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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-18083
Williams Controls, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of April
30, 1998: 17,932,040
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1
Williams Controls, Inc.
Index
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, March 31, 1998 (unaudited)
and September 30, 1997 3
Unaudited Consolidated Statement of Shareholders' Equity,
six months ended March 31, 1998 4
Unaudited Consolidated Statements of Operations,
three and six months ended March 31, 1998 and 1997 5
Unaudited Consolidated Statements of Cash Flows,
six months ended March 31, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securites and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
2
Williams Controls Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
March 31, September 30,
1998 1997
(unaudited)
--------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,064 $ 700
Trade and other accounts receivable, less allowance of $241 and
$185 at March 31, 1998 and September 30, 1997, respectively 13,038 8,468
Inventories 13,998 14,517
Prepaid expenses 1,377 713
Net assets held for disposition -- 638
Other current assets 1,098 1,098
-------- --------
Total current assets 30,575 26,134
Investment in affiliate 161 559
Property plant & equipment, net 18,076 18,080
Receivables from affiliate 3,634 3,645
Net assets held for disposition -- 1,610
Other assets 3,290 1,348
======== ========
Total assets $ 55,736 $ 51,376
======== ========
LIABILITIES AND SHAREHOLDERS'EQUITY
Current Liabilities:
Accounts payable 6,372 5,070
Accrued expenses 3,703 3,008
Current portion of long-term debt and capital leases 1,517 1,428
Other current liabilities 49 500
-------- --------
Total current liabilities 11,641 10,006
Long-term debt and capital lease obligations 23,522 22,857
Other liabilities 1,471 1,214
Commitments and contingencies -- --
Minority interest in consolidated subsidiaries 424 464
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized) -- --
Common stock ($.01 par value, 50,000,000 authorized;
18,062,240 and 17,912,240 issued at March 31, 1998
and September 30, 1997, respectively) 180 179
Additional paid-in capital 9,882 9,822
Retained earnings 9,184 7,402
Unearned ESOP shares (191) (191)
Treasury stock (130,200 shares at March 31, 1998 and
September 30, 1997, respectively) (377) (377)
-------- --------
Total shareholders' equity 18,678 16,835
======== ========
Total liabilities and shareholders' equity $ 55,736 $ 51,376
======== ========
The accompanying notes are an integral part of these statements.
3
Williams Controls, Inc.
Consolidated Statement of Shareholders' Equity
(Dollars in thousands)
(unaudited)
Issued
Common stock Additional
---------------------- Paid in Retained Unearned Treasury Shareholders
Shares Amount Capital Earnings ESOP Shares Shares Equity
---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance, September 30, 1997 17,912,240 $ 179 $ 9,822 $ 7,402 $ (191) $ (377) $ 16,835
Net earnings -- -- -- 1,782 -- -- 1,782
Common stock issued
pursuant to exercise
of warrants/options 150,000 1 60 -- -- -- 61
---------- ---------- ---------- ---------- ------------ ---------- ----------
Balance, March 31, 1998 18,062,240 $ 180 $ 9,882 $ 9,184 $ (191) $ (377) $ 18,678
========== ========== ========== ========== ============ ========== ==========
The accompanying notes are an integral part of these statements.
4
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(unaudited)
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------------- --------------- -------------- --------------
Sales $ 17,891 $ 14,248 $ 32,835 $ 27,769
Cost of sales 12,586 10,867 23,375 21,003
--------------- --------------- -------------- --------------
Gross margin 5,305 3,381 9,460 6,766
Operating expenses:
Research and development 730 489 1,289 960
Selling 736 777 1,427 1,453
Administration 1,347 1,028 2,425 1,937
--------------- --------------- -------------- --------------
Total operating expenses 2,813 2,294 5,141 4,350
--------------- --------------- -------------- --------------
Earnings from continuing operations 2,492 1,087 4,319 2,416
Other expenses:
Interest expense 431 455 806 972
Equity interest in loss of affiliate 40 49 398 179
--------------- --------------- -------------- --------------
Total other expenses 471 504 1,204 1,151
--------------- --------------- -------------- --------------
Earnings from continuing operations before income tax
expense 2,021 583 3,115 1,265
Income tax expense 791 241 1,212 513
--------------- --------------- -------------- --------------
Earnings from continuing operations before minority
interest 1,230 342 1,903 752
Minority interest in net loss of consolidated subsidiaries 17 49 39 31
--------------- --------------- -------------- --------------
Net earnings from continuing operations 1,247 391 1,942 783
Discontinued operations:
Loss from operations of automotive accessories segment (160) (521) (160) (901)
--------------- --------------- -------------- --------------
Loss from discontinued operations (160) (521) (160) (901)
--------------- --------------- -------------- --------------
Net earnings (loss) $ 1,087 $ (130) $ 1,782 (118)
=============== =============== ============== ==============
Basic and diluted earnings per common share from
continuing operations $ 0.07 $ 0.02 $ 0.11 $ 0.04
Basic and diluted loss per common share from
discontinued operations (0.01) (0.03) (0.01) (0.05)
--------------- --------------- -------------- --------------
Basic and diluted net earnings (loss) per common share $ 0.06 $ (0.01) $ 0.10 $ (0.01)
=============== =============== ============== ==============
The accompanying notes are an integral part of these statements.
5
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)
Six months Six months
Ended Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 1,782 $ (118)
Adjustments to reconcile net income
(loss) to net cash from continuing
operations:
Loss from discontinued operations 160 901
Depreciation and amortization 715 726
Minority interest in earnings (loss)
in consolidated subsidiaries (39) (31)
Equity interest in loss of affiliate 398 179
Changes in working capital of continuing
operations:
Receivables (3,053) (518)
Prepaid expenses (659) (830)
Inventories (1,132) (608)
Accounts payable and accrued
expenses 2,219 (782)
Other (26) 1,106
---------------- ----------------
Net cash provided by operating activities
of continuing operations 365 25
Cash flows from investing activities:
Proceeds from the sale of discontinued
operations 1,124 --
Payments for property, plant and
equipment (491) (390)
---------------- ----------------
Net cash provided by (used in) investing
activities of continuing operations 633 (390)
Cash flows from financing activities:
Proceeds (repayments) of long-term debt
and capital lease obligations 700 (50)
Proceeds from sale and issuance of
common stock 62 --
---------------- ----------------
Net cash provided by (used in) financing
activities of continuing operations 762 (50)
Net cash provided by (used in)
discontinued operations (1,396) 1,783
Net increase in cash and cash equivalents 364 1,368
Cash and cash equivalents at beginning
of period 700 1,379
================ ================
Cash and cash equivalents at end of
period $ 1,064 $ 2,747
================ ================
Supplemental disclosure of non-cash investing and financing activities:
Disposition of Kenco:
Net assets and liabilities sold $ 2,374 $ --
Allowances 1,376 --
Preferred stock (2,000) --
Other receivable (250) --
Receivable for inventory sold (430) --
Net gain on disposition 54 --
---------------- ----------------
Cash received $ 1,124 $ --
================ ================
The accompanying notes are an integral part of these statements.
6
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
has acquired, disposition of any current business of the Company, and the
Company's investment in and relationship with Ajay Sports, Inc., a related
company. These forward-looking statements are subject to the business and
economic risks faced by the Company. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described above and other factors described elsewhere in
this report.
1. Organization
Williams Controls, Inc., including its wholly-owned subsidiaries, Williams
Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies, Inc. ("PPT"); Williams Automotive, Inc.; GeoFocus, Inc.
("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc.
("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc.
("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec")
and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to as the "Company" or
"Registrant."
2. The Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been prepared by
the Company and, in the opinion of management, reflect all material adjustments
which are necessary to a fair statement of results for the interim periods
presented. Certain information and footnote disclosure made in the last annual
report on Form 10-K have been condensed or omitted for the interim consolidated
statements. Certain costs are estimated for the full year and allocated to
interim periods based on activity associated with the interim period.
Accordingly, such costs are subject to year-end adjustment. It is the Company's
opinion that, when the interim consolidated statements are read in conjunction
with the September 30, 1997 annual report on Form 10-K, the disclosures are
adequate to make the information presented not misleading. The interim
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated.
3. Earnings (loss) per Share
As required, the Company adopted Statement of Financial Accounting Standards No.
128 during the quarter ended December 31, 1997. This statement requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic per share
amounts are based on the weighted average shares of common stock outstanding.
Diluted earnings per share assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. Accordingly, this presentation has been adopted for all periods
presented. The basic and diluted weighted average shares outstanding are as
follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
------------------ ----------------- ----------------- -----------------
Weighted average shares outstanding 17,932,040 17,912,240 17,882,873 17,912,240
Less unallocated ESOP shares 86,000 140,000 86,000 140,000
------------------ ----------------- ----------------- -----------------
Weighted average outstanding shares
used for basic EPS 17,846,040 17,772,240 17,796,873 17,772,240
Plus incremental shares from assumed
issuance of stock options and other
contingent issuances 653,960 127,760 703,127 127,760
================== ================= ================= =================
Weighted average outstanding shares used
for diluted EPS 18,500,000 17,900,000 18,500,000 17,900,000
================== ================= ================= =================
7
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
4. Inventories
Inventories consisted of the following:
March 31, September 30,
1998 1997
---------------- ----------------
Raw material $ 5,768 $ 5,305
Work in process 2,013 2,035
Finished goods 6,217 7,177
---------------- ----------------
$ 13,998 $ 14,517
================ ================
Finished goods include component parts and finished product ready for shipment.
5. Year 2000 Conversion
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of the operational systems.
The Company has established processes for evaluating and managing the risks and
cost associated with this problem, including communicating with suppliers,
dealers and others with which it does business to coordinate Year 2000
conversion. The total cost of compliance and its effect on the Company's future
results of operations is being determined as part of the detailed conversion
planning process.
6. Sale of Discontinued Operations
On March 16, 1998, the Company completed the sale of a substantial portion of
the assets of Kenco, to Kenco Products, Inc. ("KPI") and entered into
warehousing and lease agreements with KPI (the "Kenco Transaction"). The
principal owner of KPI is Colfax Group, Inc., a Delaware corporation. One of the
principal owners of Colfax Group Inc. had been acting as general manager in
charge of operating the business of Kenco for more than the past year. Colfax
Group, Inc.is unrelated to the Registrant.
Consideration to the Registrant consisted of $1.1 million cash, a $250,000
receivable, a $430,000 receivable for inventory sold, assumption of $1.0 million
of trade payables, accrued expenses and other liabilities related to the assets
purchased and $2.0 million of Series A Senior Preferred Stock (2000 shares) of
KPI. The preferred stock provides for annual dividends of $80 per share and is
convertible to common stock according to certain terms and conditions. The
accounting principles followed in determining the consideration received was the
fair market value of the assets disposed of.
The carrying values of assets sold in the Kenco Transaction included $1.4
million of productive assets (machinery and equipment, furniture and fixtures
and tools and dies), $794,000 of accounts receivable, $530,000 of inventory and
$325,000 of prepaid assets, after recording certain adjustments to inventory and
other accounts of approximately $1.3 million to the agreed upon sales price.
The Registrant has agreed to warehouse certain inventory not immediately
purchased valued at $2.6 million ("Warehouse Agreement"). KPI has agreed to
purchase all remaining inventory from Kenco on or before September 30, 1998
subject to certain terms and conditions outlined in the Warehouse agreement.
The Registrant has agreed to lease to KPI the existing building and improvements
of Kenco for $23,000 per month ("Lease Agreement"). The lease is currently
scheduled to terminate on September 30, 1998, subject to certain early
termination provisions if Kenco sells the facility to a third party buyer.
8
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
6. Sale of Discontinued Operations - continued
One of the principal owners of Colfax Group, Inc. has guaranteed the obligations
of KPI under the Warehouse Agreement and Lease Agreement subject to certain
terms and conditions.
Simultaneously with the closing of the Kenco Transaction, the Registrant repaid
$1.1 million outstanding under its existing credit facility with its bank.
Pursuant to the Intercreditor Agreement among US Bank, Wells Fargo Bank and the
Registrant dated July 14, 1997, the Company is obligated to pay to US Bank the
first $2.34 million in proceeds from future sales of inventory to KPI.
The following represents unaudited results of operations on a proforma basis as
if the transaction had been consummated as of October 1, 1997 and 1996,
respectively.
Six Months Ended Six Months Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Sales $ 32,835 $ 27,769
Net Income 2,102 943
================ ================
Earnings per common share
Basic $ 0.12 $ 0.05
================ ================
Diluted $ 0.11 $ 0.05
================ ================
9
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
7. Business Segment Information
Three months Three months Six months Six months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
-------------- --------------- --------------- --------------
Net sales by classes of similar products from
continuing operations
Vehicle components $ 14,530 $ 11,113 $ 26,227 $ 20,577
Agricultural equipment 2,278 2,408 4,525 5,512
Electrical components and GPS 1,083 727 2,083 1,680
-------------- --------------- --------------- --------------
$ 17,891 $ 14,248 $ 32,835 $ 27,769
============== =============== =============== ==============
Earnings (loss) from continuing operations
Vehicle components 1,685 1,050 2,799 1,662
Agricultural equipment (173) (329) (364) (297)
Electrical components and GPS (282) (379) (532) (613)
-------------- --------------- -------------- --------------
1,230 342 1,903 752
============== =============== =============== ==============
Capital expenditures
Vehicle components 191 110 238 177
Agricultural equipment -- 53 104 129
Electrical components and GPS 64 55 149 84
-------------- --------------- --------------- --------------
Total capital expenditures - continuing operations 255 218 491 390
Automotive accessories - discontinued operations -- 168 -- 219
============== =============== =============== ==============
Total capital expenditures 255 386 491 609
============== =============== =============== ==============
Depreciation and amortization
Vehicle components 156 228 387 439
Agricultural equipment 82 78 163 145
Electrical components and GPS 85 81 165 142
-------------- --------------- --------------- --------------
Total depreciation and amortization - continuing
operations 323 387 715 726
Automotive accessories - discontinued operations 60 64 109 122
============== =============== =============== ==============
Total depreciation and amortization $ 383 $ 451 $ 824 $ 848
============== =============== =============== ==============
Identifiable assets
Vehicle components $ 37,082 $ 22,817
Agricultural equipment 10,419 12,052
Electrical components and GPS 8,235 7,891
--------------- --------------
Total assets - continuing operations 55,736 42,760
Automotive accessories - discontinued operations -- 11,999
=============== ==============
Total assets $ 55,736 $ 54,759
=============== ==============
10
Williams Controls, Inc.
Notes to Unaudited Financial Statements
Three and Six Months ended March 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
8. Commitments and Contingencies
Environmental Matters - The Company has identified certain contaminants in the
soil and groundwater at and around its Portland, Oregon manufacturing facility
which the Company believes may have been disposed of by the previous property
owner. The Company believes that the contamination is not a reportable event as
defined under the current Oregon statutes. Under Oregon statutes, the Company
and other potentially responsible parties are required to investigate further
and possibly remediate the contamination. The Company believes that, if
required, the remediation would take the form of permanent monitoring, but could
include the treatment and removal of the contamination or both. The Company
cannot estimate the costs of permanent monitoring, treatment or cleanup at the
present time.
The acquisition agreement between the Company and the previous building owner
contains provisions for indemnification of any environmental cleanup costs after
the Company spends $25 towards such cleanup. The Company intends to seek
indemnification from the prior property owner for permanent monitoring or
cleanup costs, if any. The prior property owner has advised the Company that it
would dispute any liability for remediation costs. The Company beleives that it
can enforce available claims against the prior property owner for any costs of
investigation or remediation or both.
9. Subsequent Events
Refinance of Sale/Leaseback - Although the Company does not have a reportable
event with respect to environmental matters discussed in Note 8, in accordance
with the terms of the sale/leaseback agreement for the Portland, Oregon
manufacturing facility, on April 20, 1998 the Company provided $3,200 of debt
financing to the purchaser until the Company receives a "no-further action"
letter from the Oregon Department of Environmental Quality related to these
environmental matters. This debt is due April 21, 2000 with an interest rate of
8.5% until October 31, 1998, when it increases to 9.75%. The Company may
repurchase the facility before the maturity date and has the obligation to
repurchase the facility at the maturity date at the original purchase price of
$4.6 million plus out-of-pocket costs of the purchaser if a "no-further action"
letter is not obtained.
Private Equity Placement - On April 21, 1998, the Company completed a private
placement offering of 80,000 shares of Series A convertible redeemable preferred
stock at $100 per share, or $8 million. The preferred stock bears a dividend
rate of 7.5%, which is payable quarterly, and is convertible at the option of
the holder into 2,909,091 shares of the Company's common stock. The preferred
stock is redeemable after three years at the option of the Company. In addition,
the Company can force conversion of the preferred stock into common shares if
the Company's common stock trades at or above $4.125 for twenty out of thirty
consecutive trading days. Holders of the Series A preferred stock are entitled
to a number of votes equal to those they would have assuming conversion into
common stock, without taking into account fractional shares.
The Company intends to use the proceeds of offering to provide debt financing to
the purchaser of the Portland, Oregon manufacturing facility, repayment of a
bank term loan of $667 and an investment of $2 million to Ajay. The remaining
balance will be used for general working capital purposes.
11
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
See "Cautionary Statement" contained at the beginning of this report.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Company's principal sources of liquidity during the six months ended March
31, 1998 were proceeds from the sale of discontinued operations of $1,124,
borrowings under its credit facilities of $700 and cash provided by operating
activities of $365. During the same period, the Company used cash for
discontinued operations of $1,396. The six-month period in fiscal 1998 compares
to cash provided by discontinued operations of $1,783, repayments of borrowings
of $50 and cash provided by continuing operations of $25 for the same period in
fiscal 1997. At March 31, 1998 the Company's working capital improved to $18,934
from $16,128 at September 30, 1997. The current ratio also improved to 2.63 at
March 31, 1998 from 2.61 at September 30, 1997.
The Company anticipates that cash generated from continuing operations,
borrowings and proceeds from the Company's Private Placement completed in April
1998 will be sufficient to satisfy its working capital requirements for
continuing operations during the remainder of the current fiscal year.
In April 1997 the Company sold its Portland, Oregon manufacturing facility in a
sale-leaseback transaction for $4,524. Under the terms of the agreement on April
20, 1998, the Company provided $3,200 of debt financing to the purchaser until
such time that the Company receives a "no further action" letter from the Oregon
Department of Environmental Quality related to environmental issues at the
property. Upon receipt of such letter the purchaser will be required to
refinance the mortgage with a third party lender. If a "no-further action"
letter is not obtained, the Company may repurchase the facility before the
maturity date and has the obligation to repurchase the facility at the maturity
date at the original purchase price of $4.6 million plus out-of-pocket costs of
the purchaser.
The purchaser previously informed the Company that it entered into a purchase
and sale agreement with a third party who would purchase the building without
any contingent repurchase obligation subject to third party due diligence. In
January 1998 the purchaser informed the Company that the third party declined to
purchase the building.
In fiscal 1997 the Company and Ajay agreed to a plan (the "Ajay
Recapitalization") whereby Ajay plans to obtain permanent bank financing
independent of the Company's loan which, management of Ajay has informed the
Company, when combined with a final investment by the Company to Ajay of $2,000,
would result in adequate working capital and eliminate any requirements for
further advances or guarantees from the Company. Ajay management informed the
Company it has signed a proposal letter with a lender for an asset based loan,
which Ajay management informed the Company that it believes that based on
expected loan advance rates would result in an approximately $2,000 shortfall of
its projected working capital needs. The Company intends to invest up to $2,000
to provide Ajay adequate working capital, of which approximately $1,200 was
advanced on April 20, 1998. In addition, as quarantor, the Company is obligated
to pay US Bank the first $2.34 million in proceeds from future sales of
inventory to KPI.
If Ajay successfully completes its bank financing, the Company has also proposed
to exchange up to $5,000 of loans and advances to Ajay into convertible voting
preferred stock which Ajay management has informed the Company that it believes
would allow Ajay to meet the minimum net worth criteria for continued listing on
the NASDAQ. The preferred stock would pay a dividend rate of 9% and would be
convertible into up to 12,000,000 shares of Ajay common stock. As presently
proposed, the dividend rate would increase two percentage points each in the
year 2002 and 2003 if Ajay does not achieve pre-tax earnings of at least $500 in
the two consecutive years prior to 2002 and 2003. The Company has also agreed to
purchase in fiscal 1998 approximately $1,000 of notes payable by Ajay to
affiliated parties which had provided loans to Ajay, to help Ajay finance
operations during the financial restructuring; although such notes payable have
not yet been purchased.
12
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations
- ---------------------
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
Overview
- --------
Net sales from continuing operations increased 26% to $17,891 for the second
quarter ended March 31, 1998 from $14,248 in the same period in fiscal 1997.
Increased sales are attributed primarily to higher unit sales volumes in the
Company's vehicle component segment which were partially offset by a decline in
unit sales volumes in the agricultural equipment segment.
Net earnings from continuing operations increased 219% to $1,247 in the second
quarter ended March 31, 1998 from $391 in the same fiscal 1997 quarter due to
increases in unit sales volumes in the Company's vehicle component segment,
which were partially offset by declining unit sales volumes in the agricultural
equipment segment and additional equity interest in losses of affiliate (Ajay
Sports, Inc.).
Net income increased to $1,087 in the second quarter ended March 31, 1998 from a
net loss of $130 in the comparable fiscal 1997 quarter due to higher
profitability in the vehicle component segment and reduced losses in the
Company's discontinued operations which were offset by increased losses in the
Company's agricultural equipment segment and additional equity interest in
losses of affiliate (Ajay Sports, Inc.).
Net sales from continuing operations
- ------------------------------------
Net sales increased $3,643, or 26%, to $17,891 for the second quarter ended
March 31, 1998 from $14,248 in the prior year quarter. Sales as a percent of
total sales in the vehicle components, agricultural equipment and electrical
components segments were 81%, 13% and 6% in the 1998 quarter compared to 78%,
17% and 5% in the 1997 quarter. Vehicle component sales in the quarter ended
March 31, 1998 increased $3,417, or 31%, due to higher unit sales of component
parts to heavy and medium truck manufacturers. Sales of agricultural equipment
declined $130, or 5%, in the quarter ended March 31, 1998 primarily due to lower
unit sales resulting from excess dealer inventory. Electrical component sales
increased $356 or 49% primarily due to increased unit sales volumes of
electrical components.
Gross margin
- ------------
Gross margin from continuing operations increased 57% to $5,305 in the second
quarter ended March 31, 1998 from $3,381 in the prior year quarter. Gross
margins as a percentage of net sales from continuing operations were 30% in the
second quarter of fiscal 1998 and 24% in the same fiscal 1997 quarter. Increases
in dollar amount in the second quarter of fiscal 1998 resulted primarily from
higher unit sales volumes and increased utilization of the Company's fixed
assets in the vehicle component and electrical component and GPS segments. Gross
margins as a percentage of net sales for the vehicle components, agricultural
equipment and electrical components segments were 32%, 15%, and 31%,
respectively, during the second quarter of fiscal 1998 compared to 27%, 12%, and
14% for the same quarter in fiscal 1997.
13
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Three months ended March 31, 1998 compared to the three months ended March 31,
1997
Operating expenses - continuing operations
- ------------------------------------------
Operating expenses for continuing operations increased 23% during the second
quarter ended March 31, 1998 compared to amounts in the same quarter in fiscal
1997. Increases are primarily related to increased research and development
activities, consulting expenses incurred during the installation of a new
management information system and completion of the QS-9000 and ISO9001
certification process. Operating expenses as a percentage of net sales from
continuing operations were 16% in the second quarter of fiscal 1998 and 1997.
Operating expenses increased 44% in the second quarter of fiscal 1998 in the
vehicle component segment to $1,543 and 47% in the electronic components and GPS
segment to $760. Operating expenses decreased 28% in the agricultural equipment
segment to $510 compared to amounts in the second quarter of fiscal 1997.
Decreases in this segment are attributed to lower sales volumes.
Research and development expenses for continuing operations increased 49% to
$730 during the second quarter of fiscal 1998 compared to amounts in the same
quarter in fiscal 1997. As a percentage of net sales from continuing operations,
research and development expenses increased to 4% from 3% in the 1997 second
quarter.
Selling expenses for continuing operations decreased 5% to $736 in the second
quarter of fiscal 1998 compared to amounts in the same quarter in fiscal 1997.
Selling expenses as a percentage of net sales from continuing operations
decreased to 4% in the second quarter of fiscal 1998 compared to 5% in the same
1997 quarter. Selling expenses decreased as a percentage of sales primarily due
to increased sales volumes in the vehicle components segment.
General and administrative expenses for continuing operations increased 31% in
the second quarter of fiscal 1998 to $1,347 compared to amounts in the same
quarter in fiscal 1997. General and administrative expenses as a percentage of
net sales from continuing operations increased to 8% in the second quarter of
fiscal 1998 from 7% in the same quarter in fiscal 1997. Increases were primarily
due to increased research and development activities, consulting expenses
incurred due to the installation of a new management information system and
completion of the QS-9000 and ISO9001 certification process.
Earnings from continuing operations
- -----------------------------------
Earnings from continuing operations increased $1,405, or 129%, to $2,492 in the
second quarter of fiscal 1998 from $1,087 in the same quarter of fiscal 1997 due
to increases in operating income of $1,166 and $250 in the automotive components
and agricultural equipment segments, respectively, offset by an $11 decrease in
the electrical components and GPS business segment.
Discontinued operations
- -----------------------
Net losses from the discontinued automotive accessories segment were $160 net of
tax benefits of $107 for the second quarter ended March 31, 1998, compared to
$521 net of tax benefits of $411 in the same quarter of fiscal 1997. The
Company's discontinued operations was sold on March 16, 1998.
Net sales from the discontinued segment declined $694, or 34%, in the second
quarter of fiscal 1998 to $1,346 compared to levels achieved in the same fiscal
1997 quarter. The decline in automotive accessory sales was due to lower unit
sales and lower prices resulting from increased competitive pressure and the
decision to terminate sales to several unprofitable customers.
14
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Six months ended March 31, 1998 compared to the six months ended March 31, 1997
Overview
- --------
Net sales from continuing operations increased 18% to $32,835 for the six months
ended March 31, 1998 from $27,769 in the same period in fiscal 1997. Increased
sales are attributed to higher unit sales volumes in the Company's vehicle
component segment, which were partially offset by declining unit sales volumes
in the agricultural equipment segment.
Net earnings from continuing operations increased 148% to $1,942 for the six
months ended March 31, 1998 from $783 in the same fiscal 1997 period due to
increases in unit sales volumes in the Company's vehicle component segment,
which were partially offset by declining unit sales volumes in the agricultural
equipment segment and additional equity interest in losses of affiliate (Ajay
Sports, Inc.).
Net income increased to $1,782 for the six months ended March 31, 1998 from a
net loss of $118 in the comparable fiscal 1997 period due to higher
profitability in the vehicle component segment and decreased losses in the
Company's discontinued operations which were offset by increased losses in the
Company's agricultural equipment segment and additional equity interest in
losses of affiliate (Ajay Sports, Inc.).
Net sales from continuing operations
- ------------------------------------
Net sales increased $5,066, or 18%, to $32,835 for the six months ended March
31, 1998 compared to $27,769 for the six months ended March 31, 1997. Sales as a
percent of total sales in the vehicle components, agricultural equipment and
electrical components segments were 80%, 14% and 6% for the six months ended
March 31, 1998 compared to 74%, 20% and 6% in the comparable prior year
six-month period. Vehicle component sales for the six months ended March 31,
1998 increased $5,650, or 27%, due to higher unit sales of component parts to
heavy and medium truck manufacturers. Sales of agricultural equipment declined
$987, or 18%, for the six months ended March 31, 1998 due to lower unit sales
resulting from excess dealer inventory. Electrical component sales increased
$403, or 24% primarily due to increased unit sales volumes of electrical
components.
Gross margin
- ------------
Gross margin from continuing operations increased 40% to $9,460 for the six
months ended March 31, 1998 compared to the six months ended March 31, 1997.
Gross margins as a percentage of net sales from continuing operations were 29%
for the six months ended March 1998 and 24% in the same first six months of
fiscal 1997. Increases in dollar amount for the six months ended March 31, 1998
resulted primarily from higher unit sales volumes in the vehicle component and
electrical component segments offset by gross margin decreases of 40% in the
Company's agricultural equipment segment due to lower sales volumes. Gross
margins as a percentage of net sales for the vehicle components, agricultural
equipment and electrical components segments were 32%, 14%, and 24%,
respectively, during the first six months of fiscal 1998 compared to 27%, 19%,
and 14% for the same six-month period in fiscal 1997.
Operating expenses - continuing operations
- ------------------------------------------
Operating expenses for continuing operations increased 18% during the six months
ended March 31, 1998 compared to amounts in the same period in fiscal 1997.
Increases are primarily due to increased research and development activities,
consulting expenses related to the installation of a new management information
system and completion of the QS-9000 and ISO9001 certification process.
Operating expenses as a percentage of net sales from continuing operations were
16% for the six months ended March 31, 1998 and 1997. Operating expenses
increased 27% in the first six months of fiscal 1998 in the vehicle component
segment to $2,848 and 53% in the electronic components and GPS segment to
$1,324. Operating expenses decreased 22% in the agricultural equipment segment
to $969 compared to amounts in the first six months of fiscal 1997. Decreases in
this segment are attributed to lower unit sales volumes.
15
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations (continued)
- ---------------------------------
Six months ended March 31, 1998 compared to the six months ended March 31, 1997
Research and development expenses for continuing operations increased 34% to
$1,289 during the six months ended March 31, 1998 compared to amounts in the
same period in fiscal 1997. As a percentage of net sales from continuing
operations, research and development expenses were 4% in the 1998 and 1997
six-month periods.
Selling expenses for continuing operations decreased 2% to $1,427 in the first
six months of fiscal 1998 compared to amounts in the same period in fiscal 1997.
Selling expenses as a percentage of net sales from continuing operations
decreased to 4% in the six months ended March 31, 1998 from 5% in the same
six-month period in fiscal 1997. Selling expenses decreased as a percentage of
sales due to increased sales volumes in the vehicle components segment.
General and administrative expenses for continuing operations increased 25% in
the first six months of fiscal 1998 to $2,425 compared to amounts in the same
period in fiscal 1997. General and administrative expenses as a percentage of
net sales from continuing operations were 7% for the first six months of fiscal
1998 and 1997. Increases were primarily due to increased research and
development activities, consulting expenses related to the installation of a new
management information system and completion of the QS-9000 and ISO9001
certification process.
Earnings from continuing operations
- -----------------------------------
Earnings from continuing operations increased $1,903, or 79%, to $4,319 in the
six months ended March 31, 1998 from $2,416 in the same period of fiscal 1997
due to a $2,224 increase in operating income in the automotive components
segment offset by a $139 decrease in the agricultural equipment segment and a
$182 decrease in the electrical components and GPS business segment.
Discontinued Operations
- -----------------------
Net losses from the discontinued automotive accessories segment were $160 net of
tax benefits of $107 for the six months ended March 31, 1998, compared to $901
net of tax benefits of $675 in the same period of fiscal 1997
Net sales from the discontinued segment declined $2,326, or 44%, for the first
six months of fiscal 1998 to $2,928 compared to levels achieved in the same
period of fiscal 1997. The decline in automotive accessory sales was due to
lower unit sales resulting from increased competitive pressure and the decision
to terminate sales to several unprofitable customers.
16
Williams Controls, Inc.
Part II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On March 27, 1998 the Company held its annual meeting of stockholders.
The stockholders elected two directors and approved an amendment to
increase the number of shares available for grant under the Company's
1993 Stock Option Plan from 1,500,000 to 3,000,000 shares.
The tabulation of votes cast for the election of the directors and
amendment to the Company's 1993 Stock Option Plan are as follows:
Proposal Number One - Election of Directors
For Withheld
---------- --------
Thomas W. Itin 16,743,344 227,324
H. Samuel Greenawalt 16,736,744 234,024
Proposal Number Two - Amendment to the 1993 Stock Option Plan
For Against Abstentions Not Voted
Increase Shares from ---------- --------- ----------- ---------
1,500,000 to 3,000,000 10,476,050 1,232,313 155,973 5,106,432
Item 5. Other Information
On April 21, 1998, the Company completed a private placement offering
of 80,000 shares of Series A convertible redeemable preferred stock at
$100 per share, or $8 million. The preferred stock bears a dividend
rate of 7.5%, which is payable quarterly, and is convertible at the
option of shareholders into 2,909,091 shares of the Company's common
stock. The preferred stock is redeemable after three years at the
option of the Company. In addition, the Company can force conversion
of the preferred stock into common shares if the Company's common stock
trades at or above $4.125 for twenty out of thirty consecutive trading
days. Holders of the Series A preferred stock are entitled to a number
of votes equal to those they would have assuming conversion into common
stock, without taking into account fractional shares.
The Company intends to use the proceeds of the offering to provide debt
financing to the purchaser of the Portland, Oregon manufacturing
facility, repayment of a bank term loan of $667 and an investment of
$2 million to Ajay. The remaining balance will be used for general
working capital purposes.
17
Item 6. Exhibits and Reports on Form 8-K
Exhibits
--------
3.1 - Certificate to Provide for the Designation, Preferences, Rights,
Qualifications, Limitations or Restrictions Thereof, of the
Series A Preferred Stock, 7 1/2% Redeemable Convertible Series.
Reports on Form 8-K
-------------------
Sale of Discontinued Operations filed on Form 8-K dated March 16, 1998
and related Pro forma Financial Statements.
18
Williams Controls, Inc.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS CONTROLS, INC.
By: /s/ Gerard A. Herlihy
-----------------------
Gerard A. Herlihy
Chief Financial and
Administrative Officer
By: /s/ William N. Holmes
------------------------
Williams N. Holmes,
Corporate Controller and
Principal Accounting Officer
Date: April 30, 1998
19