loss on disposal of $5,611, net of tax benefit of $3,189, or $(0.30) per common share, associated with the divestiture of the Agriculture Equipment Segment. The loss is based upon events and information which resulted in management's revised estimate of the net realizable value of the Agriculture Equipment Segment. The revised estimate is based upon contract negotiations and lower than anticipated bids for portions of the segment which resulted in a write-down of certain assets and a provision for associated costs. Liabilities of the Agriculture Equipment Segment to be retained by the Company as of September 30, 1999, amounted to $462 included in the accounts payable and $217 included in the accrued expenses caption of the accompanying Consolidated Balance Sheet for current payables and accruals. Additionally, $570 is included in the current portion of Long-term Debt and Capital Leases and $700 is included in the Long-term Debt and Capital Leases obligations caption for debt to be retained.
Under generally accepted accounting principles, a provision for loss on discontinued operations has been included based on management's best estimates of the amounts expected to be realized on the sale of the Agriculture Equipment Segment. While estimates are based on an analysis of the segment, including appraisals of equipment, there have been limited recent sales of comparable assets to consider in preparing such valuations. The amounts the Company will ultimately realize could differ materially in the near term from the amounts assumed in arriving at the loss anticipated on disposal of the discontinued operations.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (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:
1999 1998 1997 ---- ---- ----
Net sales $ 7,225 $ 8,500 $ 9,581 ==================================
Loss from operations before allocated interest expense and income tax benefits $ - $ (2,239) $ (2,284) Allocated interest expense - (279) (433) ---------------------------------- Loss from operations before income tax benefit - (2,518) (2,717) Income tax benefit - 959 1,087 Loss allocable to minority interest - 288 250 ---------------------------------- Loss from operations - (1,271) (1,380)
Loss on disposal before interest and income taxes (8,700) (2,273) - Allocated interest expense (100) (277) - ---------------------------------- Loss on disposal before income tax benefit (8,800) (2,550) - Income tax benefit 3,189 972 - Loss allocable to minority interest - 175 - ---------------------------------- Loss on disposal (5,611) (1,403) - ---------------------------------- Total loss on discontinued operations $(5,611) $ (2,674) (1,380) ==================================
The net assets of the Agriculture Equipment segment held for disposition included in the accompanying Consolidated Balance Sheet, net of writedown to estimated net realizable value, as of September 30, 1999 and 1998, are as follows:
1999 1998 Current assets: ---- ---- Accounts receivable and inventory, net $ 360 $ 5,787 ========================
Long term assets: Property, plant and equipment, net $ 500 $ 3,424 ========================
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.
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.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
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. The Company has a security interest in all of the assets of KPI subordinate to the security interest of KPI's bank.
The summarized results for Kenco for the years ended September 30 are as follows reflecting operating results through the measurement date:
1998 1997 ---- ---- Net sales $ 4,964 $ 8,666 ========= =========
Loss from operations before allocated interest expense and income tax benefit - (1,727) Allocated interest expense - (290) --------- --------- Loss from operations before income tax benefit - (2,017) Income tax benefit - 810 --------- --------- Loss from operations - (1,207)
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) ========= =========
Note 15. Business Segment Information - -------------------------------------
In the fourth quarter of 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 changes the method of disclosing segment information to the manner in which the Company's chief operating decision maker organizes the components for making operating decisions, assessing performance and allocating resources. The Company has organized the segments based on the type of products sold which are described in Note 1. As required by SFAS 131, all prior years' segment data has been restated.
The Company accounts for its segments under the same policies as described in the principal accounting policies footnote. Intersegment revenues and related earnings are not material. Management evaluates segment performance primarily based on revenue and operating income; therefore, other items included in pretax income, consisting primarily of interest income or expense, are not reported in segment results.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Operating income is net of all corporate expenses, which are allocated based on measurable services provided to each segment or for general corporate expenses which are allocated on a revenue and capital basis.
Identifiable corporate assets consist primarily of investment in an affiliated company and other assets, and deferred taxes.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
For geographic information, revenues are allocated between the United States and International, depending on whether the shipments are to customers within the United States or located outside the United States. Long-lived assets outside the United States were immaterial for all periods presented.
Year ended September 30, 1999 1998 1997 ---- ---- ---- Canada $ 5,493 $ 3,377 $ 2,795 Sweden 1,868 2,073 1,439 Mexico 2,276 35 - Other 2,947 3,201 2,121 ------- ------- ------- Net Sales-export 12,584 8,686 6,355 United States 48,838 48,960 40,316 ------- ------- ------- $61,422 $57,646 $46,671 ======= ======= =======
Note 16. 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, 1999 all shares had been allocated under the plan and there were no amounts under the loan outstanding.
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 17. 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.
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.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
The following table provides information on the post retirement plan status at September 30, 1999:
Accumulated Post Retirement Benefit Obligation 1999 1998 ---- ----
Retirees $ 1,503 $ 1,592 Fully eligible active participants 662 660 Other active Plan participants 1,312 1,333 ----------------------- 3,477 3,585
Plan assets - - ----------------------- Accumulated post retirement benefit obligation in excess of Plan assets 3,477 3,585
Unrecognized gain 500 147 Unrecognized prior service cost (576) (649) Unrecognized transition obligation (1,606) (1,720) -----------------------
Accrued post retirement benefit cost in the consolidated balance sheet $ 1,795 $ 1,363 =======================
Post retirement benefits expense included the following components for the years ended September 30:
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 7.75% and 6.75% for the years ended September 30, 1999 and 1998, respectively.
If the assumed medical costs trends were increased by 1%, the APBO as of September 30, 1999 would increase by $234, 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, 1999 would decrease by $306, and the aggregate of the services and interest cost components of the net annual post retirement benefit cost would be decreased by $42.
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 18. Acquisition - --------------------
In July, 1999, the Company purchased the ProActive Pedals division of Active Tools Manufacturing Co., Inc. ProActive Pedal is a designer and developer of patented adjustable foot pedal systems and modular pedal systems. The purchase price included $5,750 in cash, plus the assumption of approximately $286 in liabilities. In addition, the Company entered into a patent license with the patent holder which required an initial payment of $600 and minimum annual royalty payments of $95 per year for ten years. Assets acquired include tooling designs, technology and patent rights on adjustable foot pedal systems, as well as designs of modular foot pedal systems. The acquisition was accounted for using the purchase method of accounting and the results of operations of ProActive have been included in the consolidated results of operations of the Company from the acquisition date. The purchase price allocation resulted in a $1,750 charge to operations for acquired in-process research and development, determined by independent appraisal, for the year ended September 30, 1999. The technological feasibility of the acquired technology, which has no alternative future use, had not been established prior to the purchase. The allocation of the purchase price also resulted in $1,820 being allocated to developed technology which is being amortized over a seven year period. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed of $2,162 was recorded as goodwill and is being amortized on a straight line basis over a 15 year period.
The following unaudited pro forma results for the years ended September 30, 1999 and 1998, includes the results of ProActive Pedals assuming such acquisitions occured as of October 1, 1997, and includes the acquired in-process research and development charge in the period when incurred:
1999 1998 ---- ---- Sales $63,059 $57,856 Operating income (loss) (5,401) 6,360 Loss from continuing operations (11,137) (1,495) Net loss per share - basic (0.63) (0.09) Net loss per share - diluted (0.63) (0.09)
The purchase was financed through the private placement of 1,331,149 shares of the Company's common stock with net proceeds of approximately $3,379. In addition, the Company borrowed $2,500 from its bank under a new term loan facility ("Term Loan III").
Note 19. Sale Leaseback - -----------------------
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a sale-leaseback transaction for approximately $4,600. The transaction was accounted for as a financing and the capitalized lease obligations of approximately $4,600 were recorded as long term liabilities. 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 was reported as a note receivable at September 30, 1998. In December 1998, the Company exercised an option to repurchase the building for $4,700, consisting of cash of $1,500 and the note receivable of $3,200. Accordingly, the note receivable of $3,200 and the capital lease obligation of $4,600 have been eliminated from the balance sheet at September 30, 1999. The costs associated with the building repurchase are reported in other expenses during the year ended September 30, 1999.
The Company borrowed $2,500 from its bank under amended term loans to finance the repurchase transaction and for working capital purposes. Approximately $1,222 of the additional financing was borrowed under an amendment to the Company's existing Term Loan I which increased the Term Loan I balance to $4,105. Term Loan I is payable in equal monthly installments of $60 with the remaining balance of $3,150 due at maturity on July 1, 2001. Approximately $1,278 of the additional financing was provided under an amended Term Loan II payable in 18 equal monthly installments of $71, plus variable interest (8.5% at September 30, 1999).
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
Note 20. Quarterly Data (unaudited)
Notes to Consolidated Financial Statements Years Ended September 30, 1999, 1998, and 1997 (Dollars in thousands, except share and per share amounts) - --------------------------------------------------------------------------------
(1) Certain reclassifications have been made to the first three quarters for the year ended September 30, 1999 from amounts previously reported. (2) The third quarter of 1999 operating expenses includes a $5,278 loss from the impairment of assets related to Kenco, our former automotive accessories business unit, consisting of $4,655 for the impairment of non-voting preferred stock and notes and accounts receivable and $623 for the impairment of property. (3) The fourth quarter of 1999 operating expenses includes $1,750 expense for acquired in-process research and development and changes in estimated amounts for warranty and inventory reserves based on fourth quarter events. The fourth quarter of 1999 loss from discontinued operations includes an additional loss for the Agricultural Equipment Segment which reflects events and information which resulted in management's revised estimate of the net realizable value of this segment. (4) 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. (5) All quarters prior to the fourth quarter 1998 have been restated to reflect the Agricultural Equipment segment as a discontinued operation. (6) Earnings (loss) per share for all periods have been restated for the provisions of SFAS 128.
Note 21. Related Parties - ------------------------
In addition to related party transactions discussed elsewhere in the notes to the consolidated financial statements, during the year ended September 30, 1999, $157 was paid to an affiliated company, for website development and e-commerce designs. The chairman of the Company is a controlling shareholder of the affiliated company.
Note 22. 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Williams Controls, Inc.:
We have audited the accompanying consolidated balance sheets of Williams Controls, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the two years in the period 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 audits.
We conducted our audits 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 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, 1999 and 1998, and the results of their operations and their cash flows for each of the two years in the period then ended, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Portland, Oregon, December 29, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors Williams Controls, Inc. Portland, Oregon
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows of Williams Controls, Inc. and subsidiaries for the year 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 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 results of operations and cash flows of Williams Controls, Inc. and subsidiaries for the year 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
Item 9.
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.
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 11.
Item 11. Executive Compensation
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's 1999 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's 1999 Proxy Statement.
Part IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
1. See Exhibit Index on page 60 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 56 of this Form 10-K.
4. Reports on Form 8-K.
On Form 8-K dated August 13, 1999, under "Item 2. Acquisition or Disposition of Assets" the Company announced the acquisition of the ProActive Pedals Division of Active Tools and Manufacturing Co., Inc.
On Form 8-KA dated October 12, 1999, under "Item 7. Financial Statements and Exhibits" the Company amended its 8-K dated August 13, 1999 to include (a) financial statements of the business acquired (ProActive Pedals) and (b) Proforma financial information.
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 29, 1999 By: /s/ Thomas W. Itin ------------------------------ Thomas W. Itin, Chairman, President and Chief 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 29, 1999 By: /s/ Thomas W. Itin ------------------------------ Thomas W. Itin, Principal Executive Officer, Chairman, President, Chief Executive Officer and Director
Date: December 29, 1999 By: /s/ Gerard A. Herlihy ------------------------------ Gerard A. Herlihy Chief Financial and Administrative Officer
Date: December 29, 1999 By: /s/ Kim L. Childs ------------------------------ Kim L. Childs Principal Accounting Officer
Date: December 29, 1999 By: /s/ Anthony B. Cashen ------------------------------ Anthony B. Cashen, Director
Date: December 29, 1999 By: ------------------------------ H. Samuel Greenawalt, Director
Date: December 29, 1999 By: /s/ Timothy Itin ------------------------------ Timothy Itin, Director
Date: December 29, 1999 By: /s/ Charles G. McClure ------------------------------ Charles G. McClure, Director
Williams Controls, Inc.
Index to Schedules
Page ----
Report of Independent Public Accountants 57
Independent Auditors' Report 58
Schedule II Valuation and Qualifying Accounts 59
All other schedules are omitted because they are not required, not applicable or the required information is given in the Consolidated Financial Statements.
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 financial statements, as of and for the years ended September 30, 1999 and 1998, included in Williams Controls, Inc. and subsidiaries' Form 10-K, and have issued our report thereon dated December 29, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule 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 29, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors Williams Controls, Inc. Portland, Oregon
We have audited the 1997 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 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
Williams Controls, Inc.
Valuation and Qualifying Accounts
Schedule II
(Dollars in thousands)
Beginning Ending Description balance balance ----------- --------- -------
For Year Ended September 30, 1999
Total reserves for doubtful accounts and obsolete inventory $ 569 $ 1,066 ====== =======
For Year Ended September 30, 1998
Total reserves for doubtful accounts and obsolete inventory $ 855 $ 569 ====== =======
For Year Ended September 30, 1997
Total reserves for doubtful accounts and obsolete inventory $1,064 $ 855 ====== =======
NOTE: Valuation and qualifying accounts were not individually significant; and, therefore, additions and deductions information has not been provided in this schedule.
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 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) (e) Term Loan III Promissory Note (Filed Herewith)
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 Current Report on Form 8-K, Date of report June 30, 1998)
10.2(h) Replacement Term Loan I 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 reference 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)
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) 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)
10.6(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"))
10.7 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)
10.8 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 June 30, 1998 Form 8-K)
10.9 Asset 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)
10.10(a) Asset Purchase Agreement, dated July 28, 1999, by and between Active Tool & Manufacturing Co., Inc., and the Registrant and its subsidiary, ProActive Acquisition Corporation (Filed Herewith)
10.10(b) Patent License Agreement, dated July 28, 1999, by and between Edmond B. Cicotte and the Registrant and its subsidiary, ProActive Acquisition Corporation (Filed Herewith)
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)