UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
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
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(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No____
(2) Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 31, 1997, 17,782,040 shares of Common Stock were outstanding and
the aggregate market value of the shares (based upon the closing price of the
shares on the NASDAQ National market) of Williams Controls, Inc. held by
nonaffiliates was approximately $29,800,000.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be filed not later than January 28, 1998 are incorporated by
reference in Part III hereof.
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Williams Controls, Inc.
Index to 1997 Form 10-K
Part I Page
Item 1. Description of Business 2-7
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 8. Financial Statements and Supplementary Data 19-48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
Part III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Transactions 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 49
Signatures 50
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WILLIAMS CONTROLS, INC.
Form 10-K
Part I
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company' products, integration of businesses the Company
acquires, disposition of any current business of the Company, including its
Kenco division. These forward-looking statements are subject to the business and
economic risks faced by the Company. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described above and other factors described elsewhere in
this report.
ITEM 1. DESCRIPTION OF BUSINESS (Dollars in thousands)
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to as the "Company" or
"Registrant."
General
The Company is a Delaware corporation formed in 1988. The Company's primary
business segment was founded by Norman C. Williams in 1939 and acquired by the
Company in 1988. The Company's operating subsidiaries, which are all Delaware
corporations except GeoFocus, Inc. which is Florida corporation, are as follows:
Williams Controls Industries, Inc.: Manufactures vehicle components sold
primarily in the transportation industry.
Aptek Williams, Inc.: Develops and produces sensors, microcircuits, cable
assemblies and other electronic products for the telecommunications and the
transportation industry, and conducts research and development activities to
develop commercial applications of sensor related products for the subsidiaries
of the Company.
Premier Plastic Technologies, Inc.: Manufactures plastic components for the
automotive industry and manufactures prototype and production molds using rapid
prototyping processes.
NESC Williams, Inc.: Installs conversion kits to allow vehicles to use
compressed natural gas and provides natural gas well metering services.
Williams Automotive, Inc.: Markets the Company's products to the automotive
industry.
GeoFocus, Inc.: Develops train tracking and cyber-farming systems using global
positioning systems ("GPS") and geographical information systems ("GIS").
Williams Technologies, Inc.: Supports all subsidiaries of the Company by
providing research and development and developing strategic business
relationships to promote "technology partnering."
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Williams World Trade, Inc.: Located in Kuala Lumpur, Malaysia, WWT manages
foreign sourcing for all subsidiaries of the Company, affiliates and third party
customers.
Kenco/Williams, Inc.: Manufactures, assembles, packages and distributes truck
and auto accessories for the aftermarket parts industries. Kenco is reported as
a discontinued operation.
Techwood Williams, Inc.: Manufactured and distributed commercial wood chippers
used in landscaping and farming. Techwood ceased manufacturing operations in
fiscal 1997.
Agrotec Williams, Inc.: Manufactures spraying equipment for the professional
lawn care, 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.
As discussed in note 12 to the Notes to Consolidated Financial Statements, the
Company's operations are divided into four industry segments.
Vehicle Components - The Company's transportation component product lines
include electronic throttle control systems ("ETC"), exhaust brakes and
pneumatic and hydraulic controls. These products are used in applications which
include trucks, utility and off-highway equipment, transit buses and underground
mining machines. Markets for the Company's electronic throttle controls are
developing in smaller classes of trucks and diesel powered pick up trucks. The
Company believes that gasoline powered automobiles and pick up trucks may
convert to ETC, although such conversion requires engine redesign by the
automotive manufacturers which is presently ongoing. The Company estimates that
it has over 65% market share of ETC for Class 7 & 8 trucks. The majority of
these products are sold directly to original equipment manufacturers such as
Freightliner, Navistar, Volvo, Izusu, Motor Coach Industries and Blue Bird
Corporation. The Company also sells these products through a well-established
network of independent distributors. The major competitors in one or more
product lines include Allied Signal, Morris Controls and Furon.
Automotive Accessories - The automotive accessories product lines include bug
and stone deflectors, running boards, side steps and bed mats for light trucks
and sport-utility vehicles. These products are sold in the aftermarket to mass
merchants and auto supply stores such as Kmart, WalMart, Pep Boys and Western
Auto. The major competitors include Lund, Deflecta Shield, GT Styling and Auto
Vent Shade. Automotive accessories is reported as a discontinued operation.
Agricultural Equipment - The agricultural equipment product lines include rotary
cutters, discs, harrows and sprayers. These products are sold to independent
equipment dealers located primarily in the Southeastern United States. The major
competitors include Wood Brothers, Taylor Industries, Inc. and Alamo Group.
Electrical Components and GPS - The electrical components product line includes
the design and production of microcircuits, cable assemblies and other
electronic products used in telecommunication, computer and transportation
industries. Major customers include Allied Signal, Raychem and Eaton Corp. Major
competitors include CTS, AMP and Nethode. The GPS product line includes commuter
railroad train tracking and agricultural cyber-farming using global positioning
and geographic information systems. Major customers include Tri-Rail, Florida
Department of Transportation and Via Tropical Fruit.
Acquisitions and Dispositions
Through fiscal 1996, the Company pursued an acquisition strategy to diversify
its operations. During fiscal 1997, the Company discontinued its diversification
acquisition strategy in order to focus its corporate and financial resources on
opportunities emerging in the vehicle components and GPS train tracking markets
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and also for the development of commercial applications of sensor related
products. The Company may consider additional acquisitions in the future that
are strategically related to these opportunities.
On May 8, 1997, the Company signed a letter of intent to sell Kenco, which is
the sole business in the automotive accessories segment. Accordingly, Kenco is
reported as a discontinued operation. The letter of intent expired, and the
Company did not renew it; however, the Company intends to continue working
towards closing the sale of Kenco with the potential buyer, and may enter into
preliminary discussions with possible alternative buyers. The Company
anticipates that Kenco will be sold during the second quarter of fiscal 1998,
but there is no assurance that the sale will occur. In the event that the sale
does not occur, the Company will consider all strategic alternatives for
reducing its' operating losses, including sale, merger, liquidation or
abandonment. Based upon the current proposed terms of the sale, the purchaser
will acquire certain assets, excluding the Kenco finished goods inventory and
manufacturing and warehousing facility for $1,000 to $2,000 in cash, issue the
Company certain equity securities in the new company, and assume liabilities for
trade payables and other current liabilities. Under the proposed transaction,
the Company will own and warehouse the Kenco finished goods inventory and sell
such inventory to the purchaser during the nine months following the acquisition
on 60-day payment terms. The purchaser will be obligated to purchase any unsold
inventory at the end of the nine-month period.
Competition
In general, the Company's products are sold in highly competitive markets to
customers who are sophisticated and demanding concerning price, performance and
quality. Products are sold in competition with other independent suppliers (some
of which have substantial financial resources and significant technological
capabilities), and many of these products are, or could be, produced by the
manufacturers to which the Company sells these products. The Company's
competitive position varies among its product lines.
In the vehicle components segment the Company is the dominant producer of ETCs
sold in the heavy truck ETC market. The Company has only one primary competitor
in the diesel heavy truck market. The Company also manufactures pneumatic and
air control systems for the heavy truck market, which is comprised of numerous
highly fragmented competitors. The Company believes the principal method of
competition for ETC in the trucking industry is quality and engineering added
value and reputation. In addition, attainment of the ISO 9001 and QS 9000
quality certifications is critical to qualifying as a supplier to the automotive
industry and certain manufacturers in the truck industry. The Company's two
manufacturing facilities in its vehicle components segment have attained these
certifications. In the automotive market, ETC are not yet a well established
product line; however, the Company believes that there are approximately five
major competitors currently supplying foot peddles to the major automobile
manufactures and competing for the automotive ETC market. These companies are
substantially larger than the Company and have longstanding relationships with
their customers, which could be a significant barrier to the Company entering
into this market.
In the agricultural equipment segment, the Company competes primarily against
four competitors, three of which are substantially larger than the Company. The
principal methods of competition in this segment are price, delivery and payment
terms. Competitors in this industry currently provide seasonal dating for
payment of accounts receivable, in some cases up to 180 days for payment of
invoices.
The primary revenues from the Company's electronic components and GPS segment
are derived from sales of thick film hybrids. This industry has numerous
competitors, which compete primarily on engineering capability and price.
Although a GPS product designed for freight train tracking is currently
available on the market, the Company does not believe there are any major
competitors for its commuter train tracking product.
Entrance Into New Markets. The Company plans to introduce its ETC product into
new markets including international markets, higher-volume small truck markets,
and gasoline engine automotive markets. Although the Company's ETC product has
been successful in the domestic heavy-duty truck market, there is no assurance
that this product will be accepted in these new markets. Additional penetration
of the Company sales into the diesel ETC market will be dependent upon
conversion of smaller diesel engines to electronic engines which is controlled
by the engine manufacturers in the United States. Conversion of diesel engines
to ETC that are not yet electronic in Western Europe is dependent upon
compliance with and tightening of air control standards in this region.
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Introduction of ETC into Gasoline Engines. Introduction of ETC into gasoline
engines will require modification or redesign of engine components that will
depend upon the timing of development by the automotive manufacturers and their
original equipment manufacturers. The Company has no control over the timing of
the introduction of ETC into the automotive or higher-volume truck markets. The
Company will be competing against much larger competitors in these markets with
financial resources much greater than those of the Company and with existing
long term supplier relationships with the automotive industry.
Marketing and Distribution
The Company sells its products to customers in diversified industries worldwide;
however, approximately 77% of its sales from continuing operations are to
customers in the vehicle component segment.
For the years ended September 30, 1997, 1996 and 1995, Freightliner accounted
for 13%, 14% and 17% of net sales from continuing operations, respectively.
Navistar and Volvo each accounted for 11% of net sales from continuing
operations in fiscal 1997 and fiscal 1996 and 11% and 8%, respectively in fiscal
1995. Approximately 11%, 15% and 18% of net sales from continuing operations in
fiscal 1997, 1996 and 1995, respectively, were to customers outside of the
United States, primarily in Canada, and, to a lesser extent, in Europe and
Australia. See note 13 of Notes to Consolidated Financial Statements.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. Actual losses
and allowances have been within management's expectations.
Existing Future Sales Orders
Future sales orders for the Company's products were approximately $11,700 at
September 30, 1997, compared to $8,900 at September 30, 1996. These are orders
for which customers have requested delivery at specified future dates. The
Company has not experienced significant problems delivering products on a timely
basis.
Environment
The Company's operations result in the production of small quantities of
materials identified by the Environmental Protection Agency of the United States
Government as "hazardous waste substances" which must be disposed of in
accordance with applicable local, state and federal guidelines. Substantial
liability may result to a company for failure, on the part of itself or its
contractors, to dispose of hazardous wastes in accordance with the established
guidelines, including potential liability for the clean up of sites affected by
improper disposals. The Company uses its best efforts to ensure that its
hazardous substances are disposed of in an environmentally sound manner and in
accordance with these guidelines.
The Company has identified certain contaminants in the soil of its Portland,
Oregon manufacturing facility, which the Company believes was disposed on the
property by a previous property owner. The Company intends to seek
indemnification from such party for the costs of permanent monitoring, or
cleanup if required. The Company has retained an environmental consulting firm
which is currently conducting tests to determine the extent of any
contamination. The Company cannot estimate the costs of permanent monitoring or
property cleanup at the present time. However, the Company believes that it can
enforce available claims against the prior property owner for any costs of
monitoring or cleanup. The Company believes it is currently in compliance with
environmental regulations.
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Government Regulation
The Company's vehicle component products must comply with the National Traffic
and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated
thereunder which are administered by the National Highway Traffic Safety
Administration ("NHTSA"). If, after an investigation, NHTSA finds that the
Company is not in compliance with any of it's standards or regulations, among
other things, it may require the Company to recall its products which are found
not to be in compliance and repair or replace such products. The Company
believes it is currently in compliance with NHTSA.
Product Research and Development
The Company's operating facilities engage in engineering, research and
development and quality control activities to improve the performance,
reliability and cost-effectiveness of the Company's product lines. The Company's
engineering staff works closely with its customers in the design and development
of new products and adapting products for new applications. During 1997, 1996
and 1995, the Company spent $1,849, $2,144 and $1,445 respectively, on these
activities for continuing operations. The Company intends to increase its
research and development expenditures in 1998 to design ETC products compatible
with gasoline powered vehicles, develop commercial applications for inertia
tilt, Hall effect, and optical sensor products, and further develop train
tracking products. The Company is in early stages of development of these
programs and expects to increase research and development spending by
approximately $1 million in fiscal 1999. The majority of the additional expense
will be spent on developing a low cost foot pedal, which is in early stages of
development.
Patents and Trademarks
The Company's product lines generally have strong name recognition in the
markets which they serve. The Company has a number of product patents obtained
over a period of years which expire at various times. The Company considers each
patent to be of value and aggressively protects its rights against infringement
throughout the world. The Company owns two patents (expiring in 2009) which it
believes improved the marketability of the electronic product line of the heavy
vehicle components segment. The Company does not consider that the loss or
expiration of either patent would materially adversely affect the Company;
however, competition in the electronic product line could increase without these
patents. The Company owns numerous trademarks which are registered in many
countries enabling the Company to market its products worldwide. These
trademarks include "Williams," "Kenco" and "Hardee". The Company believes that
in the aggregate, the rights under its patents and trademarks are generally
important to its operations, but does not consider that any patent or trademark
or group of them related to a specific process or product is of material
importance in relation to the Company's total business except as described
above.
Raw Materials
The Company produces its products from raw materials, including brass, aluminum,
steel, plastic, rubber and zinc, which currently are widely available at
reasonable terms. The Company relies upon, and expects to continue to rely upon,
CTS Corporation, Robertshaw and Caterpillar, Inc. as single source suppliers for
critical components and/or products. Although these suppliers have been able to
meet the Company's needs on a timely basis, and appear to be willing to continue
being suppliers to the Company, there is no assurance that a disruption in a
supplier's business, such as a strike, would not disrupt the supply of a
component. Although the Company has recently experienced stable prices, prices
for aluminum zinc, rubber, steel, and mechanical components such as gearboxes,
hydraulics, and contact position sensors could fluctuate and affect
profitability.
Product Warranty
The Company warrants its products to the first retail purchaser and subsequent
owners against malfunctions occurring during the warranty period resulting from
defects in material or workmanship, subject to specified limitations. The
warranty on vehicle components is limited to a specified time period, mileage or
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hours of use, and varies by product and application. The Company has established
a warranty reserve based upon its estimate of the future cost of warranty and
related service costs. The Company regularly monitors its warranty reserve for
adequacy in response to historical experience and other factors.
Employees
The Company employs approximately 578 employees, including 129 union employees.
The non-union employees of the Company are engaged in sales and marketing,
accounting and administration, product research and development, production and
quality control. The union employees are engaged in manufacturing vehicle
components in the Portland, Oregon facility and are represented by the
International Union, United Automobile Workers of America and Amalgamated Local
492 (the "Union"). The Company and the Union have a collective bargaining
agreement that expires in September 2002, which provides for wages and benefits
(including pension, death, disability, health care, unemployment, vacation and
other benefits) and contains provisions governing other terms of employment,
such as seniority, grievances, arbitration and union recognition. Management of
the Company believes that its relationships with its employees and the Union are
good. The Company could experience changes in non-union labor costs as a result
of changes in local economies and general wage increases.
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ITEM 2. PROPERTIES
The following table outlines the principal manufacturing and other facilities
owned by the Company, subject to mortgages on all facilities except Agrotec.
Entity Facility Location Type and Size of Facility
- ------ ----------------- -------------------------
Kenco Middlebury, Indiana Manufacturing and offices
139,000 square feet
Hardee Loris, South Carolina Manufacturing and offices
101,000 square feet
Aptek Deerfield Beach, Florida Manufacturing and offices
48,000 square feet
Agrotec Pendleton, North Carolina Manufacturing and office
43,000 square feet
The Company's manufacturing facilities are equipped with the machinery and
equipment necessary to manufacture and assemble its products. Management
believes that the facilities have been maintained adequately, and that the
Company could increase its production output significantly at any of its
facilities with minimal expansion of its present equipment and work force. In
addition, the Company leases a 160,000 square foot manufacturing facility in
Portland, Oregon.
The Company's facilities that are encumbered by mortgages at September 30, 1997
are as follows: Kenco - $1,178,000, Hardee - $775,000 and Aptek - $2,647,000.
ITEM 3. LEGAL PROCEEDINGS
The Company and its consolidated subsidiaries are parties to various pending
judicial and administrative proceedings arising in the ordinary course of
business. The Company's management and legal counsel have reviewed the probable
outcome of these proceedings, the costs and expenses reasonably expected to be
incurred, the availability and limits of the Company's insurance coverage, and
the Company's established reserves for uninsured liabilities. While the outcome
of the pending proceedings cannot be predicted with certainty, based on its
review, management believes that any liabilities that may result are not
reasonably likely to have a material effect on the Company's liquidity,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders during
the fourth quarter of the year ended September 30, 1997.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market of the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
National Market System under the symbol "WMCO."
The range of high and low bid closing quotations for the Company's common stock
for each fiscal quarter for the past two fiscal years is as follows:
1997
----
High Low
---- ---
Quarter
-------
October 1 - December 31 $ 2.78 $ 1.97
January 1 - March 31 2.84 2.19
April 1 - June 30 2.59 1.94
July 1 - September 30 2.41 2.13
1996
----
High Low
---- ---
Quarter
-------
October 1 - December 31 $ 3.41 $ 2.28
January 1 - March 31 3.03 2.38
April 1 - June 30 2.72 1.72
July 1 - September 30 2.75 1.44
The number of record holders of the Company's common stock as of December 31,
1997 was approximately 570. The Company has never paid a dividend with respect
to its common stock and has no plans to pay a dividend in the foreseeable
future.
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ITEM 6. SELECTED FINACIAL DATA
(Dollars in thousands - except per share amounts)
<TABLE>
<CAPTION>
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997 1996* 1995** 1994*** 1993
- ------------------------ ---- ----- ------ ------- ----
Net sales from continuing operations $56,254 $51,279 $44,472 $29,954 $17,100
Earnings from continuing operations 1,135 2,363 4,971 3,520 1,167
Net earnings (loss) (2,037) (561) 4,512 3,641 1,167
Earnings from continuing operations per common
share $ .06 $ .13 $ .29 $ .21 $ .08
Net earnings (loss) per common share $ (.11) $ (.03) $ .26 $ .22 $ .14
Cash dividends per common share - - - - -
Balance Sheet Data
September 30, 1997 1996* 1995** 1994*** 1993
- ------------- ---- ----- ------ ------- ----
Current assets $26,134 $30,926 $25,788 $20,874 $ 10,623
Current liabilities 10,006 29,600 7,881 10,012 7,527
Working capital 16,128 1,326 17,907 10,862 3,096
Total assets 51,376 53,049 47,182 32,159 20,006
Long-term liabilities 24,072 4,726 20,244 9,699 5,690
Redeemable convertible preferred stock,
Including unpaid dividends - - - - 413
Minority interest in consolidated subsidiaries 463 713 764 - -
Shareholders' equity $16,835 $18,010 $18,293 $12,448 $6,376
</TABLE>
* 1996 data includes small acquisitions from Apri1 1996. Net sales, earnings
from operations and total assets related to these acquisitions were not
material. See note 16 to the Notes to Consolidated Financial Statements for
information regarding these acquisitions.
** 1995 data includes acquisitions made in February, April and August. In 1996
net sales related to these acquisitions from date of purchase were $9,646;
earnings from operations were $1,039. Total assets at September 30, 1996
related to these acquisitions were $16,072.
*** 1994 data includes small acquisitions from January 1994. Net sales,
earnings from operations and total assets related to these acquisitions
were not material. Represents only one full month of operations of Kenco.
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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
The Company's principal sources of liquidity are borrowings under its credit
facilities and funds generated from operations. At September 30, 1997, the
Company's working capital improved to $16,128 compared to $1,326 at September
30, 1996 and the current ratio improved to 2.6 at September 30, 1997 compared to
1.0 at September 30, 1996. The improvement was primarily the result of the
refinancing of the Company's bank debt and resulting classification of the loan
as a long term obligation and also as a result of a sale/leaseback transaction.
The Company generated cash flow from continuing operations of $2,117 for the
year ended September 30, 1997 compared to $415 for the prior fiscal year. The
Company's 1997 cash flow from continuing operations benefited from improved
receivable and inventory management and a federal tax refund of $670. The
improved receivable management resulted from additional efforts to monitor and
collect past due accounts receivable, including sending demand letters and
hiring outside collection services. In addition, in the agricultural equipment
segment, the Company has begun monitoring dealer inventories to ensure that
receivables are paid no later than when the equipment is sold.
The Company generated cash flow from discontinued operations of $1,577 for the
year ended September 30, 1997, compared to cash used in discontinued operations
of $3,660 for the prior fiscal year. Cash flow from discontinued operations
improved because of lower accounts receivable and inventory resulting from lower
sales levels. At September 30, 1997 accounts receivable decreased to $8,468,
compared to $13,103 at September 30, 1996 primarily due to the reclassification
of accounts receivable as net assets held for disposition and to decreased sales
at the discontinued automotive accessories segment. In addition, during fiscal
1997, the Company implemented an inventory reduction program in this operation
which reduced inventories approximately $1 million.
The Company anticipates that cash generated from operations and borrowings will
be sufficient to satisfy working capital and capital expenditure requirements
for current operations fOr the next twelve months, but the Company will require
additional financing to fund approximately $1 million of additional research and
development projects, an additional investment of approximately $2 million in
Ajay and new equipment purchases of approximately $3 million for and moving of
the PPT facility. The Company intends to raise additional capital through the
sale of Kenco, a possible sale/leaseback of a manufacturing facility and a
private placement or public offering of common or preferred stock in the third
or fourth quarter of fiscal 1998. The proceeds of the sale of Kenco are expected
to be approximately $1,000 to $2,000 plus the assumption of certain liabilities
and a retained equity investment in the acquiring company. In addition, the sale
of Kenco inventory during the six months following the sale are expected to
generate an additional $3,000 to $4,000 of cash. The proceeds from the sale of
Kenco, if completed, will be used to repay bank debt of approximately $1,800.
Any excess proceeds will be used towards payment of the $2,340 bridge loan
provided to Ajay by the previous lender. The Company is in discussions with
investment bankers about a possible institutional private placement of equity or
equity linked securities and is in discussion with real estate investment trusts
about the possible sale/leaseback of the Aptek manufacturing and research
facility in Deerfield Beach, Florida. There is no assurance that the Company can
raise new capital on terms acceptable to the Company or sell the Aptek facility.
During the three fiscal years ended September 30, 1997, the Company's automotive
accessories division reported a net loss from operations of approximately $6.6
million. Excluding the automotive accessory segment, the Company reported a
cumulative profit from continuing operations during that period of $8.5 million.
If the Company is successful in selling this division, the Company would not
incur future operating losses and uses of cash from this operation. The
Company's plans to invest additional capital in Ajay is dependent upon the
Company raising additional capital. If the Company is unsuccessful in raising
additional capital, the investment in Ajay would come from the Company's excess
cash flow and would likely be delayed until the Company had adequate liquidity
for such investment.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524. The Company may be required to repurchase
the property in April 1998 if it cannot cure possible environmental problems at
the sold property and may be required to finance $3,200 of the purchaser's price
if the purchaser cannot obtain permanent financing from a lender who would
accept the environmental condition of the property. The purchaser informed the
Company that it has entered into a purchase and sale agreement with a third
party who will purchase the property without any contingent repurchase
obligation subject to the third party's due diligence. The Company has the right
of first refusal to repurchase the building during the first year if the
purchaser attempts to sell the property to a third party. The acquisition
agreement with the company which owned the building prior to the Company
contains provision for indemnification by the seller of any environmental
cleanup costs after the subsidiary spends $25 towards such cleanup. The Company
intends to seek indemnification from the prior property owner for permanent
monitoring or cleanup costs, if any.
On July 11, 1997, the Company and Ajay refinanced their bank debt with a bank
under a $34,088 three-year revolving credit and term loan agreement.
Accordingly, the Company has reported bank debt as a long-term liability as of
September 30, 1997. At the date of the Loan closing, the Company borrowed a
total of $17,141 which was comprised of $9,619 of borrowings under the $26,000
revolving loan facility (the "Revolver"), $2,658 under a real estate term loan
("Real Estate Loan"), $3,864 under a machinery and equipment loan ("Term Loan
I"), and $1,000 under a term loan ("Term Loan II"). The Company had $488 of loan
availability under the revolving loan as of September 30, 1997.
The Company had guaranteed the debt of Ajay to the previous lender. The previous
lender provided Ajay $2,340 of bridge financing and the Company provided Ajay
$2,268 at Loan closing to repay the previous loan in full. The expected sources
of repayment for the bridge loan are primarily derived from expected financial
transactions of the Company. Therefore, it is likely that Ajay will need to
borrow additional funds from the Company in the future to repay the bridge loan
to the extent that the bridge loan is repaid with Company funds. These loans
were necessary because the Company was prohibited from down-streaming funds to
Ajay while the previous loan was in default. The Company has also agreed to
purchase 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; such notes payable have not yet been purchased.
The Company and Ajay have 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, 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 $1,000 would be required no later than February 1998. If
Ajay successfully completes its bank financing, the Company has also proposed to
exchange up to $4,000 of loans and advances 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.
In addition to the financing needs for the investment in Ajay and the moving
costs and new equipment purchases for PPT, the Company intends to accelerate
funding of certain research and development projects by establishing a new
product development center in its Deerfield Beach, Florida facility. These
projects will include development of new ETC products for advance vehicle
platforms, development of new electronic sensors and controls for vehicle
applications, development of industrial applications for certain existing sensor
products and development of GPS based train tracking systems.
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
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
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.
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
recently issued SFAS No. 128, "Earnings Per Share", which is effective for
fiscal years ending after December 15, 1997. This statement replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires reconciliation of the numerator and denominator of the basic EPS
computations to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared the earnings of the entity. Diluted EPS is computed
similar to fully diluted EPS. SFAS No. 128 requires restatement of all EPS data
that was presented in previously filed reports. Management believes that
implementation of SFAS No. 128 will not have a material effect on earnings per
share.
The FASB also recently issued SFAS No.'s 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information," respectively. Both of these statements are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes requirements
for disclosure of comprehensive income which includes certain items previously
not included in the statement of income including minimum pension liability
adjustments and foreign currency translation adjustments, among others.
Reclassification of earlier financial statements for comparative purposes is
required. SFAS No. 131 revises existing standards for reporting information
about operating segments and requires the reporting of selected information in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Management believes that implementation of SFAS No. 130 and No. 131 will not
materially affect the Company's financial statements.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
Results of Operations
Year ended September 30, 1997 Compared to September 30, 1996
Overview
Net sales from continuing operations increased 10% to $56,254 in fiscal 1997
from $51,279 in fiscal 1996 due to higher unit sales volumes in the Company's
vehicle component segment, which was partially offset by declining unit sales
volumes in the agricultural equipment and electrical components and GPS
segments.
Earnings from continuing operations decreased 24% to $4,272 in fiscal 1997 from
$5,594 in fiscal 1996 due to increases in unit sales volumes in the Company's
vehicle component segment, which was offset by declining unit sales volumes in
the agricultural equipment and electrical components and GPS segments.
Net losses increased to $2,037 in fiscal 1997 from $561 in the prior fiscal year
due to increased losses in the Company's discontinued automotive accessories
segment and higher losses in the agricultural equipment and electrical
components and GPS segments. Net losses in these segments were partially offset
by increased profitability in the vehicle components segment.
Net Sales
Net sales from continuing operations in the vehicle components segment increased
19% to $43,078 in fiscal 1997 over levels achieved in fiscal 1996 due to higher
ETC unit sales volumes in the Class 7 and 8 truck OEM markets and increased
sales of plastic parts and prototyping in the automotive manufacturing industry.
Sales increases in the vehicle component segment were partially offset by
decreases in sales of 15% and 9% in the Company's agricultural equipment and
electrical component and GPS segments, respectively. Significant sales increases
of GPS systems were offset by declines of electrical components in that segment.
Sales declines in the agricultural equipment and electrical component and GPS
segments are attributed to lower unit volumes associated with increased
competition.
Gross margin
Gross margin from continuing operations decreased 6%, to $12,890 compared to
$13,673 in fiscal 1996. Gross margins increased 10% in fiscal 1997 in the
vehicle components segment due to higher unit sales volumes. Increases in this
segment were offset by decreases of 92% in the Company's agricultural equipment
segment and 17% in the electrical component and GPS segments. Decreased gross
margins in these segments are attributed to lower unit sales volumes.
Operating expenses
Operating expenses for continuing operations increased 7% during fiscal 1997
compared to amounts in fiscal 1996. Operating expenses as a percentage of net
sales from continuing operations decreased slightly in fiscal 1997 to 15%
compared to 16% in fiscal 1996. Operating expenses increased 3% in fiscal 1997
in the vehicle component segment to $4,326 and 26% in the electronic components
and GPS segment compared to 1996 levels, while operating expenses in the
agricultural equipment segment remained relatively stable. Increases in
operating expenses were attributed to higher sales volumes of the Company's ETC
and GPS products.
Research and development expenses for continuing operations decreased 14% to
$1,849 during fiscal 1997 compared to amounts in fiscal 1996. As a percentage of
net sales from continuing operations, research and development expenses
decreased from 4% to 3%. Decreases in dollar amount were due to curtailments of
research and development activities in all business segments during the
Company's bank refinancing negotiations in fiscal 1997.
Selling expenses for continuing operations increased 20% to $2,913 in fiscal
1997 compared to 1996 levels. Selling expenses as a percentage of net sales from
continuing operations remained stable at 5% in fiscal 1997 and 1996. Selling
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
expenses increased due to increased sales volumes in the vehicle components
segment and additional sales and marketing activities in the electrical
components and GPS and agricultural equipment segments.
General and administrative expenses for continuing operations increased 10% in
fiscal 1997 to $3,856 compared to fiscal 1996 amounts. General and
administrative expenses remained stable at 7% of net sales from continuing
operations in fiscal 1997 and 1996. Increases in dollar amount at the electrical
components and GPS and vehicle component segments in fiscal 1997 were attributed
to additional management personnel required for future growth activities.
Earnings from continuing operations
Earnings from continuing operations decreased 24% to $4,272 in fiscal 1997 from
$5,594 in fiscal 1996 due to increased operating losses in the agricultural
equipment and electrical components and GPS business segments.
Other Expenses
Other expenses increased 25% to $2,232 in fiscal 1997 from $1,782 in fiscal
1996. Increases were attributed to increased interest rates associated with the
Company's borrowing activities and new loan agreements and increased equity
interest losses in affiliate (AJAY Sports, Inc.).
Discontinued operations
Net losses from the discontinued automotive accessories segment were $3,172 net
of tax benefits of $2,121 for fiscal 1997, compared to $2,924 net of tax
benefits of $1,885 in fiscal 1996. The fiscal 1997 net loss includes operations
through the measurement date of May 8, 1997. All losses incurred after the
measurement date are reported as losses on disposal of discontinued operations.
The 1996 losses include a pre-tax operating restructuring charge of $2,250.
Net sales from the discontinued segment declined $7,375, or 47%, in fiscal 1997
to $8,666 from $16,043 in fiscal 1996. The decline in automotive accessory sales
were due to lower unit sales and lower prices resulting from strong downward
prices pressure generated by competitors who are more vertically integrated and
have lower cost structures than the Company's automotive accessories segment.
The estimated loss on disposal of the business of $1,965 consists of $1,171 of
estimated future operating losses net of tax benefits of $781 and $794 of
operating losses incurred since the measurement date net of tax benefits of
$530. The $794 of operating losses since the measurement date includes $489 of
charges that are primarily for inventory reserves. The Company has elected to
include interest costs in its estimated loss on disposal based upon the expected
debt reduction from the $5,000 of cash proceeds and the current rate of
interest.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
Results of Operations
Year ended September 30, 1996 Compared to September 30, 1995
Sales
Sales for the year ended September 30, 1996 increased 15% to $51,279 compared to
$44,472 for the prior year. Sales of vehicle components, agricultural equipment,
and electrical components accounted for 70%, 22% and 8% as a percent of total
sales for the year ended September 30, 1996 compared to 78%, 15% and 7% for the
prior year. Vehicle component sales were $36,141 for the year ended September
30, 1996 compared to $34,826 for the prior year, an increase of 4%. Agricultural
equipment sales were $11,026 for the year ended September 30, 1996 compared to
$6,783 for the prior year, an increase of 63%. Sales of electrical components
were $4,112 for the year ended September 30, 1996 compared to $2,863 for the
prior year, an increase of 44%. Agricultural equipment and electrical component
sales were the result of acquisitions completed in February 1995 and April 1995.
Vehicle component sales were relatively flat for the year as retail sales of
Class 8 trucks, the primary market for the Company's electronic throttle product
line, declined over 20% compared to the prior year. Historically, the Class 8
truck market has been cyclical with annual production ranging from approximately
100,000 to 200,000 units. In calendar year 1995, Class 8 truck production was
over 200,000 units, which capped five years of increased annual production. In
calendar 1996, Class 8 truck production declined to an estimated 160,000 units.
The decrease in the Class 8 truck market has been offset by an increase in sales
to the midrange truck market, which continues to introduce electronic throttles
to new truck models, as this technology becomes more acceptable to this market
segment. The Company anticipates this trend to continue for approximately 12 to
18 months.
Agricultural equipment and electrical component sales are the results of
acquisitions in 1995 and, therefore, comparison of 1996 to 1995 is not
meaningful. The agricultural equipment segment has increased sales by
integrating small product line acquisitions into its primary dealer network.
Sales in the electrical component segment were lower than expected for the year
due to loss of two primary customers.
Earnings from Operations
Earnings from operations for the year ended September 30, 1996 were $5,594
compared to $9,498 for the prior year, a decrease of 41%. Earnings from
continuing operations as a percentage of sales for the year ended September 30,
1996 were 11% compared to 21% for the prior year. The decrease in earnings from
continuing operations is due to lower gross margins and increased operating
expenses.
Gross margin as a percentage of sales for the year ended September 30, 1996 was
27% compared to 33% for the prior year. The decrease in gross margin results
from a larger percentage of the Company's operations being in business segments
with lower gross margins primarily as a result of acquisitions. Margins
decreased in the agricultural equipment segment due to increased cost incurred
to improve product quality and because of an unprofitable product line, which
was discontinued in fiscal 1996. Gross margins decreased 29% in fiscal 1996 in
the Company's vehicle component segment due to higher fixed costs and
acquisitions of lower performing businesses. Gross margins remained stable in
the Company's agricultural equipment and electronic component and GPS segments.
Increases in sales in these two segments were offset by higher costs.
Operating expenses for the year ended September 30, 1996 were $8,079 or 16% of
sales compared to $5,178 or 12 % of sales for the same period in the prior year.
The increased operating expenses are due primarily to costs associated with
companies acquired in the agricultural equipment and electrical components
segments.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
Research and development expenses for continuing operations increased 48% to
$2,144 during fiscal 1996 compared to amounts in fiscal 1995. As a percentage of
net sales from continuing operations, research and development expenses
increased from 3% to 4%. Increases in dollar amount were primarily due to
additional activities related to product development in the Company's vehicle
component segment.
Selling expenses for continuing operations increased 75% to $2,421 in fiscal
1996 compared to 1995 levels. Selling expenses as a percentage of net sales from
continuing operations increased to 5% in fiscal 1996 from 3% in fiscal 1995.
Selling expenses increased primarily due to increased sales volumes in the
agricultural equipment and electronic components and GPS segments and additional
sales and marketing activities in the electrical components and GPS and
agricultural equipment segments.
General and administrative expenses for continuing operations increased 50% in
fiscal 1996 to $3,514 compared to fiscal 1995 amounts. General and
administrative expenses as a percentage of net sales from continuing operations
increased to 7% in fiscal 1996 from 5% in fiscal 1995. Increases in dollar
amount were attributed primarily to higher sales levels in the Company's
agricultural equipment segment and electrical components and GPS segment.
General and administrative expenses also increased due to the acquisition of
businesses within the vehicle component and electrical component and GPS
segments.
Earnings from operations of the vehicle component segment decreased 19% for the
year ended September 30, 1996 compared to the prior year. The decrease in
earnings from operations in this segment is due to the shift in product mix to
products used in midrange truck applications, which typically have lower margins
than heavy-duty truck applications. In addition, due to the downturn in the
Class 8 truck market segment, the Company's customers are faced with increased
price pressure to compete in this cyclical market. Therefore, the Company is
working with its customers to maintain or reduce selling prices while absorbing
the increased cost of raw materials.
The discontinued automotive accessories segment had losses from operations of
$2,924 for the year ended September 30, 1996 compared to losses from operations
of $459 for the prior year. The primary reason for the increased loss is due to
a one-time restructuring charge of $2,250 recognized during the third quarter.
The electrical components and GPS segment had losses from operations of $659 for
the year ended September 30, 1996 compared to earnings from operations of $182
for the prior year. The loss from operations was due primarily to the loss of
two of its major customers in the telecommunication industry. The electrical and
GPS components segment was added through an acquisition completed in April of
1995. The electrical components segment continues to focus on product
development efforts to enhance future sales opportunities.
The agricultural equipment segment had losses from operations of $578 for the
year ended September 30, 1996 compared to earnings from operations of $857 for
the prior year. The agricultural equipment segment resulted from acquisitions in
February 1995. The agricultural equipment segment had increased overhead and
production inefficiencies and an unprofitable product line, which was
discontinued in August 1996. It also had increased costs to improve its product
line to meet the quality of competition.
Other Expenses
Interest expense included in continuing operations for the year ended September
30, 1996 was $1,607 compared to $1,674 for the year ended September 30, 1995 as
a result of increased borrowings plus a loss from the equity interest in an
affiliate of $175,000. Interest expense included in discontinued operations for
the year ended September 30, 1996 and 1995 was $456. Interest income, affiliate
relates to a loan provided to Ajay, which was repaid in July of 1995.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands except per share amounts)
Net Earnings (Loss)
The net loss for the year ended September 30, 1996 was $561 or $.03 per share
compared to net earnings of $4,512 or $.26 per share for the prior year.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WILLIAMS CONTROLS, INC.
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheet at September 30, 1997 and 1996 20
Consolidated Statement of Shareholders' Equity for the
years ended September 30, 1997, 1996 and 1995 21
Consolidated Statement of Operations for the years
ended September 30, 1997, 1996 and 1995 22
Consolidated Statement of Cash Flows for the years
ended September 30, 1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-47
Independent Auditors' Report 48
See page 51 for Index to Schedules and page 54 for Index to Exhibits.
19
<PAGE>
Williams Controls Inc.
Consolidated Balance Sheet
(Dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1997 1996
-------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 700 $ 1,379
Trade and other accounts receivable, less allowance of $185 and
$1,250 in 1997 and 1996, respectively 8,468 13,103
Inventories 14,517 15,288
Prepaid expenses and other 1,811 1,156
Net assets held for disposition 638 -
-------------------- --------------------
Total current assets 26,134 30,926
Investment in affiliate 559 943
Property plant and equipment, net 18,080 19,801
Receivables from affiliate 3,645 -
Net assets held for disposition 1,610 -
Other assets 1,348 1,379
==================== ====================
Total assets $ 51,376 $ 53,049
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,070 $ 5,895
Accrued expenses 3,008 2,493
Current portion of long-term debt and capital leases 1,428 212
Estimated loss on disposal 500 -
Revolving line of credit - 21,000
-------------------- --- -------------------
Total current liabilities 10,006 29,600
Long-term debt and capital lease obligations 22,857 2,782
Other liabilities 1,215 1,944
Commitments and contingencies - -
Minority interest in consolidated subsidiaries 463 713
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized) - -
Common stock ($.01 par value, 50,000,000 authorized;
17,912,240 and 17,869,987 issued at September 30,
1997 and 1996, respectively) 179 179
Additional paid-in capital 9,822 9,671
Retained earnings 7,402 9,439
Unearned ESOP shares (191) (511)
Treasury stock (130,200 and 195,200 shares at
September 30, 1997 and 1996, respectively) (377) (540)
Pension liability adjustment - (228)
-------------------- --- -------------------
Total shareholders' equity 16,835 18,010
==================== === ===================
Total liabilities and shareholders' equity $ 51,376 $ 53,049
==================== === ===================
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Williams Controls, Inc.
Consolidated Statement of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issued
Common stock Pension
--------------------- Additional Retained Unearned Liability Treasury Shareholders'
Shares Amount Paid in Earnings ESOP Shares Adjustment Shares Equity
Capital
----------- --------- ------------ -------- ----------- ---------- -------- -------------
Balance, September 30, 1994 16,676,181 $ 167 $ 7,066 $ 5,488 $ - $ (273) $ - $ 12,448
Net earnings - - - 4,512 - - - 4,512
Common stock issued pursuant to
acquisitions 588,806 6 1,957 - - - - 1,963
Unearned ESOP shares - - - - (630) - - (630)
----------- --------- ------------ -------- ----------- ---------- -------- --------------
Balance, September 30, 1995 17,264,987 173 9,023 10,000 (630) (273) - 18,293
Net loss - - - (561) - - - (561)
Issuance of shares upon exercise
of stock options and warrants 455,000 4 231 - - - - 235
Common stock issued pursuant to
acquisitions 150,000 2 288 - - - - 290
Reduction of unallocated ESOP
shares - - 129 - 119 - - 248
Change in pension liability
adjustment - - - - - 45 - 45
Cost of treasury shares acquired - - - - - - (540) (540)
----------- --------- ------------ -------- ----------- ---------- -------- --------------
Balance, September 30, 1996 17,869,987 179 9,671 9,439 (511) (228) (540) 18,010
Net loss - - - (2,037) - - - (2,037)
Issuance of contingent shares
for acquisition 42,253 - 106 106
Treasury stock issued for
acquisition Services - - - - - - 163 163
Reduction of unallocated ESOP
shares - - 45 320 365
Change in pension liability
adjustment - - - - - 228 - 228
----------- --------- ------------ -------- ----------- ---------- -------- --------------
Balance, September 30, 1997 17,912,240 $ 179 $ 9,822 $ 7,402 $ (191) $ - $ (377) $ 16,835
=========== ========= ============ ======== =========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Williams Controls, Inc.
Consolidated Statement of Operations
(Dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the year ended September 30
1997 1996 1995
-------------- -------------- -------------
Sales $ 56,254 $ 51,279 $ 44,472
Cost of sales 43,364 37,606 29,796
-------------- -------------- -------------
Gross margin 12,890 13,673 14,676
Operating expenses:
Research and development 1,849 2,144 1,445
Selling 2,913 2,421 1,384
Administration 3,856 3,514 2,349
-------------- -------------- -------------
Total operating expenses 8,618 8,079 5,178
-------------- -------------- -------------
Earnings from continuing operations 4,272 5,594 9,498
Other (income) expenses:
Interest expense 1,848 1,607 1,674
Interest income, affiliate - - (601)
Equity interest in loss of affiliate 384 175 282
-------------- -------------- -------------
Total other expenses 2,232 1,782 1,355
-------------- -------------- -------------
Earnings from continuing operations before income tax expense 2,040 3,812 8,143
Income tax expense 1,155 1,505 3,108
-------------- -------------- -------------
Earnings from continuing operations before minority interest 885 2,307 5,035
Minority interest in net (earnings) loss of consolidated subsidiaries 250 (64)
56
-------------- -------------- -------------
Earnings from continuing operations 1,135 2,363 4,971
Discontinued operations:
Loss from operations of automotive accessories segment (1,207) (2,924) (459)
Loss on disposal of automotive accessories segment, including
Provision of $1,171 for operating losses during phase-out period (1,965) - -
-------------- -------------- -------------
Loss from discontinued operations (3,172) (459)
(2,924)
-------------- -------------- -------------
Net earnings (loss) $ (2,037) $ (561) $ 4,512
============== ============== =============
Earnings per common share from continuing operations $ 0.06 $ 0.13 $ 0.29
Loss per common share from discontinued operations (0.17) (0.16) (0.03)
-------------- -------------- -------------
Net earnings (loss) per common share $ (0.11) $ (0.03) $ 0.26
============== ============== =============
Weighted average shares used in per share calculation 18,200,000 17,800,000 17,600,000
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Williams Controls, Inc.
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the year ended September 30,
1997 1996 1995
------------------ --------------- --------------
Cash flows from operating activities:
Net income (loss) $ (2,037) $ (561) $ 4,512
Adjustments to reconcile net income (loss) to net cash from
continuing operations:
Loss from discontinued operations 3,172 2,924 459
Depreciation and amortization 1,375 1,899 1,382
Minority interest in earnings (loss) in consolidated subsidiaries (250) (56) 64
Equity interest in loss of affiliate 384 175 282
Deferred income taxes (1,368) (491) 167
Changes in working capital of continuing operations, net of
acquisitions:
Receivables (108) 349 (846)
Inventories 771 (2,401) (1,068)
Accounts payable and accrued expenses 258 (310) (449)
Other (80) (1,113) 253
------------------ --------------- --------------
Net cash provided by operating activities of continuing operations 2,117 415 4,756
Cash flows from investing activities:
Repayments from (loans to) an affiliate (3,645) - 4,913
Payments for acquisitions - (1,220) (6,766)
Payments for property, plant and equipment (811) (1,237) (1,147)
------------------ --------------- --------------
Net cash used for investing activities of continuing operations (4,456) (2,457) (3,000)
Cash flows from financing activities:
Proceeds from long-term debt and capital lease obligations 16,809 6,000 15,000
Repayments of long-term debt and capital lease obligations (21,000) (267) (8,564)
Proceeds from sale/leaseback transaction 4,274 - -
Proceeds from issuance of common stock - 235 -
Repurchase of common stock - (540) -
Net repayments under lines of credit - - (3,187)
Payment of debt issuance costs - - (364)
------------------ --------------- --------------
Net cash provided by financing activities of continuing operations 83 5,428 2,885
Net cash provided by (used in) discontinued operations 1,577 (3,660) (3,230)
Net increase (decrease) in cash and cash equivalents (679) (274) 1,411
Cash and cash equivalents at beginning of period 1,379 1,653 242
================== =============== ==============
Cash and cash equivalents at end of period $ 700 $ 1,379 $ 1,653
================== =============== ==============
Supplemental disclosure of cash flow information:
================== =============== ==============
Interest paid $ 2,275 $ 1,800 $ 2,400
Income taxes paid, net of refund $ (424) $ 1,200 $ 2,600
================== =============== ==============
</TABLE>
The non-cash activity related to the Company's investing activity is described
in note 4, and non-cash activity related to the Company's acquisitions is
described in note 16.
The accompanying notes are an integral part of these statements.
23
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 1. Summary of Operations
Williams Controls, Inc, including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is herein referred to as the "Company" or
"Registrant". The subsidiaries are detailed as follows:
Vehicle Components
Williams Controls Industries, Inc.: Manufactures vehicle components sold
primarily in the transportation industry.
Premier Plastic Technologies, Inc.: Manufactures plastic components for the
automotive industry and manufactures prototype and production molds using rapid
prototyping processes.
NESC Williams, Inc.: Installs conversion kits to allow vehicles to use
compressed natural gas and provides natural gas well metering services.
Williams Automotive, Inc.: Markets the Company's products to the automotive
industry.
Electrical Components and GPS Aptek Williams, Inc.: Develops and produces
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
Agrotec Williams, Inc.: Manufactures spraying equipment for the professional
lawn care and nursery and pest control industries.
Hardee Williams, Inc.: Manufactures equipment used in farming, highway and park
maintenance.
Waccamaw Wheel Williams, Inc.: Manufactures solid rubber tail wheels and other
rubber products, used on agricultural equipment, from recycled truck and bus
tires.
Techwood Williams, Inc.: Manufactured and distributed commercial wood chippers
used in landscaping and farming. Techwood ceased manufacturing operations in
fiscal 1997.
24
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Automotive Accessories
Kenco/Williams, Inc.: Manufactures, assembles, packages and distributes truck
and auto accessories for the aftermarket parts industries. Kenco is reported as
a discontinued operation.
25
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Other Subsidiaries
Williams Technologies, Inc.: Supports all subsidiaries of the Company by
providing research and development and developing strategic business
relationships to promote "technology partnering."
Williams World Trade, Inc.: Located in Kuala Lumpur, Malaysia, WWT manages
foreign sourcing for subsidiaries of the Company, affiliates and third party
customers.
Note 2. Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include all
of the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - All short-term highly liquid investments purchased
with an original maturity of three months or less are considered to be cash
equivalents.
Inventories - Inventories are valued at the lower of cost (first-in, first-out)
or market.
Property, Plant and Equipment - Land, buildings, equipment and improvements to
existing facilities are recorded at cost. Maintenance and repairs are expensed
as incurred. Depreciation has been computed using the straight-line method over
the estimated useful lives of property and equipment as follows: buildings 31.5
years, furniture, machinery and equipment 3 to 12 years. Capitalized leases are
amortized using the same method over the shorter of the estimated useful lives
or the lease term.
Goodwill - The excess of cost over net assets of acquired companies is being
amortized using the straight-line method over periods not exceeding 40 years. At
each balance sheet date, management assesses whether there has been an
impairment in the carrying value of cost in excess of net assets of businesses
acquired, primarily by comparing current and projected sales, operating income
and annual cash flows, on an undiscounted basis, with the related annual
amortization expenses as well as considering the equity of such companies.
Concentration of Risk - The Company invests a portion of its excess cash in debt
instruments of financial institutions with strong credit ratings and has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company has not experienced any losses on its cash
equivalents.
The Company sells its products to customers in diversified industries worldwide;
however, approximately 77% of its sales from continuing operations are to
customers in the vehicle component segment.
For the years ended September 30, 1997, 1996 and 1995, Freightliner accounted
for 13%, 14% and 17% of net sales from continuing operations, respectively.
Navistar and Volvo each accounted for 11% of net sales from continuing
operations in fiscal 1997 and fiscal 1996 and 11% and 8%, respectively in fiscal
1995. Approximately 11%, 15% and 18% of net sales from continuing operations in
fiscal 1997, 1996 and 1995 respectively were to customers outside of the United
States, primarily in Canada, and, to a lesser extent, in Europe and Australia.
See note 13 of Notes to Consolidated Financial Statements.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. In the opinion
of management, actual losses and allowances have been within its expectations.
26
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Debt Issuance Costs - Costs incurred in the issuance of debt financing are
amortized over the term of the debt agreement.
27
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
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. Actual product warranty costs have not differed materially from accrued
estimated amounts.
Research and Development Costs - Research and development costs are expensed as
incurred.
Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment
date.
Post-retirement Benefits - Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers" Accounting for Post Retirement Benefits Other than
Pensions" requires the Company to accrue retiree insurance benefits over the
period in which employees become eligible for such benefits. The Company
implemented SFAS No. 106 by amortizing the transition obligation over twenty
years.
Earnings per Share - Earnings per share are computed on the basis of the
weighted average number of shares outstanding plus the common stock equivalents
which would arise from the exercise of stock options and warrants. Primary and
fully diluted earnings per share are the same for 1997, 1996 and 1995.
Reclassifications - Certain amounts previously reported in the 1995 and 1996
financial statements have been reclassified to conform to 1997 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
receivables from an affiliate is not practicable to estimate due to the
indefinite payment terms and due to the related party nature of the underlying
transaction.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") allows companies to choose whether to account for
stock-based compensation on a fair value method, or to continue accounting for
such compensation under the method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has chosen to continue to account for stock-based compensation using APB
25 (see Note 9). If the accounting provisions of SFAS 123 had been adopted, the
effect on net income would have been immaterial.
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
recently issued SFAS No. 128, "Earnings Per Share", which is effective for
fiscal years ending after December 15, 1997. This statement replaces the
presentation of primary earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires reconciliation of the numerator and denominator of the basic EPS
computations to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared the earnings of the entity. Diluted EPS is computed
similar to fully diluted EPS. SFAS No. 128 requires restatement of all EPS data
that was presented in previously filed reports. Management believes that
implementation of SFAS No. 128 will not have a material effect on earnings per
share.
28
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
The FASB also recently issued SFAS No.'s 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information," respectively. Both of these statements are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes requirements
for disclosure of comprehensive income which includes certain items previously
not included in the statement of income including minimum pension liability
adjustments and foreign currency translation adjustments, among others.
Reclassification of earlier financial statements for comparative purposes is
required. SFAS No. 131 revises existing standards for reporting information
about operating segments and requires the reporting of selected information in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Management believes that implementation of SFAS No. 130 and No. 131 will not
materially affect the Company's financial statements.
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 consisted of the following:
1997 1996
------- -------
Raw material $ 5,305 $ 7,243
Work in process 2,035 1,349
Finished goods 7,177 6,696
------- -------
$14,517 $15,288
Finished goods include component parts and finished product ready for shipment.
Note 4. Investment in and Receivables from Affiliate
Prior to July 1995, the Company had a loan receivable from Ajay Sports, Inc. and
its subsidiaries ("Ajay"). In October 1994, the Company exercised options to
acquire 4,117,647 shares of Ajay common stock through a reduction in the loan
receivable. At September 30, 1997, the Company owns 4,117,647 shares of Ajay
common stock, which represents approximately 18% of Ajay's outstanding common
stock. Ajay manufactures and distributes golf accessories primarily to retailers
throughout the United States. The investment in Ajay is recorded as an
investment in affiliate in the Consolidated Balance Sheet net of the Company's
equity interest in Ajay's losses since acquisition ($384, $175 and $282 for the
years ended September 30, 1997, 1996 and 1995, respectively). The Company is
required to account for the investment in Ajay on the equity method due to
common ownership by the Chairman and President of the Company who is also the
Chairman and President of Ajay.
In addition, 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 through July 11, 1997. At September 30, 1997, the
Company also has manufacturing rights in certain Ajay facilities through 2002,
under a joint venture agreement, and the Company has vested options to acquire
11,110,873 shares of Ajay common stock at prices ranging from $.34 to .50 per
share.
29
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
The Company had guaranteed Ajay's $13,500 credit facility to the previous lender
("Previous Lender") of which $12,051 was outstanding at July 11, 1997, the date
which the previous loan was repaid with proceeds from a new combined loan for
the Company and Ajay (the "Loan") with a new lender (the "Bank"). Ajay's loan
availability at the date of the Loan closing was insufficient to repay the
Previous Lender. The previous Lender provided Ajay $2,340 of bridge financing
and the Company provided Ajay $2,268 at Loan closing to repay its previous loan
in full. The expected sources of repayment for the bridge loan are primarily
derived from expected financial transactions of the Company. Therefore, it is
likely that Ajay will need to borrow additional funds from the Company in the
future to repay the bridge loan to the extent that the bridge loan is repaid
with Company funds. As a condition to the non-interest bearing loans made by the
Company to Ajay, Ajay granted the Company a security interest in all of the
assets of Ajay subordinate to the liens of the Bank and the Previous Lender. The
Chairman of the Company has provided a guaranty to the Company for the Company's
investments and loans to Ajay. In addition, the Company has agreed to provide
400,000 newly issued shares of the Company's common stock to Ajay, which will be
security for the bridge loan. Such shares have not yet been issued. The Company
has also agreed to purchase 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. These loans were necessary
because the Company was prohibited from down-streaming funds to Ajay while the
previous loan was in default.
The Company and Ajay have agreed to a plan (the "Ajay Recapitalization") whereby
Ajay plans to obtain permanent bank financing which, when combined with a final
investment by the Company, Ajay management has informed the Company it believes
will 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 has informed the Company that it believes, based on
expected loan advance rates, would leave Ajay approximately $2,000 short of its
projected minimum working capital needs. The Company intends to invest up to
$2,000 to provide Ajay adequate working capital, of which approximately $1,000
will be required in February 1998. If Ajay successfully completes its bank
financing, the Company has agreed to exchange up to $4,000 of loans and advances
into convertible voting preferred stock which Ajay management has informed the
Company that it believes will allow Ajay to meet the minimum net worth
requirement, which is one of the criteria for continued listing on the NASDAQ.
As presently proposed, the preferred stock will 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 will 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.
Following is a summary of condensed unaudited financial information of Ajay as
of and for the twelve months ended September 30, 1997, 1996 and 1995:
1997 1996 1995
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Current assets $ 14,264 $ 13,951 $ 9,405
Other assets 4,449 4,101 1,577
----------- ----------- -----------
$ 18,713 $ 18,052 $10,982
=========== =========== ===========
Current liabilities $ 5,031 $ 14,207 $ 2,870
Other liabilities 12,061 17 3,600
Stockholders' equity 1,621 3,828 4,512
----------- ----------- -----------
$ 18,713 $ 18,052 $10,982
=========== =========== ===========
Net sales $ 29,063 $ 24,669 $15,645
Gross margin $ 3,772 $ 4,412 $ 2,083
----------- ----------- -----------
Net loss $ (2,133) $ (985) $(1,565)
=========== =========== ===========
30
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
If valued at the September 30, 1997 quoted closing price of publicly traded Ajay
shares, the value of the Company's investment in Ajay would be approximately
$774. At September 30, 1997 Ajay had approximately $4,212 of outstanding
preferred stock that is convertible to approximately 8,000,000 shares of Ajay
common stock and outstanding options and warrants (in addition to the Company's
options) to purchase approximately 4,200,000 shares of Ajay common stock at
prices ranging from $.34 to $1.00 per share (unaudited).
31
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 5. Debt
On July 11, 1997, the Company and Ajay refinanced their bank debt with a bank
("the Bank") under a $34,088 three-year revolving credit and term loan agreement
("the Loan"). Accordingly, the Company has reported bank debt as a long-term
liability as of September 30, 1997. At the date of the Loan closing, the Company
borrowed a total of $17,141 which was comprised of $9,619 of borrowings under
the $26,000 revolving loan facility (the "Revolver"), $2,658 under a real estate
term loan ("Real Estate Loan"), $3,864 under a machinery and equipment loan
("Term Loan I"), and $1,000 under a term loan ("Term Loan II"). The Loan is a
joint and several obligation of the Company and Ajay. At the date of the Loan
closing, Ajay borrowed a total of $7,391, which was comprised of $6,825 under
the Revolver and $566 under Term Loan I (a total of $6,280 at September 30,
1997). The proceeds from the Company's and Ajay's borrowings plus cash on hand
were used to repay the Previous Lender. In addition, the Previous Lender
provided bridge financing of $2,340 to Ajay which is to be repaid primarily from
the proceeds of the sale of Kenco, the sale of other assets, or from a specified
percentage of future combined Ajay and the Company's cash flow. The Company's
Chairman has guaranteed Term Loan II to the Bank.
Under the Revolver, the Company and Ajay can borrow up to $26,000 based upon a
borrowing base availability calculated using specified percentages of eligible
accounts receivable and inventory. The Revolver bears interest at the Bank's
prime rate (8.5% at September 30, 1997) plus .5%. The Real Estate Loan and Term
Loan I bear interest at the Bank's prime rate plus .75%. At the Company's
option, the Company may borrow funds under the Revolver, the Real Estate Loan
and the Term Loan I at the London InterBank Offering Rate ("Libor") plus 2.75%,
3% and 3%, respectively. The Revolver, Real Estate Loan and Term Loan I mature
on July 14, 2000 and are secured by substantially all of the assets of the
Company and Ajay. The real estate term loan is being amortized over twenty years
and Term Loan I is being amortized over seven years with all remaining principal
outstanding due at the July 11, 2000. Term Loan II matures on June 1, 1999 with
principal payments based upon an amortization period of twenty four months plus
additional principal payments equal to any excess proceeds from the sale of
Kenco after repayment of any Revolver due on Kenco plus principal payments equal
to 50% of the Company's and Ajay's annual consolidated excess cash flow. The
loan agreement prohibits payment of any dividends by the Company, requires the
Company and Ajay in the aggregate to maintain minimum working capital of $25,000
exclusive of the Revolver and minimum tangible net worth of $11,000. The Loan
also prohibits additional indebtedness and common stock repurchases, and
restricts combined Company and Ajay annual capital spending and increased
operating lease obligations to $2,500 and $600, respectively. The loan agreement
imposes a prepayment penalty declining from 3% in the first year of the loan to
.5% in the year 2000 which is waived if the loan is repaid with proceeds from
the sale of assets or is refinanced with an affiliate of the Bank. The Company
had $488 of availability under the revolving loan as of September 30, 1997.
32
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
The Company's long-term debt consists of the following: 1997 1996
-------- --------
Bank revolving credit facility due on July 11, 2000; variable interest $ 9,498 -
rate (9.0% at September 30, 1997)
Bank Term Loan I, due on July 11, 2000, variable interest rate 9.25%, 3,818 -
payable in monthly installments of $46, with a remaining balance due
of $ 2,300 at maturity
Bank Term Loan II, due on June 1, 1999 variable interest rate 9.5%, 958 -
payable in monthly installments of $42, with a remaining balance due
of $83 at maturity
Real Estate loan, due on July 11, 2000, variable interest rate 9.25%, 2,647 -
payable in monthly installments of $11, with a remaining balance due
of $2,270 at maturity
Mortgage loan, due in 1998; variable interest rate (9.5% at September 775 875
30, 1997), payable in monthly installments of $8 plus interest
Sale leaseback financing, due in 2003, 8.0% interest rate, payable in 4,526 -
monthly installments of $38, including interest
Mortgage loan, due in 2003, 8.8% interest rate, payable in monthly 1,178 1,321
installments of $21 including interest
Unsecured subordinated note payable, due in 2005, interest only at 750 750
prime (8.50% at September 30, 1997)
Other 135 48
-------- --------
24,285 2,994
Less current portion 1,428 212
-------- --------
$22,857 $ 2,782
======== ========
</TABLE>
Maturities of long-term debt are as follows:
1998 $ 1,428
1999 1,457
2000 14,883
2001 307
2002 4,852
Thereafter 1,358
-----------
$ 24,285
===========
33
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 6. Pension Plans
The Company maintains two pension plans; one plan covers the salaried employees
and the other plan covers the Company's hourly employees. Annual net periodic
pension costs under the pension plans are determined on an actuarial basis. The
Company's policy is to fund these costs accrued over 15 years and obligations
arising due to plan amendments over the period benefited. The assets and
liabilities are adjusted annually based on actuarial results. Net pension cost
is computed as follows:
1997 1996 1995
----- ----- -----
Service cost $ 227 $ 226 $ 169
Interest cost 451 450 388
Actual return on plan assets (476) (477) (360)
Other components 21 21 29
----- ----- -----
$ 223 $ 220 $ 226
===== ===== =====
The expected long-term rate of return on plan assets is 9.0%. The discount rate
and rate of increase in future compensation levels used in determining the
actuarial present value of accumulated benefit obligations was 7.5% and 5.0% in
1997, 8.0% and 5.0% in 1996, and 8.5% and 5.0% in 1995, respectively. Plan
assets consist substantially of equity and fixed income securities.
34
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
SFAS No. 87 requires recognition in the balance sheet of a minimum pension
liability for underfunded plans. The minimum liability that must be recognized
is equal to the excess of the accumulated benefit obligation over plan assets.
At September 30, 1997 and 1996 the minimum liability for the Company's
underfunded plan was $0 and $228, respectively.
The funded status as of September 30 is as follows:
Salaried Hourly
Employees Employees
1997 Plan Plan
- ---- --------- ---------
Actuarial present value of vested benefits $ 2,418 $ 2,792
Actuarial present value of non-vested benefits 112 534
--------- ---------
Accumulated benefits obligation 2,530 3,326
========= =========
Actuarial present value of projected benefits obligation (2,901) (3,606)
Plan assets at fair market value 3,091 3,379
--------- ---------
Funded status 190 (227)
========= =========
Unrecognized net (losses) gain 226 (99)
Prior service costs 138 (374)
Prepaid (accrued) pension cost (174) 246
--------- ---------
Funded status $ 190 $ (227)
========= =========
Salaried Hourly
Employees Employees
1997 Plan Plan
- ---- --------- ---------
Actuarial present value of vested benefits $ 2,173 $ 2,558
Actuarial present value of non-vested benefits 80 457
--------- ---------
Accumulated benefits obligation 2,253 3,015
========= =========
Actuarial present value of projected benefits obligation (2,667) (3,053)
Plan assets at fair market value 2,634 2,669
--------- ---------
Funded status (33) (384)
========= =========
Unrecognized net losses (89) (228)
Prior service costs 150 (316)
Prepaid (accrued) pension cost (94) 160
--------- ---------
Funded status $ (33) $ (384)
========= =========
35
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 7. Property, Plant and Equipment
At September 30, 1997 and 1996, property, plant and equipment consist of the
following:
1997 1996
-------- ---------
Land and land improvements $ 2,750 $ 2,742
Buildings 9,466 9,407
Machinery and equipment 10,225 10,872
Office furniture and equipment 1,704 1,934
-------- ---------
24,145 24,955
Less accumulated depreciation (6,065) (5,154)
-------- ---------
$ 18,080 $ 19,801
======== =========
Net property, plant and equipment of $18,080 at September 30, 1997 excludes
certain machinery, equipment and office equipment held for disposition.
Note 8. Income Taxes (benefit)
The provision for income taxes (benefit) is as follows:
1997 1996 1995
-------- -------- --------
Continuing operations:
Current $ 2,523 $ 1,996 $ 2,941
Deferred (1,368) (491) 167
-------- -------- --------
1,155 1,505 3,108
Discontinued operations (2,121) (1,885) (283)
-------- -------- --------
$ (966) $ (380) $ 2,825
======== ======== ========
The reconciliation between the effective tax rate and the statutory federal tax
rate on earnings from continuing operations as a percent is as follows:
1997 1996 1995
-------- -------- --------
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
Effect of change in valuation allowance 17.1
Other 1.5 1.5 .2
-------- -------- --------
56.6 39.5 38.2
======== ======== ========
36
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(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, 1997
and 1996 are as follows:
1997 1996
-------- --------
Deferred tax assets:
Inventories, due to obsolescence reserve
and additional costs inventoried for
tax purposes pursuant to the
Tax Reform Act of 1986 $ 431 $ 385
Accrual for compensated absences 145 108
Accrual for retiree medical benefits 383 345
Accounts receivable reserves 138 389
Estimated loss on disposal 189 -
Equity interest in loss on affiliate 320 174
Tax gain on sale/leaseback 659 -
Accrued other reserves 144 138
State net operating loss carryforwards 727 480
-------- --------
Total gross deferred tax assets 3,136 2,019
Less valuation allowance 620 270
-------- --------
Net deferred tax assets 2,516 1,749
-------- --------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation and
amortization 1,485 1,219
-------- --------
Net deferred income tax asset $ 1,031 $ 530
======== ========
Current deferred income tax assets $ 1,098 $ 1,020
Long-term deferred income tax assets, net 1,418 729
Long-term deferred income tax liabilities (1,485) (1,219)
-------- --------
$ 1,031 $ 530
======== ========
At September 30, 1997, the Company has approximately $12,000 of state net
operating loss carry forwards, which are available to the Company in certain
state tax jurisdictions and expire in 2006 through 2012. During the year ended
September 30, 1997, the Company increased its valuation allowance against
certain state net operating loss carryforwards it does not expect to utilize.
37
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 9. Stock Option Plans
The Company has issued stock options and warrants at exercise prices ranging
from $.34 - 3.63 per share, the market value at the date of issuance. These
options and warrants expire between 1998 and 2000. This stock option activity
during the periods indicated are as follows:
Shares Option Prices
------- -------------
Outstanding at September 30, 1994 755,000 $ .46
Granted 40,000 3.63
Exercised - -
Canceled - -
------- -------------
Outstanding at September 30, 1995 795,000 .46 - 3.63
Granted - -
Exercised (455,000) .52
Canceled - -
------- -------------
Outstanding at September 30, 1996 340,000 .46 - 3.63
Granted - -
Exercised - -
Canceled - -
------- -------------
Outstanding at September 30, 1997 340,000 $ .46 - 3.63
======= =============
The Company extended the expiration date of 150,000 options held by Acrodyne
Corporation, a related party from November 8, 1997 to November 8, 1999.
In addition to the stock options noted above, the Company has two other
qualified stock option plans. The Company adopted the 1993 Stock Option Plan
("the 1993 Plan") which reserves an aggregate of 1,500,000 shares of the
Company's common stock for the issuance of stock options which may be granted to
employees, officers and directors of and consultants to the Company. Under the
terms of the 1993 Plan, the Company may grant "incentive stock options" or
"non-qualified options" at not less than the fair market value on the date of
grant. Options granted under the 1993 Plan are exercisable as to 25 percent of
the shares covered thereby commencing six months after the earlier of the date
of grant or the date of employment, and as to an additional 25%, cumulatively,
on the first, second and third anniversaries of the date of grant, and expire
ten years after the date of grant. At September 30, 1997, the Company had
388,125 shares available for future grants. Stock option activity during the
periods indicated under the 1993 Plan are as follows:
38
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Shares Option Prices
---------- -------------
Outstanding at September 30, 1994 458,000 $1.63 - 3.23
Granted 10,000 3.23
Exercised - -
Canceled - -
---------- -------------
Outstanding at September 30, 1995 468,000 1.63 - 3.23
Granted - -
Exercised - -
Canceled (68,000) 1.63 - 3.23
---------- -------------
Outstanding at September 30, 1996 400,000 1.63 - 3.23
Granted 1,078,800 1.94
Exercised - -
Canceled (366,925) 1.63 - 3.23
---------- -------------
Outstanding at September 30, 1997 1,111,875 1.63 - 3.23
========== =============
39
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
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, 1997 there were
110,000 shares available for grant under the 1995 Plan.
Stock option activity during the periods indicated under the 1995 Plan are as
follows:
Shares Option Prices
---------- -------------
Outstanding at September 30, 1994 - $ -
Granted 30,000 3.66
Exercised - -
Canceled - -
---------- -------------
Outstanding at September 30, 1995 30,000 3.66
Granted 30,000 3.63
Exercised - -
Canceled - -
---------- -------------
Outstanding at September 30, 1996 60,000 3.63-3.66
Granted 30,000 2.66
Exercised - -
Canceled - -
---------- -------------
Outstanding at September 30, 1997 90,000 $ 2.66-3.66
========== =============
40
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 10. Stock Repurchase Program
In January 1996 the Company initiated a stock repurchase program of up to
1,000,000 shares of its common stock. Under this program the Company has
acquired 195,200 shares during fiscal 1996 at an average price of $2.77 per
share, which include 100,000 shares of common stock at $2.75 per share
representing the market price on the date purchased from Enercorp, Inc., a
publicly-held business development company which beneficially owns approximately
11% of the Company's stock. The Chairman and President of the Company is a
significant shareholder of Enercorp. During the year ended September 30, 1997,
the Company issued 65,000 treasury shares at $2.50 per share to Enercorp and a
consultant for acquisition advisory work. The Loan prohibits further purchases
under this program.
Note 11. Discontinued Operations/Restructuring Charge
In July 1996, the Company adopted a restructuring plan for its automotive
accessories business and recorded a restructuring charge of $2,250 in fiscal
1996. The restructuring provision primarily represented non-cash, asset
write-offs related to product line restructuring.
On May 8, 1997, the Company signed a letter of intent to sell Kenco, which is
the sole business in the automotive accessories segment. Accordingly, Kenco is
reported as a discontinued operation in the statement of operations. The letter
of intent expired, and the Company did not renew it; however, the Company
intends to continue working with the potential buyer towards closing the sale of
Kenco, and also may enter into preliminary discussions with possible alternative
buyers. The Company anticipates that Kenco will be sold during the second
quarter of fiscal 1998, but there is no assurance that the sale will occur. In
the event that the sale does not occur, the Company will consider all strategic
alternatives for reduction of operating losses including sale, merger,
liquidation or abandonment. Based upon the current proposed terms of the sale,
the purchaser will acquire certain assets, excluding Kenco's finished goods
inventory and manufacturing and warehousing facility, for $1,000 to $2,000 in
cash, issue the Company certain equity securities in the company owned by the
proposed buyer, and assumption of liabilities for trade payables and other
current liabilities. Under the proposed transaction, the Company will own and
warehouse the Kenco finished goods inventory and sell such inventory to the
purchaser during the nine months following the acquisition on 60-day payment
terms. The purchaser will be obligated to purchase any unsold inventory at the
end of the nine-month period.
The summarized results for Kenco for the years ended September 30 are as
follows:
1997 1996 1995
-------- -------- --------
Net sales $ 8,666 $ 16,043 $ 15,863
======== ======== ========
Loss from operations before allocated
interest expense and income tax benefit (1,727) (4,353) (286)
Allocated interest expense (290) (456) (456)
-------- -------- --------
Loss from operations before income tax benefit (2,017) (4,809) (742)
Income tax benefit 810 1,885 283
-------- -------- --------
Loss from operations (1,207) (2,924) (459)
Loss on disposal before interest
and income taxes (2,771) - -
Allocated interest expense (505) - -
-------- -------- --------
Loss on disposal before
income tax benefit (3,276) - -
Income tax benefit 1,311 - -
-------- -------- --------
Loss on disposal (1,965) - -
-------- -------- --------
Total loss on discontinued operations $ (3,172) $ (2,924) $ (459)
======== ======== ========
41
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
The estimated pre-tax loss on disposal of $3,276 includes $1,952 of estimated
future operating losses of which $500 remains as an estimated liability at
September 30, 1997. The Company has elected to include estimated interest costs
in its estimated loss on disposal based upon the expected debt reduction from
the proceeds and the current rate of interest.
The net assets and liabilities of the discontinued operations held for
disposition included in the accompanying balance sheet as of September 30, 1997,
are as follows:
Current assets (liabilities):
Accounts receivable $ 1,673
Prepaid assets 257
Accounts payable (970)
Accrued expenses and other (322)
--------
Net current assets $ 638
========
Long term assets (liabilities):
Machinery and equipment, net $ 1,185
Office equipment, net 254
Other assets 183
Long term liabilities (12)
--------
Net long term liabilities $ 1,610
========
42
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 12. Business Segment Information
1997 1996 1995
------- ------- -------
Net sales by classes of similar products from
continuing operations
Vehicle components $43,078 $36,141 $34,826
Agricultural equipment (1) 9,419 11,026 6,783
Electrical components and GPS (2) 3,757 4,112 2,863
------- ------- -------
56,254 51,279 44,472
Earnings (loss) from continuing operations
Vehicle components 7,477 6,831 8,459
Agricultural equipment (1) (1,988) (578) 857
Electrical components and GPS(2) (1,217) (659) 182
------- ------- -------
4,272 5,594 9,498
======= ======= =======
Identifiable assets
Vehicle components 21,281 20,003 18,624
Agricultural equipment (1) 10,211 11,806 8,528
Electrical components and GPS(2) 8,413 7,542 7,544
------- ------- -------
Total assets - continuing operations 39,905 39,351 34,696
Automotive accessories - discontinued operations 11,471 13,698 12,486
------- ------- -------
Total assets 51,376 53,049 47,182
======= ======= =======
Capital expenditures
Vehicle components 420 532 852
Agricultural equipment (1) 145 487 220
Electrical components and GPS(2) 246 218 75
------- ------- -------
Total capital expenditures - continuing operations 811 1,237 1,147
Automotive accessories - discontinued operations 330 358 536
------- ------- -------
Total capital expenditures 1,141 1,595 1,683
======= ======= =======
Depreciation and amortization
Vehicle components 821 1,372 1,142
Agricultural equipment (1) 239 288 121
Electrical components and GPS(2) 315 239 119
------- ------- -------
Total depreciation and amortization - continuing
operations 1,375 1,899 1,382
Automotive accessories - discontinued operations 231 257 256
------- ------- -------
Total depreciation and amortization $ 1,606 $ 2,156 $ 1,638
======= ======= =======
(1) Primary operation acquired February 1995
(2) Primary operation acquired April 1995
43
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 13. Net Sales from Continuing Operations - Geographic Region
1997 1996 1995
-------- -------- --------
Canada $ 2,795 $ 4,570 $ 5,326
Other 3,560 3,261 2,754
-------- -------- --------
Net sales-export 6,355 7,831 8,080
United States 49,899 43,448 36,392
-------- -------- --------
Net $ 56,254 $ 51,279 $ 44,472
======== ======== ========
Note 14. Other Benefit Plans
The Company maintains an Employee Stock Ownership Plan (ESOP) for non-union
employees. The ESOP may buy shares of the Company's stock from time to time on
the open market or directly from the Company. The ESOP has been authorized to
borrow up to $1,000 from the Company or financial institutions to finance its
purchases. At September 30, 1997 the outstanding balance of the loan was
approximately $191 which has been used to finance the purchase of approximately
424,000 shares of common stock. The Company is required to make contributions to
the ESOP to repay the loan including interest.
The Company sponsors salaried employees and union employees matching 401(k)
plans, in which eligible employees may elect to contribute a portion of their
compensation.
Note 15. Post Retirement Benefits other than Pensions
The Company provides health care and life insurance benefits for certain of its
retired employees ("Post Retirement Plan"). These benefits are subject to
deductibles, co-payment provisions and other limitations. The Company may amend
or change the Post Retirement Plan periodically. The cost of these benefits is
expensed as claims are paid.
Effective October 1, 1993 the Company adopted SFAS No. 106, Employers'
Accounting for Post Retirement Benefits other than Pensions ("SFAS 106"). SFAS
106 requires companies to accrue the cost of post retirement health care and
life insurance benefits within employees' active service period rather than
recognizing these costs on a cash basis as had been prior practice.
The Company elected to amortize the Accumulated Post Retirement Benefit
obligation at October 1, 1993 over twenty years as a component of post
retirement benefits expense.
44
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
In September 1997, the Company concluded negotiations of a five-year union
contract, which has been ratified by union members and is awaiting final
signature. As a part of the contract, the Company has reduced its retiree health
care obligations and obtained cost sharing between the retired employees and the
Company for future cost increases.
The following table provides information on the post retirement plan status at
September 30, 1997:
Accumulated Post Retirement Benefit Obligation
Retirees $ 1,293
Fully eligible active participants 579
Other active Plan participants 1,094
-------
2,966
Plan assets -
-------
Accumulated post retirement benefit
obligation in excess of Plan assets 2,966
Unrecognized gain 687
Unrecognized prior service cost (810)
Unrecognized transition obligation (1,835)
-------
Accrued post retirement benefit cost
in the consolidated balance sheet $ 1,008
=======
Post retirement benefits expense for 1997 included the follow components:
Service cost $ 74
Interest cost 218
Amortization of unrecognized net obligation at transition 165
-------
Post retirement benefits expense $ 457
=======
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 7.5%.
If the assumed medical costs trends were increased by 1%, the APBO as of
September 30, 1997 would increase by $203, and the aggregate of the services and
interest cost components of the net annual post retirement benefit cost would be
increased by $24.
45
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 16. Acquisitions
In April 1996, the Company acquired the assets of the Burda Group of Companies
located in West Linn, Oregon, a distributor of a commercial chipper line, for
$20. This company was operated as Techwood Williams, Inc. and ceased operations
in fiscal 1997.
In April 1996, the Company also acquired the assets of Neumann Manufacturing and
Engineering, Inc. located in Madison Heights, Michigan, a manufacturer of
plastic components for the automotive industry, for $1,200. This company is
being operated as Premier Plastics Technologies, Inc.
In July 1996, the Company completed the acquisition of GeoFocus, Inc. located in
Gainesville, Florida for 150,000 shares of the Company's common stock valued at
$290. GeoFocus develops train tracking and cyber-farming systems using global
positioning systems ("GPS") and geographical information systems ("GIS").
These acquisitions were accounted for using the purchase method of accounting
and the results of operations of these businesses have been included in the
consolidated results of operations of the Company from the acquisition dates.
Note 17. Sale Leaseback
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524, less $250 withheld in an escrow fund for
possible environmental cleanup costs. The Company may be required to repurchase
the property within one year if it cannot cure possible environmental problems
at the sold property and may be required to finance part of the purchaser's
price in January 1998 if the purchaser cannot obtain permanent financing from a
lender who would accept the environmental condition of the property. 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 purchaser informed the Company that it has 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. The Company has the right of first refusal to repurchase the building
during the first year if the purchaser attempts to sell the property to a third
party.
The transaction was accounted for as a financing where the property is recorded
as an asset and continues to be depreciated and the capitalized lease
obligations are recorded as long term liabilities. The lease has a term of
fifteen years and requires minimum annual payments of $450 with rental increases
every two years equal to the increase in the consumer price index for the
Portland, Oregon area but not greater than a 5% nor less than a 3% increase for
every two-year period. The Company has a deferred gain on the sale of the
building of $1,686. At the time that the contingent repurchase obligation is
eliminated, the Company will record the transaction as an operating lease. At
such time, the gain on the sale will be recognized and the capitalized costs and
lease obligation will be eliminated from the balance sheet.
46
<PAGE>
Notes to Consolidated Financial Statements
Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
Note 18. Quarterly Data (unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Annual
---- -------- -------- -------- -------- --------
Continuing operations:
Net sales $ 13,521 $ 14,248 $ 14,536 $ 13,949 $ 56,254
Gross margin 3,627 3,381 2,966 2,916 12,890
Operating expenses 2,056 2,294 2,306 1,962 8,618
-------- -------- -------- -------- --------
Earnings from continuing operations 392 391 179 173 1,135
Loss from discontinued operations (380) (521) (2,271) - (3,172)
-------- -------- -------- -------- --------
Net earnings (loss) $ 12 $ (130) $ (2,092) $ 173 $ (2,037)
======== ======== ======== ======== ========
Earnings (loss) per common share
from continuing operations $ 0.02 $ 0.02 $ 0.01 $ .01 $ .06
(Loss) per common share from
discontinued operations (0.02) (0.02) (.13) .00 (.17)
-------- -------- -------- -------- --------
Earnings (loss) per common share $ .00 $ (0.00) $ (.12) $ .01 $ (.11)
======== ======== ======== ======== ========
Weighted average shares outstanding 17,800 17,900 18,500 18,500 18,200
======== ======== ======== ======== ========
First Second Third Fourth(1)
1996 Quarter Quarter Quarter Quarter Annual
---- -------- -------- -------- -------- --------
Continuing operations:
Net sales $ 12,044 $ 12,598 $ 13,474 $ 13,163 $ 51,279
Gross margin 3,823 3,593 3,779 2,478 13,673
Operating 1,719 1,749 2,018 2,593 8,079
-------- -------- -------- -------- --------
Earnings (loss) from operations 1,035 879 730 (281) 2,363
Loss from discontinued operation (45) (365) (1,824) (690) (2,924)
-------- -------- -------- -------- --------
Net earnings (loss) $ 990 $ 514 $ (1,094) $ (971) $ (561)
======== ======== ======== ======== ========
Earnings (loss) per common share
from continuing operations $ .06 $ .05 $ .04 $ (.02) $ .13
(Loss) per common share from
discontinued operations .00 (.02) (.10) (.04) (.16)
-------- -------- -------- -------- --------
Earnings (loss) per common share $ .06 $ .03 $ (.06) $ (.06) $ (.03)
======== ======== ======== ======== ========
Weighted average shares outstanding 17,900 17,600 17,600 17,800 17,800
======== ======== ======== ======== ========
</TABLE>
1) The fourth quarter of 1996 continuing operations includes the operation of
acquisitions from date of purchase. The results of operations of these
acquisitions are not material. The fourth quarter of 1996 continuing operations
includes a $1,000 write down due to an unfavorable inventory adjustment
resulting from increased overhead and production inefficiencies and an
unprofitable product line which was discontinued in August 1996 and additional
inventory and account receivable reserves of approximately $300.
Note 19. Contingencies
The Company has identified certain contaminants in the soil of its Portland,
Oregon manufacturing facility, which the Company believes, was disposed of on
the property by a previous property owner. The Company intends to seek
indemnification from such party for the costs of permanent monitoring, or
cleanup if required. The Company has retained an environmental consulting firm,
which is currently conducting tests to determine the extent of any
contamination. The Company cannot estimate the costs of permanent monitoring or
property clean up at the present time. However, the Company believes that it can
enforce valid claims against the prior property owner for any costs it may
incur.
47
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Williams Controls, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Williams
Controls, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Williams Controls,
Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Horwath Gelfond Hockstadt Pangburn & Co.
HORWATH GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
December 18, 1997
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated by reference from the Company's 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company's 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company's 1998 Proxy Statement.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. See Exhibit Index on page 47 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 44 of this Form 10-K.
4. Reports on Form 8-K.
None.
49
<PAGE>
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: September 16, 1998 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: September 16, 1998 By /s/ Thomas W. Itin
-------------------------------------
Thomas W. Itin, Principal Executive
Officer, Chairman, President, Chief
Executive Officer and Director
Date: September 14, 1998 By /s/ Gerard A. Herlihy
-------------------------------------
Gerard A. Herlihy
Chief Financial and
Administrative Officer
Date: September 23, 1998 By /s/ William N. Holmes
-------------------------------------
William N. Holmes
Corporate Controller and Principal
Accounting Officer
Date: September 23, 1998 By /s/ R. William Caldwell
-------------------------------------
R. William Caldwell, Director
Date: September ___, 1998 By
-------------------------------------
H. Samuel Greenawalt, Director
Date: September 23, 1998 By /s/ Timothy Itin
-------------------------------------
Timothy Itin, Director
50
<PAGE>
Williams Controls, Inc.
Index to Schedules
Page
Independent Auditors' Report 52
Schedule II Valuation and Qualifying Accounts 53
All other schedules are omitted because they are not required, not applicable or
the required information is given in the Consolidated Financial Statements.
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Williams Controls, Inc.
Portland, Oregon
We have audited the 1997, 1996 and 1995 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,
1996 and 1995 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 Hockstadt Pangburn & Co.
------------------------------------------------
HORWATH GELFOND HOCHSTADT PANGBURN & CO.
Denver, Colorado
December 18, 1997
52
<PAGE>
Williams Controls, Inc.
Valuation and Qualifying Accounts
Schedule II
(Dollars in thousands)
Beginning Charged to
Description balance expenses
----------- ---------- ----------
For Year Ended
September 30, 1997
Total reserves for doubtful accounts
and obsolete inventory $ 1,064 $ 937
========= ========
For Year Ended
September 30, 1996
Total reserves for doubtful accounts
and obsolete inventory $ 2,959 $ 1,691
========= ========
For Year Ended
September 30, 1995
Total reserves for doubtful accounts
and obsolete inventory $ 575 $ 1,125
========= ========
NOTE: Valuation and qualifying accounts were not individually significant; and,
therefore, additions and deductions information has not been provided in this
schedule.
53
<PAGE>
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)
10.1 (a) Indemnification Agreement for Thomas W. Itin ("Itin Indemnification
Agreement"). (Incorporated by reference to Exhibit 10.9 to the 1989 Form
S-18)
10.1 (b) Amendment No. 1 to Itin Indemnification Agreement. (Incorporated by
reference to Exhibit 10.1(b) to the Registrant's Annual Report on form 10-K
for the Fiscal Year Ended September 30, 1993 (the "1993 Form-10K"))
10.1 (c) Form of Indemnification Agreement for R. William Caldwell, H. Samuel
Greenawalt and Timothy Itin. (Incorporated by reference to Exhibit 10.1(c)
to the Registrant's 1993 Form 10-K)
10.2 (a)Credit Agreement dated July 11, 1997 among Registrant and its
subsidiaries and Ajay Sports, Inc. ("Ajay") and its subsidiaries, all as
borrowers, and Wells Fargo Bank, National Association, as lender (the
"Credit Agreement"). (Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1997 (the "June 1997 Form 10-Q"))
10.2 (b)Promissory Notes under the Credit Agreement: (a) Revolving Credit Loans
Promissory Note (b) Term Loan I Promissory Note (c) Term Loan II Promissory
Note (d) Real Estate Loan Promissory Note (All incorporated by reference to
Exhibit 10.2 to the Registrant's June 1997 Form 10-Q)
54
<PAGE>
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) Kenco Williams, Inc.
(c) Hardee Williams, Inc.
(d) 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.
(c) Kenco 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)
10.3(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 The Company's 1995 Stock Option Plan for Non-Employee Directors.
(Incorporated by referenced to Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1995 (the "March 1995
Form 10-Q")
10.5 Williams/Ajay Loan and Joint Venture Implementation Agreement dated May 6,
1994, as amended by letter agreement dated April 3, 1995. (Incorporated by
reference to Exhibit 10.4 to the Registrant's March 1995 Form 10-Q)
10.6(a) Mortgage and Security Agreement, dated August 31, 1988, by Sparkomatic
Corporation in favor of MetLife Capital Credit Corporation. (Incorporated
by reference to Exhibit 10.7(a) to the Registrant's 1993 Form 10-K)
55
<PAGE>
Exhibit
Number Description
10.6(b) Mortgage Note in the principal amount of $1,700,000, dated August 31,
1988, from Sparkomatic Corporation to MetLife Capital Credit Corporation.
(Incorporated by reference to Exhibit 10.7(b) to the Registrant's 1993 Form
10-K)
10.6(c) Loan Assumption, Modification and Extension Agreement (the "Assumption
Agreement"), dated August 12, 1993, among Kenco Williams, Inc., Sparkomatic
Corporation and MetLife Capital Corporation and the Guaranty given by
Williams to MetLife to guaranty the obligations of Kenco Williams, Inc. to
MetLife thereunder. (Incorporated by reference to Exhibit 10.9 to the
Registrant's Post-Effective Amendment No. 1, as filed with the Commission
on September 23, 1993, on Form S-3 to the 1989 Form S-18 (the
"Post-Effective Amendment"))
10.6(d) Guaranty dated as of March 31, 1994 made by the Registrant in favor of
MetLife Capital Corporation. (Incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1994)
10.7(a) Guaranty dated as of October 2, 1995 by Thomas W. Itin to the Registrant
(the "Itin Guaranty"). (Incorporated by reference to Exhibit 10.9 to the
Registrant's 1995 Form 10-K)
10.7(b) Amendment One to the Itin Guaranty. (Incorporated by reference to
Exhibit 10.7(b) to the Registrant's Annual Report on Form 10-K for the
period ended September 30, 1997 (the "1997 Form 10-K"))
10.8 Security Agreement between Ajay and its subsidiaries, as debtors, and the
Registrant and its subsidiaries, as secured parties. (Incorporated by
reference to Exhibit 10.8 to the 1997 Form 10-K)
21.1 List of Subsidiaries. See Item 1 in this report
27.1 Financial Data Schedule. (Incorporated by reference to Exhibit 27.1 to the
1997 Form 10-K)
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Exhibit 10.7(b) Amendment One to the Itin Guaranty
AMENDMENT NO. ONE TO GUARANTY
AMENDMENT NO. ONE, dated this 7th day of January, 1998 but effective as of
July 11, 1997, to that certain GUARANTY dated as of October 2, 1995, by and
between Thomas W. Itin ("Itin") and Williams Controls, Inc., a Delaware
corporation, and its successors and assigns ("Williams").
A. For its own benefit and that of its operating subsidiaries, Ajay Sports,
Inc. ("Ajay") obtained financing of up to $13.5 million under a revolving loan
agreement dated as of July 25, 1995 between Ajay and United States National Bank
of Oregon ("US Bank"), as amended by a First Amendment dated as of October 2,
1995 (as amended, the "Ajay/US Bank Loan"). The Ajay/US Bank Loan was guaranteed
by each of Ajay's operating subsidiaries and was secured by its inventory and
accounts then existing or thereafter acquired.
B. On July 11, 1997, Williams and its subsidiaries and Ajay and its
subsidiaries refinanced their bank loans with Wells Fargo Bank, National
Association ("Wells Fargo") through a joint credit facility (the "Wells Fargo
Credit Facility").
C. In connection with the above-described financing, Williams and its
subsidiaries and Ajay and its subsidiaries entered into a Consent, Reaffirmation
and Release Agreement dated July 14, 1997 with US Bank and Ajay issued a
promissory note in the principal amount of $2,340,000 (the "Ajay/US Bank Term
Loans"), payment of which was guaranteed directly by Itin (the "Itin/US Bank
Guaranty") and Williams and its subsidiaries jointly and severally (the
"Williams/US Bank Guaranty").
D. This Amendment supplements and amends the guaranty dated October 2, 1995
which Itin previously delivered to Williams in connection with the Ajay/US Bank
Loan and Williams' guaranty delivered in connection therewith, which Itin
reaffirms as amended hereby.
NOW, THEREFORE, Itin, as Chairman and Chief Executive Officer of each of
Williams and Ajay and as a significant shareholder in both Williams and Ajay, in
consideration of Williams' guaranty of Ajay's obligations under the Ajay/US Bank
Term Loans, periodic advances to Ajay and for Williams jointly entering into the
Wells Fargo Credit Facility with Ajay, and other good and valuable
consideration, the adequacy and receipt of which hereby is acknowledged, and
intending to be legally bound, the parties hereby amend the October 2, 1995
Guaranty of Itin as follows:
Section 1 is deleted in its entirety and is replaced with the following in
its stead:
1. The Guaranty. Itin hereby absolutely and unconditionally guarantees to
Williams repayment of the Guaranteed Obligations, as defined below. The
"Guaranteed Obligations" shall include all of the following:
(a) The Market Value (as hereinafter defined) of the 4,111,647 shares
of Ajay common stock owned by Williams (the "Shares") at not less than
$1,400,000 on the date, if any, that Itin first becomes obligated to
perform under this Guaranty. For purposes of this Guaranty, "Market Value"
shall mean the average closing bid price per share of the Ajay common stock
as reported on the Nasdaq National Market, the Nasdaq SmallCap Market or
the OTC Bulletin Board, or if none, the National Quotation Bureau's "Pink
Sheets."
(b) Any and all amounts Williams or its subsidiaries are required to
pay to US Bank upon performance under the Ajay/US Bank Term Loans.
(c) Any and all amounts Williams has advanced, contemplates advancing
or is required to advance to Ajay or for which Williams otherwise becomes
liable to third parties for the benefit of Ajay in connection with the
termination of Ajay's Revolving Loan Agreement with US Bank dated July 25,
1995, as amended (the "Original Ajay/US Bank Loan") in connection with the
Wells Fargo Credit Facility.
(d) Any and all amounts which Williams, under its joint and several
liability obligations to Wells Fargo, ultimately is required to pay to
Wells Fargo under the Wells Fargo Credit Facility to the extent that such
amounts paid by Williams have not been repaid by Ajay or otherwise
extinguished at the time this Guaranty is being called upon.
(e) Amounts, including, without limitation, principal, interest and
reasonable collection costs directly related to the performance of Itin
hereunder.
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Section 3 is amended by deleting the reference in the second sentence to
the "Williams Guaranty" and is replaced with "the Ajay/US Bank Term Loans or any
other obligation which constitutes a Guaranteed Obligation hereunder".
Section 4 is amended by renumbering subsection (b) as subsection (d) and
adding the following new subsections (b) and (c):
(b) upon notice (given in accordance with Section 6 hereof) by Itin to
Williams terminating the Guaranty, which termination shall have the effect
of ending Itin's obligation to guaranty any obligations incurred by
Williams after the date of termination; provided, however, that a
termination under this subsection shall not terminate Itin's obligations
with respect to any Guaranteed Obligations existing or otherwise
outstanding on the date of termination under this subsection;
(c) automatically upon a change of control in Williams other than a
voluntary change of control by Itin; with "control" (including the terms
controlling, controlled by an under common control with) meaning the
possession, direct or indirect, of the power to direct or cause the
direction of management and policies of Williams, whether through the
ownership of voting securities, by contract or otherwise; or
Section 5 is amended by deleting the references in subsections (d) and (f)
to the "Williams Guaranty" and inserting "the Ajay/US Bank Term Loans or any
other obligation which constitutes a Guaranteed Obligation hereunder" in lieu
thereof; and by inserting "or any other third party" immediately after "US Bank"
each time that term appears in subsections (d) and (f).
Subsection (i) of Section 6 is amended by deleting the reference to "Dale
J. Nelson" and replacing it with "Gerard A. Herlihy" where it appears in
subsection (i), and by changing the area code references in subsection (ii) from
"(810)" to "(248)."
All other provisions of the Guaranty amended hereby shall remain in full
force and effect without revision or amendment.
IN WITNESS WHEREOF, the parties have caused this Amendment No. One to
Guaranty to be signed and delivered as of the date first above written.
"ITIN"
By /s/ Thomas W. Itin
----------------------------
Thomas W. Itin, Individually
WILLIAMS CONTROLS, INC.
By /s/ Gerard A. Herlihy
----------------------------
Gerard A. Herlihy, Chief
Financial Officer
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Exhibit 10.8 Security Agreement between Ajay and its subsidiaries, as debtors,
and the Registrant and its subsidiaries, as secured parties.
SECURITY AGREEMENT
DATE: Effective July 14, 1997
BETWEEN: AJAY SPORTS, INC., a Delaware corporation and
AJAY LEISURE PRODUCTS, INC., a Delaware corporation
AJAY LEISURE DE MEXICO C.V. DE S.A., a Mexicali, Mexico corporation
PALM SPRINGS GOLF, INC., a Colorado corporation
1501 E. Wisconsin Street
Delavan, Wisconsin 53115
Attention: Thomas W. Itin
LEISURE LIFE, INC., a Tennessee corporation
215 4th Avenue North
Baxter, Tennessee 38544
Attention: Thomas W. Itin
(collectively, the "Debtors")
AND: WILLIAMS CONTROLS, INC., a Delaware corporation on its own behalf and on
behalf of its subsidiaries, WILLIAMS CONTROLS INDUSTRIES, INC., AGROTEC
WILLIAMS, INC., APTEK WILLIAMS, INC., GEOFOCUS, INC., HARDEE WILLIAMS,
INC., KENCO WILLIAMS, INC., NESC WILLIAMS, INC., PREMIER PLASTIC
TECHNOLOGIES, INC., WACCAMAW WHEEL WILLIAMS, INC., WILLIAMS TECHNOLOGIES,
INC., WILLIAMS WORLD TRADE, INC., WILLIAMS AUTOMOTIVE, INC. and TECHWOOD
WILLIAMS, INC.
14100 S.W. 72nd Avenue
Portland, Oregon 97224
Attention: Gerard A. Herlihy, CFO
(collectively, the "Secured Party")
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1. Grant of Security Interest. For valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and to secure payment and
performance of the obligations described in Section 2, Debtors hereby grant to
Secured Party, a security interest in and to the following (collectively, the
"Collateral"):
(a) all of Debtors' inventory (including finished inventory,
work-in-process, and raw materials), equipment, machinery, furniture and
fixtures, vehicles, supplies, all accounts (including all rights under
contracts to sell or lease goods or equipment or to render services,
whether or not earned by performance, which are not evidenced by an
instrument or chattel paper), contract rights, drafts, acceptances, notes,
securities and other instruments, all chattel paper, documents, records,
computer software and data general intangibles and other forms of
receivables, and all guaranties and securities therefor, including without
limitation the property described below, now owned or hereafter acquired by
Debtors, as well as the products and proceeds thereof:
(i) any and all patents, copyrights, registered and common law
trademarks, trade names, service marks, service names, slogans,
assumed names and other similar rights owned by Debtors or which they
have the right to use in the conduct of their respective businesses,
including, without limitation, any rights to Debtors' trade names;
(ii) all claims, causes of action, and other rights of Debtors
that relate in any way to the ownership, operation, use, or lease of
any of the Collateral;
(iii) all rents, income, receipts, revenues, issues, profits and
other income, liens, and security interests of any nature to which
Debtors may now be or shall hereafter become entitled arising from the
Collateral; and
(b) all equipment, fixtures, and goods described on Exhibit A as it
may from time to time be amended to include additional equipment, fixtures,
and goods, together with all accessions, parts, additions, substitutions,
and replacements affixed thereto, as well as the products and proceeds
thereof.
2. Obligations Secured. This Agreement is given to secure (a) performance of the
covenants and agreements hereinafter made, (b) payment of all indebtedness now
or hereafter owing to Secured Party by Debtors, including, without limitation,
performance of the covenants and agreements under (a) that certain Consent,
Reaffirmation and Release Agreement dated July 14, 1997 by and among United
States National Bank of Oregon ("US Bank"), Secured Party and Debtors and the
related promissory note dated July 14, 1997 in the initial principal amount of
$2,340,000 made by Ajay Sports, Inc. in favor of US Bank (collectively, the "US
Bank Term Loan"); (b) any and renewals and extensions of the foregoing
instruments, whether or not evidenced by new or additional instruments; (c)
performance of the covenants and provisions in all other agreements,
certificates, guaranties, or other documents executed by Debtors in connection
with the US Bank Term Loan; (d) full performance of Debtors' joint and several
obligations with Secured Party under the joint credit facility dated July 11,
1997 by and among Wells Fargo Bank, National Association, as lender, and Debtors
and Secured Party as borrowers; (e) full performance or repayment of any and all
obligations of Debtors to Secured Party resulting from advances, either direct
or indirect, to Debtor by Secured Party and any other obligations incurred,
either direct or indirect, for the benefit of Debtors by Secured Party, and (e)
payment of all costs, expenses and reasonable attorney fees at trial, on appeal,
or in any bankruptcy proceeding incurred by Secured Party in enforcing the
debts, obligations and liabilities of Debtors and in preserving, handling,
protecting, collecting, foreclosing, disposing and otherwise realizing on any
and all security therefor.
Notwithstanding any provision contained herein as to the rights of Secured
Party hereunder, Secured Party shall take no action, including, without
limitation, enforcement of any of its rights with respect to the Collateral that
would be in conflict with or contrary to the rights of either of US Bank or
Wells Fargo Bank as to the Collateral under the US Bank Term Loan or the Wells
Fargo Credit Facility, it being understood and agreed by the Secured Party that
its rights hereunder are and shall remain subordinate to the rights of US Bank
and/or Wells Fargo until Debtors' obligations to them are paid in full in
accordance with the terms of the US Bank Term Loan and the Wells Fargo Credit
Facility.
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3. Warranties, Representations and Covenants of Debtors. Each Debtor represents,
warrants and covenants as follows:
(a) Except for Permitted Liens (as defined below): (i) It will keep
its portion of the Collateral free and clear of any lien, encumbrance or
security interest; (ii) It will not mortgage, pledge, grant, or permit to
exist a security interest or lien upon any of the Collateral, now owned or
hereafter acquired by it; (iii) It is, and as to portions of the Collateral
it acquires after the date hereof, it will be, the sole owner of the
Collateral, free from any adverse lien, security interest, or adverse claim
of any kind whatsoever, except for claims of persons claiming solely by,
through or under Secured Party. "Permitted Liens" means (i) liens arising
by operation of law for taxes, assessments or governmental charges not yet
due; (ii) statutory liens of mechanics, materialmen, shippers,
warehousemen, carriers and other similar persons for services or materials
arising in the ordinary course of business for which payment is not yet
due; (iii) non-consensual liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) liens for taxes or
statutory liens of mechanics, materialmen, shippers, warehousemen, carriers
and other similar persons for services or materials which are due but are
being contested in good faith and by appropriate and lawful proceedings
promptly initiated and diligently conducted and for which reserves
satisfactory to Secured Party have been established; (v) liens listed on
Schedule I, (vi) liens in favor of Secured Party; (vii) liens in favor of
United States National Bank of Oregon; and (viii) liens in favor of Wells
Fargo Bank, National Association created in connection with the Wells Fargo
Credit Facility. No financing statement or other instrument affecting the
Collateral, or rights therein, bearing the signature of, or otherwise
authorized by, Debtor is on file in any public filing office, other than
those giving rise to Permitted Liens. Debtor will notify Secured Party of
any claim or demand against the Collateral and will defend the Collateral
against all claims and demands of all persons at any time claiming the same
or any interest therein, other than those persons whose claims or demands
are based on Permitted Liens, and other than those persons claiming solely
by, through or under Secured Party.
(b) Debtors' equipment and inventory are located in the States of
Wisconsin and Tennessee and/or in Mexicali, Mexico. Each Debtor will notify
Secured Party in the event it opens places of business in other states or
comes to have Collateral located in other states. The Collateral is not
used or bought for personal, family or household purposes.
(c) Debtors' principal place of business is in Delavan, Wisconsin
except that Debtor Leisure Life, Inc.'s principal place of business is
located in Baxter, Tennessee and Debtor Ajay Leisure De Mexico C.V. de
S.A.'s principal place of business is in Mexicali, Mexico. Debtor will not
move its principal place of business outside its present location. Debtor
will not do business under any assumed business names except those of which
Debtor has notified Secured Party in writing of the adoption or change of
any assumed business name, and will, upon request of Secured Party, execute
any additional financing statements or other certificates necessary to
reflect the adoption or change in such name or names.
(d) Debtor will not sell, lease, transfer or otherwise dispose of any
interest in any Collateral (other than in the ordinary course of business)
without the prior written consent of Secured Party.
(e) Debtor will keep the Collateral in good condition and repair, and
will not misuse, abuse, destroy, or allow to deteriorate or waste the
Collateral or any part thereof, except for ordinary wear and tear of its
normal and excepted use in Debtor's business. Debtor will not use any of
the Collateral in violation or any governmental law, rule, or regulation.
Secured Party or its designee may examine and inspect the Collateral at all
reasonable times, wherever located, and for that purpose is authorized by
Debtor to enter any place or places where any part of the Collateral may
be.
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(f) Debtor will keep the Collateral fully insured against loss or
damage by fire, theft, collision, and such other hazards.
(g) Debtor will pay promptly when due all taxes, license fees, and
assessments on the Collateral. Debtor may withhold payment of any tax,
license fee, or assessment in connection with a good faith dispute over the
obligation to pay, so long as Secured Party's interest in the Collateral is
not jeopardized. If a lien arises or is filed as a result of nonpayment,
Debtor shall within 20 days after the lien arises or, if a lien is filed,
within 15 days after Debtor has notice of the filing, secure the discharge
of the lien or deposit with Secured Party cash or a sufficient corporate
surety bond or other security satisfactory to Secured Party in an amount
sufficient to discharge the lien plus any costs, attorney fees, or other
charges that could accrue as a result of a foreclosure or sale under the
lien.
(h) Debtor will promptly execute any document, alone or with Secured
Party, procure any document, give any notices, do all other acts, and pay
all costs associated with the foregoing that Secured Party determines are
necessary to protect the Collateral against rights, claims or interest of
third parties (except those arising from Permitted Liens or those claiming
solely by, through or under Secured Party) and will otherwise preserve the
Collateral as security hereunder.
(i) Debtor will not assert against Secured Party any claim or defense
which Debtor may have against any other person with respect to the
Collateral or any part thereof.
(j) Until foreclosure, Debtor will indemnify, defend and hold Secured
Party harmless from and against any loss, liability, damage, cost and
expense whatsoever arising from the use, operation, ownership or possession
of the Collateral or any part thereof.
(k) Debtor shall promptly replace any material loss, theft, damage or
destruction of any Collateral; provided that if all insurance proceeds
covering such loss, theft, damage or destruction are promptly applied to
the reduction of indebtedness under the Note, then such failure to replace
shall not constitute an Event of Default.
(l) At such time as the US Bank Term Loans are repaid and the security
interests and financing statements related thereto are terminated, Debtors
promptly will deliver to Secured Party all appropriate financing statements
and such other documents or instruments as Secured Party may reasonably
request to perfect the Security Interest created hereby which will be
subordinate only to the security interests granted in connection with the
Wells Fargo Credit Facility.
4. Preservation of Collateral by Secured Party. If Debtors should fail to make
any payment, perform or observe any other covenant, obligation or agreement, or
take any other action which Debtors are obligated hereunder to make, perform,
observe, take or do, then Secured Party may, at Secured Party's sole discretion,
without notice to or demand upon Debtors and without releasing Debtors from any
obligation, covenant, or agreement hereof, make, perform, observe, take or do
the same in such manner and to such extent as Secured Party may deem necessary
to protect the security interest in or the value of the Collateral. Furthermore,
Secured Party, in its sole discretion, may commence, appear or otherwise
participate in any action or proceeding purporting to affect Secured Party's
security interest in or the value or ownership of the Collateral. All sums
expended or incurred by Secured Party pursuant to the foregoing authorizations
(including reasonable attorney fees) shall be secured hereby and shall be due
and payable within ten days after demand and shall bear interest from the date
of expenditure until the date of reimbursement at two percent above the prime
lending rate of Wells Fargo Bank, National Association.
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5. Use of Collateral by Debtor. So long as no Event of Default shall have
occurred, Debtors may have possession of the Collateral (other than instruments
delivered to Secured Party pursuant to this Agreement) and may use the
Collateral in any lawful manner not inconsistent with any other agreement or
policy of insurance which affects the Collateral. Secured Party acknowledges and
agrees that any buyer in the ordinary course of Debtors' businesses takes free
of Secured Party's security interest.
6. Events of Default. TIME IS OF THE ESSENCE. Any of the following shall
constitute an event of default under this Agreement ("Event of Default"):
(a) An Event of Default shall occur under this Agreement, the US Bank
Term Loans or any other agreement to which Debtors are party;
(b) Secured Party receives any evidence that any Debtor has taken any
action that is contrary to its grant to Secured Party of a security
interest in the Collateral, and such default is not remedied within 20 days
after notice to Debtor by Secured Party;
(c) Debtor fails to perform or observe any covenant, agreement, term,
or promise contained herein or in any other agreement with Secured Party to
which Debtor is a party, and such performance or observance is not remedied
within 20 days from the earlier of the time an officer or director of
Debtor obtains actual acknowledge thereof or notice from Secured Party or
the Banks;
(d) Any representation, warranty, or statement made herein proves to
have been false or misleading in any material respect as of the time made;
or
(e) Material loss, theft, destruction or disappearance of, or damage
to, the Collateral, and such Collateral is not replaced within 20 days of
such event (or such additional time as may be necessary to replace such
Collateral by the exercise of reasonable diligence) or all insurance
proceeds covering such loss, theft, destruction or disappearance are not
promptly applied to the reduction of any indebtedness to US Bank, Wells
Fargo or Secured Party, as appropriate.
7. Remedies Upon Default.
(a) Upon the occurrence of any Event of Default, Secured Party may, at
its option and in addition to any other remedies provided by law, in this
Agreement or in any other agreement with Secured Party to which Debtor is a
party, do any one or more of the following, successively or concurrently:
(i) Declare all indebtedness secured hereby to be immediately due
and payable.
(ii) Either personally, or by means of a court appointed
receiver, take possession of all or any of the Collateral and exclude
therefrom Debtors and all others claiming under Debtors, and
thereafter hold, store, use, operate, manage, lease, maintain and
control the Collateral, make repairs, replacements, alterations,
additions and improvements to the Collateral and exercise all rights
and powers of Debtors with respect to the Collateral or any part
thereof. Debtors hereby expressly waive any requirement that Secured
Party or the receiver post a bond upon such appointment. If Secured
Party demands or attempts to take possession of the Collateral in the
exercise of any rights under this Agreement, Debtors shall turn over
promptly and deliver complete possession thereof to Secured Party.
(iii) Without notice to or demand upon Debtors, make such
payments and do such acts as Secured Party may deem necessary to
protect Secured Party's security interest in the Collateral, including
without limitation, (1) paying, purchasing, contesting or compromising
any encumbrance, charge or lien which is prior to or superior to the
security interest granted hereunder, and in exercising any such powers
or authority to pay all expenses incurred in connection therewith, and
(2) in exercising its rights under this Section 7, collect,
compromise, endorse, sell, or otherwise deal with Collateral or
proceeds thereof in its own name or that of Debtors, with full power
to endorse any certificates of title.
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(iv) Require Debtors to deliver to Secured Party all original
documents, drafts, acceptances, notes, securities, other instruments
and chattel paper. If any of the chattel paper covers property that is
covered by certificates of title, then Debtors shall also deliver such
certificates.
(v) Require Debtors to assemble the Collateral, or any portion
thereof, at a place designated by Secured Party and reasonably
convenient to both parties, and promptly to deliver such Collateral to
Secured Party or its designee. Secured Party, and its agents and
representatives and designees, shall have the right to enter upon any
or all of Debtors' premises and property to exercise Secured Party's
rights thereunder.
(vi) Notify account debtors or lessees of any Collateral that the
Collateral has been assigned to Secured Party and the proceeds, lease
payments, or other payments thereon shall be paid to Secured Party.
Upon request of Secured Party, Debtors will also promptly notify
account debtors and will indicate on all billings to account debtors
that the accounts are payable to Secured Party, and will promptly
notify lessees of Collateral that all lease payments are payable to
Secured Party. Any and all proceeds thereafter received by Debtors
shall be turned over to Secured Party daily in the exact form in which
they are received.
(vii) Foreclose on the Collateral as herein provided or in any
manner permitted by law, and exercise any and all lawful rights and
remedies conferred upon Secured Party by Debtor in connection with the
indebtedness secured hereby, either concurrently or in such order as
Secured Party may determine; and sell or cause to be sold in such
order as Secured Party may determine, as a whole or in such parcels as
Secured Party may determine, the Collateral without affecting in any
way other rights or remedies to which Secured Party may be entitled.
(viii) Sell, lease or otherwise dispose of the Collateral at
public sale, without having the Collateral at the place of sale, and
upon terms and in such manner as Secured Party may determine. Secured
Party, or any Debtor may be a purchaser at any sale.
(ix) Exercise any remedies of a secured party under the Uniform
Commercial Code of Wisconsin and/or Tennessee and of any other state
in which Collateral is located.
(b) Unless the Collateral is perishable or threatens to decline
rapidly in value or is of a type customarily sold on a recognized market,
Secured Party shall give Debtor at least ten days' prior written notice of
the time and place of any intended public sale or of the time after which
any intended private sale or other disposition of the Collateral is to be
made, which notice shall be deemed reasonable.
(c) In the event of a public or private sale of the Collateral, the
proceeds, after payment therefrom of Secured Party's reasonable expenses of
sale, reasonable attorney fees and other legal expenses incurred in
connection therewith, shall be applied in satisfaction of the obligations
secured hereby, and any surplus remaining shall be paid by Secured Party to
Debtor. If proceeds applied to such obligations are insufficient to pay the
same in full, Debtors shall be jointly and severally liable for any
deficiency and shall promptly pay the same to Secured Party. Any
repossession or retaking or sale of the Collateral pursuant to the terms
hereof shall not operate to release Debtors until full payment of any
deficiency has been made in cash.
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8. Payment of Costs of Collection. In case of an Event of Default, or in case
litigation is commenced to enforce or construe any term of this Agreement or any
other instrument evidencing indebtedness of Debtors to Secured Party or of any
other document or agreement executed hereunder, the losing party will pay to the
prevailing party such amounts as shall be sufficient to cover the cost and
expense of collection or enforcement, including, without limitation, reasonable
attorney's fees and costs at trial, on appeal, and in any bankruptcy proceeding.
9. Power of Attorney. Debtors do hereby irrevocably appoint Secured Party as
their attorney-in-fact, with full power of substitution, upon the occurrence of
an Event of Default, to execute any document or instrument, including any proofs
of claim, to endorse any draft or other instrument for the payment of money, to
execute releases, to negotiate settlements, to cancel any insurance referred to
herein and to do all other things necessary or required to effect a settlement
under any insurance policy or to take any action or perform any obligation or
enforce any right with respect to the Collateral Debtors would have the right or
power to do, all of which actions may be taken in Secured Party's own name.
Secured Party agrees to give Debtors notice of any actions it has taken pursuant
to its appointment as attorney-in-fact within a reasonable time after such
action is taken, it being understood that the failure to give such notice will
not revoke Secured Party's appointment as attorney-in-fact or invalidate any
actions taken in such capacity. This power of attorney is a power coupled with
an interest which cannot be revoked until payment in full of the whole amount
then due and unpaid of the indebtedness of Debtor to Secured Party.
10. Miscellaneous.
(a) Notices. All notices or other communications required or permitted
hereunder shall be given to the appropriate party or parties and shall be
effective as provided in the Wells Fargo Credit Facility; provided, that,
notices given to or by US Bank shall be given as provided in the US Bank
Term Loan.
(b) Remedies Cumulative. Any and all remedies herein expressly
conferred upon Secured Party shall be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on Secured Party,
and the exercise of any one remedy shall not preclude the exercise of any
other.
(c) Waiver. Secured Party shall not be deemed to have waived any
power, right or remedy under this or any other agreement executed by
Debtors unless the waiver is in writing signed by Secured Party. No delay
in exercising Secured Party's power, right or remedy shall be a waiver nor
shall a waiver on one occasion operate as a waiver of such power, right or
remedy on a future occasion.
(d) Further Assurances. Debtors will join with Secured Party in
executing, filing and doing whatever may be necessary under applicable law
to perfect and continue Secured Party's security interest in the Collateral
now owned or hereafter acquired by Debtors, all at Debtors' expense.
(e) Attorneys Fees. If Secured Party exercises its rights or remedies
under this Agreement or under the Uniform Commercial Code, Debtor agrees to
pay all costs, expenses and reasonable attorney fees as the trial court or
any appellate court may adjudge reasonable in any matter arising from or
related to this Agreement, including claims and adversary proceedings in
bankruptcy.
(f) Successors and Assigns. This Agreement may not be assigned by
Debtors without the prior written consent of Secured Party. This Agreement
shall be binding upon and shall inure to the benefit of the parties and
their permitted respective successors and assigns. The US Bank Term Loans
constitute a separate instrument and may be negotiated, extended or renewed
by Secured Party without releasing Debtor, the Collateral, or any guarantor
or co-maker.
(g) Validity; Severability. If any provision of this Agreement is held
to be invalid, such event shall not affect, in any respect whatsoever, the
validity of the remainder of this Agreement, and the remainder shall be
construed without the invalid provision so as to carry out the intent of
the parties to the extent possible without the invalid provision.
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(h) Exhibits and Schedules. Any exhibits or schedules attached to this
Agreement and referred to herein are incorporated in this Agreement as if
they were fully set forth in the text hereof.
(i) Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Oregon.
(j) Counterparts; Hearings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such
counterparts shall together constitute but one and the same Agreement.
Section headings in this Agreement are inserted for convenience of
reference only and shall not constitute a part hereof.
(k) Amendment. This agreement can be modified or terminated only by a
writing signed by Secured Party and Debtors.
(l) Term of Security Agreement. This Agreement shall remain in full
force and effect as long as any indebtedness of Debtors to Secured Party
remains unpaid or outstanding.
(m) Capitalized Terms. Capitalized terms not defined herein shall have
the respective meanings ascribed thereto in the US Bank Term Loans or the
Wells Fargo Credit Facility.
(n) Include. The terms "include," "including," and similar terms shall
be construed as if followed by the phrase "without limitation."
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
SECURED PARTY:
WILLIAMS CONTROLS, INC., a Delaware
corporation, on its own behalf and as
agent on behalf of its subsidiaries,
Williams Controls Industries, Agrotec
Williams, Inc., Aptek Williams, Inc.,
GeoFocus, Inc., Hardee Williams, Inc.,
Kenco Williams, Inc., NESC Williams,
Inc., Premier Plastic Technologies,Inc.,
Waccamaw Wheel Williams, Inc., Williams
Technologies, Inc., Williams World
Trade, Inc., Williams Automotive, Inc.
and Techwood Williams, Inc.
By /s/ Gerard A Herlihy
--------------------------
Gerard A. Herlihy, CFO
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DEBTORS:
AJAY SPORTS, INC.
By /s/ Duane R. Stiverson
---------------------------
Duane R. Stiverson
Chief Financial Officer
AJAY LEISURE PRODUCTS, INC.
By /s/ Duane R. Stiverson
---------------------------
Duane R. Stiverson
Chief Financial Officer
LEISURE LIFE, INC.
By /s/ Duane R. Stiverson
---------------------------
Duane R. Stiverson
Chief Financial Officer
PALM SPRINGS GOLF, INC.
By /s/ Duane R. Stiverson
---------------------------
Duane R. Stiverson
Chief Financial Officer
AJAY LEISURE de MEXICO D.V. de S.A.
By /s/ Clarence H. Yahn
---------------------------
Clarence H. Yahn
Sole Administrator
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