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, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-18083
Williams Controls, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- -------------------------------------- ------------
(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 August
14, 1997 were 17,782,040.
Williams Controls, Inc.
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1997 (unaudited)
and September 30, 1996 1
Unaudited Consolidated Statement of Stockholders' Equity,
nine months ended June 30, 1997 2
Unaudited Consolidated Statements of Operations,
three and nine months ended June 30, 1997 and 1996 3
Unaudited Consolidated Statements of Cash Flows,
nine months ended June 30, 1997 and 1996 4
Notes to Unaudited Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
June 30, September 30,
1997 1996
---------- -------------
(unaudited)
Assets
Current Assets:
Cash $ 3,091 $ 1,379
Accounts receivable, net 12,234 13,103
Inventories 14,879 15,288
Other 1,545 1,885
Total current assets 31,749 31,655
------ ------
Investment in affiliate 739 943
Property, plant and equipment 25,968 24,955
Less accumulated depreciation and amortization 6,376 5,154
------ ------
19,592 19,801
------ ------
Other assets 1,862 1,379
------ ------
$53,942 $53,778
====== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving line of credit $ - $21,000
Current portion of long-term debt
and capital leases 258 212
Estimated net loss from discontinued operations 1,171 -
Accounts payable and accrued expenses 8,831 8,388
------ ------
Total current liabilities 10,260 29,600
------ ------
Long-term debt 19,542 2,734
Finance and capital lease obligations 4,524 48
Other liabilities 2,951 2,673
Commitments and contingencies - -
Minority interest in consolidated subsidiaries 597 713
Stockholders' equity:
Preferred stock of $.01 par value, 50,000,000
shares authorized - -
Common stock of $.01 par value, 50,000,000
shares authorized, 17,912,240 and
17,869,987 shares issued 179 179
Additional paid-in capital 9,777 9,671
Retained earnings 7,229 9,439
Unearned ESOP shares (511) (511)
Treasury stock (130,200 and 195,200 shares) (378) (540)
Pension liability adjustment (228) (228)
------- -------
16,068 18,010
------ ------
$53,942 $53,778
====== ======
The accompanying notes are an integral part of these statements.
1
Unaudited Consolidated Statement of Stockholders' Equity
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Number of Additional Pension Unearned
Shares Common Paid-in Retained Liability ESOP Treasury Stockholders'
Issued Stock Capital Earnings Adjustment Shares Shares Equity
Balance, September 30, 1996 17,869,987 $ 179 $9,671 $9,439 $(228) $(511) $ (540) $18,010
Issuance of contingent shares
for acquisition 42,253 - 106 - - - - 106
Issuance of shares from treasury
for acquisition advisory services - - - - - - 162 162
Net loss - - - (2,210) - - - (2,210)
---------- ------ ------- -------- ------ ------- ------- -------
Balance, June 30, 1997 17,912,240 $ 179 $9,777 $7,229 $(228) $(511) $ (378) $16,068
========== ====== ======= ====== ====== ======= ======= =======
The accompanying notes are an integral part of these statements.
2
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Three months Three months Nine months Nine months
ended ended ended ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
---------------------------------------------------------
Net sales $ 14,536 $13,474 $42,305 $38,116
Cost of sales 11,470 9,695 32,286 26,921
------- ------- ------- -------
Gross margin 3,066 3,779 10,019 11,195
------- ------- ------- -------
Operating expenses:
Research and development 512 444 1,472 1,409
Selling 816 652 2,470 1,680
Administrative 1,064 922 3,001 2,397
------- ------- ------- -------
2,392 2,018 6,943 5,486
------- ------- ------- -------
Earnings from continuing operations 674 1,761 3,076 5,709
Other (income) expense:
Interest expense 477 433 1,437 1,154
Equity interest in loss of affiliate 25 - 204 75
------- ------- ------- -------
502 433 1,641 1,229
------- ------- ------- -------
Earnings from continuing operations
before income taxes 172 1,328 1,435 4,480
Income taxes 78 548 589 1,760
------- ------- ------- -------
Earnings from continuing operations
before minority interest 94 780 846 2,720
Minority interest in net (earnings) loss
of consolidated subsidiaries 85 (50) 116 (90)
------- ------- ------- -------
Earnings from continuing operations 179 730 962 2,630
Discontinued operations:
Loss from operations of discontinued
Automotive Accessories segment (306) (1,824) (1,207) (2,220)
Loss on disposal of Automotive Accessories
segment, including provision of $1,171 for
operating losses during phase-out period (1,965) - (1,965) -
------- ------- ------ -------
Loss from discontinued operations $(2,271) $(1,824) $(3,172) (2,220)
------- ------- ------ ------
Net earnings (loss) $(2,092) $(1,094) $(2,210) $ 410
====== ====== ====== ======
Earnings per common
share from continuing operations $ .01 $ .04 $ .05 $ .15
Loss per common
share from discontinued operations $ ( .13) $ (.10) $ ( .17) $ (.13)
------- ------- ------ ------
Loss per common share $ ( .12) $ (.06) $ ( .12) $ .02
======= ======= ====== ======
The accompanying notes are an integral part of these statements.
3
Unaudited Consolidated Statements of Cash Flows
(Dollars in thousands) Williams Controls, Inc.
Nine months Nine months
ended ended
June 30, 1997 June 30, 1996
------------- -------------
Cash flows from operations:
Net earnings $ (2,210) $ 410
Non-cash adjustments to net earnings:
Provision for loss on disposal of
discontinued operations 1,171 -
Depreciation and amortization 1,303 1,655
Restructuring charge - 2,250
Minority interest in earnings (loss)
of consolidated subsidiaries (116) 90
Equity interest in loss of affiliate 204 75
Changes in working capital items net
of the effects of acquisitions:
Receivables, net 869 (2,861)
Inventories 409 (4,817)
Other 290 (329)
Accounts payable and accrued expenses 820 461
------ -------
Net cash provided by (used for) operations 2,740 (3,066)
------ -------
Cash flows from investing:
Payment for acquisitions - (1,200)
Payment for equipment (1,013) (1,139)
------- -------
Net cash used for investing (1,013) (2,339)
------- -------
Cash flows from financing:
Net borrowings (repayments) under revolving loan (4,129) 5,759
Net proceeds from sale/leaseback 4,274 -
Payments of long-term debt and capital leases (160) (75)
Repurchase of common stock - (540)
Proceeds from stock issuance - 235
------- ------
Net cash provided by financing (15) 5,379
------- ------
Net increase/(decrease) in cash 1,712 (26)
Cash at beginning of period 1,379 1,653
------- -------
Cash at end of period $ 3,091 $ 1,627
======= =======
Cash paid for:
Interest $ 1,567 $ 1,500
======= =======
Taxes paid (net refund) $ (483) $ 1,000
======= =======
The accompanying notes are an integral part of these statements.
4
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
1. Organization
The interim consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Williams Controls Industries,
Inc. ("Williams"); Kenco Williams, Inc. ("Kenco"); NESC Williams, Inc.
("NESC"); Williams Technologies, Inc. ("WTI"); Williams World Trade, Inc.
("WWT"); Williams Automotive, Inc.; Aptek Williams, Inc. ("Aptek"); Agrotec
Williams, Inc. ("Agrotec"); Techwood Williams, Inc. ("Techwood"); Premier
Plastic Technologies, Inc. ("PPT"); GeoFocus, Inc. ("GeoFocus"); and the
Company's 80% owned subsidiaries, Hardee Williams, Inc. ("Hardee") and
Waccamaw Wheel Williams, Inc. ("Waccamaw"). All significant intercompany
accounts and transactions have been eliminated. 2. The Interim Consolidated
Financial Statements
2. The interim unaudited consolidated financial statements
The interim unaudited consolidated financial statements have been prepared
by the Company and, in the opinion of management, reflect all material
adjustments that are necessary to a fair statement of results for the
interim periods presented. Such adjustments consisted only of normal
recurring items. 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. The interim financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto in the Company's annual report on Form 10-K. The interim period
results are not necessarily indicative of results that may be expected for
any other interim period or for the full year. 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.
3. Earnings (loss) per Share
Earnings per share are computed based on the weighted average number of
common shares and common stock equivalent shares outstanding during the
period. Options and warrants are considered common stock equivalents for
the purposes of this computation. The weighted average number of common
shares used in computation of earnings per share was 18,179,000 and
18,089,000 for the three and nine months ended June 30, 1997, respectively,
and 17,600,000 for the three and nine months ended June 30, 1996. Common
stock equivalents, which are antidilutive, are not included in the earnings
per share calculation.
5
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
4. Inventories
June 30, September 30,
1997 1996
Raw material $ 8,535 $ 7,243
Work-in-process 1,032 1,349
Finished goods 5,312 6,696
------ ------
$14,879 $15,288
====== ======
Inventories are valued at the lower of cost (first-in, first out) or
market. Finished goods include component parts and finished product ready
for shipment.
5. Investment in Affiliate
The Company owns 4,117,647 shares of Ajay Sports, Inc. ("Ajay") common
stock, or approximately 18% of Ajay's outstanding common stock, and the
Company owns vested options to acquire 11,110,873 of Ajay's common stock at
prices ranging from $.34 to $.50 per share. The Company also has
manufacturing rights in certain Ajay facilities through 2002 under a joint
venture agreement. Ajay manufactures and distributes golf clubs, golf
accessories and leisure living furniture primarily to retailers throughout
the United States.
The investment in Ajay is recorded as an investment in affiliate in the
Consolidated Balance Sheets net of the Company's equity interest of $631 in
Ajay's losses since acquiring the investment. The Company is required to
account for the investment in Ajay on the equity method due to common
ownership by the Chairman and President of the Company who is also Chairman
and President of Ajay. At June 30, 1997, the market value of the Company's
investment in Ajay was $1,029 based upon the closing price of $.25 per
share.
The Company had guaranteed Ajay's $13,500 credit facility to the previous
lender ("Previous Lender") of which $12,051 was outstanding at July 11,
1997, the date on which the previous loan was repaid with proceeds from a
new loan ( the "Loan") with a new lender (the "Bank"). Ajay's loan
availability at the date of the Loan closing was insufficient to repay the
Previous Lender. The previous Lender provided Ajay $2,340 of bridge
financing and the Company provided Ajay a secured demand loan of $2,268 at
Loan closing to repay the previous loan in full. The loan from the Company
to Ajay bears an annual interest rate at the Bank's prime rate plus 3/4% .
The expected sources of repayment for the bridge loan are primarily derived
from expected financial transactions of the Company. Therefore, it is
likely that Ajay will need to borrow additional funds from the Company in
the future to repay the bridge loan to the extent that the bridge loan is
repaid with Company funds(See Note 6). As a condition to the loans made by
the Company to Ajay, Ajay has agreed to grant the Company a security
interest in all of the assets of Ajay subordinate to the liens of the Bank
and the Previous Lender. In addition, the Company has agreed to issue
400,000 newly issued shares of the Company's common stock to Ajay which
will be security to the previous lender for the bridge loan. The Company
has also agreed to purchase approximately $1,000 of notes payable by Ajay
to affiliated parties, which had provided loans to Ajay to help Ajay
finance operations during debt refinancing. These affiliated companies
provided these loans because the Company was prohibited from down-streaming
funds to Ajay while the previous loan was in default.
6
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
6. Debt - Subsequent Event
On July 11, 1997, the Company refinanced its bank debt with the Bank under
a $34,088 three year revolving credit and term loan agreement. Accordingly,
the Company has recorded the debt as a long-term liability as of June 30,
1997. At the date of the Loan closing, the Company borrowed a total of
$17,141 which was comprised of $9,619 of borrowings under the $26,000
revolving loan facility (the "Revolver"), $2,658 under a real estate term
loan ("Real Estate Loan"), $3,864 under a machinery and equipment loan
("Term Loan I"), and $1,000 under Term Loan II ("Term Loan II"). The Loan
is a joint and several obligation of the Company and Ajay. At the date of
the Loan closing, Ajay borrowed a total of $7,391 which was comprised of
$6,825 under the Revolver and $566 under Term Loan I. The proceeds from the
Company's and Ajay's borrowings plus cash on hand were used to repay the
Previous Lender. In addition, the Previous Lender provided bridge financing
of $2,340 to Ajay which is to be repaid primarily from the proceeds of the
sale of Kenco (Note 9), the sale of other assets, or from a specified
percentage of future combined Ajay and Williams cash flow. The Company's
Chairman has guaranteed $1,000 of the bridge loan and the Term Loan II.
Under the Revolver, the Company and Ajay can borrow up to $26,000 based
upon a borrowing base availability calculated using specified percentages
of eligible accounts receivable and inventory. The Revolver bears interest
at the Bank's prime rate (8.5% at July 11, 1997) plus .5%. The Real Estate
Loan and Term Loan I bear interest at the Bank's prime rate plus .75%. At
the Company's option, the Company may borrow funds under the Revolver, the
Real Estate Loan and the Term Loan I at the London InterBank Offering Rate
("Libor") plus 2.75%, 3% and 3%, respectively. The Revolver, Real Estate
Loan and Term Loan I mature on July11, 2000 and are secured by
substantially all of the assets of the Company and Ajay. The Real Estate
Loan is being amortized over 20 years and Term Loan I is being amortized
over seven years with all remaining principal outstanding due on July 11,
2000. At July 11, 1997, after the Loan closing, the Company had
approximately $1,545 available for borrowing under the Loan. Term Loan II
matures on June 1, 1999 with principal payments based upon an amortization
period of 24 months plus additional principal payments equal primarily to
any excess proceeds from the sale of Kenco after repayment of any
indebtedness under the Revolver borrowing due from Kenco plus principal
payments equal to 50% of the Company's and Ajay's annual consolidated
excess cash flow, as defined. The Loan agreement prohibits payment of any
dividends by the Company, requires the Company and Ajay in the aggregate to
maintain minimum working capital of $25,000 exclusive of the Revolver and
maintain minimum tangible net worth of $11,000. The Loan also prohibits
additional indebtedness and common stock repurchases, and restricts
combined Company and Ajay annual capital expenditures and increased
operating lease obligations to $2,500 and $600, respectively. The Loan
agreement imposes a prepayment penalty of 3%-.5%, which is waived if the
Loan is repaid with proceeds from the sale of assets or equity or is
refinanced with an affiliate of the Bank.
7. Common Stock and Treasury Shares - Stock Repurchase Program
In July 1997, the Company agreed to issue 400,000 shares of common stock to
Ajay as security for a bridge loan due to the Previous Lender. In addition,
the Company has agreed to issue, if required by the affiliated companies'
lender, up to $1,000 market value of the Company's common stock to serve as
collateral for notes due to such affiliated companies in exchange for the
affiliated companies agreement to subordinate to the Bank their rights to
principal repayments until certain financial transactions have been
completed.
7
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
7. Common Stock and Treasury Shares - Stock Repurchase Program (continued)
The Company granted 1,078,800 options under the Employee Stock Option Plan
to 195 employees on May 1, 1997, with an exercise price equal to the market
value at date of grant. In January 1996 the Company initiated a stock
repurchase program of up to one million shares of the Company's common
stock. The Loan prohibits further purchases under this program. Under this
program, through June 1997, the Company had acquired approximately 195,200
shares at an average price of $2.77 per share. During the nine months ended
June 30, 1997, the Company issued 65,000 treasury shares to related parties
for acquisition advisory work.
8. Sale/Leaseback - Contingent Liability
In April 1997 the Company sold its Portland, Oregon manufacturing facility
in a sale-leaseback transaction for $4,524 less $250 withheld in an escrow
fund for possible environmental cleanup costs. The Company may be required
to repurchase the property within one year if it cannot cure possible
environmental problems at the sold property and may be required to finance
part of the purchaser's price in October 1997 if the purchaser cannot
obtain permanent financing from a lender willing to accept the
environmental condition of the property. The acquisition agreement under
which the Company purchased the facility contains provisions for
indemnification by the subsidiary of the company that owned and sold the
property to the Company for any environmental cleanup costs after the
subsidiary spends $25 towards such cleanup. The Company intends to seek
indemnification from the prior property owner for cleanup costs, if any.
Although the Company has the right of first refusal to repurchase the
building during the first year if the purchaser attempts to sell the
property to a third party, the Company has discussed with the purchaser the
possible resale of the building to an acceptable third party who would
purchase the property without any contingent repurchase obligation.
The transaction was accounted for as a financing in which the property
remains recorded as an asset and continues to be depreciated and the
capitalized lease obligations are recorded as long term liabilities. The
lease has a term of 15 years and requires minimum annual payments of $450
with rental increases every two years equal to the increase in the consumer
price index for the Portland, Oregon area but not greater than a 5% nor
less than a 3% increase for every two-year period. At the time that the
contingent repurchase obligation is eliminated, the Company will record the
transaction as an operating lease. At such time, the gain on the sale of
approximately $1,700 will be recognized and the capitalized costs and lease
obligation will be eliminated from the balance sheet.
9 Discontinued Operations
On May 8, 1997, the Company signed a letter of intent to sell Kenco. The
Company anticipates that Kenco will be sold on or around September 30,
1997, but there is no assurance that the sale will occur. If the sale does
not occur, the Company will consider all strategic alternatives for
reduction of operating losses including sale, merger or liquidation of
Kenco. Accordingly, Kenco is reported as a discontinued operation for the
quarter and nine months ended June 30, 1997 and 1996. Based upon the
proposed terms of the sale, the purchaser will acquire certain assets,
excluding Kenco's manufacturing and warehousing facility, for $5,000 in
cash and assume the liability for trade payables and other current
liabilities. The proposed purchaser has expressed an interest in also
purchasing the manufacturing and warehouse facilities, which would result
in an as yet undetermined increase in the cash purchase price. In addition,
under the terms of the purchase offer, the Company will receive an equity
interest in the new company.
8
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
The summarized results for Kenco are as follows:
Three months Three months Nine months Nine months
ended ended ended ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
Net sales $ 2,194 $ 4,001 $ 7,285 $ 11,922
Loss from discontinued operations (450) (2,928) (1,727) (3,362)
Allocated interest expense 60 113 290 339
------ -------- -------- --------
Loss before income tax benefit (510) (3,041) (2,017) (3,701)
Income tax benefit 204 1,217 810 1,481
------ ------- -------- ------
Net loss from discontinued operations (306) (1,824) (1,207) (2,220)
------ ------- -------- ------
Loss on disposal before interest
and income taxes (2,771) - (2,771) -
Allocated interest expense 505 - 505 -
-------- ------- ------- ------
Loss on disposal before
income tax benefit (3,276) - (3,276) -
Income tax benefit 1,311 - 1,311 -
------ ------- ------- ------
Loss on disposal (1,965) - (1,965) -
------ ------- ------- ------
Total loss on discontinued operations $(2,271) $(1,824) $(3,172) $ (2,220)
====== ====== ====== =======
The estimated loss on disposal of Kenco of $1,965 consists of $1,171 of
estimated future operating losses net of tax benefits of $781 and $794 of
operating losses incurred since the measurement date net of tax benefits of
$530. The $794 of operating losses since the measurement date include $488
of charges which are primarily provisions for obsolete inventory and
charges for other non-recoverable assets. The Company has elected to
include estimated interest costs in its estimated loss on disposal based
upon the expected debt reduction from the $5,000 of cash proceeds and the
current rate of interest. The 1996 third quarter and nine-month loss from
discontinued operations included a $2,250 pre-tax restructuring charge.
9
Notes to Unaudited Consolidated Financial Statements
Three Months ended June 30, 1997 and 1996
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
10. Segment Information
Three months Three months Nine months Nine months
ended ended ended ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
By classes of similar products
Net Sales - Continuing Operations:
Vehicle components $ 11,119 $ 9,333 $31,696 $26,503
Agricultural equipment 2,352 3,251 7,864 8,277
Electrical components 1,065 890 2,745 3,336
------- ------- ------- ------
Total from continuing operations 14,536 13,474 42,305 38,116
Net Sales - Discontinued Operations 2,194 4,001 7,285 11,922
------- ------ ------ ------
Total sales 16,730 17,475 49,590 50,038
====== ====== ====== ======
Earnings (Loss) from Continuing Operations:
Vehicle components 1,716 1,389 4,961 4,843
Agricultural equipment (810) 489 (1,017) 1,013
Electrical components (232) (117) (868) (147)
------ ------ ------ ------
Total from continuing operations 674 1,761 3,076 5,709
Loss - Discontinued Operations (450) (2,928) (1,727) (3,362)
------ ------ ------ -------
Total earnings (loss) from operations 224 (1,167) 1,349 2,347
====== ====== ====== =======
Capital expenditures from Continuing Operations:
Vehicle components 233 26 410 268
Agricultural equipment 40 22 169 373
Electrical components 72 3 156 213
------ ------ ------ ------
Total from continuing operations 345 51 735 854
Capital Expenditures - Discontinued Operations 59 125 278 285
------ ------ ------ -----
Total capital expenditures 404 176 1,013 1,139
====== ====== ===== =====
Depreciation and Amortization - Continuing
Operations:
Vehicle components 272 251 711 1,104
Agricultural equipment 40 80 185 178
Electrical components 78 63 220 180
----- ------ ------ --------
Total from continuing operations 390 394 1,116 1,462
Depreciation and Amortization - Discontinued
Operations 65 65 187 193
----- ------ ------ --------
Total depreciation and amortization $ 455 $ 459 $ 1,303 $ 1,655
===== ====== ====== ========
June 30, June 30,
1997 1996
Identifiable assets
Heavy vehicle components 24,229 19,370
Discontinued operations - automotive accessories 11,265 14,589
Agricultural equipment 10,565 13,678
Electrical components 7,793 7,553
------ ------
Total assets $53,942 $55,190
====== ======
Note: Prior year data restated to conform with current year segment
classification.
10
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Financial Condition, Liquidity and Capital Resources
The Company's principal sources of liquidity are borrowings under its Loan and
funds generated from operations. At June 30, 1997, the Company's working capital
improved to $21,489 compared with $2,055 at September 30, 1996 and the current
ratio improved to 3.1 at June 30, 1997 compared to 1.1 at September 30, 1996.
The improvement was primarily as a result of the successful refinancing of the
Company's bank debt and resulting classification of the Loan as a long-term
obligation and also as a result of a sale/leaseback transaction. The Company
generated cash flow from operations of $2,740 for the nine months ended June 30,
1997 compared to cash used of $3,066 for the nine months ended June 30, 1996.
The Company's 1997 cash flow from operations benefited from improved receivable
and inventory management and a federal tax refund.
The Company intends to reduce Bank debt and fund operational growth by raising
additional capital through the sale of Kenco, a possible sale/leaseback of a
manufacturing facility and a private placement or public offering of its common
stock. The Company has signed a letter of intent to sell certain assets of Kenco
for an expected $5,000 cash plus the assumption of certain liabilities. The
proceeds of this transaction, if completed, would be used to pay bank debt
including Term Loan II and any excess proceeds would be used towards payment of
the $2,340 bridge loan provided to Ajay by the Previous Lender. The payment on
Ajay's behalf would increase the demand loan due from Ajay.
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524. The Company may be required to repurchase
the property within one year if it cannot cure possible environmental problems
and may be required to finance part of the purchaser's price in October 1997 if
the purchaser cannot obtain permanent financing from a lender willing to accept
the environmental condition of the property. Although the Company has the right
of first refusal to repurchase the building during the first year if the
purchaser attempts to sell the property to a third party, the Company has
discussed with the purchaser the possible resale of the building to an
acceptable third party who would purchase the property without any contingent
repurchase obligation. The acquisition agreement under which the Company
purchased the facility contains provisions for indemnification by the subsidiary
of the company that owned and sold the property to the Company for any
environmental cleanup costs after the subsidiary spends $25 towards such
cleanup. The Company intends to seek indemnification from the prior property
owner for cleanup costs, if any, under those indemnification provisions.
11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Results of Operations
Overview
The Company has agreed to sell the remaining operations of the automotive
accessories segment, which have been classified as discontinued operations.
Continuing Operations
The following discussion of results of operations include only the continuing
operations and all references to financial statement amounts are for continuing
operations only.
The Company's net earnings from continuing operations declined $551 and $1,668,
or 75.3% and 63.4%, respectively, for the quarter and nine months ended June 30,
1997, compared to the prior year periods primarily as a result of losses in the
agricultural equipment and electrical component segments.
Three months ended June 30, 1997 compared to the three months ended June 30,
1996
Net sales from continuing operations: Net sales increased $1,062, or 7.9%, to
$14,536 for the three months ended June 30, 1997 compared to $13,474 in the
prior year quarter. Excluding the sales of GeoFocus, which was acquired in
August 1996, sales increased $875, or 6.5% for the quarter ended June 30, 1997.
Sales as a percent of total sales in the vehicle components, agricultural
equipment and electrical components segments were 76.5%, 16.2% and 7.3% in the
1997 quarter compared to 69.3%, 24.1% and 6.6% in the 1996 quarter. Vehicle
component sales in the quarter ended June 30, 1997 increased $1,786, or 19.1%,
due to higher unit sales of component parts to heavy truck manufacturers. Sales
of agricultural equipment declined $899, or 27.7%, in the quarter ended June 30,
1997 due to lower unit sales believed to result from reduced demand resulting
from cool and rainy weather in the Spring of 1997. Electrical component sales
increased $175, or 19.7% primarily due to the acquisition of GeoFocus, Inc. in
August 1996. Electrical equipment sales exclusive of GeoFocus sales decreased
$12, or 1.3%.
Cost of sales from continuing operations: Costs of sales as a percent of sales
increased to 78.9% in the quarter ended June 30, 1997 compared to 72.0% in the
quarter ended June 30, 1996. The higher cost of sales percentage related
primarily to lower sales and the resulting lower absorption of fixed overheads
at the agricultural equipment segment and higher costs in the electrical
equipment segment.
Operating expenses - continuing operations: Operating expenses increased $374,
or 18.5%, to $2,392 in the quarter ended June 30, 1997 compared to $2,018 in the
prior year quarter. Operating expenses were 16.5% of sales in the quarter ended
June 30, 1996 compared to 15.0 % of sales in the quarter ended June 30, 1996.
Higher operating expenses related primarily to increased selling costs in the
agricultural equipment segment and increased administration costs in the
electrical component segment due to the acquisition of GeoFocus, Inc. in August
1996.
Other expenses: Other expenses increased $69, or 15.9%, to $502 in the quarter
ended June 30, 1997 compared to $433 in the prior year quarter due to higher
interest rates on defaulted bank debt and increased losses from the Company's
equity investment in Ajay.
12
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Results of Operations - Continued
Nine months ended June 30, 1997 compared to the nine months ended June 30, 1996
Net sales from continuing operations: Net sales increased $4,189, or 11.0%, to
$42,305 for the nine months ended June 30, 1997 compared to $38,116 in the prior
year period. PPT and GeoFocus were not in operation for the full 1996 period.
Excluding the sales of PPT and GeoFocus, sales increased $1,225, or 3.3%, for
the nine months ended June 30, 1997 compared to the prior year period.
Sales as a percent of total sales in the vehicle components, agricultural
equipment and electrical components segments were 74.9%, 18.6% and 6.5% for the
nine months ended June 30, 1997 compared to 69.5%, 21.7% and 8.8% in the prior
year period. Vehicle component sales for the nine months ended June 30, 1997
increased $5,193, or 19.6%. Excluding sales of PPT, which was acquired in April
1996, sales of the vehicle component segment increased $2,708, or 10.8% the for
the nine months ended June 30, 1997 over the prior year period due to higher
unit sales of component parts to heavy truck manufacturers. Sales of
agricultural equipment declined $413, or 5.0%, for the nine months ended June
30, 1997 due to lower unit sales believed to result from reduced demand
resulting from cool and rainy weather in the Spring of 1997. Electrical
component sales decreased $591, or 17.7%. Electrical component sales exclusive
of GeoFocus, which was acquired in August 1996, decreased $1,070, or 32.1%
primarily due to the loss of two major customers.
Cost of sales from continuing operations: Costs of sales as a percent of sales
increased to 76.3% for the nine months ended June 30, 1997 compared to 70.6% in
the prior year period. The higher cost of sales percentage related primarily to
lower sales and the resulting lower absorption of fixed overheads at the
agricultural equipment segment and the electrical equipment segment.
Operating expenses: Operating expenses increased $1,457, or 26.6%, to $6,943 for
the nine months ended June 30, 1997 compared to $5,486 in the prior year period.
Exclusive of PPT and GeoFocus, which were not in operation for the full
nine-month period ended June 30, 1997, operating expenses increased $623, or
11.6% over the period ended June 30, 1996. Operating expenses were 16.4% of
sales for the nine months ended June 30, 1997 compared to 14.4% of sales for the
nine months ended June 30, 1996. Higher operating expenses for operations that
were in operation for both the nine months ended June 30, 1997 and 1996 related
primarily to increased selling costs in the agricultural equipment segment.
Other expenses: Other expenses increased $412, or 33.5%, to $1,641 for the nine
months ended June 30, 1997 compared to $1,229 for the same period in 1996 due to
higher interest expenses associated with increased borrowings, higher interest
rates on defaulted bank debt and increased losses from the equity investment in
Ajay.
Discontinued Operations
Net loss from the discontinued automotive accessories segment was $306 net of
tax benefits of $204 for the three months ended June 30, 1997 compared to net
losses of $1,824 net of tax benefits of $1,217 for the quarter ended June 30,
1996. The 1997 quarterly net loss includes operations for the quarter through
the measurement date of May 8, 1997. All losses after the measurement date are
reported as losses on disposal
13
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts) Williams Controls, Inc.
Results of Operations (continued)
Discontinued Operations (continued)
of discontinued operations. The 1996 losses included a pre-tax operating
restructuring charge of $2,250. Net sales from the discontinued segment declined
$1,807, or 45.2% to $2,194 for the quarter ended June 30, 1997 compared to
$4,001 in the prior year period.
Net loss from the automotive accessories discontinued segment was $1,207 net of
tax benefits of $810 for the nine months ended June 30, 1997 compared to net
losses of $2,220 net of tax benefits of $1,481 for the nine months ended June
30, 1996. The 1996 losses included a pre-tax operating restructuring charge of
$2,250. Net sales from the discontinued segment declined $4,637, or 38.9% to
$7,285 for the nine months ended June 30, 1997 compared to $11,922 in the prior
year period. The decline in automotive accessory sales was due to lower unit
sales and lower prices resulting from strong downward price pressure generated
by competitors who are vertically integrated and have lower cost structures than
the Company's automotive accessories segment.
The estimated loss on disposal of the business of $1,965 consists of $1,171 of
estimated future operating losses net of tax benefits of $781 and $794 of
operating losses incurred since the measurement date net of tax benefits of
$530. The $794 of operating losses since the measurement date includes $489 of
charges that are primarily estimated inventory reserves. The Company has elected
to include interest costs in its estimated loss on disposal based upon the
expected debt reduction from the $5,000 of cash proceeds and the current rate of
interest. The 1996 third quarter and nine-month loss from discontinued
operations included a $2,250 restructuring charge.
14
Part II
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
10.1 Credit Agreement dated July 11, 1997, among registrant and its
subsidiaries and Ajay Sports, Inc. And its subsidiaries, as
borrowers, and Wells Fargo Bank, National Association, as lender
(the "Credit Agreement").
10.2 Promissory Notes under the Credit Agreements
(a) Revolving Credit Loans Promissory Note
(b) Term Loan I Promissory Note
(c) Term Loan II Promissory Note
(d) Real Estate Loan Promissory Note
10.3 Mortgage and Security Agreement between Aptek Williams, Inc.
and Wells Fargo Bank
10.4 Patent Assignment and Security Agreements for
(a) Williams Controls Industries, Inc.
(b) Kenco Williams, Inc.
(c) Hardee Williams, Inc.
(d) Aptek Williams, Inc.
10.5 Trademark Security Agreements for
(a) Agrotec Williams, Inc.
(b) Hardee Williams, Inc.
(c) Kenco Williams, Inc.
10.6 Continuing Unconditional Guaranty of Thomas W. Itin in favor of Wells
Fargo Bank.
10.7 Intercreditor Agreement dated July 11, 1997 among registrant and
subsidiaries, Ajay Sports, Inc. and subsidiaries, United States
National Bank of Oregon ("US Bank"), Thomas W. Itin, and Wells Fargo
Bank, National Association. 10.8 Consent, Reaffirmation and Release
Agreement with US Bank.
10.9 Promissory Note of Ajay for $2,340,000 to US Bank.
10.10 Mortgage, Assignment of Rents, Security Agreement and Fixture
Filing by Aptek Williams, Inc. in favor of US Bank.
10.11 Guaranty to US Bank
15
Williams Controls, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
/s/ Thomas W. Itin
------------------
Thomas W. Itin, Chairman, President and
CEO
/s/ Gerard A. Herlihy
----------------------
Gerard A. Herlihy, Chief Financial
Officer
Date: August 14, 1996
16