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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-18083
Williams Controls, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of April
30, 1998: 17,932,040
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1
<PAGE>
Williams Controls, Inc.
Index
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 1998 (unaudited)
and September 30, 1997 3
Unaudited Consolidated Statement of Shareholders' Equity,
six months ended March 31, 1998 4
Unaudited Consolidated Statements of Operations,
three and six months ended March 31, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows,
six months ended March 31, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securites and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
2
<PAGE>
Williams Controls Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
(unaudited)
--------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,064 $ 700
Trade and other accounts receivable, less allowance of $241 and
$185 at March 31, 1998 and September 30, 1997, respectively 13,038 8,468
Inventories 13,998 14,517
Prepaid expenses 1,377 713
Net assets held for disposition -- 638
Other current assets 1,098 1,098
-------- --------
Total current assets 30,575 26,134
Investment in affiliate 161 559
Property plant & equipment, net 18,076 18,080
Receivables from affiliate 3,634 3,645
Net assets held for disposition -- 1,610
Other assets 3,290 1,348
======== ========
Total assets $ 55,736 $ 51,376
======== ========
LIABILITIES AND SHAREHOLDERS'EQUITY
Current Liabilities:
Accounts payable 6,372 5,070
Accrued expenses 3,703 3,008
Current portion of long-term debt and capital leases 1,517 1,428
Other current liabilities 49 500
-------- --------
Total current liabilities 11,641 10,006
Long-term debt and capital lease obligations 23,522 22,857
Other liabilities 1,471 1,214
Commitments and contingencies -- --
Minority interest in consolidated subsidiaries 424 464
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized) -- --
Common stock ($.01 par value, 50,000,000 authorized;
18,062,240 and 17,912,240 issued at March 31, 1998
and September 30, 1997, respectively) 180 179
Additional paid-in capital 9,882 9,822
Retained earnings 9,184 7,402
Unearned ESOP shares (191) (191)
Treasury stock (130,200 shares at March 31, 1998 and
September 30, 1997, respectively) (377) (377)
-------- --------
Total shareholders' equity 18,678 16,835
======== ========
Total liabilities and shareholders' equity $ 55,736 $ 51,376
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Williams Controls, Inc.
Consolidated Statement of Shareholders' Equity
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Issued
Common stock Additional
---------------------- Paid in Retained Unearned Treasury Shareholders
Shares Amount Capital Earnings ESOP Shares Shares Equity
---------- ---------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 17,912,240 $ 179 $ 9,822 $ 7,402 $ (191) $ (377) $ 16,835
Net earnings -- -- -- 1,782 -- -- 1,782
Common stock issued
pursuant to exercise
of warrants/options 150,000 1 60 -- -- -- 61
---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance, March 31, 1998 18,062,240 $ 180 $ 9,882 $ 9,184 $ (191) $ (377) $ 18,678
========== ========== ========== ========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $ 17,891 $ 14,248 $ 32,835 $ 27,769
Cost of sales 12,586 10,867 23,375 21,003
--------------- --------------- -------------- --------------
Gross margin 5,305 3,381 9,460 6,766
Operating expenses:
Research and development 730 489 1,289 960
Selling 736 777 1,427 1,453
Administration 1,347 1,028 2,425 1,937
--------------- --------------- -------------- --------------
Total operating expenses 2,813 2,294 5,141 4,350
--------------- --------------- -------------- --------------
Earnings from continuing operations 2,492 1,087 4,319 2,416
Other expenses:
Interest expense 431 455 806 972
Equity interest in loss of affiliate 40 49 398 179
--------------- --------------- -------------- --------------
Total other expenses 471 504 1,204 1,151
--------------- --------------- -------------- --------------
Earnings from continuing operations before income tax
expense 2,021 583 3,115 1,265
Income tax expense 791 241 1,212 513
--------------- --------------- -------------- --------------
Earnings from continuing operations before minority
interest 1,230 342 1,903 752
Minority interest in net loss of consolidated subsidiaries 17 49 39 31
--------------- --------------- -------------- --------------
Net earnings from continuing operations 1,247 391 1,942 783
Discontinued operations:
Loss from operations of automotive accessories segment (160) (521) (160) (901)
--------------- --------------- -------------- --------------
Loss from discontinued operations (160) (521) (160) (901)
--------------- --------------- -------------- --------------
Net earnings (loss) $ 1,087 $ (130) $ 1,782 (118)
=============== =============== ============== ==============
Basic and diluted earnings per common share from
continuing operations $ 0.07 $ 0.02 $ 0.11 $ 0.04
Basic and diluted loss per common share from
discontinued operations (0.01) (0.03) (0.01) (0.05)
--------------- --------------- -------------- --------------
Basic and diluted net earnings (loss) per common share $ 0.06 $ (0.01) $ 0.10 $ (0.01)
=============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Six months Six months
Ended Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 1,782 $ (118)
Adjustments to reconcile net income
(loss) to net cash from continuing
operations:
Loss from discontinued operations 160 901
Depreciation and amortization 715 726
Minority interest in earnings (loss)
in consolidated subsidiaries (39) (31)
Equity interest in loss of affiliate 398 179
Changes in working capital of continuing
operations:
Receivables (3,053) (518)
Prepaid expenses (659) (830)
Inventories (1,132) (608)
Accounts payable and accrued
expenses 2,219 (782)
Other (26) 1,106
---------------- ----------------
Net cash provided by operating activities
of continuing operations 365 25
Cash flows from investing activities:
Proceeds from the sale of discontinued
operations 1,124 --
Payments for property, plant and
equipment (491) (390)
---------------- ----------------
Net cash provided by (used in) investing
activities of continuing operations 633 (390)
Cash flows from financing activities:
Proceeds (repayments) of long-term debt
and capital lease obligations 700 (50)
Proceeds from sale and issuance of
common stock 62 --
---------------- ----------------
Net cash provided by (used in) financing
activities of continuing operations 762 (50)
Net cash provided by (used in)
discontinued operations (1,396) 1,783
Net increase in cash and cash equivalents 364 1,368
Cash and cash equivalents at beginning
of period 700 1,379
================ ================
Cash and cash equivalents at end of
period $ 1,064 $ 2,747
================ ================
Supplemental disclosure of non-cash investing and financing activities:
Disposition of Kenco:
Net assets and liabilities sold $ 2,374 $ --
Allowances 1,376 --
Preferred stock (2,000) --
Other receivable (250) --
Receivable for inventory sold (430) --
Net gain on disposition 54 --
---------------- ----------------
Cash received $ 1,124 $ --
================ ================
The accompanying notes are an integral part of these statements.
6
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
has acquired, disposition of any current business of the Company, and the
Company's investment in and relationship with Ajay Sports, Inc., a related
company. These forward-looking statements are subject to the business and
economic risks faced by the Company. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described above and other factors described elsewhere in
this report.
1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to as the "Company" or
"Registrant."
2. The Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been prepared by
the Company and, in the opinion of management, reflect all material adjustments
which are necessary to a fair statement of results for the interim periods
presented. Certain information and footnote disclosure made in the last annual
report on Form 10-K have been condensed or omitted for the interim consolidated
statements. Certain costs are estimated for the full year and allocated to
interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is the Company's
opinion that, when the interim consolidated statements are read in conjunction
with the September 30, 1997 annual report on Form 10-K, the disclosures are
adequate to make the information presented not misleading. The interim
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.
3. Earnings (loss) per Share
As required, the Company adopted Statement of Financial Accounting Standards No.
128 during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic per share
amounts are based on the weighted average shares of common stock outstanding.
Diluted earnings per share assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. Accordingly, this presentation has been adopted for all periods
presented. The basic and diluted weighted average shares outstanding are as
follows:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 17,932,040 17,912,240 17,882,873 17,912,240
Less unallocated ESOP shares 86,000 140,000 86,000 140,000
------------------ ----------------- ----------------- -----------------
Weighted average outstanding shares
used for basic EPS 17,846,040 17,772,240 17,796,873 17,772,240
Plus incremental shares from assumed
issuance of stock options and other
contingent issuances 653,960 127,760 703,127 127,760
================== ================= ================= =================
Weighted average outstanding shares used
for diluted EPS 18,500,000 17,900,000 18,500,000 17,900,000
================== ================= ================= =================
</TABLE>
7
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
4. Inventories
Inventories consisted of the following:
March 31, September 30,
1998 1997
---------------- ----------------
Raw material $ 5,768 $ 5,305
Work in process 2,013 2,035
Finished goods 6,217 7,177
---------------- ----------------
$ 13,998 $ 14,517
================ ================
Finished goods include component parts and finished product ready for shipment.
5. Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
The Company has established processes for evaluating and managing the risks and
cost associated with this problem, including communicating with suppliers,
dealers and others with which it does business to coordinate Year 2000
conversion. The total cost of compliance and its effect on the Company's future
results of operations is being determined as part of the detailed conversion
planning process.
6. Sale of Discontinued Operations
On March 16, 1998, the Company completed the sale of a substantial portion of
the assets of Kenco, to Kenco Products, Inc. ("KPI") and entered into
warehousing and lease agreements with KPI (the "Kenco Transaction"). 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 for more than the past year. Colfax
Group, Inc.is unrelated to the Registrant.
Consideration to the Registrant consisted of $1.1 million cash, a $250,000
receivable, a $430,000 receivable for inventory sold, assumption of $1.0 million
of trade payables, accrued expenses and other liabilities related to the assets
purchased and $2.0 million of Series A Senior Preferred Stock (2000 shares) of
KPI. The preferred stock provides for annual dividends of $80 per share and is
convertible to common stock according to certain terms and conditions. The
accounting principles followed in determining the consideration received was the
fair market value of the assets disposed of.
The carrying values of assets sold in the Kenco Transaction included $1.4
million of productive assets (machinery and equipment, furniture and fixtures
and tools and dies), $794,000 of accounts receivable, $530,000 of inventory and
$325,000 of prepaid assets, after recording certain adjustments to inventory and
other accounts of approximately $1.3 million to the agreed upon sales price.
The Registrant has agreed to warehouse certain inventory not immediately
purchased valued at $2.6 million ("Warehouse Agreement"). KPI has agreed to
purchase all remaining inventory from Kenco on or before September 30, 1998
subject to certain terms and conditions outlined in the Warehouse agreement.
The Registrant has agreed to lease to KPI the existing building and improvements
of Kenco for $23,000 per month ("Lease Agreement"). The lease is currently
scheduled to terminate on September 30, 1998, subject to certain early
termination provisions if Kenco sells the facility to a third party buyer.
8
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
6. Sale of Discontinued Operations - continued
One of the principal owners of Colfax Group, Inc. has guaranteed the obligations
of KPI under the Warehouse Agreement and Lease Agreement subject to certain
terms and conditions.
Simultaneously with the closing of the Kenco Transaction, the Registrant repaid
$1.1 million outstanding under its existing credit facility with its bank.
Pursuant to the Intercreditor Agreement among US Bank, Wells Fargo Bank and the
Registrant dated July 14, 1997, the Company is obligated to pay to US Bank the
first $2.34 million in proceeds from future sales of inventory to KPI.
The following represents unaudited results of operations on a proforma basis as
if the transaction had been consummated as of October 1, 1997 and 1996,
respectively.
Six Months Ended Six Months Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Sales $ 32,835 $ 27,769
Net Income 2,102 943
================ ================
Earnings per common share
Basic $ 0.12 $ 0.05
================ ================
Diluted $ 0.11 $ 0.05
================ ================
9
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
7. Business Segment Information
<TABLE>
<CAPTION>
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales by classes of similar products from
continuing operations
Vehicle components $ 14,530 $ 11,113 $ 26,227 $ 20,577
Agricultural equipment 2,278 2,408 4,525 5,512
Electrical components and GPS 1,083 727 2,083 1,680
-------------- --------------- --------------- --------------
$ 17,891 $ 14,248 $ 32,835 $ 27,769
============== =============== =============== ==============
Earnings (loss) from continuing operations
Vehicle components 1,685 1,050 2,799 1,662
Agricultural equipment (173) (329) (364) (297)
Electrical components and GPS (282) (379) (532) (613)
-------------- --------------- -------------- --------------
1,230 342 1,903 752
============== =============== =============== ==============
Capital expenditures
Vehicle components 191 110 238 177
Agricultural equipment -- 53 104 129
Electrical components and GPS 64 55 149 84
-------------- --------------- --------------- --------------
Total capital expenditures - continuing operations 255 218 491 390
Automotive accessories - discontinued operations -- 168 -- 219
============== =============== =============== ==============
Total capital expenditures 255 386 491 609
============== =============== =============== ==============
Depreciation and amortization
Vehicle components 156 228 387 439
Agricultural equipment 82 78 163 145
Electrical components and GPS 85 81 165 142
-------------- --------------- --------------- --------------
Total depreciation and amortization - continuing
operations 323 387 715 726
Automotive accessories - discontinued operations 60 64 109 122
============== =============== =============== ==============
Total depreciation and amortization $ 383 $ 451 $ 824 $ 848
============== =============== =============== ==============
Identifiable assets
Vehicle components $ 37,082 $ 22,817
Agricultural equipment 10,419 12,052
Electrical components and GPS 8,235 7,891
--------------- --------------
Total assets - continuing operations 55,736 42,760
Automotive accessories - discontinued operations -- 11,999
=============== ==============
Total assets $ 55,736 $ 54,759
=============== ==============
</TABLE>
10
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
8. Commitments and Contingencies
Environmental Matters - The Company has identified certain contaminants in the
soil and groundwater at and around its Portland, Oregon manufacturing facility
which the Company believes may have been disposed of by the previous property
owner. The Company believes that the contamination is not a reportable event as
defined under the current Oregon statutes. Under Oregon statutes, the Company
and other potentially responsible parties are required to investigate further
and possibly remediate the contamination. The Company believes that, if
required, the remediation would take the form of permanent monitoring, but could
include the treatment and removal of the contamination or both. The Company
cannot estimate the costs of permanent monitoring, treatment or cleanup at the
present time.
The acquisition agreement between the Company and the previous building owner
contains provisions for indemnification of any environmental cleanup costs after
the Company spends $25 towards such cleanup. The Company intends to seek
indemnification from the prior property owner for permanent monitoring or
cleanup costs, if any. The prior property owner has advised the Company that it
would dispute any liability for remediation costs. The Company beleives that it
can enforce available claims against the prior property owner for any costs of
investigation or remediation or both.
9. Subsequent Events
Refinance of Sale/Leaseback - Although the Company does not have a reportable
event with respect to environmental matters discussed in Note 8, in accordance
with the terms of the sale/leaseback agreement for the Portland, Oregon
manufacturing facility, on April 20, 1998 the Company provided $3,200 of debt
financing to the purchaser until the Company receives a "no-further action"
letter from the Oregon Department of Environmental Quality related to these
environmental matters. This debt is due April 21, 2000 with an interest rate of
8.5% until October 31, 1998, when it increases to 9.75%. The Company may
repurchase the facility before the maturity date and has the obligation to
repurchase the facility at the maturity date at the original purchase price of
$4.6 million plus out-of-pocket costs of the purchaser if a "no-further action"
letter is not obtained.
Private Equity Placement - On April 21, 1998, the Company completed a private
placement offering of 80,000 shares of Series A convertible redeemable preferred
stock at $100 per share, or $8 million. 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 after three years at the option of the Company. 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.
The Company intends to use the proceeds of offering to provide debt financing to
the purchaser of the Portland, Oregon manufacturing facility, repayment of a
bank term loan of $667 and an investment of $2 million to Ajay. The remaining
balance will be used for general working capital purposes.
11
<PAGE>
Williams Controls, Inc.
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 Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Company's principal sources of liquidity during the six months ended March
31, 1998 were proceeds from the sale of discontinued operations of $1,124,
borrowings under its credit facilities of $700 and cash provided by operating
activities of $365. During the same period, the Company used cash for
discontinued operations of $1,396. The six-month period in fiscal 1998 compares
to cash provided by discontinued operations of $1,783, repayments of borrowings
of $50 and cash provided by continuing operations of $25 for the same period in
fiscal 1997. At March 31, 1998 the Company's working capital improved to $18,934
from $16,128 at September 30, 1997. The current ratio also improved to 2.63 at
March 31, 1998 from 2.61 at September 30, 1997.
The Company anticipates that cash generated from continuing operations,
borrowings and proceeds from the Company's Private Placement completed in April
1998 will be sufficient to satisfy its working capital requirements for
continuing operations during the remainder of the current fiscal year.
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524. Under the terms of the agreement on April
20, 1998, the Company provided $3,200 of debt financing to the purchaser until
such time that the Company receives a "no further action" letter from the Oregon
Department of Environmental Quality related to environmental issues at the
property. Upon receipt of such letter the purchaser will be required to
refinance the mortgage with a third party lender. If a "no-further action"
letter is not obtained, the Company may repurchase the facility before the
maturity date and has the obligation to repurchase the facility at the maturity
date at the original purchase price of $4.6 million plus out-of-pocket costs of
the purchaser.
The purchaser previously informed the Company that it entered into a purchase
and sale agreement with a third party who would purchase the building without
any contingent repurchase obligation subject to third party due diligence. In
January 1998 the purchaser informed the Company that the third party declined to
purchase the building.
In fiscal 1997 the Company and Ajay agreed to a plan (the "Ajay
Recapitalization") whereby Ajay plans to obtain permanent bank financing
independent of the Company's loan which, management of Ajay has informed the
Company, when combined with a final investment by the Company to Ajay of $2,000,
would result in adequate working capital and eliminate any requirements for
further advances or guarantees from the Company. Ajay management informed the
Company it has signed a proposal letter with a lender for an asset based loan,
which Ajay management informed the Company that it believes that based on
expected loan advance rates would result in an approximately $2,000 shortfall of
its projected working capital needs. The Company intends to invest up to $2,000
to provide Ajay adequate working capital, of which approximately $1,200 was
advanced on April 20, 1998. In addition, as quarantor, the Company is obligated
to pay US Bank the first $2.34 million in proceeds from future sales of
inventory to KPI.
If Ajay successfully completes its bank financing, the Company has also proposed
to exchange up to $5,000 of loans and advances to Ajay into convertible voting
preferred stock which Ajay management has informed the Company that it believes
would allow Ajay to meet the minimum net worth criteria for continued listing on
the NASDAQ. The preferred stock would pay a dividend rate of 9% and would be
convertible into up to 12,000,000 shares of Ajay common stock. As presently
proposed, the dividend rate would increase two percentage points each in the
year 2002 and 2003 if Ajay does not achieve pre-tax earnings of at least $500 in
the two consecutive years prior to 2002 and 2003. The Company has also agreed to
purchase in fiscal 1998 approximately $1,000 of notes payable by Ajay to
affiliated parties which had provided loans to Ajay, to help Ajay finance
operations during the financial restructuring; although such notes payable have
not yet been purchased.
12
<PAGE>
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations
- ---------------------
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
Overview
- --------
Net sales from continuing operations increased 26% to $17,891 for the second
quarter ended March 31, 1998 from $14,248 in the same period in fiscal 1997.
Increased sales are attributed primarily to higher unit sales volumes in the
Company's vehicle component segment which were partially offset by a decline in
unit sales volumes in the agricultural equipment segment.
Net earnings from continuing operations increased 219% to $1,247 in the second
quarter ended March 31, 1998 from $391 in the same fiscal 1997 quarter due to
increases in unit sales volumes in the Company's vehicle component segment,
which were partially offset by declining unit sales volumes in the agricultural
equipment segment and additional equity interest in losses of affiliate (Ajay
Sports, Inc.).
Net income increased to $1,087 in the second quarter ended March 31, 1998 from a
net loss of $130 in the comparable fiscal 1997 quarter due to higher
profitability in the vehicle component segment and reduced losses in the
Company's discontinued operations which were offset by increased losses in the
Company's agricultural equipment segment and additional equity interest in
losses of affiliate (Ajay Sports, Inc.).
Net sales from continuing operations
- ------------------------------------
Net sales increased $3,643, or 26%, to $17,891 for the second quarter ended
March 31, 1998 from $14,248 in the prior year quarter. Sales as a percent of
total sales in the vehicle components, agricultural equipment and electrical
components segments were 81%, 13% and 6% in the 1998 quarter compared to 78%,
17% and 5% in the 1997 quarter. Vehicle component sales in the quarter ended
March 31, 1998 increased $3,417, or 31%, due to higher unit sales of component
parts to heavy and medium truck manufacturers. Sales of agricultural equipment
declined $130, or 5%, in the quarter ended March 31, 1998 primarily due to lower
unit sales resulting from excess dealer inventory. Electrical component sales
increased $356 or 49% primarily due to increased unit sales volumes of
electrical components.
Gross margin
- ------------
Gross margin from continuing operations increased 57% to $5,305 in the second
quarter ended March 31, 1998 from $3,381 in the prior year quarter. Gross
margins as a percentage of net sales from continuing operations were 30% in the
second quarter of fiscal 1998 and 24% in the same fiscal 1997 quarter. Increases
in dollar amount in the second quarter of fiscal 1998 resulted primarily from
higher unit sales volumes and increased utilization of the Company's fixed
assets in the vehicle component and electrical component and GPS segments. Gross
margins as a percentage of net sales for the vehicle components, agricultural
equipment and electrical components segments were 32%, 15%, and 31%,
respectively, during the second quarter of fiscal 1998 compared to 27%, 12%, and
14% for the same quarter in fiscal 1997.
13
<PAGE>
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
Operating expenses - continuing operations
- ------------------------------------------
Operating expenses for continuing operations increased 23% during the second
quarter ended March 31, 1998 compared to amounts in the same quarter in fiscal
1997. Increases are primarily related to increased research and development
activities, consulting expenses incurred during the installation of a new
management information system and completion of the QS-9000 and ISO9001
certification process. Operating expenses as a percentage of net sales from
continuing operations were 16% in the second quarter of fiscal 1998 and 1997.
Operating expenses increased 44% in the second quarter of fiscal 1998 in the
vehicle component segment to $1,543 and 47% in the electronic components and GPS
segment to $760. Operating expenses decreased 28% in the agricultural equipment
segment to $510 compared to amounts in the second quarter of fiscal 1997.
Decreases in this segment are attributed to lower sales volumes.
Research and development expenses for continuing operations increased 49% to
$730 during the second quarter of fiscal 1998 compared to amounts in the same
quarter in fiscal 1997. As a percentage of net sales from continuing operations,
research and development expenses increased to 4% from 3% in the 1997 second
quarter.
Selling expenses for continuing operations decreased 5% to $736 in the second
quarter of fiscal 1998 compared to amounts in the same quarter in fiscal 1997.
Selling expenses as a percentage of net sales from continuing operations
decreased to 4% in the second quarter of fiscal 1998 compared to 5% in the same
1997 quarter. Selling expenses decreased as a percentage of sales primarily due
to increased sales volumes in the vehicle components segment.
General and administrative expenses for continuing operations increased 31% in
the second quarter of fiscal 1998 to $1,347 compared to amounts in the same
quarter in fiscal 1997. General and administrative expenses as a percentage of
net sales from continuing operations increased to 8% in the second quarter of
fiscal 1998 from 7% in the same quarter in fiscal 1997. Increases were primarily
due to increased research and development activities, consulting expenses
incurred due to the installation of a new management information system and
completion of the QS-9000 and ISO9001 certification process.
Earnings from continuing operations
- -----------------------------------
Earnings from continuing operations increased $1,405, or 129%, to $2,492 in the
second quarter of fiscal 1998 from $1,087 in the same quarter of fiscal 1997 due
to increases in operating income of $1,166 and $250 in the automotive components
and agricultural equipment segments, respectively, offset by an $11 decrease in
the electrical components and GPS business segment.
Discontinued operations
- -----------------------
Net losses from the discontinued automotive accessories segment were $160 net of
tax benefits of $107 for the second quarter ended March 31, 1998, compared to
$521 net of tax benefits of $411 in the same quarter of fiscal 1997. The
Company's discontinued operations was sold on March 16, 1998.
Net sales from the discontinued segment declined $694, or 34%, in the second
quarter of fiscal 1998 to $1,346 compared to levels achieved in the same fiscal
1997 quarter. The decline in automotive accessory sales was due to lower unit
sales and lower prices resulting from increased competitive pressure and the
decision to terminate sales to several unprofitable customers.
14
<PAGE>
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Six months ended March 31, 1998 compared to the six months ended March 31, 1997
Overview
- --------
Net sales from continuing operations increased 18% to $32,835 for the six months
ended March 31, 1998 from $27,769 in the same period in fiscal 1997. Increased
sales are attributed to higher unit sales volumes in the Company's vehicle
component segment, which were partially offset by declining unit sales volumes
in the agricultural equipment segment.
Net earnings from continuing operations increased 148% to $1,942 for the six
months ended March 31, 1998 from $783 in the same fiscal 1997 period due to
increases in unit sales volumes in the Company's vehicle component segment,
which were partially offset by declining unit sales volumes in the agricultural
equipment segment and additional equity interest in losses of affiliate (Ajay
Sports, Inc.).
Net income increased to $1,782 for the six months ended March 31, 1998 from a
net loss of $118 in the comparable fiscal 1997 period due to higher
profitability in the vehicle component segment and decreased losses in the
Company's discontinued operations which were offset by increased losses in the
Company's agricultural equipment segment and additional equity interest in
losses of affiliate (Ajay Sports, Inc.).
Net sales from continuing operations
- ------------------------------------
Net sales increased $5,066, or 18%, to $32,835 for the six months ended March
31, 1998 compared to $27,769 for the six months ended March 31, 1997. Sales as a
percent of total sales in the vehicle components, agricultural equipment and
electrical components segments were 80%, 14% and 6% for the six months ended
March 31, 1998 compared to 74%, 20% and 6% in the comparable prior year
six-month period. Vehicle component sales for the six months ended March 31,
1998 increased $5,650, or 27%, due to higher unit sales of component parts to
heavy and medium truck manufacturers. Sales of agricultural equipment declined
$987, or 18%, for the six months ended March 31, 1998 due to lower unit sales
resulting from excess dealer inventory. Electrical component sales increased
$403, or 24% primarily due to increased unit sales volumes of electrical
components.
Gross margin
- ------------
Gross margin from continuing operations increased 40% to $9,460 for the six
months ended March 31, 1998 compared to the six months ended March 31, 1997.
Gross margins as a percentage of net sales from continuing operations were 29%
for the six months ended March 1998 and 24% in the same first six months of
fiscal 1997. Increases in dollar amount for the six months ended March 31, 1998
resulted primarily from higher unit sales volumes in the vehicle component and
electrical component segments offset by gross margin decreases of 40% in the
Company's agricultural equipment segment due to lower sales volumes. Gross
margins as a percentage of net sales for the vehicle components, agricultural
equipment and electrical components segments were 32%, 14%, and 24%,
respectively, during the first six months of fiscal 1998 compared to 27%, 19%,
and 14% for the same six-month period in fiscal 1997.
Operating expenses - continuing operations
- ------------------------------------------
Operating expenses for continuing operations increased 18% during the six months
ended March 31, 1998 compared to amounts in the same period in fiscal 1997.
Increases are primarily due to increased research and development activities,
consulting expenses related to the installation of a new management information
system and completion of the QS-9000 and ISO9001 certification process.
Operating expenses as a percentage of net sales from continuing operations were
16% for the six months ended March 31, 1998 and 1997. Operating expenses
increased 27% in the first six months of fiscal 1998 in the vehicle component
segment to $2,848 and 53% in the electronic components and GPS segment to
$1,324. Operating expenses decreased 22% in the agricultural equipment segment
to $969 compared to amounts in the first six months of fiscal 1997. Decreases in
this segment are attributed to lower unit sales volumes.
15
<PAGE>
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Six months ended March 31, 1998 compared to the six months ended March 31, 1997
Research and development expenses for continuing operations increased 34% to
$1,289 during the six months ended March 31, 1998 compared to amounts in the
same period in fiscal 1997. As a percentage of net sales from continuing
operations, research and development expenses were 4% in the 1998 and 1997
six-month periods.
Selling expenses for continuing operations decreased 2% to $1,427 in the first
six months of fiscal 1998 compared to amounts in the same period in fiscal 1997.
Selling expenses as a percentage of net sales from continuing operations
decreased to 4% in the six months ended March 31, 1998 from 5% in the same
six-month period in fiscal 1997. Selling expenses decreased as a percentage of
sales due to increased sales volumes in the vehicle components segment.
General and administrative expenses for continuing operations increased 25% in
the first six months of fiscal 1998 to $2,425 compared to amounts in the same
period in fiscal 1997. General and administrative expenses as a percentage of
net sales from continuing operations were 7% for the first six months of fiscal
1998 and 1997. Increases were primarily due to increased research and
development activities, consulting expenses related to the installation of a new
management information system and completion of the QS-9000 and ISO9001
certification process.
Earnings from continuing operations
- -----------------------------------
Earnings from continuing operations increased $1,903, or 79%, to $4,319 in the
six months ended March 31, 1998 from $2,416 in the same period of fiscal 1997
due to a $2,224 increase in operating income in the automotive components
segment offset by a $139 decrease in the agricultural equipment segment and a
$182 decrease in the electrical components and GPS business segment.
Discontinued Operations
- -----------------------
Net losses from the discontinued automotive accessories segment were $160 net of
tax benefits of $107 for the six months ended March 31, 1998, compared to $901
net of tax benefits of $675 in the same period of fiscal 1997
Net sales from the discontinued segment declined $2,326, or 44%, for the first
six months of fiscal 1998 to $2,928 compared to levels achieved in the same
period of fiscal 1997. The decline in automotive accessory sales was due to
lower unit sales resulting from increased competitive pressure and the decision
to terminate sales to several unprofitable customers.
16
<PAGE>
Williams Controls, Inc.
Part II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On March 27, 1998 the Company held its annual meeting of stockholders.
The stockholders elected two directors and approved an amendment to
increase the number of shares available for grant under the Company's
1993 Stock Option Plan from 1,500,000 to 3,000,000 shares.
The tabulation of votes cast for the election of the directors and
amendment to the Company's 1993 Stock Option Plan are as follows:
Proposal Number One - Election of Directors
For Withheld
---------- --------
Thomas W. Itin 16,743,344 227,324
H. Samuel Greenawalt 16,736,744 234,024
Proposal Number Two - Amendment to the 1993 Stock Option Plan
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For Against Abstentions Not Voted
Increase Shares from ---------- --------- ----------- ---------
1,500,000 to 3,000,000 10,476,050 1,232,313 155,973 5,106,432
</TABLE>
Item 5. Other Information
On April 21, 1998, the Company completed a private placement offering
of 80,000 shares of Series A convertible redeemable preferred stock at
$100 per share, or $8 million. The preferred stock bears a dividend
rate of 7.5%, which is payable quarterly, and is convertible at the
option of shareholders into 2,909,091 shares of the Company's common
stock. The preferred stock is redeemable after three years at the
option of the Company. 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.
The Company intends to use the proceeds of the offering to provide debt
financing to the purchaser of the Portland, Oregon manufacturing
facility, repayment of a bank term loan of $667 and an investment of
$2 million to Ajay. The remaining balance will be used for general
working capital purposes.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
3.1 - Certificate to Provide for the Designation, Preferences, Rights,
Qualifications, Limitations or Restrictions Thereof, of the
Series A Preferred Stock, 7 1/2% Redeemable Convertible Series.
Reports on Form 8-K
-------------------
Sale of Discontinued Operations filed on Form 8-K dated March 16, 1998
and related Pro forma Financial Statements.
18
<PAGE>
Williams Controls, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
By: /s/ Gerard A. Herlihy
-----------------------
Gerard A. Herlihy
Chief Financial and
Administrative Officer
By: /s/ William N. Holmes
------------------------
Williams N. Holmes,
Corporate Controller and
Principal Accounting Officer
Date: April 30, 1998
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-START> Oct-01-1997
<PERIOD-END> Mar-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,064
<SECURITIES> 0
<RECEIVABLES> 13,279
<ALLOWANCES> 241
<INVENTORY> 13,998
<CURRENT-ASSETS> 30,575
<PP&E> 24,742
<DEPRECIATION> 6,666
<TOTAL-ASSETS> 55,736
<CURRENT-LIABILITIES> 11,641
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 18,498
<TOTAL-LIABILITY-AND-EQUITY> 55,736
<SALES> 32,835
<TOTAL-REVENUES> 32,835
<CGS> 23,375
<TOTAL-COSTS> 28,516
<OTHER-EXPENSES> 398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 806
<INCOME-PRETAX> 3,115
<INCOME-TAX> 1,212
<INCOME-CONTINUING> 1,942
<DISCONTINUED> (160)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,782
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
___________________
Certificate to Provide for the Designation, Preferences,
Rights, Qualifications, Limitations or
Restrictions Thereof, of the Series A Preferred Stock,
7 1/2% Redeemable Convertible Series
___________________
Williams Controls, Inc., a Delaware corporation (the "Corporation"), hereby
certifies that pursuant to the authority vested in the Board of Directors of the
Corporation by the provisions of its Certificate of Incorporation, and by the
provisions of Section 151 of The General Corporation Law of the State of
Delaware, the Board of Directors adopted the following resolution:
RESOLVED, there is hereby created a series of preferred stock, $.01 par
value, of the Corporation, consisting of 80,000 shares of the authorized,
but unissued preferred stock and designated the "Series A Preferred Stock"
(hereinafter referred to as the "Series A"); and that to the extent that
the terms, relative rights, preferences, qualifications and limitations of
the Series A are not fixed and determined by the Certificate of
Incorporation of the Corporation, as amended, they hereby are fixed and
determined as set forth in Attachment A attached hereto.
I, being the duly authorized officer of the Corporation, do hereby certify
under penalty of perjury that the foregoing resolution amending the Williams
Controls, Inc. Certificate of Incorporation to provide for the designation,
preferences, rights, qualifications, limitations or restrictions thereof, of the
Series A Preferred Stock, 7 1/2% Redeemable Convertible Series is the act and
deed of the Corporation and that the facts stated herein are true and,
accordingly, have hereunto set my hand this fourteenth day of April, 1998.
/s/ Gerald Raskin
-----------------------
Gerald Raskin
Assistant Secretary
Williams Controls, Inc.
1
<PAGE>
-----------------------------
Certificate to Provide for the Designation, Preferences,
Rights, Qualifications, Limitations or Restrictions Thereof,
of the Series A Preferred Stock,
7 1/2% Redeemable Convertible Series
-----------------------------
SECTION 1. DESIGNATION, PAR VALUE AND NUMBER. 80,000 shares of authorized
preferred stock of the Corporation are hereby constituted as a series of
preferred stock, having a par value of $0.01 per share, designated as 'Series A
Preferred Stock, 7 1/2% Redeemable Convertible Series" hereinafter called
"Series A". In accordance with the terms hereof, each share of Series A shall
have the same relative rights as and be identical in all respects with each
other share of Series A.
SECTION 2. DIVIDENDS
(a) Cumulative Dividends. From and after the date of issuance of any
shares of Series A, the holders of the Series A shall be entitled to
receive in cash, when and as declared by the Board of Directors, cumulative
preferential dividends at the rate of seven and one half (7 1/2%) percent
per annum, payable quarterly on the 2nd day of January and the 1st days of
April, July and October in each year to holders of record of Series A as of
the fifteenth (15th) day of the month immediately preceding the month in
which a quarterly dividend is due (each a "Dividend Record Date"). The
first dividend payment due on July 1, 1998 shall be declared and paid on a
pro rata basis for the period such shares of Series A are outstanding.
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% (e.g., the annual dividend rate for the quarterly period commencing
July 1, 2001 will be 10.0% and the annual dividend rate for the quarterly
period commencing October 1, 2001 will be 12.5%).
(b) Rreference of Dividends. If dividends shall not have been fully
paid or declared and set apart for payment on all shares of Series A, the
amount of the deficiency (without interest) shall be fully paid before any
dividends shall be declared or paid on any shares of Common Stock, $.01 par
value per share (the "Common Stock") or any other equity security which is
junior to the Series A. If any dividends are paid on any of the Series A at
any time in an aggregate amount less than the total dividends then
accumulated and payable on all shares of Series A entitled to dividends
then outstanding, the amount to be distributed shall be paid on each share
of Series A entitled to dividends in the proportion that the dividends then
accumulated and payable on each such share bear to the total dividends
accumulated and payable on all outstanding shares of Series A entitled to
dividends.
(c) Date of Payment. In any case where the due date for the payment of
dividends on the Series A shall be on a day on which banking institutions
are authorized or obligated by law to close, the payment of dividends need
not be made on such date, but may be made on the next succeeding day which
is not a day on which banking institutions are authorized or obligated by
law to close, with the same force and effect as if made on the date of such
payment, and dividends shall accrue and be paid for the period through and
including the date of payment.
SECTION 3. PRIORITY. All shares of the Series A shall rank on a parity with each
other and shall be preferred to the Common Stock of the Corporation, and any
other class of stock of the Corporation, as to the payment of dividends and the
distribution of assets upon the liquidation, dissolution or winding up of the
Corporation. The Corporation shall have the right to create other classes of
preferred stock which shall rank below the Series A without the consent of the
holders of the Series A; provided, however, that the Corporation shall not have
the right to create other classes of preferred stock which shall equal to or
above the Series A without the prior consent of the holders of the Series A
Preferred Stock.
2
<PAGE>
SECTION 4. VOLUNTARY CONVERSION RIGHTS.
(a) Voluntary Conversion-Each holder of Series A shall have the right,
at any time and from time to time, at the holde's option, to convert all
or any portion of such holder's shares of Series A into fully paid and
non-assessable full shares of Common Stock of the Corporation at the
Conversion Price (as defined below) in effect at the time of conversion,
each share of the Series A being taken at $100.00 per share for the
purposes of such conversion. The initial Conversion Price is $2.75 per
share of Common Stock ("Initial Conversion Price"). The Initial Conversion
Price shall be adjusted as provided for below in Section 6 (the Initial
Conversion Price, and the Initial Conversion Price as thereafter then
adjusted, shall be referred to as the "Conversion Price"). Upon each
adjustment of the Conversion Price, the holders of the Series A shall
thereafter be entitled to receive upon conversion, at the Conversion Price,
resulting from such adjustments, the number of shares of Common Stock
obtained by multiplying $100.00 times the number of shares of Series A
being converted and divide such amount by the Conversion Price, as then
adjusted.
(b) Method of Conversion. In order to convert shares of the Series A
into Common Stock, the holder thereof shall surrender the certificate or
certificates therefor, duly endorsed in blank at the principal office of
the Corporation or its transfer agent, if any, or at such other office or
offices, located in the United States as the Board of Directors may
designate by written notice to all holders of Series A shares, and give
written notice to the Corporation at said office that the holder elects to
convert said shares of Series A. Shares of the Series A shall be deemed to
have been converted as of the date (hereinafter called the "Conversion
Date") of receipt by the Corporation of the surrender of such shares for
conversion as provided above, and the person or persons entitled to receive
the Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common Stock on such date.
As soon as practicable on or after the Conversion Date but in no event more
than five (5) business days thereafter, the Corporation will deliver by
Federal Express or other nationally recognized overnight delivery service
to the address of the holders who submitted the Series A for conversion, a
certificate or certificates for the number of full shares of Common Stock
issuable upon such conversion, together with cash in lieu of any fraction
of a share, as hereinafter provided, to the person or persons entitled to
receive the same and a check representing all accrued and unpaid dividends
on the Series A so converted through the Conversion Date.
(c) Conversion Prior to Redemption. In case the shares of Series A are
called for redemption, the right to convert Series A shares shall cease and
terminate at the close of business on the date fixed for redemption, unless
default shall be made in payment of the amount due on such redemption.
SECTION 5. FORCED CONVERSION RIGHTS. The Company shall have the right to force
conversion of all, but not less than all, of the Series A into shares of Common
Stock; provided that: (I) on the day that notice of forced conversion is given
(the "Forced Conversion Notice Date") and on the Forced Conversion Date (as
defined below) the Common Stock issuable upon conversion of the Series A has
been registered pursuant to the Securities Act of 1933, as amended (the "Act")
and such registration is then currently effective; and (ii) the average of the
closing bid price of the Common Stock as listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), the New York Stock
Exchange ("NYSE"), the American Stock Exchange ("ASE") or wherever the Company's
Common Stock then trades, is at least 150% of the Conversion Price for twenty
(20) trading days within a thirty (30) consecutive trading day period ending no
more than ten (10) days prior to the Force Conversion Notice Date. Any notice of
forced conversion must be given to all holders no less than thirty (30) days nor
more than forty-five (45) days prior to the date set forth for conversion (the
"Forced Conversion Date"). On the Forced Conversion Date, the Corporation shall
pay to all holders of the Series A, all accrued and unpaid dividends through and
including the Forced Conversion Date.
3
<PAGE>
SECTION 6. ANTI-DILUTION ADJUSTMENTS. The Conversion Price shall be adjusted as
follows:
(a) Amendment to the Certificate of Incorporation. In the case of any
amendment to the Certificate of Incorporation of the Corporation to change
the designation of the Common Stock or the rights, privileges, restrictions
or conditions in respect to the Common Stock or division of the Common
Stock, the Series A shall be adjusted so as to provide that upon conversion
thereof the holder shall receive, in lieu of shares of Common Stock
theretofore issuable upon such conversion, the kind and amount of shares,
other securities, money and property receivable upon such designation,
change or division by such holder issuable upon such conversion had the
conversion occurred immediately prior to such designation, change or
division. The Series A shall be deemed thereafter to provide for
adjustments which shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 6. The provisions of this
Subsection 6(a) shall apply in the same manner to successive
reclassifications, changes, consolidations and mergers.
(b) Stock Splits; Stock Dividends. If the Corporation shall at any
time subdivide its outstanding shares of Common Stock into a greater number
of shares of Common Stock, or declare a dividend or make any other
distribution upon the Common Stock payable in shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision or
dividend or other distribution shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion
Price in effect immediately prior to such combination shall be
proportionately increased. Notwithstanding anything to the contrary set
forth above in this subsection (b), in the event that the Corporation shall
dividend or otherwise make a distribution to its holders of Common Stock of
the securities the Corporation owns in Ajay Sports, Inc. and/or the
securities of any subsidiaries or other entities (collectively, the
"Subsidiary Securities"), the Corporation shall treat the holders of the
Series A as if they had converted their Series A into Common Stock as of
the record date for the dividend or distribution, the Corporation shall
distribute the Subsidiary Securities to the holders of the Series A and the
Conversion Price shall not change as a result thereof.
(c) Issuance of Additional Securities. In case the Corporation shall
issue or otherwise sell or distribute shares of Common Stock for a
consideration per share in cash or property, or the Corporation shall issue
options or warrants to purchase Common Stock (other than options granted
pursuant to the Corporation's stock option plans existing on the date the
Board of Directors approves these resolutions) that are exercisable at, or
the Corporation shall issue or otherwise sell or distribute rights to
subscribe for or securities convertible into or exchangeable for Common
Stock, at a price less than the then effective Conversion Price, the
Conversion Price then in effect shall automatically be reduced by
multiplying the then Conversion Price by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such issuance, sale or distribution plus the number of shares of Common
Stock which the aggregate consideration received or to be received by the
Corporation for such issuance, sale or distribution (such consideration, if
other than cash, as determined by the Board of Directors including a
majority of the Directors who are not officers or employees of the
Corporation or any of its subsidiaries, whose determination shall be
conclusive and described in a resolution of the Board of Directors) would
purchase at the Conversion Price per share, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after
giving effect to such issuance, sale or distribution. Notwithstanding
anything herein to the contrary, no adjustment shall be made to the
Conversion Price upon: (I) the exercise of any outstanding options,
warrants or other rights to purchase Common Stock or upon conversion of any
securities or other rights convertible into Common Stock, which options,
warrants, securities or other rights were outstanding prior to the initial
issuance of any shares of Series A; or (ii) the issuance, sale or
distribution of 500,000 or less shares of Common Stock in any one
transaction or (regardless of price) and 750,000 shares of Common Stock in
the aggregate (regardless of price), after which such totals are reached
the provisions of this subsection (c) relating to the reduction of the
Conversion Price shall apply.
4
<PAGE>
(d) Reorganization or Reclassification. If any capital reorganization
or reclassification of the capital stock of the Corporation, or any
consolidation or merger of the Corporation with another corporation or
entity, or the sale of all or substantially all of the Corporation's assets
to another corporation or other entity shall be effected in such a way that
holders of shares of Common Stock shall be entitled to receive stocks,
securities, other evidence of equity ownership or assets with respect to or
in exchange for shares of Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale (except as
otherwise provided below in this Subsection 6(d)), lawful and adequate
provisions shall be made whereby the holders of Series A shall thereafter
have the right to receive upon the basis and upon the terms and conditions
specified herein, such shares of stock, securities, other evidence of
equity ownership or assets as may be issued or payable with respect to or
in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of Common Stock immediately theretofore purchasable
and receivable upon the conversion of Series A had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any
such case appropriate provisions shall be made with respect to the rights
and interests of the holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the
Conversion Price and of the number of shares of Common Stock receivable
upon the conversion of Series A) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities, other evidence
of equity ownership or assets thereafter deliverable upon the exercise
hereof (including an immediate adjustment, by reason of such consolidation
or merger, of the Conversion Price to the value for the Common Stock
reflected by the terms of such consolidation or merger if the value so
reflected is less than the Conversion Price in effect immediately prior to
such consolidation or merger). Subject to the terms of the Series A, in the
event of a merger or consolidation of the Corporation with or into another
corporation or other entity as a result of which the number of shares of
Common Stock of the surviving corporation or other entity issuable to
holders of Common Stock of the Corporation, is greater or lesser than the
number of shares of Common Stock of the Corporation outstanding immediately
prior to such merger or consolidation, then the Conversion Price in effect
immediately prior to such merger or consolidation shall be adjusted in the
same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Corporation. The Corporation
shall not effect any such consolidation, merger or sale, unless, prior to
the consummation thereof, the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and
mailed or delivered to the holders, the obligation to deliver to such
holders such shares of stock, securities, other evidence of equity
ownership or assets as, in accordance with the foregoing provisions, such
holders may be entitled to receive or otherwise acquire. If a purchase,
tender or exchange offer is made to and accepted by the holders of more
than fifty (50%) percent of the outstanding shares of Common Stock of the
Corporation, the Corporation shall not effect any consolidation, merger or
sale with the person having made such offer or with any affiliate of such
person, unless prior to the consummation of such consolidation, merger or
sale the holders of Series A shall have been given a reasonable opportunity
to then elect to receive upon the conversion of Series A, the amount of
stock, securities, other evidence of equity ownership or assets then
issuable with respect to the number of shares of Common Stock of the
Corporation into which the Series A is convertible in accordance with such
offer.
(e) Change of Control. In case the Corporation shall, at any time
prior to conversion of the shares of Series A, consolidate or merge with
any other corporation or transfer all or substantially all of its assets to
any other corporation, then the Corporation shall, as a condition precedent
to such transaction, cause effective provision to be made so that the
holders of the Series A after the effective date of such transaction shall
be entitled to receive the kind and amount of shares, evidences of
indebtedness and/or other securities or property receivable on such
transaction by a holder of the number of shares of Common Stock as to which
each share of Series A was convertible immediately prior to such
transaction (without giving effect to any restriction upon such exercise);
and, in any such case, appropriate provision shall be made with respect to
the rights and interest of the holders of Series A to the end that the
provisions of the Series A shall thereafter be applicable (as nearly as may
be practicable) with respect to any shares, evidences of indebtedness or
other securities or assets thereafter deliverable upon conversion of the
Series A. Upon the occurrence of any event described in this Section 6(d),
the holders of the Series A shall have the right to convert into shares of
Common Stock immediately prior to the change of control at a price equal to
the lesser of (I) the Conversion Price or (ii) the price per share of
Common Stock payable in the change of control transaction.
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(f) Adjustment to Conversion Price. The term "Conversion Price" as
used herein shall mean the Conversion Price specified in this certificate,
until the occurrence of an event stated in Section 6 and thereafter shall
mean said price, as adjusted from time to time herein.
(g) Record of Conversion Price. Whenever the shares of Common Stock or
other types of securities or assets receivable upon conversion of the
Series A shall be adjusted as provided in this Section 6, the Corporation
shall forthwith obtain and file with its corporate records a certificate or
letter from a firm of independent public accountants of recognized standing
(which may be the Corporation's then independent certified public
accountants) setting forth the computation and the adjusted number of
shares of Common Stock or other securities or assets resulting from such
adjustments, and a copy of such certificate or letter shall be mailed to
the holders hereof. Any such certificate or letter shall be conclusive
evidence as to the correctness of the adjustment or adjustments referred to
therein and shall be available for inspection by any holders of the Series
A on any day during normal business hours.
(h) Notice. In case:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in Common Stock of the
Corporation; or
(ii) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock payable in cash of the Corporation;
or
(iii) any reclassification of Common Stock or any consolidation,
merger, conveyance of the property of the Corporation as an entirety,
or substantially as an entirety, dissolution, liquidation or winding
up shall be effected by the Corporation;
then the Corporation shall mail, or cause to be mailed by the Corporation'
transfer agent, if any, for the Series A and to the holders of record of the
outstanding shares of the Series A, at least thirty (30) days, but not more than
sixty (60) days, prior to the applicable record date hereinafter specified, a
notice stating (A) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to such
dividend, distribution or right are to be determined, or (B) the date on which
such reclassification, consolidation, merger, conveyance, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled to
exchange the certificates representing their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
SECTION 7. RESERVATION OF SHARES OF COMMON STOCK.
(a) Reservation of Shares. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the shares of the Series A, the full
number of shares of Common Stock then deliverable upon the conversion of
all shares of the Series A then outstanding. If shares of the Common Stock
of the Corporation are listed on any securities exchange, the Corporation
shall make application for the listing thereon, on notice of issuance, of
the shares of Common Stock deliverable upon the conversion of the
outstanding shares of the Series A and shall use its best efforts to effect
such listing.
(b) Fractional Shares. No fractional shares of Common Stock are to be
issued upon conversion. The Corporation shall pay a cash adjustment out of
surplus in respect to any fraction of a share which would otherwise be
issuable, in an amount equal to the fair market value of the Common Stock
which shall be the same fraction of the last price per share at which the
Common Stock was sold on any principal stock exchange on which such stock
is then listed or admitted to trading, prior to the opening of business on
the conversion date, or if no sale of such stock takes place on such day on
such exchange, the average of the closing bid and asked prices on such day
as officially quoted on such exchange, or if such stock shall not at the
time be listed or admitted to trading on any stock exchange, the average of
the last bid and asked prices for such stock on such day in the
over-the-counter market as reported on NASDAQ prior to the opening of
business on the conversion date, or, if the Common Stock is not then
included in NASDAQ, as furnished by the National Quotation Bureau, Inc. or
if such firm is not at the time engaged in the business of reporting such
prices, as furnished by any firm then engaged in such business or by any
member of the National Association of Securities Dealers, Inc., selected by
the Corporation. If the Common Stock is not then publicly traded, fair
market value shall be determined in good faith by the Corporation's Board
of Directors.
(c) Transfer Taxes. The Corporation will pay any and all transfer
taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of shares of the Series A pursuant hereto. The
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Corporation shall not, however, be required to pay any tax which may be
payable in respect of transfer involved in the issue and delivery of shares
of Common Stock in a name other than that in which the shares of the Series
A so converted were registered, and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(d) Common Stock. For the purpose of this Section, the term "Common
Stock" shall include any stock of any class of the Corporation which has no
preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and which is not subject to redemption by the Corporation.
Shares of Common Stock shall be only such shares which have no preference
in respect of dividends or of amounts payable in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation
and which are not subject to redemption by the Corporation; provided that
if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable shall be substantially in the
proportion which the total number of shares of such class resulting from
all such reclassifications bears to the total number of shares of all such
classes resulting from all such reclassification.
(e) Status of Common Stock. All Common Stock that may be issued upon
conversion of the Series A will, upon issuance, be duly issued, fully paid
and non-assessable and free from all taxes, liens and charges with respect
to the issuance thereof.
SECTION 8. VOTING.
(a) Voting. The holders of the Series A shall be entitled to vote, on
all matters in which holders of Common Stock are entitled to vote, voting
together with the Common Stock without regard to class. The holders of the
Series A shall have the number of votes that they would have had assuming
conversion of the Series A into Common Stock as of the record date for the
meeting of the Corporation's holders of Common Stock. The holders of the
Series A shall be entitled to receive all communications sent by the
Corporation to the holders of Common Stock. Except as provided in Section 8
c or by Delaware law, holders of shares of the Series A shall not be
entitled to vote as a separate class.
(b) No Cumulative Voting. The holders of shares of the Series A shall
not have the right of cumulative voting in an election of directors.
(c) Voting as a Separate Class. The Corporation shall not, without the
consent (given by vote at a meeting called for that purpose) of the holders
of two-thirds of the shares of the Series A then outstanding, voting as a
separate class:
(i) create, authorize or issue any stock ranking equal to or
senior to the Series A as to dividends or distributions, or any
obligation or security convertible into shares of any such senior
stock; or
(ii) amend, alter, change, or repeal any of the express terms of
the Series .
SECTION 9. REDEMPTION.
(a) Redemption. Commencing three (3) years following the last
issuance of the shares of Series A, the Company may redeem the Series
A in whole at any time at the option of the Corporation by resolution
of its Board of Directors, at a redemption price of $100.00 per share,
plus accrued and unpaid dividends if any, to the date fixed for
redemption.
(b) Notice of Redemption. Notice of redemption of the shares of
the Series A shall be given by certified mail, return receipt
requested, postage prepaid, not less than thirty (30) nor more than
forty-five (45) days prior to the date fixed for redemption, to each
holder of the Series A, at each holder's last address appearing on the
books of the Corporation; but no failure to receive such a notice by
any holder, so long as mailed in accordance with the provisions
herein, shall affect the validity of the proceedings for the
redemption of any shares of the Series A so to be redeemed. Each
notice of redemption of shares of the Series A shall state:
(i) the redemption date,
(ii) the redemption price,
(iii) the Conversion Price on the date of the notice,
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(iv) that on the redemption date the redemption price will
become due and payable upon each share of the Series A to be
redeemed and the right to convert each such share shall cease as
of the close of business on the redemption date, unless default
shall be made in the payment of the redemption price, and
(v) the place or places where certificates for such shares
of the Series A to be redeemed are to be surrendered for
conversion or for payment of the redemption price.
(c) Conversion Prior to the Redemption. At any time prior to the
redemption date, each holder of the Series A shall be entitled to
convert all or any portion of such holders' Series A into Common Stock
based on the Conversion Price.
(d) Rights Following Redemption. If notice of redemption shall
have been duly given as provided in Section 9(b), and if, on the
redemption date, funds necessary for such redemption have been
deposited in trust with a bank or trust company, or have been set
aside, in trust, by the Corporation, for the purpose of redeeming
shares of the Series A, the shares of the Series A called for
redemption shall, as of the close of business on the redemption date,
no longer be transferable on the books of the Corporation and shall no
longer be deemed to be outstanding, the right to receive dividends
thereon shall cease to accrue, and all rights with respect to such
shares so called for redemption shall terminate, except only the right
of the holders thereof to receive the redemption price, without
interest thereon, upon surrender of the certificates for such shares.
(e) Redemption Price. In case any holder of shares of the Series
A which shall have been redeemed shall not, within three years of the
date of redemption thereof, claim the amount deposited in trust for
the redemption of such shares, the bank or trust company with which
such funds were deposited, upon request of the Corporation, shall pay
over to the Corporation such unclaimed amount and shall thereupon be
relieved of all responsibility in respect thereof. The Corporation
shall not be required to hold the amount so paid over to it, or any
amount theretofore set aside by it, in trust after such three-year
period, separate and apart from its other funds, and thereafter the
holders of such shares of the Series A shall look only to the
Corporation for payment of the redemption price thereof, without
interest. All liability of the Corporation to any holder of shares of
the Series A for payment of the redemption price for shares of the
Series A called for redemption shall cease and terminate as of the
close of business on the fourth anniversary of the redemption date for
such shares.
(f) Cancellation of Shares. Shares of the Series A redeemed
pursuant to this Section 9 shall be canceled by the Corporation and
thereafter shall be authorized and unissued shares of preferred stock,
undesignated as to series, subject to reissuance by the Corporation as
shares of any series of preferred stock other than the Series A.
SECTION 10. LIQUIDATION.
(a) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation
(hereinafter collectively called "liquidation"), before any amount
shall be paid to or set aside for, or any assets shall be distributed
among, the holders of shares of Common Stock or of any other equity
security of the Corporation, each holder of a share of the Series A
shall be entitled to receive out of the assets of the Corporation or
the proceeds thereof, a preferential payment in an amount equal to
$100.00 per share, plus the amount of accrued and unpaid dividends on
such share, if any, and no more.
(b) Proportional Rights. In the event the amount available for
distribution as liquidation preference payments to holders of the
Series A and any other stock ranking on a parity therewith is
insufficient to pay the full amount of their respective preferences,
such amount shall be divided among and paid to such holders ratably in
proportion to the respective amounts which would be payable to such
holders if their respective liquidation preferences were to be paid in
full.
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(c) Insufficient Funds. In the event any liquidation preference
payment to be made on the shares of the Series A shall amount in the
aggregate to less than $100.00 per share plus accrued and unpaid
dividends, the Corporation in its discretion may require the surrender
of certificates for shares of the Series A and issue a replacement
certificate or certificates, or it may require the certificates
evidencing the shares in respect of which such payments are to be made
to be presented to the Corporation, or its agent, for notation thereon
of the amounts of the liquidation preference payments made in respect
of such shares. In the event a certificate for shares of the Series A
on which payment of one or more partial liquidation preferences has
been made is presented for exchange or transfer shall bear an
appropriate notation as to the aggregate amount of liquidation
preference payments theretofore made in respect thereof.
(d) Merger or Sale. Neither the consolidation or merger of the
Corporation with or into any other corporation or corporations, nor
the sale or transfer by the Corporation of all or any part of its
assets, shall be deemed to be a liquidation of the Corporation for the
purposes of this Section 10.
SECTION 11. REPLACEMENT CERTIFICATES.
(a) Mutilated Certificate. If any mutilated certificate of Series
A is surrendered to the Corporation, the Corporation shall execute and
deliver in exchange therefor a new certificate for Series A of like
tenor and principal amount, bearing a number not contemporaneously
outstanding.
(b) Destroyed, Lost or Stolen Certificate. If there is delivered
to the Corporation (i) evidence to its reasonable satisfaction of the
destruction, loss or theft of any certificate of Series A and (ii)
such reasonable security or indemnity as may be required by it to save
it harmless, then, in the absence of notice to the Corporation that
such certificate of Series A has been acquired by a bona fide
purchaser, the Corporation shall execute and deliver in lieu of any
such destroyed, lost or stolen certificate of Series A, a new
certificate of Series A of like tenor and principal amount and bearing
a number not contemporaneously outstanding.
(c) Status of New Certificate. Upon the issuance of any new
certificate of Series A under this Section 11, the Corporation may
require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any
other expenses connected therewith. Every new certificate of Series A
issued pursuant to this Section 11 in lieu of any destroyed, lost or
stolen certificate of Series A, shall constitute an original
additional contractual obligation of the Corporation, whether or not
the destroyed, lost or stolen certificate of Series A shall be at any
time enforceable by anyone. Any new certificate for Series A delivered
pursuant to this Section 11 shall be so dated that neither gain nor
loss in interest shall result from such exchange. The provisions of
this Section 11 are exclusive and shall preclude (to the extent
lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen certificate of
Series A.
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