UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _____
Commission file number 0-18083
Williams Controls, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- - --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's common stock as of July 31,
1998: 17,932,040
<PAGE>
Williams Controls, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1998 (unaudited)
and September 30, 1997 3
Unaudited Consolidated Statement of Shareholders' Equity,
nine months ended June 30, 1998 4
Unaudited Consolidated Statements of Operations, three
and nine months ended June 30, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows,
nine months ended June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
2
<PAGE>
Williams Controls Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts and per share information)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1998 September 30,
(unaudited) 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,615 $ 700
Trade and other accounts receivable, less allowance of $249 and
$185 at June 30, 1998 and September 30, 1997, respectively 11,274 8,468
Inventories 14,988 14,517
Prepaid expenses 997 713
Net assets held for disposition - 638
Other current assets 3,347 1,098
-------- --------
Total current assets 32,221 26,134
Property plant & equipment, net 18,642 18,080
Investment in affiliate 4,750 559
Receivables from affiliate - 3,645
Notes Reivable 3,200 -
Net assets held for disposition - 1,610
Other assets 3,257 1,348
======== ========
Total assets $ 62,070 $ 51,376
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,850 $ 5,070
Accrued expenses 2,436 3,008
Current portion of long-term debt and capital leases 1,004 1,428
Other current liabilities 299 500
-------- --------
Total current liabilities 9,589 10,006
Long-term debt and capital lease obligations 23,427 22,857
Other liabilities 1,662 1,214
Commitments and contingencies
Minority interest in consolidated subsidiaries 347 464
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized; 80,000 and 0
issued at June 30, 1998 and September 30, 1997, respectively) 1 -
Common stock ($.01 par value, 50,000,000 authorized;
18,062,240 and 17,912,240 issued at June 30, 1998 and
September 30, 1997, respectively) 180 179
Additional paid-in capital 17,238 9,822
Retained earnings 10,194 7,402
Unearned ESOP shares (191) (191)
Treasury stock (130,200 shares at June 30, 1998 and
September 30, 1997, respectively) (377) (377)
-------- --------
Total shareholders' equity 27,045 16,835
-------- --------
Total liabilities and shareholders' equity $ 62,070 $ 51,376
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
Williams Controls, Inc.
Consolidated Statement of Shareholders' Equity
(Dollars in thousands, except share amounts and per share information)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issued Issued
Common Stock Preferred Stock Additional Unearned Share
-------------------- --------------- Paid in Retained ESOP Treasury Holders'
Shares Amount Shares Amount Capital Earnings Shares Stock Equity
-------------------- --------------- ---------- -------- -------- -------- --------
Balance, September 30, 1997 17,912,240 $ 179 - $ - $ 9,822 $ 7,402 $ (191) $ (377) $ 16,835
Net earnings - - - - - 2,912 - - 2,912
Preferred Stock dividends (120) - - (120)
Common stock issued pursuant
to exercise of options: 150,000 1 - - 60 61
Sale of preferred stock 80,000 1 7,356 7,357
==================================================================================================
Balance, June 30, 1998 18,062,240 $ 180 80,000 $ 1 $ 17,238 $ 10,194 $ (191) $ (377) $ 27,045
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share amounts and per share information)
(unaudited)
<CAPTION>
<S> <C> <C> <C> <C>
Three Three Nine Nine
months months months months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Sales $ 16,922 $ 14,536 $ 49,757 $ 42,305
Cost of sales 12,026 11,570 35,401 32,573
---------- ---------- ---------- ----------
Gross margin 4,896 2,966 14,356 9,732
Operating expenses:
Research and development 728 512 2,018 1,472
Selling 896 730 2,323 2,183
General and administrative 1,438 1,064 3,862 3,001
---------- ---------- ---------- ----------
Total operating expenses 3,062 2,306 8,203 6,656
---------- ---------- ---------- ----------
Earnings from continuing operations 1,834 660 6,153 3,076
Other expenses:
Interest expense 422 463 1,228 1,435
Equity interest in (income) loss of affiliate (25) 25 373 204
---------- ---------- ---------- ----------
Total other expenses 397 488 1,601 1,639
---------- ---------- ---------- ----------
Earnings from continuing operations before
income tax expense 1,437 172 4,552 1,437
Income tax expense 385 78 1,596 591
---------- ---------- ---------- ----------
Earnings from continuing operations before
minority interest 1,052 94 2,956 846
Minority interest in net loss of consolidated
subsidiaries 77 85 116 116
---------- ---------- ---------- ----------
Net earnings from continuing operations 1,129 179 3,072 962
Discontinued operations:
Loss from operations of automotive accessories
segment - (2,271) (160) (3,172)
---------- ---------- ---------- ----------
Loss from discontinued operations - (2,271) (160) (3,172)
---------- ---------- ---------- ----------
Net earnings (loss) 1,129 (2,092) 2,912 (2,210)
Preferred dividends 120 - 120 -
---------- ---------- ---------- ----------
Net earnings allocable to common stockholders $ 1,009 $ (2,092) $ 2,792 $ (2,210)
========== ========== ========== ==========
Basic earnings per share from continuing operations $ 0.06 $ 0.01 $ 0.16 $ 0.05
Basic loss per share from discontinued operations - (0.13) (0.01) (0.17)
---------- ---------- ---------- ----------
Basic net earning (loss) per share $ 0.06 $ (0.12) $ 0.15 $ (0.12)
========== ========== ========== ==========
Diluted earnings per share from continuing operations $ 0.05 $ 0.01 $ 0.16 $ 0.05
Diluted loss per share from discontinued operations - (0.13) (0.01) (0.17)
---------- ---------- ---------- ----------
Diluted net earnings (loss) per share $ 0.05 $ (0.12) $ 0.15 $ (0.12)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months Nine months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from operating activities:
Net earnings (loss) $ 2,912 $ (2,210)
Adjustments to reconcile net earnings (loss)
to net cash from continuing operations:
Loss from discontinued operations 160 1,171
Depreciation and amortization 1,090 1,303
Minority interest in earnings (loss) in consolidated subsidiaries (116) (116)
Equity interest in loss of affiliate 373 204
Changes in working capital of continuing operations:
Receivables 492 869
Prepaid Expenses (279) -
Inventories (2,737) 409
Income tax receivable and other (1,010) 290
Accounts payable and accrued expenses (1,276) 820
--------- ---------
Net cash provided by operating activities of continuing operations (391) 2,740
Cash flows from investing activities:
Loans made for sale/leaseback financing (3,200) -
Proceeds from the sale of discontinued operations 1,124 -
Payments for property, plant and equipment (1,602) (1,013)
Payments to affiliates (919) -
--------- ---------
Net cash used in investing activities of continuing operations (4,597) (1,013)
Cash flows from financing activities:
Proceeds (repayments) of long-term debt and capital lease obligations 165 (4,289)
Net proceeds from sale/leaseback - 4,274
Payment of cash dividends (120) -
Proceeds from sale of preferred stock 7,357 -
Proceeds from sale and issuance of common stock 62 -
--------- ---------
Net cash provided by (used in) financing activities
of continuing operation 7,464 (15)
Net cash used in discontinued operations (1,561) -
--------- ---------
Net increase in cash and cash equivalents 915 1,712
Cash and cash equivalents at beginning of period 700 1,379
--------- ---------
Cash and cash equivalents at end of period $ 1,615 $ 3,091
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Disposition of Kenco:
Net assets and liabilities sold $ 2,374 $ -
Allowances 1,376 -
Preferred stock (2,000) -
Other receivable (250) -
Receivable for inventory sold (430) -
Net gain on disposition 54 -
----------- -----------
Cash received $ 1,124 $ -
=========== ===========
Conversion of note receivable from affiliate
to investment in affiliate $ 5,000 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1998 and 1997
(Dollars in thousands, except share and per share amounts)
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
has acquired, disposition of any businesses of the Company, and the Company's
investment in and relationship with Ajay Sports, Inc., a related company. These
forward-looking statements are subject to the business and economic risks faced
by the Company. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described above and other factors described elsewhere in this report.
1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec");
WC Sales Management, Inc. ("WC Sales") and its 80% owned subsidiaries Hardee
Williams, Inc. ("Hardee") and Waccamaw Wheel Williams, Inc. ("Waccamaw") are
hereinafter referred to as the "Company."
2. The Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been prepared by
the Company and, in the opinion of management, reflect all material adjustments
which are necessary to a fair statement of results for the interim periods
presented. The interim results for the three and nine months ended June 30, 1998
are not necessarily indicative of the results expected for the entire fiscal
year. Certain information and footnote disclosure made in the last annual report
on Form 10-K have been condensed or omitted for the interim consolidated
statements. Certain costs are estimated for the full year and allocated to
interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is the Company's
opinion that, when the interim consolidated statements are read in conjunction
with the September 30, 1997 annual report on Form 10-K, the disclosures are
adequate to make the information presented not misleading. The interim
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.
3. Earnings (loss) per Share
As required, the Company adopted Statement of Financial Accounting Standards No.
128 during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic per share
amounts are based on the weighted average shares of common stock outstanding.
Diluted earnings per share assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. Accordingly, this presentation has been adopted for all periods
presented. The basic and diluted weighted average shares outstanding are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
Reconciliation of net income: ------------- ------------- ------------- -------------
- - -----------------------------
Net earnings (loss) 1,129 (2,092) 2,912 (2,210)
Less preferred stock dividends (120) - (120) -
---------- ---------- ---------- ----------
Net earnings allocable to common
stockholders 1,009 (2,092) 2,792 (2,210)
========== ========== ========== ==========
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Reconciliation of weighted average shares: June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
- - ------------------------------------------ ------------- ------------- ------------- -------------
Weighted average shares outstanding 18,062,240 17,912,240 18,029,462 17,912,240
Less unallocated ESOP shares 85,888 140,000 85,888 140,000
---------- ---------- ---------- ----------
Weighted average outstanding shares
used for basic EPS 17,976,352 17,772,240 17,943,574 17,772,240
Plus incremental shares from assumed
Issuance of stock options and other
contingent issuances 3,053,181 727,760 1,353,158 227,760
---------- ---------- ---------- ----------
Weighted average outstanding shares
used for diluted EPS 21,029,533 18,500,000 19,296,732 18,000,000
========== ========== ========== ==========
</TABLE>
7
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1998 and 1997
(Dollars in thousands, except share and per share amounts)
4. Inventories
Inventories consisted of the following:
June 30, September 30,
1998 1997
---------------- ----------------
Raw material $ 6,203 $ 5,305
Work in process 2,317 2,035
Finished goods 6,468 7,177
---------------- ----------------
$ 14,988 $ 14,517
================ ================
Finished goods include component parts and finished product ready for shipment.
5. Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
The Company has established processes for evaluating and managing the risks and
cost associated with this problem, including communicating with suppliers,
dealers and others with which it does business to coordinate Year 2000
conversion. The total cost of compliance and its effect on the Company's future
results of operations is being determined as part of the detailed conversion
planning process.
6. Refinance of Sale/Leaseback
Although the Company believes that it does not have a reportable event with
respect to environmental matters as discussed in Note 9, in accordance with the
terms of the sale/leaseback agreement for the Portland, Oregon manufacturing
facility, on April 20, 1998 the Company provided $3,200 of debt financing to the
purchaser until the Company receives a "no-further action" letter from the
Oregon Department of Environmental Quality related to these environmental
matters. This debt is due April 21, 2000 with an interest rate of 8.5% until
October 31, 1998, when it increases to 9.75%. The Company may repurchase the
facility before the maturity date and has the obligation to repurchase the
facility at the maturity date at the original purchase price of $4,600 plus
out-of-pocket costs of the purchaser if a "no-further action" letter is not
obtained.
8
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1998 and 1997
(Dollars in thousands, except share and per share amounts)
7. Private Placement of Preferred Stock
On April 21, 1998, the Company completed a private placement of 80,000 shares of
Series A convertible redeemable preferred stock at $100 per share, or $8,000 in
gross proceeds and received net proceeds of $7,357. The preferred stock bears a
dividend rate of 7.5%, which is payable quarterly, and is convertible at the
option of the holder into 2,909,091 shares of the Company's common stock. The
preferred stock is redeemable at the Company's option anytime after April 21,
2001. The preferred stock is not mandatorily redeemable. In addition, the
Company can force conversion of the preferred stock into common shares if the
Company's common stock trades at or above $4.125 for twenty out of thirty
consecutive trading days. Holders of the Series A preferred stock are entitled
to a number of votes equal to those they would have assuming conversion into
common stock, without taking into account fractional shares.
Commencing with the quarterly period beginning July 1, 2001, the annual dividend
rate will increase each quarter by 2.5% up to a maximum dividend of 24% per
annum. The Company used the proceeds of the offering to provide debt financing
to the purchaser of the Portland, Oregon manufacturing facility, repayment of a
bank term loan of $667 and an investment of $2,000 in Ajay. The remaining
balance was used for general working capital purposes.
9
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1998 and 1997
(Dollars in thousands, except share and per share amounts)
8. Business Segment Information
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months Three months Nine months Nine months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Net sales by classes of similar products
from continuing operations
Vehicle components $ 14,182 $ 11,119 $ 40,409 $ 31,696
Agricultural equipment 2,094 2,352 6,619 7,864
Electrical components and GPS 646 1,065 2,729 2,745
------------- ------------- ------------- -------------
16,922 14,536 49,757 42,305
============= ============= ============= =============
Earnings (loss) from continuing operations
Vehicle components 2,866 1,702 8,349 4,961
Agricultural equipment (540) (810) (887) (1,017)
Electrical components and GPS (492) (232) (1,309) (868)
------------- ------------- ------------- -------------
1,834 660 6,153 3,076
============= ============= ============= =============
Capital expenditures
Vehicle components 901 233 1,139 410
Agricultural equipment 16 40 119 169
Electrical components and GPS 196 72 344 156
------------- ------------- ------------- -------------
Total capital expenditures - continuing operations 1,113 345 1,602 735
Automotive accessories - discontinued operations - 59 - 278
------------- ------------- ------------- -------------
Total capital expenditures 1,113 404 1,602 1,013
Depreciation and amortization
Vehicle components 240 272 626 711
Agricultural equipment 167 40 226 185
Electrical components and GPS 72 78 238 220
------------- ------------- ------------- -------------
Total depreciation and amortization - continuing operations 479 390 1,090 1,116
Automotive accessories - discontinued operations 23 65 (332) 187
------------- ------------- ------------- -------------
Total depreciation and amortization $ 502 $ 455 $ 758 $ 1,303
Identifiable assets June 30, 1998 June 30, 1997
------------- -------------
Vehicle components $ 35,488 $ 24,319
Agricultural equipment 10,351 11,265
Electrical components and GPS 8,212 10,565
------------- -------------
Total assets - continuing operations 54,051 46,149
Automotive accessories - discontinued operations 8,019 7,793
------------- -------------
Total assets $ 62,070 $ 53,942
============= =============
</TABLE>
10
<PAGE>
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1998 and 1997
(Dollars in thousands, except share and per share amounts)
9. Commitments and Contingencies
Environmental Matters - The Company has identified certain contaminants in the
soil and groundwater at and around its Portland, Oregon manufacturing facility
which the Company believes may have been disposed of by the previous property
owner. The Company believes that the contamination is not a reportable event as
defined under the current Oregon statutes. Under Oregon statutes, the Company
and other potentially responsible parties are required to investigate further
and possibly remediate the contamination. The Company believes that, if
required, the remediation would take the form of permanent monitoring, but could
include the treatment and removal of the contamination or both. The Company
cannot estimate the costs of permanent monitoring, treatment or cleanup at the
present time.
The acquisition agreement between the Company and the previous building owner
contains provisions for indemnification of any environmental cleanup costs after
the Company spends $25 towards such cleanup. The Company intends to seek
indemnification from the prior property owner for permanent monitoring or
cleanup costs, if any. The prior property owner has advised the Company that it
would dispute any liability for remediation costs. The Company believes that it
can enforce available claims against the prior property owner for any costs of
investigation or remediation or both.
10. Debt Facility Restructuring
On June 30, 1998, the Company restructured its credit facility with Wells Fargo
Bank, National Association to eliminate Ajay Sports, Inc. and its subsidiaries
("Ajay") as borrowers under the credit facility. The credit facility as
restructured provides for a maximum borrowing capacity of approximately $22,300,
consisting of a revolving credit facility of up to $16,500, a $3,100 term loan
and a $2,700 real estate loan. Under the restructured facility, all joint and
several liability, cross collateral agreements and guarantees of the Company
with respect to the portion of the Wells Fargo credit facility allocable to Ajay
prior to the restructuring have been terminated.
In connection with the restructuring of the Wells Fargo bank credit facility,
the Company entered into an agreement with Ajay under which the Company has
agreed to make the second advance of $1,000 to Ajay for total advances of
$2,000. These additional advances when combined with certain liabilities assumed
from Ajay by the Company and potential additional payments to a bank on Ajay's
behalf, if required to be made, could result in Ajay owing the Company up to
approximately $8,650. On June 30, 1998, the Company converted $5,000 of the
potential $8,650 debt into 6 million shares of a newly created series of
preferred stock of Ajay, the Series D Cumulative Convertible Non-Voting
Preferred Stock, and agreed to accept a secured promissory note for any
unconverted portion of the debt. The 6 million shares are convertible into
3,333,334 shares of Ajay Common Stock after giving effect to a one-for-six
reverse stock split by Ajay which became effective on August 14, 1998. The note
is secured by a lien on Ajay's assets which is junior to the lien held by Ajay's
bank lenders. The Company continues to own approximately 17.7% of the
outstanding common stock of Ajay and holds options to purchase an additional
1,851,813 shares of common stock after giving effect to a one-for-six reverse
stock split by Ajay which became effective on August 14, 1998.
11. New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company adopted SFAS 130 during the first quarter
of 1998. Comprehensive loss did not differ from currently reported net loss in
the periods presented.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
11
<PAGE>
Williams Controls, Inc.
Management Discussion & Analysis
(Dollars in thousands, except share and per share amounts)
See "Cautionary Statement" contained at the beginning of this report.
Financial Condition, Liquidity and Capital Resources
The Company's principal sources of liquidity during the nine months ended June
30, 1998 were net proceeds from the sale of preferred stock of $7,357 and net
proceeds from the sale of discontinued operations of $1,124. During the
year-to-date period, the Company used cash for operating activities of $391 and
purchased equipment of $1,602. At June 30, 1998 the Company's working capital
increased to $22,632 from $16,128 at September 30, 1997. The current ratio also
increased to 3.4 at June 30, 1998 from 2.61 at September 30, 1997.
The Company anticipates that cash generated from continuing operations,
borrowings and proceeds from the sale of preferred stock in April 1998 will be
sufficient to satisfy its working capital requirements for continuing operations
during the remainder of the current fiscal year.
Accounts receivable increased due to higher sales in the Company's vehicle and
component segment and seasonality in the agricultural component segment.
Investment in affiliate increased due to advances of $1,000 to affiliates and
the conversion of previous advances to investments in preferred stock (see
footnote 10). Notes receivable increased due to financing provided to the
purchaser of the Portland, Oregon manufacturing facility (see footnote 6). Long
term debt includes $4,700 of capitalized lease obligations related to the same
investment.
In April 1998 the Company completed a private placement of 80,000 shares of
Series A convertible redeemable preferred stock at $100 per share, or $8,000 in
gross proceeds. The preferred stock bears a dividend rate of 7.5%, which is
payable quarterly, and is convertible at the option of the holder into 2,909,091
shares of the Company's common stock. The preferred stock is redeemable after
three years at the option of the Company. In addition, the Company can force
conversion of the preferred stock into common shares if the Company's common
stock trades at or above $4.125 for twenty out of thirty consecutive trading
days. Holders of the Series A preferred stock are entitled to a number of votes
equal to those they would have assuming conversion into common stock, without
taking into account fractional shares. Proceeds of the offering were used to
provide debt financing to the purchaser of the Portland, Oregon manufacturing
facility, repayment of a bank term loan of $667 and an investment of $2,000 in
Ajay. The remaining balance was used for general working capital purposes.
During fiscal 1997 the Company sold its Portland, Oregon manufacturing facility
in a sale-leaseback transaction for $4,524. Under the terms of the agreement in
April 1998, the Company provided $3,200 of debt financing to the purchaser until
such time that the Company receives a "no further action" letter from the Oregon
Department of Environmental Quality related to environmental issues at the
property. Upon receipt of such letter the purchaser will be required to
refinance the mortgage with a third party lender. If a "no-further action"
letter is not obtained, the Company may repurchase the facility before the
maturity date and has the obligation to repurchase the facility at the maturity
date at the original purchase price of $4,600 plus out-of-pocket costs of the
purchaser.
On June 30, 1998, the Company restructured its credit facility with Wells Fargo
Bank, National Association to eliminate Ajay Sports, Inc. and its subsidiaries
("Ajay") as borrowers under the credit facility. The credit facility as
restructured provides for a maximum borrowing capacity of approximately $22,300,
consisting of a revolving credit facility of up to $16,500, a $3,100 term loan
and a $2,700 real estate loan. Under the restructured facility, all joint and
several liability, cross collateral agreements and guarantees of the Company
with respect to the portion of the Wells Fargo credit facility allocable to Ajay
prior to the restructuring have been terminated.
In connection with the restructuring of the Wells Fargo bank credit facility,
the Company entered into an agreement with Ajay under which the Company has
agreed to make the second advance of $1,000 to Ajay for total advances of
$2,000. These additional advances when combined with certain liabilities assumed
from Ajay by the Company and potential additional payments to a bank on Ajay's
behalf, if required to be made, could result in Ajay owing the Company up to
approximately $8,650. On June 30, 1998, the Company converted $5,000 of the
potential $8,650 debt into 6 million shares of a newly created series of
preferred stock of Ajay, the Series D Cumulative Convertible Non-Voting
Preferred Stock, and agreed to accept a secured promissory note for any
unconverted portion of the debt. The 6 million shares are convertible into
3,333,334 shares of Ajay Common Stock after giving effect to a one-for-six
reverse stock split by Ajay which became effective on August 14, 1998. The note
is secured by a lien on Ajay's assets which is junior to the lien held by Ajay's
bank lenders. The Company continues to own approximately 17.7% of the
outstanding common stock of Ajay and holds options to purchase an additional
1,851,813 shares of common stock after giving effect to a one-for-six reverse
stock split by Ajay which became effective August 14, 1998.
12
<PAGE>
Williams Controls, Inc.
Management Discussion & Analysis
(Dollars in thousands, except share and per share amounts)
Results of Operations
- - ----------------------
Three months ended June 30, 1998 compared to the three months ended June 30,
1997
Overview
- - --------
Net sales from continuing operations increased 16% to $16,922 in the third
quarter ended June 30, 1998 from $14,536 in the same period in fiscal 1997.
Increased sales are attributed primarily to higher unit sales volumes in the
Company's vehicle component segment which were partially offset by a decline in
unit sales volumes in the electrical components and GPS and agricultural
equipment segments.
Net earnings from continuing operations increased 531% to $1,129 in the third
quarter ended June 30, 1998 from $179 in the same fiscal 1997 quarter primarily
due to increases in unit sales volumes and profitability in the Company's
vehicle component segment, decreased losses in the Company's agricultural
equipment segment and a lower effective income tax rate.
Net earnings attributable to common shareholders increased to $1,009 in the
third quarter ended June 30, 1998 from a net loss of $2,092 in the comparable
fiscal 1997 quarter due to higher unit sales and profitability in the vehicle
component segment, decreased losses in the agricultural equipment segment,
reduced losses in the Company's discontinued automotive accessories segment,
which was sold in March 1998 and a lower effective income tax rate. These
increases were partially offset by preferred dividends of $120 in the current
year quarter, compared to $0 in the prior year quarter.
Net sales from continuing operations
- - ------------------------------------
Net sales from continuing operations increased $2,386, or 16%, to $16,922 in the
third quarter ended June 30, 1998 from $14,536 in the prior year quarter. Net
sales as a percent of total sales in the vehicle components, agricultural
equipment and electrical components segments were 84%, 12% and 4%, respectively,
in the 1998 quarter compared to 76%, 16% and 8%, respectively, in the 1997
quarter. Vehicle component sales in the quarter ended June 30, 1998 increased
$3,063 or 28%, due to higher unit sales of component parts to heavy and
medium-duty truck manufacturers. Sales of agricultural equipment declined $258,
or 11%, in the quarter ended June 30, 1998 primarily due to lower unit sales
resulting from excess dealer inventory and poor weather affecting the
southeastern agricultural markets which this segment serves. Electrical
component and GPS segment sales decreased $419, or 39%, primarily due to
decreased unit sales volume of electrical components.
Gross margin
- - ------------
Gross margin from continuing operations increased 65% to $4,896 in the third
quarter ended June 30, 1998 from $2,966 in the prior year quarter. Gross margins
as a percentage of net sales from continuing operations were 29% in the third
quarter of fiscal 1998 compared to 20% in the same fiscal 1997 quarter.
Increases in dollar amount in the third quarter of fiscal 1998 resulted
primarily from higher unit sales volumes of higher margin products and increased
utilization of the Company's fixed assets in the vehicle component segment and
improved gross margins at the agricultural segment. Gross margins as a
percentage of net sales in the vehicle components, agricultural equipment and
electrical components and GPS segments were 33%, 4%, and 20%, respectively,
during the third quarter of fiscal 1998 compared to 26%, (11%), and 29%,
respectively, for the same quarter in fiscal 1997.
Operating expenses - continuing operations
- - ------------------------------------------
Operating expenses for continuing operations increased 33% during the third
quarter ended June 30, 1998 compared to amounts in the same quarter in fiscal
1997. Operating expenses as a percentage of net sales from continuing operations
were 18% and 16% in the third quarter of fiscal 1998 and 1997, respectively.
Increases were primarily related to higher personnel costs needed to support
existing sales levels, higher legal and professional fees, additional research
and development activities and higher selling costs. Operating expenses as a
percentage of net sales in the vehicle components, agricultural equipment and
electronic components and GPS segments were 13%, 30% and 96%, respectively,
compared to 11%, 24% and 51%, respectively, in the same quarter of fiscal 1997.
13
<PAGE>
Williams Controls, Inc.
Management Discussion & Analysis
(Dollars in thousands, except share and per share amounts)
Results of Operations (continued)
- - ----------------------------------
Three months ended June 30, 1998 compared to the three months ended June 30,
1997
Research and development expenses for continuing operations increased 42% to
$728, or 4% of sales from continuing operations, during the third quarter of
fiscal 1998 from $512, or 4% of sales in the same quarter of fiscal 1997. Higher
expenses in the 1998 quarter are primarily attributed to increased product
development activities in the vehicle component segment.
Selling expenses for continuing operations increased 23% to $896, or 5% of sales
in the third quarter of fiscal 1998, from $730, or 5% of sales, in the same
quarter of fiscal 1997. Increases related primarily to increased activities
associated with higher sales.
General and administrative expenses for continuing operations increased 35% in
the third quarter of fiscal 1998 to $1,438, or 8% of sales, from $1,064, or 7%
of sales, in the same quarter of fiscal 1997. Increases were primarily due to
increased personnel costs and higher legal and professional fees in the current
fiscal year quarter.
Income tax expense
- - ------------------
The effective income tax rate for the quarter ended June 30, 1998 was 27%
compared to 45% in the same period in 1997 due to estimated refunds for prior
year state taxes and a lower estimated state tax rate for fiscal 1998.
Net earnings from continuing operations
- - ---------------------------------------
Net earnings from continuing operations increased $950, or 531%, to $1,129 in
the third quarter of fiscal 1998 from $179 in the same quarter of fiscal 1997.
Increases were primarily due to increases in operating income of $548 in the
automotive components segment, decreased losses of $446 in the agricultural
equipment segment, estimated refunds of prior year state taxes and a lower
estimated state tax rate for fiscal 1998.
Discontinued operations
- - -----------------------
The Company did not have a net loss from the discontinued automotive accessories
segment for the third quarter ended June 30, 1998, compared to losses of $2,271
net of tax benefits of $1,515 in the same quarter of fiscal 1997. The Company's
discontinued automotive accessories segment was sold on March 16, 1998.
14
<PAGE>
Williams Controls, Inc.
Management Discussion & Analysis
(Dollars in thousands, except share and per share amounts)
Results of Operations (continued)
- - ---------------------------------
Nine months ended June 30, 1998 compared to the nine months ended June 30, 1997
Overview
- - --------
Net sales from continuing operations increased 18% to $49,757 in the nine months
ended June 30, 1998 from $42,305 in the same period in fiscal 1997. Increased
sales are attributed to higher unit sales volumes in the Company's vehicle
component segment, which were partially offset by declining unit sales volumes
in the agricultural equipment segment.
Net earnings from continuing operations increased 219% to $3,072 for the nine
months ended June 30, 1998 from $962 in the same fiscal 1997 period primarily
due to increased unit sales volumes and profitability in the Compan's vehicle
component segment, decreased losses in the agricultural equipment segment and a
lower effective income tax rate.
Net earnings attributable to common stockholders increased to $2,792 for the
nine months ended June 30, 1998 from a net loss of $2,210 in the comparable
fiscal 1997 period. Higher net income in the current year is attributed
primarily to higher sales and profitability in the Company's vehicle component
segment, decreased losses in the discontinued automotive accessories segment,
decreased losses in the agricultural equipment segment and a lower effective
income tax rate. These increases were partially offset by preferred dividends of
$120 in the current year nine-month period, compared to $0 in the same prior
year period.
Net sales from continuing operations
- - ------------------------------------
Net sales increased $7,452, or 18%, to $49,757 for the nine months ended June
30, 1998 compared to $42,305 for the nine months ended June 30, 1997. Sales as a
percent of total sales in the vehicle components, agricultural equipment and
electrical components segments were 81%, 13% and 6%, respectively, for the nine
months ended June 30, 1998 compared to 75%, 19% and 6%, respectively, in the
comparable prior year nine-month period. Vehicle component sales for the nine
months ended June 30, 1998 increased $8,979, or 28% due to higher unit sales of
component parts to heavy and medium truck manufacturers. Sales of agricultural
equipment declined $1,245, or 16%, for the nine months ended June 30, 1998 due
to lower unit sales resulting from excess dealer inventory and poor weather
affecting the southeastern agricultural markets which this segment serves.
Gross margin
- - ------------
Gross margin from continuing operations increased 48% to $14,356 for the nine
months ended June 30, 1998 from $9,732 in the nine months ended June 30, 1997.
Gross margin as a percentage of net sales from continuing operations was 29% for
the 1998 period compared to 23% in the same fiscal 1997 nine-month period.
Increases in dollar amount in the 1998 period resulted primarily from higher
unit sales volumes of higher margin products and increased utilization of the
Company's fixed assets in the vehicle component segment. Gross margin as a
percentage of net sales in the vehicle components, agricultural equipment and
electrical components and GPS segments were 32%, 11% and 23% respectively,
during the fiscal 1998 period compared to 27%, 10% and 20%, respectively, during
the same nine-month period in fiscal 1997.
Operating expenses - continuing operations
- - ------------------------------------------
Operating expenses for continuing operations increased 23% to $8,203 in the nine
months ended June 30, 1998 compared to $6,656 in the same period in fiscal 1997.
Operating expenses as a percentage of net sales from continuing operations were
16% for the nine-month periods ending June 30, 1998 and 1997. Increases are
primarily due to higher general and administrative costs and increased research
and development activities in the Company's vehicle component and electrical
component and GPS segments and increased selling expenses in the vehicle
components segment. Operating expenses as a percentage of net sales in the
vehicle components, agricultural equipment and electronic components and GPS
segments were 12%, 24% and 71%, respectively, in the fiscal 1998 nine-month
period compared to 11%, 23% and 51%, respectively, in the comparable fiscal 1997
period.
15
<PAGE>
Williams Controls, Inc.
Management Discussion & Analysis
(Dollars in thousands, except share and per share amounts)
Results of Operations (continued)
- - ---------------------------------
Nine months ended June 30, 1998 compared to the nine months ended June 30, 1997
Research and development expenses for continuing operations increased 37% to
$2,018, or 4% of sales from continuing operations, during the nine months ended
June 30, 1998 from $1,472, or 3% of sales in the same period in fiscal 1997.
Higher expenses in the fiscal 1998 period are primarily attributed to increased
product development activities in the electrical component and GPS and vehicle
component segments.
Selling expenses for continuing operations increased 6% to $2,323, or 5% of
sales from continuing operations, during the first nine months of fiscal 1998
from $2,183, or 5% of sales, in the same period of fiscal 1997. Increases in
dollar amount relate primarily to increased sales activities.
General and administrative expenses for continuing operations increased 29% in
the first nine months of fiscal 1998 to $3,862, or 8% of sales, from $3,001, or
7% of sales in the same period in fiscal 1997. Increases were primarily due to
increased personnel costs and higher legal and professional fees in the current
fiscal year period.
Income tax expense
- - ------------------
The effective income tax rate for the nine months ended June 30, 1998 was 35%
compared to 41% in the same period in 1997 due to estimated refunds for prior
year state taxes and a lower estimated state tax rate for fiscal 1998.
Net earnings from continuing operations
- - ---------------------------------------
Net earnings from continuing operations increased $2,110 or 219% to $3,072 in
the nine months ended June 30, 1998 from $962 in the same period of fiscal 1997.
Increases were primarily due to increases in operating income in the automotive
components segment of $1,684, decreased losses of $620 in the agricultural
equipment segment, estimated refunds of prior year state taxes and a lower
estimated state tax rate for fiscal 1998.
Discontinued Operations
- - -----------------------
Net losses from the discontinued automotive accessories segment were $160 net of
tax benefits of $107 for the nine months ended June 30, 1998, compared to $3,172
net of tax benefits of $2,121 in the same period of fiscal 1997.
16
<PAGE>
Williams Controls, Inc.
Part II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On April 21, 1998 the Company completed a private placement of 80,000
shares of Series A Preferred Stock, 7 1/2% Redeemable Convertible
Series (the "Preferred Stock") at an offering price of $100 per share,
for aggregate gross proceeds of $8,000,000. This offering was made
solely to accredited investors in reliance on certain exemptions from
the registration requirements under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws,
including the exemptions found in Section 4(6) of the Securities Act
and/or in Rule 506 of Regulation D under the Securities Act. The
investment banking firm of Taglich Brothers, D'Amadeo, Wagner &Co.,
Inc., New York, New York, acted as placement agent for this offering
and for its services, received as compensation 7 1/2% of the gross
proceeds, or $600,000, and five-year placement agent warrants to
purchase 203,637 shares of the Company's common stock for $3.30 per
share.
The Preferred Stock receives a dividend of 7 1/2% per annum, payable
quarterly, and is redeemable at the option of the Company three years
after the date of issuance. The Preferred Stock is convertible at the
option of the holders based on a conversion price of $2.75 per share,
or 2,909,091 shares of common stock, subject to future adjustment. The
Company has the right to force conversion of the Preferred Stock if
the company's common stock publicly trades at or above $4.125 per
share (150% of the conversion price) for 20 trading days within a
consecutive 30 day trading period ending no more than 10 days prior to
the date notice of forced conversion is given by the Company to the
holders.
The holders of the Preferred Stock have the right to vote on all
matters brought before the Company's stockholders, voting with the
common stockholders without regard to class. The number of votes
eligible to be cast by the holders of the Preferred Stock is
determined by the number of votes they would have assuming conversion
of the Preferred Stock as of the record date for the vote being taken.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
17
<PAGE>
Williams Controls, Inc.
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On April 2, 1998, the Company filed a report on Form 8-K reporting an
event on March 16, 1998 under Item 2 concerning the sale of assets
related to its discontinued operations and under Item 5 reporting
repayment of certain debt, and filing unaudited pro forma financial
statements related to this sale of assets.
18
<PAGE>
Williams Controls, Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
Date: August 14, 1998 By: /s/ Gerard A. Herlihy
----------------------------
Gerard A. Herlihy
Chief Financial and
Administrative Officer
Date: August 14, 1998 By: /s/ William N. Holmes
----------------------------
William N. Holmes,
Corporate Controller and
Principal Accounting Officer
19
<PAGE>
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