| | For the year ended September 30, |
| | 2008 | | 2007 | | 2006 |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 7,830 | | | $ | 7,937 | | | $ | 9,549 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 1,803 | | | | 2,005 | | | | 1,579 | |
| Deferred income taxes | | | 495 | | | | 638 | | | | 2,157 | |
| Stock based compensation | | | 672 | | | | 537 | | | | 452 | |
| Gain on settlement of liabilities | | | — | | | | (889 | ) | | | (744 | ) |
| Gain from stock settlement of environmental claims | | | (337 | ) | | | — | | | | — | |
| (Gain) loss from sale and disposal of fixed assets | | | (109 | ) | | | (170 | ) | | | 5 | |
| Gain on put/call option agreement | | | — | | | | — | | | | (10 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Receivables | | | (1,563 | ) | | | 889 | | | | (1,124 | ) |
| Inventories | | | 937 | | | | 766 | | | | (5,485 | ) |
| Accounts payable and accrued expenses | | | 1,132 | | | | (2,260 | ) | | | 2,162 | |
| Other | | | (914 | ) | | | (1,034 | ) | | | (709 | ) |
| Net cash provided by operating activities | | | 9,946 | | | | 8,419 | | | | 7,832 | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Payments for property, plant and equipment | | | (1,791 | ) | | | (2,230 | ) | | | (2,281 | ) |
| Proceeds from sale of property, plant and equipment | | | 111 | | | | 182 | | | | — | |
| Net cash used in investing activities | | | (1,680 | ) | | | (2,048 | ) | | | (2,281 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Repayments of debt | | | (1,000 | ) | | | (7,540 | ) | | | (5,089 | ) |
| Repurchase of common stock | | | — | | | | — | | | | (3,200 | ) |
| Net proceeds from exercise of stock options | | | 173 | | | | 260 | | | | 216 | |
| Net cash used in financing activities | | | (827 | ) | | | (7,280 | ) | | | (8,073 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 7,439 | | | | (909 | ) | | | (2,522 | ) |
| Cash and cash equivalents at beginning of year | | | 1,621 | | | | 2,530 | | | | 5,052 | |
| Cash and cash equivalents at end of year | | $ | 9,060 | | | $ | 1,621 | | | $ | 2,530 | |
| |
| | For the year ended September 30, |
| | 2008 | | 2007 | | 2006 |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| Interest paid | | $ | 91 | | | $ | 644 | | | $ | 1,086 | |
| Income taxes paid, net | | | 2,284 | | | | 4,052 | | | | 3,105 | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
| Pension liability adjustment | | $ | (220 | ) | | $ | (120 | ) | | $ | 539 | |
See accompanying notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Years Ended September 30, 2008, 2007 and 2006
(Dollars in thousands, except share and per share amounts)
Note 1. Organization and Basis of Presentation
Organization:
Williams Controls, Inc., including its wholly-owned subsidiaries as follows and hereinafter referred to as the “Company,” “Registrant,” “we,” “our,” or “us”:
Active Subsidiaries –Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou) Controls Co. Ltd. (“Williams Controls Asia”); Williams Controls Europe GmbH (“Williams Controls Europe”); and Williams Controls India Private Limited (“Williams Controls India”).
Inactive subsidiaries –Aptek Williams, Inc. (“Aptek”); Premier Plastic Technologies, Inc. (“PPT”); ProActive Acquisition Corporation (“ProActive”); WMCO-Geo (“GeoFocus”); NESC Williams, Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”); Williams World Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”); Agrotec Williams, Inc. (“Agrotec”) and our 80% owned subsidiaries Hardee Williams, Inc. (“Hardee”) and Waccamaw Wheel Williams, Inc. (“Waccamaw”).
Basis of Presentation:
The consolidated financial statements include all of the accounts of Williams Controls, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions, based upon all known facts and circumstances, that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of issuance of the consolidated 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. Estimates are used in accounting for, among other things, pension and post-retirement benefits, product warranty, excess and obsolete inventory, allowance for doubtful accounts, useful lives for depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, deferred tax assets and contingencies.
Concentration of Risk and Sales by Customer:
For the years ended September 30, 2008, 2007 and 2006, The Volvo Group accounted for 19%, 17% and 16%, Paccar, Inc. accounted for 11%, 14% and 17%, Freightliner, LLC accounted for 9%, 13% and 17%, Navistar International Corporation accounted for 7%, 6% and 8% of net sales, respectively. Approximately 46%, 41% and 36% of net sales in fiscal 2008, 2007 and 2006, respectively, were to customers outside of the United States, primarily in Belgium, Canada, China, France, Korea, Mexico and Sweden, and, to a lesser extent, in other European countries, South America, Pacific Rim nations and Australia. At September 30, 2008 and 2007, The Volvo Group represented 25% and 25%, Paccar, Inc. represented 9% and 7%, Freightliner, LLC represented 8% and 6%, and Navistar International Corporation represented 8% and 6%, of trade accounts receivable, respectively.
Realignment of operations:
The realignment of operations was essentially completed as of the date of the Company’s last fiscal year ended September 30, 2007.
During the second quarter of fiscal year 2006, the Company began a plan (“the Plan”) to realign its manufacturing operations as part of ongoing efforts to focus on its core product competencies and improve its global competitiveness. The Plan was substantially completed in fiscal 2007. The Plan consisted of outsourcing all of the Company’s die casting and machining operations from its Portland, Oregon manufacturing facility to high-quality suppliers, primarily in Asia, and relocating of the Company’s assembly operations for the majority of its pneumatic products from the Portland facility to its manufacturing facility in Suzhou, China. In conjunction with the
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realignment, the Company eliminated 50 hourly and 2 salaried positions from its Portland, Oregon facility during fiscal 2007. As part of the Plan, the Company incurred a one-time termination benefit in relation to those employees affected by the Plan.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and related guidance, a one-time benefit arrangement must meet certain criteria in order for a Company to recognize a liability for such one-time benefits. The plan must establish the terms of the benefit arrangement, including the benefits that employees will receive upon termination, in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated. That determination was reached when the Company began negotiations over the effects of the realignment related workforce reductions with the United Automobile Workers of America (UAW) during the third quarter of fiscal 2006, at which time an estimated liability for anticipated termination costs began to be recorded. The Company reached an agreement with the UAW regarding the effects of the realignment associated workforce reduction on April 6, 2007.
The total costs of the plan were approximately $1.5 million and included costs related to hourly and salaried termination benefits of $605; supplier and parts qualification of $100; refurbishment of tools of $150; accelerated depreciation on certain assets of $240; and general administrative and other costs of $400. Certain of these costs are classified in financial statement line items other than realignment of operations expense. The Company recorded realignment expenses of $737 and $582, respectively, for the twelve month periods ended September 30, 2007 and 2006, which were recorded in operating expenses in the accompanying consolidated statements of operations. No realignment expense was recorded in fiscal year 2008. Following is a reconciliation of the changes in the Company’s liability accrual related to the employee termination benefits during fiscal 2008 and the comparable period in fiscal 2007.
| Year ended September 30, | | | 2008 | | 2007 | | 2006 |
| Balance at beginning of period | | $ | 86 | | | $ | 226 | | | $ | — |
| Payments | | | (86 | ) | | | (519 | ) | | | — |
| Additional accruals | | | — | | | | 379 | | | | 226 |
| Balance at end of period | | $ | — | | | $ | 86 | | | $ | 226 |
Note 2. Significant Accounting Policies
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Short-term Investments:
Short-term investments consist of equity securities and are classified as available-for-sale securities and recorded at fair value with any unrealized gains and losses reported, net of tax, in other comprehensive income. The carrying value of available-for-sale securities approximates fair value due to their short maturities.
Trade Accounts Receivable:
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Trade accounts receivable are presented net of an allowance for doubtful accounts of $47 and $33 at September 30, 2008, and September 30, 2007, respectively.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined using standard costs, which approximate the first in, first out, or FIFO method. Cost includes the acquisition of purchased components, parts and subassemblies, labor and overhead. Market with respect to raw materials is replacement cost and, with respect to work-in-process and finished goods, is net realizable value.
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Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The principal estimated lives are: 31.5 years for buildings, 5 to 12 years for machinery and equipment, and 3 to 5 years for office furniture and equipment. Maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets:
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, management reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the estimated undiscounted future cash flows of the operation to which the assets relate, to the carrying value of such assets. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying value or fair value less costs to sell.
Deferred Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated 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. Valuation allowances are established as necessary to reduce deferred tax assets unless realization of the assets is considered more likely than not.
Product Warranty:
The Company establishes a product warranty liability based on a percentage of product sales. The liability is based on historical return rates of products and amounts for significant and specific warranty issues, and is included in accrued expenses on the accompanying consolidated balance sheets. Warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a liability, which in the opinion of management, is adequate to cover such warranty costs. Warranty payments can vary significantly from year to year depending on the timing of the settlement of warranty claims with various customers. Following is a reconciliation of the changes in the Company’s warranty liability for the years ended September 30, 2008, 2007 and 2006.
| Year ended September 30, | | 2008 | | 2007 | | 2006 |
| Balance at beginning of period | $ | 1,712 | | | $ | 1,720 | | | $ | 1,656 | |
| Payments | | (1,359 | ) | | | (1,076 | ) | | | (864 | ) |
| Warranty claims accrued | | 767 | | | | 1,228 | | | | 1,112 | |
| Adjustments and changes in estimates | | (401 | ) | | | (160 | ) | | | (184 | ) |
| Balance at end of period | $ | 719 | | | $ | 1,712 | | | $ | 1,720 | |
During fiscal 2008, the Company recorded a reduction of warranty liability of $324 related to warranty claims with one customer. The Company reviewed its assumptions for its warranty liability with this one customer, which covers a period in excess of one year, and determined a reduction in liability was necessary. This reduction in the liability has been recorded as a reduction of cost of sales in the accompanying condensed consolidated statement of operations. Warranty payments in fiscal 2008 were higher than historical rates as the Company settled and paid a significant number of claims dating back to fiscal 2006 with one customer.
During fiscal 2007, the Company recorded an adjustment for additional warranty liability of $239 related to warranty claims with one customer. The Company reviewed its assumptions for its warranty liability with this one customer, which covers a period in excess of one year, and determined an additional liability was required. This
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additional liability has been recorded in cost of sales in the accompanying condensed consolidated statement of operations. At September 30, 2007, the Company also made an adjustment to reverse the $400 warranty liability, as described below, as the warranty return period had expired.
Included in the warranty liability at September 30, 2006 were warranty liabilities associated with our former passenger car and light truck product lines, which were sold on September 30, 2003. The Company recorded a $400 warranty liability during 2003 related to products sold from our passenger car and light truck product lines in fiscal 2003. The Company’s obligation for products sold by these product lines relates only to products sold prior to September 30, 2003. Also in fiscal 2006, the Company settled certain warranty claims with one customer covering a period in excess of one year for less than was anticipated in the Company’s liability assumptions, which were based on historical return rates and prior settlements. Based on this, the Company reduced its warranty liability during the second quarter of fiscal 2006 by $184, which has been reflected in cost of sales in the accompanying condensed consolidated statement of operations.
Environmental Costs:
Liabilities for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, or if an amount is likely to fall within a range and no amount within that range can be determined to be the better estimate, the minimum amount of the range is recorded. Liabilities for environmental matters exclude claims for recoveries from prior owners or operators until it is probable that such recoveries will be realized.
Revenue Recognition:
Revenue is recognized at the time of product shipment, which is when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured. Revenues are reported net of estimated returns, rebates and customer discounts.
Research and Development Costs:
Research and development costs are expensed as incurred. Research and development costs consist primarily of employee costs, cost of consumed materials, depreciation and engineering related costs.
Pensions and Post-retirement Benefit Obligations:
The Company accounts for pensions and post-retirement benefits in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, SFAS No. 106, “Employers’ Accounting for Post Retirement Benefits Other than Pensions”, and SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Post Retirement Benefits – An Amendment of FASB Statements No. 87, 88, and 106” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132R”. SFAS No. 87 requires the Company to calculate its pension expense and liabilities using actuarial assumptions, including a discount rate assumption and a long-term rate of return on assets assumption. Changes in interest rates and market performance can have a significant impact on the Company’s pension expense and future payments. SFAS No. 106 requires the Company to accrue the cost of post-retirement benefit obligations. The accruals are based on interest rates and the costs of health care. Changes in interest rates and health care costs could impact post-retirement expenses and future payments.
Earnings Per Share:
Basic earnings per share (“EPS”) and diluted EPS are computed using the methods prescribed by SFAS No. 128, “Earnings Per Share”. Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares outstanding and the dilutive impact of common equivalent shares outstanding.
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Following is a reconciliation of basic EPS and diluted EPS:
| | Year Ended | | Year Ended |
| | September 30, 2008 | | September 30, 2007 |
| | | | | | Per Share | | | | | | Per Share |
| | Income | | Shares | | Amount | | Income | | Shares | | Amount |
| Basic EPS — | $ | 7,830 | | 7,522,885 | | | $1.04 | | | $ | 7,937 | | 7,467,161 | | | $1.06 | |
| Effect of dilutive securities — | | | | | | | | | | | | | | | |
| Stock options | | — | | 225,035 | | | | | | — | | 272,466 | | | |
| Diluted EPS — | $ | 7,830 | | 7,747,920 | | | $1.01 | | | $ | 7,937 | | 7,739,627 | | | $1.03 | |
| | Year Ended |
| | September 30, 2006 |
| | | | | | Per Share |
| | Income | | Shares | | Amount |
| Basic EPS — | $ | 9,549 | | 7,427,141 | | | $1.29 | |
| Effect of dilutive securities — | | | | | | | |
| Stock options | | — | | 200,964 | | | |
| Diluted EPS — | $ | 9,549 | | 7,628,105 | | | $1.25 | |
At September 30, 2008, 2007 and 2006, the Company had options covering 111,658, 100,912 and 52,589 shares, respectively, which were not considered in the diluted EPS calculation since they would have been antidilutive.
Share-Based Compensation:
The Company uses SFAS No. 123R, “Share Based Payment,” to account for its share-based compensation plans. The Company uses the Black-Scholes option pricing model to value its stock option grants under SFAS No. 123R. Share-based compensation expense is recognized on a straight-line basis over the requisite service period, which equals the vesting period. Under SFAS No. 123R, the Company is also required to estimate forfeitures in calculating the expense related to share-based compensation. In addition, SFAS No. 123R requires the Company to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash inflow.
Contingencies:
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management and legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be recorded in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Fair Value of Financial Instruments:
The carrying amounts reflected in the accompanying consolidated balance sheet for cash and cash equivalents, short-term investments, accounts receivable, other accounts receivable, prepaid expenses and other current assets, accounts payable (excluding accounts payable related to certain insolvent subsidiaries as discussed in Note 5), accrued expenses, and short-term borrowings approximate fair value due to the short-term nature of the instruments. Refer to Note 6 regarding the terms and conditions of the Company’s long-term debt.
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Recent Accounting Pronouncements:
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the approval of the Securities and Exchange Commission. The Company does not expect the effects of adopting this statement to be significant.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” SFAS No. 141R changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. This statement will be effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008. This statement, when adopted, will change the Company’s accounting treatment for business combinations on a prospective basis.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will adopt SFAS No. 159 during the first quarter of fiscal 2009. The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Company is currently in the process of determining the effects of adopting this statement in its consolidated financial statements. In November 2007, the FASB approved the deferral of the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Note 3. Inventories
Inventories consist of the following at September 30:
| | 2008 | | 2007 |
| Raw material | $ | 5,578 | | $ | 7,057 |
| Work in process | | 53 | | | 66 |
| Finished goods | | 2,584 | | | 2,029 |
| | $ | 8,215 | | $ | 9,152 |
Note 4. Property, Plant and Equipment
Property, plant and equipment consist of the following at September 30:
| | 2008 | | 2007 |
| Land and land improvements | $ | 828 | | | $ | 828 | |
| Buildings | | 4,009 | | | | 3,988 | |
| Machinery and equipment | | 11,889 | | | | 11,853 | |
| Office furniture, computers & software | | 4,689 | | | | 4,143 | |
| Construction in progress | | 675 | | | | 544 | |
| | | 22,090 | | | | 21,356 | |
| Less accumulated depreciation | | (12,994 | ) | | | (12,403 | ) |
| | $ | 9,096 | | | $ | 8,953 | |
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Depreciation expense for the years ended September 30, 2008, 2007 and 2006 was $1,763, $1,793 and $1,288, respectively.
Note 5. Settlement of Accounts Payable
Included in the accompanying consolidated balance sheet is approximately $155 of accounts payable related to closed insolvent subsidiaries of the Company. In accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, a debtor can only relieve itself of a liability if it has been extinguished. Accordingly, a liability is considered extinguished if (a) the debtor pays the creditor and is relieved of its obligation for the liability or (b) the debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. During the years ended September 30, 2007 and 2006, the Company was judicially released from and reversed $889 and $744, respectively, of old accounts payable resulting in a gain, which has been recorded in other (income) expense in the accompanying consolidated statements of operations. No amounts were released and reversed during fiscal year 2008. The Company expects to reverse amounts in future periods based on the recognition of the liabilities being judicially released in accordance with SFAS No. 140 of $90 in fiscal 2010; and an total of $65 in fiscal 2011 – 2016.
Note 6. Debt
As of September 30, 2008, the Company has paid off its entire term loan debt and has no amounts outstanding under its revolving loan facility. The Company’s long-term debt consisted of $1,000 of term loan debt at September 30, 2007.
In September 2004, the Company entered into a $25,000 senior secured lending facility with Merrill Lynch, consisting of an $8,000 revolving loan facility and a $17,000 term loan. In October 2008, GE Capital assumed the loan as successor to Merrill Lynch. The term loan has been repaid in its entirety. The loans are secured by substantially all the assets of the Company. Borrowings under the revolving loan facility are subject to a borrowing base equal to 85% of eligible accounts receivables and 60% of eligible inventories. Interest rates for the revolving loan facility are based on the election of the Company of either a LIBOR rate or Prime rate. The LIBOR rate option is LIBOR plus 3.75% per annum. The Prime rate option is at Prime plus 2.75% per annum. Fees under the loan agreement include an unused line fee of 0.50% per annum on the unused portion of the revolving credit facility.
The revolving loan facility expires on September 29, 2009, at which time all outstanding amounts under the revolving loan facility are due and payable. The Company is subject to certain quarterly and annual financial covenants. At September 30, 2008 the Company was in compliance with all but one of its financial covenants and at September 30, 2007, the Company was in compliance with all but two of its financial covenants. The Company has not obtained a waiver from GE Capital for fiscal 2008 as of the filing of these financial statements and is continuing to work with GE Capital to resolve this item. The Company did obtain a waiver from Merrill Lynch for fiscal 2007 for the financial covenants it did not meet.
The Company had $8,000 available under its revolving credit facility at both September 30, 2008 and 2007.
Note 7. Employee Benefit Plans
The Company maintains two pension plans, an hourly employee plan and a salaried employee plan. The hourly plan covers certain of the Company’s union employees. The salaried plan covers certain salaried 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 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.
The Company also 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. In accordance with SFAS No. 106 “Employers Accounting for Post Retirement Benefits other than Pensions,” the Company elected to amortize the accumulated post retirement benefit obligation (“APBO”) at October 1, 1993 over twenty years as a component of post retirement benefit expense.
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In 2003, the Company modified the provisions of the salaried plan to limit the number of eligible employees to those currently in the plan at the time of the modification and to limit benefits under the plan to those earned to that date. As part of the 2003 contract and strike settlement agreement with the union hourly workers, the hourly plan was also modified in 2003 to limit participation in the plan to those employees in the plan at August 31, 2002.
Adoption of SFAS No. 158
Effective September 30, 2007, the Company adopted the recognition and disclosure provisions of SFAS No. 158. Under the recognition provisions of SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of SFAS No. 87, 88, 106, and 132R,” the Company is required to recognize the overfunded or underfunded status of its defined benefit plans as an asset or liability, respectively, in its consolidated balance sheet. For the Company’s pension plans, the funded status is measured as the difference between the projected benefit obligation and the fair value of plan assets. For the Company’s post retirement plan, the funded status is measured as the difference between the accumulated postretirement benefit obligation and the fair value of plan assets. Under the transition provisions of SFAS No. 158, actuarial gains or losses, and prior service costs or credits that have not yet been included in net periodic benefit expense as of the adoption date are recognized in stockholders’ equity as components of the ending balance of accumulated other comprehensive income (loss), net of tax. In future periods, the Company will recognize changes in the funded status that are not components of the current-period net periodic benefit expense as a component of other comprehensive income (loss) in the year the change occurs.
SFAS No. 158 also requires plans assets and obligations to be measured as of the end of the fiscal year rather than at an earlier measurement date, as allowed under current accounting standards. The Company currently measures plan assets and obligations as of August 31. The effective date for the end of the fiscal year measurement date requirement is the first fiscal year ending after December 15, 2008. The Company has not yet adopted the measurement provisions and is currently assessing the effect it will have on its consolidated financial statements.
Pension Plans
The following table reports the changes in the projected benefit obligation, the fair value of plan assets, and the determination of the amounts recognized in the consolidated balance sheets for the Company’s pension plans at September 30:
| | Salaried Plan | | Hourly Plan |
| September 30, | | 2008 | | 2007 | | 2008 | | 2007 |
| Accumulated benefit obligation | $ | 4,695 | | | $ | 4,894 | | | $ | 7,641 | | | $ | 7,613 | |
| Change in projected benefit obligation: | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 4,894 | | | $ | 5,184 | | | $ | 7,613 | | | $ | 7,883 | |
| Service cost | | — | | | | — | | | | 66 | | | | 118 | |
| Interest cost | | 296 | | | | 294 | | | | 460 | | | | 447 | |
| Actuarial (gain) loss | | (153 | ) | | | (267 | ) | | | 36 | | | | (238 | ) |
| Curtailment | | — | | | | — | | | | — | | | | (134 | ) |
| Benefits paid | | (342 | ) | | | (317 | ) | | | (534 | ) | | | (463 | ) |
| Benefit obligation at end of year | $ | 4,695 | | | $ | 4,894 | | | $ | 7,641 | | | $ | 7,613 | |
| Change in plan assets: | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 4,579 | | | $ | 3,893 | | | $ | 6,825 | | | $ | 5,729 | |
| Actual return on plan assets | | (383 | ) | | | 370 | | | | (568 | ) | | | 558 | |
| Employer contributions | | 437 | | | | 633 | | | | 870 | | | | 1,001 | |
| Benefits paid | | (342 | ) | | | (317 | ) | | | (534 | ) | | | (463 | ) |
| Fair value of plan assets at end of year | $ | 4,291 | | | $ | 4,579 | | | $ | 6,593 | | | $ | 6,825 | |
| Funded status at end of year | $ | (404 | ) | | $ | (315 | ) | | $ | (1,048 | ) | | $ | (788 | ) |
Subsequent to the August 31 measurement date, asset values have declined as a result of recent volatility in the capital markets. The Company estimates that the value of plan assets for both plans at November 30, 2008 decreased approximately $2,750 when compared to the asset values at the measurement date.
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Weighted-average assumptions used to determine benefit obligations at September 30:
| | Salaried Plan | | Hourly Plan |
| | 2008 | | 2007 | | 2008 | | 2007 |
| Discount rate | 6.97% | | 6.25% | | 6.97% | | 6.25% |
| Rate of compensation increase | — | | — | | — | | — |
The amounts included in accumulated other comprehensive losses that have not yet been recognized in net periodic benefit cost as of September 30, 2008 and 2007 consist of the following:
| | Salaried Plan | | Hourly Plan |
| | 2008 | | 2007 | | 2008 | | 2007 |
| Actuarial loss | $ | 1,875 | | $ | 1,399 | | $ | 2,883 | | $ | 1,975 |
| Prior service cost | | — | | | — | | | 49 | | | 70 |
| | $ | 1,875 | | $ | 1,399 | | $ | 2,932 | | $ | 2,045 |
Amounts in fiscal 2009 that will be amortized from accumulated other comprehensive loss into net periodic benefit cost include the following:
| | Salaried Plan | | Hourly Plan |
| Actuarial loss | | $105 | | | | $316 | |
| Prior service cost | | — | | | | 16 | |
| | | $105 | | | | $332 | |
Net periodic benefit cost for the years ended September 30 include the following:
| | Salaried Plan | | Hourly Plan |
| Years ended September 30: | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 |
| Service cost | $ | — | | | $ | — | | | $ | — | | | $ | 66 | | | $ | 118 | | | $ | 144 | |
| Interest cost | | 296 | | | | 294 | | | | 275 | | | | 460 | | | | 447 | | | | 412 | |
| Expected return on plan assets | | (310 | ) | | | (272 | ) | | | (228 | ) | | | (470 | ) | | | (401 | ) | | | (333 | ) |
| Amortization of prior service cost | | — | | | | — | | | | — | | | | 21 | | | | 47 | | | | 52 | |
| Curtailment | | — | | | | — | | | | — | | | | — | | | | 69 | | | | — | |
| Recognized net actuarial loss | | 64 | | | | 91 | | | | 117 | | | | 166 | | | | 249 | | | | 344 | |
| Net periodic benefit cost | $ | 50 | | | $ | 113 | | | $ | 164 | | | $ | 243 | | | $ | 529 | | | $ | 619 | |
Weighted-average assumptions used to determine Net Periodic Benefit Cost for the years ended September 30:
| | Salaried Plan | | Hourly Plan |
| | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 |
| Discount rate | 6.25% | | 5.85% | | 5.25% | | 6.25% | | 5.85% | | 5.25% |
| Expected return on plan assets | 6.75% | | 6.75% | | 6.50% | | 6.75% | | 6.75% | | 6.50% |
| Rate of compensation increase | — | | — | | — | | — | | — | | — |
The overall expected long-term rate of return assumptions for fiscal 2008 were developed using return expectations. Historical and future expected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. The weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
40
Plan Assets:
The Company’s pension plan weighted-average asset allocations at September 30, 2008 and 2007, by asset category are as follows:
| | Salaried Plan | | Hourly Plan |
| | | | | | Target | | | | | | Target |
| | 2008 | | 2007 | | Allocation | | 2008 | | 2007 | | Allocation |
| Asset Category: | | | | | | | | | | | | | | | | | |
| Equity securities | 45 | % | | 48 | % | | 39 | % | | 45 | % | | 48 | % | | 39 | % |
| Debt securities | 49 | % | | 46 | % | | 55 | % | | 49 | % | | 46 | % | | 55 | % |
| Real estate | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes multiple investment managers in order to maximize the plan’s return while minimizing risk.
Cash Flows:
The Company expects to recognize $612 in expense in fiscal 2009 related to its pension plans and make payments of $183 in fiscal 2009.
Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next 10 fiscal years:
| | | Benefit Payments |
| Year ending: | | Salaried Plan | | Hourly Plan |
| 2009 | | $ | 340 | | | $ | 530 | |
| 2010 | | | 350 | | | | 510 | |
| 2011 | | | 360 | | | | 540 | |
| 2012 | | | 350 | | | | 530 | |
| 2013 | | | 350 | | | | 540 | |
| Years 2014-2018 | | | 1,750 | | | | 2,880 | |
Post Retirement Plan
The following table sets forth the changes in benefit obligation and the determination of the amounts recognized in the consolidated balance sheets for the Post Retirement Plan at September 30:
| September 30, | | 2008 | | 2007 |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of year | $ | 3,988 | | | $ | 3,942 | |
| Service cost | | 5 | | | | 6 | |
| Interest cost | | 237 | | | | 221 | |
| Actuarial (gain) loss | | (792 | ) | | | 84 | |
| Benefits paid | | (283 | ) | | | (265 | ) |
| Benefit obligation at end of year | $ | 3,155 | | | $ | 3,988 | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of year | $ | — | | | $ | — | |
| Employer contributions | | 283 | | | | 265 | |
| Benefits paid | | (283 | ) | | | (265 | ) |
| Fair value of plan assets at end of year | $ | — | | | $ | — | |
| Funded status at end of year | $ | (3,155 | ) | | $ | (3,988 | ) |
41
Weighted-average assumptions used to determine benefit obligations at September 30:
| | 2008 | | 2007 |
| Discount rate | 6.80% | | 6.17% |
| Rate of compensation increase | — | | — |
The amounts included in accumulated other comprehensive losses that have not yet been recognized in net periodic benefit cost as of September 30, 2008 and 2007 consist of the following:
| | 2008 | | 2007 |
| Actuarial loss | $ | 650 | | | $ | 1,518 | |
| Prior service credit | | (675 | ) | | | (805 | ) |
| Transition obligation | | 101 | | | | 121 | |
| Actuarial loss | $ | 76 | | | $ | 834 | |
Amounts in fiscal 2009 that will be amortized from accumulated other comprehensive loss into net periodic benefit cost include the following:
| Actuarial loss | $ | 23 | |
| Prior service credit | | (131 | ) |
| Transition obligation | | 20 | |
| | $ | (88 | ) |
Net periodic post retirement benefit cost for the years ended September 30 included the following:
| Year ended September 30: | | 2008 | | 2007 | | 2006 |
| Service cost | $ | 6 | | | $ | 6 | | | $ | 7 | |
| Interest cost | | 237 | | | | 220 | | | | 199 | |
| Amortization | | (35 | ) | | | (22 | ) | | | (29 | ) |
| Net periodic post retirement benefit cost | $ | 208 | | | $ | 204 | | | $ | 177 | |
| Discount rate assumption | | 6.17 | % | | | 5.80 | % | | | 5.25 | % |
Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next 10 fiscal years:
| Year ending: | Benefit Payments |
| 2009 | $ | 285 | |
| 2010 | | 275 | |
| 2011 | | 278 | |
| 2012 | | 278 | |
| 2013 | | 279 | |
| Years 2014-2018 | | 1,274 | |
The assumed health care cost trend rate used in measuring the benefit obligation ranged between 5.0%-9.0% in the first year, declining gradually to 5.0% in 2017 and remaining at 5.0% thereafter.
If the assumed medical costs trends were increased by 1%, the benefit obligation as of September 30, 2008 would increase by $259, and the aggregate of the services and interest cost components of the net post retirement benefit cost would be increased by $23. If the assumed medical costs trends were decreased by 1%, the benefit obligation as of September 30, 2008 would decrease by $225, and the aggregate of the services and interest cost components of the net post retirement benefit cost would be decreased by $19.
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As part of the strike settlement agreement entered into in August 2003, the Company modified the provisions of the Post Retirement Plan to limit the number of eligible employees to those currently in the plan at August 31, 2002. The plan was further modified so that the benefits for any plan participant who had not retired under the union pension plan as of September 17, 2003 would be limited to a one-time lump sum payment under the plan of $6 at the time of a qualified retirement under the union pension plan.
Other Benefit Plans
The Company sponsors a matching 401(k) plan for salaried employees and certain union employees, in which eligible employees may elect to contribute a portion of their compensation. Employer matching contributions in fiscal 2008, 2007 and 2006 were $276, $230 and $213, respectively.
Note 8. Income Tax Expense
The provision for income tax expense is as follows for the years ended September 30:
| | 2008 | | 2007 | | 2006 |
| Current | $ | 3,455 | | $ | 3,669 | | $ | 2,552 |
| Deferred | | 495 | | | 638 | | | 2,157 |
| | $ | 3,950 | | $ | 4,307 | | $ | 4,709 |
The reconciliation between the effective tax rate and the statutory federal tax rate on income from continuing operations as a percent is as follows:
| Provision | | 2008 | | 2007 | | 2006 |
| Statutory federal income tax rate | 34.0 | % | | 34.0 | % | | 34.0 | % |
| State taxes, net of federal income tax benefit | 2.6 | | | 2.8 | | | 2.1 | |
| Reduction in deferred tax assets due to change in state tax law | — | | | 4.8 | | | — | |
| Abandonment of state net operating losses | — | | | 4.8 | | | — | |
| Impact of foreign operations | (3.0 | ) | | (0.4 | ) | | 0.3 | |
| Effect of change in valuation allowance | (0.5 | ) | | (9.8 | ) | | (0.4 | ) |
| Stock-based compensation | 1.1 | | | 0.6 | | | 0.7 | |
| Section 199 deduction | (1.5 | ) | | (0.9 | ) | | (0.8 | ) |
| Extraterritorial income exclusion | — | | | (0.8 | ) | | (1.3 | ) |
| Other | 0.8 | | | 0.1 | | | (1.6 | ) |
| | 33.5 | % | | 35.2 | % | | 33.0 | % |
At September 30, 2008, the Company had recorded an income tax payable of $133, which is included in accrued expenses in the accompanying consolidated balance sheets.
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2008 and 2007 are as follows:
| | 2008 | | 2007 |
| Deferred tax assets: | | | | | | | |
| Inventories | $ | 147 | | | $ | 201 | |
| Warranty liability | | 265 | | | | 630 | |
| Accrual for compensated absences | | 149 | | | | 122 | |
| Stock based compensation | | 256 | | | | 156 | |
| Accrual for retiree medical benefits | | 1,087 | | | | 1,393 | |
| Loss from investment in affiliate (Ajay Sports, Inc.) | | 3,845 | | | | 3,845 | |
| Tax gain on sale/leaseback | | 648 | | | | 648 | |
| Accrued environmental obligations | | 376 | | | | 385 | |
| Accrued other liabilities | | 293 | | | | 235 | |
| Pension plan comprehensive loss adjustment | | 501 | | | | — | |
| State net operating loss carryforwards | | 92 | | | | 133 | |
| Other | | 56 | | | | 12 | |
| Total deferred tax assets | | 7,715 | | | | 7,760 | |
| Less valuation allowance | | (5,216 | ) | | | (5,433 | ) |
| Deferred tax assets, net of valuation allowance | | 2,499 | | | | 2,327 | |
| Deferred tax liabilities: | | | | | | | |
| Plant and equipment | | 625 | | | | 368 | |
| Pension plan comprehensive loss adjustment | | — | | | | 12 | |
| Net deferred income tax assets | $ | 1,874 | | | $ | 1,947 | |
| Current deferred income tax assets | $ | 1,316 | | | $ | 1,617 | |
| Long-term deferred income tax assets | | 6,412 | | | | 6,151 | |
| Long-term deferred income tax liabilities | | (638 | ) | | | (388 | ) |
| Valuation allowance | | (5,216 | ) | | | (5,433 | ) |
| | $ | 1,874 | | | $ | 1,947 | |
At September 30, 2008, the Company has approximately $2,191 of state net operating loss carry-forwards, which are available to the Company in certain state tax jurisdictions and begin to expire in 2016. These state net operating loss carry-forwards have a full valuation allowance against them at September 30, 2008.
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted the provisions of FIN 48 on October 1, 2007. As of the date of adoption, the Company had unrecognized tax benefits of $109, of which $72 will favorably affect the effective tax rate, if recognized. The adoption of FIN 48 resulted in a decrease of $82 to retained earnings as a cumulative effect adjustment to stockholder’s equity. The amount of interest and penalties related to the unrecognized tax benefits as of the date of adoption was $14. The Company will recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by $23 within the 12 months of this reporting date.
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Following is a reconciliation of the Company’s unrecognized tax benefits:
| Balance at October 1, 2007 | $ | 109 | |
| Additions based on tax positions related to the current year | | 6 | |
| Additions based on tax positions of prior years | | 63 | |
| Settlements | | (74 | ) |
| Balance at September 30, 2008 | $ | 104 | |
During the fourth quarter of fiscal 2008, the Company settled with the State of Oregon on the outstanding examination issues. The settlement did not have a material adverse effect on the Company’s results of operations. The settlement liability was paid in October 2008. The Company is not currently under examination in any other states or foreign jurisdictions.
The Company is subject to income taxes in the United States and foreign jurisdictions. The Company is no longer subject to U.S. federal, state or foreign income tax examinations for fiscal years ended before September 30, 2005, September 30, 2004 and September 30, 2005, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.
In the ordinary course of the Company’s business there are transactions where the ultimate tax determination is uncertain. The Company believes that is has adequately provided for income tax issues not yet resolved with federal, state, local and foreign tax authorities. If an ultimate tax assessment exceeds the Company’s estimate of tax liabilities, an additional charge to expense would result.
Pretax earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. U.S. income taxes and foreign withholding taxes have not been provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. It is not practical to determine the amount of income tax payable in the event the Company repatriated all undistributed foreign earnings. However, if these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes and foreign withholding taxes.
The Company’s subsidiary in China is entitled to a five-year tax holiday, pursuant to which it is exempted from paying the enterprise income tax for calendar 2007, the year in which it first had positive earnings, and calendar 2008. After the two-year exemption period, the Company’s subsidiary in China will be entitled to approximately a 50% exemption for calendar 2009 through 2011.
Note 9. Commitments and Contingencies
The Company and its 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 liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on its review, the Company believes that any unrecorded liability that may result is not more than likely to have a material effect on the Company’s liquidity, financial condition or results of operations.
The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program and during fiscal 2004 the Company established a liability of $950 for this matter. At September 30, 2007, the Company recorded an additional liability of $546 based on remaining costs estimates determined by the Company with the help of an environmental consulting firm. As of September 30, 2008, the total liability recorded is $1,021 and is recorded in accrued expenses in the accompanying condensed consolidated balance sheet. The Company asserted and settled a contractual indemnity claim against Dana Corporation (“Dana”), from which it acquired the property, and contribution claims against the other prior owner of the property as well as businesses previously located on the property (including Blount, Inc. (“Blount”) and Rosan, Inc. (“Rosan”)) under the Federal Superfund Act and
45
the Oregon Cleanup Law. During 2008, the Company entered into a settlement agreement with Dana, Blount and Rosan under which it received total cash payments from Dana, Blount and Rosan of $735, and shares of Dana stock equal to approximately $337 at the time of settlement, and assumed the full obligation to, and risks associated with, completing the remediation. The Company recorded the shares received as available-for-sale securities in short-term investments in the accompanying condensed consolidated balance sheets. As of September 30, 2008, the Company has recorded a total gain of $1,072, which was recorded in operating expenses in the consolidated financial statements for the receipt of the cash and stock.
On October 1, 2004, the Company was named as a co-defendant in a product liability case (Cuesta v. Ford, et al, District Court for Bryant, Oklahoma). The complaint seeks an unspecified amount of damages on behalf of the class. During the second quarter of fiscal 2007, the Oklahoma district court granted the plaintiffs class action status. The Company and Ford appealed the District Court’s class certification ruling to the Court of Civil Appeals of the State of Oklahoma (“Appeals Court”) and during the second quarter of fiscal 2008, the Appeals Court, in a 3-to-0 decision, reversed the District Court’s ruling and decertified the nationwide class. As permitted under Oklahoma law, the plaintiffs filed for a re-hearing by the Appeals Court and during the third quarter of fiscal 2008, the Appeals Court denied the motion for re-hearing. The plaintiffs have since appealed the Court of Civil Appeals decision to the Oklahoma Supreme Court which has not taken action yet. The Company continues to believe the claim to be without merit and intends to continue to vigorously defend against this action. Although the Appeals Court decision is favorable to the Company, there can be no assurance that the ultimate outcome of the lawsuit will be favorable to the Company or will not have a material adverse effect on the Company’s business, consolidated financial condition and results of operations. The Company cannot reasonably estimate the possible loss or range of loss at this time. In addition, the Company has incurred and may incur future litigation expenses in defending this litigation.
The Company leases certain facilities under non-cancelable operating leases. In addition, the Company leases certain equipment used in their operations. Future minimum lease payments under all non-cancelable operating leases are approximately as follows for annual periods ending September 30,
| 2009 | $ | 542 |
| 2010 | | 480 |
| 2011 | | 465 |
| 2012 | | 352 |
| Total | $ | 1,839 |
Rent expense under operating leases was $707, $436 and $324 for the years ended September 30, 2008, 2007 and 2006, respectively.
Note 10. Share-Based Compensation
The Company currently has two qualified stock option plans. The Restated 1993 Stock Option Plan (the “1993 Plan”) reserves an aggregate of 870,000 shares of the Company’s authorized common stock for the issuance of stock options, which includes the 120,000 share increase in authorized shares approved by the stockholders at the February 27, 2008 Annual Meeting of Stockholders. These shares 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” with an exercise price of not less than the fair market value on the date of grant. Options granted under the 1993 Plan have a vesting schedule, which is typically five years, determined by the Compensation Committee of the Board of Directors and expire ten years after the date of grant. At September 30, 2008 and 2007, the Company had 123,867 and 55,471 shares, respectively, available for future grants under the 1993 Plan. The non-employee Director Plan (the “1995 Plan”) reserves an aggregate of 86,666 shares of the Company’s common stock for issuance of stock options, which includes the 20,000 share increase in authorized shares approved by the stockholders at the February 27, 2008 Annual Meeting of Stockholders. These shares may be granted to non-employee directors of the Company. Under this plan the non-employee directors are each automatically granted 1,666 options at a price equal to the market value on the date of grant which is the date of the Annual Meeting of Stockholders 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, 2008 and 2007 there were 28,354 and 16,684 shares, respectively, available for grant under the 1995 Plan.
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As of September 30, 2008, there was $1,985 of total unrecognized compensation costs related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 3.5 years.
The Company’s share-based compensation expenses were recorded in the following expense categories for the years ended September 30, 2008, 2007 and 2006:
| | 2008 | | 2007 | | 2006 |
| Cost of sales | $ | 111 | | $ | 74 | | $ | 71 |
| Research and development | | 73 | | | 30 | | | 27 |
| Selling | | 76 | | | 62 | | | 49 |
| Administration | | 412 | | | 371 | | | 305 |
| Total share-based compensation expense | $ | 672 | | $ | 537 | | $ | 452 |
| Total share-based compensation expense (net of tax) | $ | 572 | | $ | 454 | | $ | 402 |
As part of the employment agreement with Patrick W. Cavanagh, President and Chief Executive Officer, the Company has the option to pay Mr. Cavanagh up to 7% of his annual base salary in shares of common stock of the Company and exercised that option for each of fiscal years 2008, 2007 and 2006. In the third quarter of fiscal 2008, the Company elected to pay 7% of Mr. Cavanagh’s fiscal 2008 salary in common stock of the Company by issuing him 1,364 shares of restricted common stock at $13.34 per share. In the third quarter of fiscal 2007, the Company elected to pay 7% of Mr. Cavanagh’s fiscal 2007 salary in common stock of the Company by issuing him 989 shares of restricted common stock at $16.98 per share. During the third quarter of fiscal 2006, the Company paid 7% of Mr. Cavanagh’s fiscal 2006 salary in common stock of the Company by issuing him 1,306 shares of restricted common stock at $12.86 per share.
Also during the third quarter of fiscal 2008, the Company paid $5 of Dennis E. Bunday’s, Executive Vice President and Chief Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and Marketing, salary in common stock of the Company by issuing them 374 and 224 shares, respectively, of restricted common stock at $13.34 per share. During the third quarter of fiscal 2007, the Company paid $5 of Dennis E. Bunday’s, Executive Vice President and Chief Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and Marketing, salary in common stock of the Company by issuing them 294 and 176 shares, respectively, of restricted common stock at $16.98 per share. During the third quarter of fiscal 2006, the Company paid $5 of Mr. Bunday’s salary in common stock of the Company by issuing him 388 shares of restricted common stock at $12.86 per share. All of the payments of base salary in stock to Mr. Bunday and Mr. Koenen were pursuant to each of their respective employment agreements.
During the first quarter of fiscal 2007, the Company paid bonuses related to fiscal year 2006. As part of the employment agreement with Patrick W. Cavanagh, President and Chief Executive Officer, the Company has the option to pay Mr. Cavanagh a portion of his bonus in shares of common stock of the Company as approved by the Board of Directors. The Company paid $89 of Mr. Cavanagh’s bonus related to fiscal year 2006 in shares of common stock, consisting of 6,401 shares at a price of $13.91 per share.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued during the years ended September 30, 2008, 2007 and 2006.
| | 2008 | | 2007 | | 2006 |
| Risk-free interest rate | 3.55% | | 4.46% | | 4.57% |
| Expected dividend yield | 0% | | 0% | | 0% |
| Expected term | 6.4 years | | 6.4 years | | 6.3 years |
| Expected volatility | 68% | | 80% | | 88% |
Using the Black-Scholes methodology, the total value of options granted during the years ended September 30, 2008, 2007 and 2006, was $712, $1,526 and $488, respectively, which would be amortized over the vesting period of the options. The weighted average grant date fair value of stock options granted during the years ended September 30, 2008, 2007 and 2006 was $8.79, $12.40 and $8.22 per share, respectively.
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The Company uses the US Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate. The expected term of options granted represents the weighted average period the stock options are expected to remain outstanding. Expected volatilities are based on the historical volatility of the Company’s common stock and fluctuate based on the changes in price of the Company’s common stock looking back over an equivalent period as the expected term of the new option grant.
The following table summarizes stock options outstanding as of September 30, 2008.
| | | | Weighted Average |
| | Shares | | Exercise Price |
| Outstanding at September 30, 2007 | 622,785 | | | | $ 8.40 | |
| Granted | 80,996 | | | | 13.65 | |
| Exercised | (37,198 | ) | | | 4.66 | |
| Forfeited | (21,062 | ) | | | 11.63 | |
| Outstanding at September 30, 2008 | 645,521 | | | | $ 9.17 | |
| Exercisable at September 30, 2008 | 362,833 | | | | $ 6.80 | |
At September 30, 2008, the weighted average remaining contractual term of options outstanding and options exercisable was 6.6 years and 5.5 years, respectively.
The aggregate intrinsic value of options outstanding and options exercisable at September 30, 2008 was $2,998 and $2,345, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option). The intrinsic value of all stock options exercised during the years ended September 30, 2008, 2007 and 2006 was $421, $640 and $423, respectively. Cash received from the exercise of stock options for the years ended September 30, 2008, 2007 and 2006 was $173, $260 and $216, respectively.
Stock option activity during the periods indicated under the 1993 Plan is as follows:
| | Shares Available | | Shares Subject | | | | |
| | For Grant | | To Options | | Option Prices |
| Outstanding at September 30, 2005 | 142,097 | | | 592,286 | | | $ | 3.96 | – | 17.25 |
| Granted | (45,992 | ) | | 45,992 | | | | 8.22 | – | 14.04 |
| Exercised | — | | | (50,498 | ) | | | 3.96 | – | 4.68 |
| Forfeited | 42,344 | | | (42,344 | ) | | | 3.96 | – | 16.01 |
| | | |
| Outstanding at September 30, 2006 | 138,449 | | | 545,436 | | | | 3.96 | – | 17.25 |
| Granted | (113,068 | ) | | 113,068 | | | | 14.03 | – | 18.05 |
| Exercised | — | | | (54,778 | ) | | | 3.96 | – | 15.00 |
| Forfeited | 30,090 | | | (30,090 | ) | | | 3.96 | – | 15.00 |
| | | |
| Outstanding at September 30, 2007 | 55,471 | | | 573,636 | | | | 3.96 | – | 18.05 |
| Newly authorized | 120,000 | | | — | | | | | | |
| Granted | (71,000 | ) | | 71,000 | | | | 13.17 | – | 15.46 |
| Exercised | — | | | (37,198 | ) | | | 3.96 | – | 14.03 |
| Forfeited | 19,396 | | | (19,396 | ) | | | 3.96 | – | 17.25 |
| | | |
| Outstanding at September 30, 2008 | 123,867 | | | 588,042 | | | $ | 3.96 | – | 18.05 |
48
Stock option activity during the periods indicated under the 1995 Plan is as follows:
| | | Shares Available | | Shares Subject | | |
| | | For Grant | | To Options | | Option Prices |
| Outstanding at September 30, 2005 | | 36,676 | | | 29,990 | | | $ | 3.96 – 16.13 |
| Granted | | (13,328 | ) | | 13,328 | | | | 7.20 – 12.24 |
| Exercised | | — | | | (833 | ) | | | 7.20 |
| Forfeited | | 1,666 | | | (1,666 | ) | | | 15.94 |
| |
| Outstanding at September 30, 2006 | | 25,014 | | | 40,819 | | | | 3.96 – 16.13 |
| Granted | | (9,996 | ) | | 9,996 | | | | 17.69 |
| Forfeited | | 1,666 | | | (1,666 | ) | | | 15.94 |
| |
| Outstanding at September 30, 2007 | | 16,684 | | | 49,149 | | | | 3.96 – 17.69 |
| Newly authorized | | 20,000 | | | — | | | | |
| Granted | | (9,996 | ) | | 9,996 | | | | 15.25 |
| Forfeited | | 1,666 | | | (1,666 | ) | | | 14.64 |
| |
| Outstanding at September 30, 2008 | | 28,354 | | | 57,479 | | | $ | 3.96 – 17.69 |
The following table summarizes information about stock options under both plans outstanding at September 30, 2008:
| | | Options Outstanding | | Options Exercisable |
| | | Number | | Weighted Average | | Weighted | | Number Exercisable | | Weighted |
| Range of Exercise | | Outstanding at | | Remaining Contractual | | Average | | at September 30, | | Average |
| Prices | | September 30, 2008 | | Life — Years | | Exercise Price | | 2008 | | Exercise Price |
| $ | 3.96 – 4.68 | | | 219,491 | | | | 5.0 | | | | $ 4.23 | | | | 193,992 | | | | $ 4.18 | |
| | 7.20 – 13.57 | | | 287,738 | | | | 6.9 | | | | 9.21 | | | | 135,222 | | | | 8.07 | |
| | 14.03 – 18.05 | | | 138,292 | | | | 8.5 | | | | 16.91 | | | | 33,619 | | | | 16.84 | |
| $ | 3.96 – 18.05 | | | 645,521 | | | | 6.6 | | | | $ 9.17 | | | | 362,833 | | | | $ 6.80 | |
At September 30, 2007 and 2006, 316,655 and 271,503 options, respectively, were exercisable at weighted average exercise prices of $6.01 and $5.76 per share, respectively.
49
Note 11. Geographic Information
The Company accounts for its geographic information in accordance with SFAS No.131 “Disclosures about Segments of an Enterprise and Related Information.” Geographic information for revenues are allocated between the United States and International countries, depending on whether the shipments are to customers within the United States or located outside the United States. Revenues for each geographic location are as follows:
| Year ended September 30, | | 2008 | | 2007 | | 2006 |
| North America (NAFTA): | | | | | | | | |
| United States | $ | 35,240 | | $ | 40,545 | | $ | 47,473 |
| Canada | | 3,700 | | | 5,280 | | | 7,101 |
| Mexico | | 2,817 | | | 3,351 | | | 3,018 |
| | $ | 41,757 | | $ | 49,176 | | $ | 57,592 |
| Europe: | | | | | | | | |
| Belgium | $ | 5,544 | | $ | 5,340 | | $ | 5,078 |
| France | | 3,256 | | | 2,694 | | | 1,456 |
| Sweden | | 4,038 | | | 4,219 | | | 3,949 |
| Other | | 1,924 | | | 1,226 | | | 1,196 |
| | $ | 14,762 | | $ | 13,479 | | $ | 11,679 |
| Asia:�� | | | | | | | | |
| Korea | $ | 3,800 | | $ | 2,743 | | $ | 2,828 |
| China | | 3,262 | | | 1,270 | | | 648 |
| Other | | 1,539 | | | 1,691 | | | 1,468 |
| | $ | 8,601 | | $ | 5,704 | | $ | 4,944 |
| |
| Other: | | 661 | | | 565 | | | 419 |
| Consolidated net sales | $ | 65,781 | | $ | 68,924 | | $ | 74,634 |
| |
| Foreign sales | $ | 30,541 | | $ | 28,379 | | $ | 27,161 |
| United States sales | | 35,240 | | | 40,545 | | | 47,473 |
| Consolidated net sales | $ | 65,781 | | $ | 68,924 | | $ | 74,634 |
50
During the years ended September 30, 2008, 2007 and 2006, the Company operated in two geographic reportable segments as shown in the table below.
| Year ended September 30, | | 2008 | | 2007 | | 2006 |
| Revenue – External Customers: | | | | | | | | | | | |
| United States | $ | 62,516 | | | $ | 68,034 | | | $ | 74,379 | |
| China | | 3,265 | | | | 890 | | | | 255 | |
| | $ | 65,781 | | | $ | 68,924 | | | $ | 74,634 | |
| Revenue – Intersegments: | | | | | | | | | | | |
| United States | $ | 1,472 | | | $ | 3,288 | | | $ | 2,601 | |
| China | | 12,177 | | | | 9,452 | | | | 4,219 | |
| Other | | 626 | | | | 512 | | | | 341 | |
| Eliminations | | (14,275 | ) | | | (13,252 | ) | | | (7,161 | ) |
| | $ | — | | | $ | — | | | $ | — | |
| Income before income taxes: | | | | | | | | | | | |
| United States | $ | 10,642 | | | $ | 12,059 | | | $ | 14,584 | |
| China | | 1,085 | | | | 143 | | | | (333 | ) |
| Other | | 53 | | | | 42 | | | | 7 | |
| | $ | 11,780 | | | $ | 12,244 | | | $ | 14,258 | |
| Total assets: | | | | | | | | | | | |
| United States | $ | 34,579 | | | $ | 27,945 | | | | | |
| China | | 5,887 | | | | 4,242 | | | | | |
| Other | | 142 | | | | 116 | | | | | |
| | $ | 40,608 | | | $ | 32,303 | | | | | |
| Long-lived assets: | | | | | | | | | | | |
| United States | $ | 8,257 | | | $ | 8,141 | | | | | |
| China | | 1,316 | | | | 1,391 | | | | | |
| Other | | 48 | | | | 44 | | | | | |
| | $ | 9,621 | | | $ | 9,576 | | | | | |
Note 12. Employment Agreements
In January 2008, the Company entered into an employment agreement with Scott J. Thiel, Vice President of Engineering and Development. The contract specifies an initial base salary per year, plus a bonus based on parameters established by the board of directors. The agreement also provides for a one-year severance payment under certain circumstances in the event the Company terminates his employment.
In March 2007, the Company entered into employment agreements with Dennis E. Bunday, its Executive Vice President and Chief Financial Officer, Mark S. Koenen, Vice President of Sales and Marketing and Gary A. Hafner, Vice President of Manufacturing. The contracts specify an initial base salary per year, plus bonuses based on parameters established by the board of directors. The agreements also provide for a one-year severance payment under certain circumstances in the event the Company terminates their employment.
On October 1, 2004, the Company entered into an employment agreement with Patrick W. Cavanagh for the position of President and Chief Executive Officer. The contract specifies an initial base salary per year, bonus parameters established by the board of directors, relocation assistance and stock options grants to be made in fiscal 2005. The agreement also provides for severance payments under certain circumstances in the event the Company terminates his employment.
51
Note 13. Stock Repurchase Program
In October 2008, the Company’s Board of Directors authorized the purchase, from time to time, of up to $5,000 of shares of the Company’s common stock. Repurchases may be made in the open market or through block trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors. The Company has no obligation to repurchase shares under the repurchase program and the timing, actual number and price of shares to be purchased will depend on the performance of the Company’s stock price, general market conditions, and various other factors within the discretion of management.
Note 14. Quarterly Data (unaudited)
The following table summarizes the Company’s quarterly financial data for the past two fiscal years ended September 30, 2008 and 2007.
| | First | | Second | | Third | | Fourth | | |
| 2008 | | Quarter | | Quarter | | Quarter | | Quarter | | Annual |
| Net sales | $ | 14,972 | | $ | 16,484 | | $ | 17,137 | | $ | 17,188 | | $ | 65,781 |
| Cost of sales | | 10,085 | | | 10,858 | | | 10,965 | | | 11,052 | | | 42,960 |
| Gross profit | $ | 4,887 | | $ | 5,626 | | $ | 6,172 | | $ | 6,136 | | $ | 22,821 |
| Operating expenses | $ | 3,089 | | $ | 2,004 | | $ | 3,010 | | $ | 3,067 | | $ | 11,170 |
| Net income | $ | 1,156 | | $ | 2,480 | | $ | 2,197 | | $ | 1,997 | | $ | 7,830 |
| Earnings per common share | | | | | | | | | | | | | | |
| Basic | $ | 0.15 | | $ | 0.33 | | $ | 0.29 | | $ | 0.27 | | $ | 1.04 |
| Diluted | $ | 0.15 | | $ | 0.32 | | $ | 0.28 | | $ | 0.26 | | $ | 1.01 |
| |
| | First | | Second | | Third | | Fourth | | | |
| 2007 | | Quarter | | Quarter | | Quarter | | Quarter | | Annual |
| Net sales | $ | 18,442 | | $ | 18,309 | | $ | 15,822 | | $ | 16,351 | | $ | 68,924 |
| Cost of sales | | 12,150 | | | 12,174 | | | 10,116 | | | 10,712 | | | 45,152 |
| Gross profit | $ | 6,292 | | $ | 6,135 | | $ | 5,706 | | $ | 5,639 | | $ | 23,772 |
| Operating expenses | $ | 2,799 | | $ | 3,049 | | $ | 2,962 | | $ | 3,133 | | $ | 11,943 |
| Net income | $ | 2,543 | | $ | 2,054 | | $ | 1,824 | | $ | 1,516 | | $ | 7,937 |
| Earnings per common share | | | | | | | | | | | | | | |
| Basic | $ | 0.34 | | $ | 0.28 | | $ | 0.24 | | $ | 0.20 | | $ | 1.06 |
| Diluted | $ | 0.33 | | $ | 0.27 | | $ | 0.24 | | $ | 0.20 | | $ | 1.03 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
52
Design and Evaluation of Internal Controls Over Financial Reporting
Report of Management
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on our assessment we believe that, as of September 30, 2008, the Company’s internal control over financial reporting are effective based on those criteria.
There has been no change in the Company’s internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting as of September 30, 2008 as stated in their report which is included herein.
ITEM 9B. OTHER INFORMATION
Not applicable.
53
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to our directors and executive officers is incorporated herein by reference to the sections entitled “Election of Directors” and “Management” in our proxy statement for our 2009 Annual Meeting of Stockholders (the “2008 Proxy Statement”) to be filed with the Securities and Exchange Commission no later than 120 days after the end of our fiscal year ended September 30, 2008.
ITEM 11. EXECUTIVE COMPENSATION
The section of our 2008 Proxy Statement entitled “Executive Compensation” is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The section of our 2008 Proxy Statement entitled “Securities Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The section of our 2008 Proxy Statement entitled “Certain Relationships and Related Party Transactions” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section of our 2008 Proxy Statement entitled “Independent Registered Public Accounting Firm” is incorporated herein by reference.
54
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1)Financial Statements — See “Index to Financial Statements” at Item 8 on page 24 of this Annual Report on Form 10-K.
(2)Financial Statement Schedules — All financial statement schedules are omitted either because they are not required, not applicable or the required information is included in the financial statements or notes thereto.
(3)Exhibits — See “Exhibit Index” beginning on page 57.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
| Date: | | December 11, 2008 | By | | / s / PATRICK W. CAVANAGH |
| | | | | | Patrick W. Cavanagh, Director, President and Chief |
| | | | | | Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: | | December 11, 2008 | By | | / s / R. EUGENE GOODSON |
| | | | | | R. Eugene Goodson, Chairman of the Board |
| |
| Date: | | December 11, 2008 | By | | / s / PATRICK W. CAVANAGH |
| | | | | | Patrick W. Cavanagh, Director, President and Chief |
| | | | | | Executive Officer |
| |
| Date: | | December 11, 2008 | By | | / s / DENNIS E. BUNDAY |
| | | | | | Dennis E. Bunday, Executive Vice President, Chief |
| | | | | | Financial Officer and Principal Accounting Officer |
| |
| Date: | | December 11, 2008 | By | | / s / H. SAMUEL GREENAWALT |
| | | | | | H. Samuel Greenawalt, Director |
| |
| Date: | | December 11, 2008 | By | | / s / DOUGLAS E. HAILEY |
| | | | | | Douglas E. Hailey, Director |
| |
| Date: | | December 11, 2008 | By | | / s / CARLOS P. SALAS |
| | | | | | Carlos P. Salas, Director |
| |
| Date: | | December 11, 2008 | By | | / s / PETER E. SALAS |
| | | | | | Peter E. Salas, Director |
| |
| Date: | | December 11, 2008 | By | | / s / DONN J. VIOLA |
| | | | | | Donn J. Viola, Director |
56
WILLIAMS CONTROLS, INC.
Exhibit Index
| Exhibit | | |
| Number | | Description |
| 2.01 | | Asset Purchase Agreement, dated as of September 30, 2003, by and among the Company, Teleflex Incorporated and Teleflex Automotive Incorporated(Incorporated by reference to Exhibit 2.1 to the Registrant’s current report on Form 8-K filed on December 9, 2003). |
| |
| 3.01(a) | | Certificate of Incorporation of the Registrant, as amended.(Incorporated by reference to Exhibit 3.01 (a) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) |
| |
| 3.01(b) | | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 27, 1995.(Incorporated by reference to Exhibit 3.01 (b) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) |
| |
| 3.01(c) | | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated October 28, 2004.(Incorporated by reference to Exhibit 3.01 (c) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) |
| |
| 3.01(d) | | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated February 22, 2005.(Incorporated by reference to Exhibit 3.01 (d) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) |
| |
| 3.01(e) | | Certificate of Amendment to Certificate of Incorporation of the Registrant, dated March 2, 2006.(Incorporated by reference to Exhibit 3.01 (e) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2006) |
| |
| 3.02 | | Restated By-Laws of the Registrant as amended July 1, 2002.(Incorporated by reference to Exhibit 3.6 to the Registrant’s quarterly report on Form 10-Q, Commission File No. 000-18083, for the quarter ended June 30, 2002) |
| |
| 4.01 | | 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. 000-18083, filed with the Commission on November 1, 1989) |
| |
| 4.07 | | Certificate to Provide for the Designation, Preferences, Rights, Qualifications, Limitations or Restrictions Thereof, of the Series C Preferred Stock, 15% Redeemable Non-Convertible Series(Incorporated by reference to the Registrant’s report on Form 8-K, filed on September 29, 2004) |
| |
| 10.01(a) | | Form of Indemnification Agreement for H. Samuel Greenawalt.(Incorporated by reference to Exhibit 10.1(c) to the Registrant’s annual report on Form 10-K for the fiscal year ended September 30, 1993, Commission File No. 0-18083, filed with the Commission on November 1, 1989) |
| |
| 10.01(b) | | Form of Indemnification Agreement for Douglas E. Hailey(Incorporated by reference to Exhibit 10.1(a) to the Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2001) |
| |
| 10.02 | | The Company’s 1995 Stock Option Plan for Non-Employee Directors.(Incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 1995, Commission File No. 0-18083, filed with the Commission on November 1, 1989) |
| |
| 10.03 | | The Registrant’s 1993 Stock Option Plan as amended to date.(Incorporated by reference to Exhibit 10.4(b) to the Registrant’s annual report on Form 10-k for the fiscal year ended September 30,1998, Commission File No. 0-18083, filed with the Commission on November 1, 1989) |
57
| Exhibit | | |
| Number | | Description |
| 10.05 | | Management Services Agreement, dated as of July 1, 2002, by and among American Industrial Partners, a Delaware general partnership, and the Company(Incorporated by reference to Exhibit (d) (ix) to the Schedule TO-I/A filed on July 5, 2002). |
| |
| 10.06 | | Dolphin Side Letter, dated as of July 1, 2002(Incorporated by reference to Exhibit (d)(xi) to the Schedule TO-I/A filed on July 5, 2002). |
| |
| 10.10 | | Credit Agreement, dated September 27, 2004, among Williams, Williams Controls Industries, Inc., a wholly-owned subsidiary of Williams, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc.(Incorporated by reference to the Registrant’s report on Form 8-K, filed on September 29, 2004) |
| |
| 10.11 | | Amended and Restated Management Services Agreement, dated September 30, 2004, among Williams, American Industrial Partners and Dolphin Advisors, LLC(Incorporated by reference to the Registrant’s report on Form 8-K, filed on September 29, 2004) |
| |
| 10.12 | | Employment Agreement with Dennis E. Bunday, Executive Vice President and Chief Financial Officer(Incorporated by reference to the Registrant’s report on Form 10-K, filed on December 14, 2007) |
| |
| 10.13 | | Employment Agreement with Patrick W. Cavanagh, President and Chief Executive Officer(Incorporated by reference to the Registrant’s report on Form 10-K, filed on December 14, 2006) |
| |
| 10.14 | | Revised Code of Ethics(Incorporated by reference to the Registrant’s report on Form 8-K, filed on October 3, 2006) |
| |
| 10.15 | | Employment Agreement with Mark S. Koenen, Vice President of Sales and Marketing(Incorporated by reference to the Registrant’s report on Form 10-K, filed on December 14, 2007) |
| |
| 10.16 | | Employment Agreement with Gary A. Hafner, Vice President of Manufacturing(Incorporated by reference to the Registrant’s report on Form 10-K, filed on December 14, 2007) |
| |
| 10.17 | | Employment Agreement with Scott J. Thiel, Vice President of Engineering and Development(Filed Herewith) |
| |
| 18 | | Preferability Letter of Independent Registered Public Accounting Firm related to the change in the measurement date for Williams pension plans from September 30 to August 31(Incorporated by reference to Exhibit 18 to the Registrant’s annual report on Form 10-K for the fiscal year ended September 30, 2004) |
| |
| 21.01 | | Schedule of Subsidiaries(Filed Herewith) |
| |
| 23.01 | | Consent of Moss Adams LLP, Independent Registered Public Accounting Firm(Filed herewith) |
| |
| 23.02 | | Consent of KPMG LLP, Independent Registered Public Accounting Firm(Filed herewith) |
| |
| 31.01 | | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)(Filed herewith) |
| |
| 31.02 | | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)(Filed herewith) |
| |
| 32.01 | | Certification of Patrick W. Cavanagh Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.02 | | Certification of Dennis E. Bunday Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
58
