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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission file number 0-18083
Williams Controls, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1099587
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 SW 72nd Avenue
Portland, Oregon 97224
- --------------------------------------- ----------
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code:
(503) 684-8600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of July 31,
1999: 19,879,070
Williams Controls, Inc.
Index
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1999 (unaudited)
and September 30, 1998 1
Unaudited Consolidated Statements of Operations,
three and nine months ended June 30, 1999 and 1998 2
Unaudited Consolidated Statements of Cash Flows,
nine months ended June 30, 1999 and 1998 3
Notes to Unaudited Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
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
Part I
Item 1.
Williams Controls Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)
June 30, September 30,
1999 1998
(unaudited)
------------------- ---------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,410 $ 1,281
Trade and other accounts receivable, less allowance of $157 and
$325 at June 30, 1999 and September 30, 1998, respectively 10,602 11,765
Inventories 10,430 10,693
Deferred taxes and other 2,616 2,231
Net assets held for disposition 5,125 5,117
------------------- ---------------------
Total current assets 30,183 31,087
Property plant and equipment, net 18,665 20,013
Investment in and note receivable from affiliate 5,733 6,140
Note receivable - 3,200
Property held for sale, net 1,818 -
Net assets held for disposition 1,821 1,847
Other assets 1,851 4,072
=================== =====================
Total assets $ 60,071 $ 66,359
=================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,063 $ 4,771
Accrued expenses 2,605 3,399
Current portion of long-term debt and capital leases 2,257 1,181
Estimated loss on disposal 589 2,550
------------------- --------------------
Total current liabilities 10,514 11,901
Long-term debt and capital lease obligations 22,460 27,846
Other liabilities 2,737 2,201
Commitments and contingencies
Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 authorized;
79,450 and 80,000 issued at June 30, 1999 and
September 30, 1998, respectively) 1 1
Common stock ($.01 par value, 50,000,000 authorized;
18,524,286 and 18,311,288 issued at June 30, 1999
and September 30, 1998, respectively) 185 183
Additional paid-in capital 18,183 17,917
Retained earnings 7,125 7,444
Unearned ESOP shares (73) (73)
Treasury stock (130,200 shares at June 30, 1999 and
September 30, 1998) (377) (377)
Note receivable (500) (500)
Pension liability adjustment (184) (184)
------------------- --------------------
Total shareholders' equity 24,360 24,411
=================== ====================
Total liabilities and shareholders' equity $ 60,071 $ 66,359
=================== ====================
The accompanying notes are an integral part of these balance sheets.
1
Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)
(unaudited)
Three months Three months Nine months Nine months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Sales $ 16,262 $ 14,767 $ 47,828 $ 43,078
Cost of sales 11,879 10,068 33,885 29,770
-------------- -------------- -------------- --------------
Gross margin 4,383 4,699 13,943 13,308
Operating expenses:
Research and development 1,017 720 2,683 2,004
Selling 493 543 1,501 1,519
Administration 1,010 1,061 2,884 2,745
Loss from impairment of assets 5,278 - 5,278 -
-------------- -------------- -------------- --------------
Total operating expenses 7,798 2,324 12,346 6,268
-------------- -------------- -------------- --------------
Earnings (loss) from continuing operations (3,415) 2,375 1,597 7,040
Other (income) expenses:
Interest income (55) (51) (277) (152)
Interest expense 389 340 1,187 1,040
Other (income) expense (44) 7 69 10
Equity interest in (income) loss of affiliate 155 (25) 407 373
-------------- -------------- -------------- --------------
Total other expenses 445 271 1,386 1,271
-------------- -------------- -------------- --------------
Earnings (loss) from continuing operations before income tax
expense (benefit) (3,860) 2,104 211 5,769
Income tax expense (benefit) (1,482) 639 81 2,060
-------------- -------------- -------------- --------------
Net earnings (loss) from continuing operations (2,378) 1,465 130 3,709
Discontinued operations:
Net loss from operations of automotive accessories
business unit - - - (160)
Net loss from operations of the agricultural equipment
business unit - (336) - (639)
-------------- -------------- -------------- --------------
Net loss from discontinued operations $ - $ (336) $ - $ (799)
-------------- -------------- -------------- --------------
Net earnings (loss) $ (2,378) $ 1,129 $ 130 $ 2,910
Dividends on preferred stock 149 120 449 120
-------------- -------------- -------------- --------------
Net earnings (loss) allocable to common shareholders $ (2,527) $ 1,009 $ (319) $ 2,790
============== ============== ============== ==============
Earnings (loss) per common share from continuing operations
- basic $ (.14) $ .08 $ (.02) $ .20
Loss per common share from discontinued operations - basic - (.02) - (.04)
-------------- -------------- -------------- -------------
Net earnings (loss) per common share - basic $ (.14) $ .06 $ (.02) $ .16
============== ============== ============== =============
Earnings per common share from continuing operations
- diluted $ (.14) $ .07 $ (.02) $ .19
Loss per common share from discontinued operations - diluted - (.02) - (.04)
============== ============== ============== ==============
Net earnings per common share - diluted $ (.14) $ .05 $ (.02) $ .15
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
2
Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months Nine months
Ended Ended
June 30, 1999 June 30, 1998
------------------ -------------------
Cash flows from operating activities:
Net earnings $ 130 $ 2,910
Adjustments to reconcile net earnings to net cash from
continuing operations:
Loss from discontinued operations - 799
Depreciation and amortization 1,378 864
Equity interest in loss of affiliate 407 373
Loss from impairment of assets 5,278 -
Changes in working capital of continuing operations:
Receivables (405) 387
Inventories 263 (2,258)
Accounts payable and accrued expenses (560) (1,236)
Other 10 (372)
------------------ -------------------
Net cash provided by operating activities of continuing operations 6,501 1,467
Cash flows from investing activities:
Loans made for sale/leaseback financing - (3,200)
Payments for property, plant and equipment (1,994) (1,482)
Advances to affiliate (100) (919)
Investment in note receivable (575) -
------------------ -------------------
Net cash used in investing activities of continuing operations (2,669) (5,601)
Cash flows from financing activities:
Proceeds (repayments) of long-term debt and capital lease obligations (3,964) 265
Borrowing under term notes 2,500 -
Preferred dividends (449) (120)
Proceeds from issuance of preferred stock - 7,357
Proceeds from issuance of common stock 153 62
------------------ -------------------
Net cash provided by (used in) financing activities of continuing operations (1,760) 7,564
Cash flows from discontinued operations:
Proceeds from sale of Automotive Accessories business unit - 1,124
Net cash used in operations (1,943) (3,639)
------------------ -------------------
Net cash used in discontinued operations (1,943) (2,515)
Net increase in cash and cash equivalents 129 915
Cash and cash equivalents at beginning of period 1,281 700
================== ===================
Cash and cash equivalents at end of period $ 1,410 $ 1,615
================== ===================
Supplemental disclosure of cash flow information:
Interest paid $ 1,354 $ 1,385
Income taxes paid $ 602 $ 92
Income tax refunds $ 414 $ 5
================== ===================
Supplemental disclosure of non-cash investing and financing activities:
Note receivable for capital lease obligation $ 3,200 $ -
================== ===================
Tax benefits related to stock options $ 115 $ -
================== ===================
Capital lease obligations incurred $ 354 $ -
================== ===================
Exchange of note receivable from affiliate for investment in affiliate $ - $ 5,000
================== ===================
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.
3
Williams Controls, Inc.
Notes to Unaudited Consolidated Financial Statements
Three and Nine Months ended June 30, 1999 and 1998 (Dollars in
thousands, except share and per share amounts)
Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution of the Company's products, integration of businesses the Company
acquires, disposition of any current business of the Company, including its
Agricultural Equipment segment. 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"); ProActive
Acquisition Corporation ("ProActive"); 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. Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements have been
prepared by the Company and, in the opinion of management, reflect all
material adjustments which are necessary to a fair statement of results
for the interim periods presented. The interim results are not
necessarily indicative of the results expected for the entire fiscal
year. Certain information and footnote disclosure made in the last annual
report on Form 10-K have been condensed or omitted for the interim
consolidated statements. Certain costs are estimated for the full year
and allocated to interim periods based on activity associated with the
interim period. Accordingly, such costs are subject to year-end
adjustment. It is the Company's opinion that, when the interim
consolidated statements are read in conjunction with the September 30,
1998 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 intercompany accounts and transactions have been eliminated.
3. Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income", which requires companies to report a measure of
all changes in equity except those resulting from investments by owners
and distributions to owners. Total comprehensive income (loss) for the
three and nine months ended June 30, 1999 and 1998 was $(2,378) and
$1,129, and $130 and $2,910 respectively, and consisted solely of net
earnings (loss). As of June 30, 1999, accumulated other comprehensive
loss was $184 and consisted of pension liability adjustment.
4. Earnings (loss) per Share
Effective in its fiscal year ended September 30, 1998, the Company
adopted SFAS 128, "Earnings Per Share". SFAS 128 prescribes new Basic and
Diluted Earnings Per Share ("EPS") calculations that replace the former
calculations for Primary and Fully Diluted EPS. Prior periods have been
restated to conform to the requirements of SFAS 128. Basic EPS is
calculated using the weighted average number of common shares outstanding
for the period and diluted EPS is calculated using the weighted average
number of common shares and dilutive common equivalent shares
outstanding.
4
Following is a reconciliation of basic EPS and diluted EPS from continuing
operations:
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
-------------------------------- -------------------------------
Per Per
Share Share
Loss Shares Amount Income Shares Amount
--------- ------ ------ --------- ------ ------
Income (loss) from continuing
Operations $(2,378) $ 1,465
Less-Preferred stock dividends (149) (120)
-------- ---------
Basic EPS-
Income (loss) from continuing
operations
available to common
shareholders (2,527) 18,363,343 $(.14) 1,345 17,874,989 $ .08
====== ======
Effect of dilutive securities -
Stock options and warrants - - - 453,483
Convertible preferred stock - - 120 2,365,922
Shares expected to be issued - - - 400,000
-------- ---------- --------- ----------
Diluted EPS -
Income (loss) from continuing
operations
available to common
shareholders $(2,527) 18,363,343 $(.14) $ 1,465 21,094,394 $ .07
======== ========== ====== ========= ========== ======
Nine Months Ended Nine Months Ended
June 30, 1999 June 30, 1998
-------------------------------- -------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
--------- ------ ------ --------- ------ ------
Income (loss) from continuing
operations $ 130 $ 3,709
Less-Preferred stock dividends (449) (120)
-------- ---------
Basic EPS-
Income (loss) from continuing
operations
available to common
shareholders (319) 18,313,559 $(.02) 3,589 17,854,660 $ .20
====== ======
Effect of dilutive securities -
Stock options and warrants - - - 266,632
Convertible preferred stock - - 120 788,641
Shares expected to be issued - - - 400,000
-------- ---------- --------- ----------
Diluted EPS -
Income (loss) from continuing
operations
available to common
shareholders $ (319) 18,313,559 $(.02) $ 3,709 19,309,933 $ .19
======== ========== ====== ========= ========== ======
At June 30, 1999 and 1998, the Company had options and warrants covering
3,417,886 and 582,236 shares, respectively of the Company's common stock
outstanding that were not considered in the respective dilutive EPS
calculations since they would have been antidilutive. In 1999 conversion
of the preferred shares would have been antidilutive and, therefore, was
not considered in the computation of diluted earnings per share.
5. Inventories
Inventories consisted of the following:
June 30, September 30,
1999 1998
------------------- --------------------
Raw material $ 5,178 $ 5,152
Work in process 2,088 1,333
Finished goods 3,164 4,208
------------------- --------------------
$10,430 $10,693
=================== ====================
Finished goods include component parts and finished product ready for
shipment.
5
6. Sale Leaseback and Financing
In April 1997 the Company sold its Portland, Oregon manufacturing
facility in a sale-leaseback transaction for approximately $4,600. The
transaction was accounted for as a financing and the capitalized lease
obligations of approximately $4,600 were recorded as long term
liabilities. In April 1998, under the terms of the agreement, the Company
provided a mortgage note to the purchaser in the amount of $3,200 which
was reported as a note receivable at September 30, 1998. In December
1998, the Company exercised an option to repurchase the building for
$4,700, consisting of cash of $1,500 and the note receivable of $3,200.
Accordingly, the note receivable of $3,200 and the capital lease
obligation of $4,600 have been eliminated from the balance sheet at June
30, 1999. The costs associated with the building repurchase are reported
in other expenses during the nine months ended June 30, 1999.
The Company borrowed $2,500 from its bank under amended term loans to
finance the repurchase transaction and for working capital purposes.
Approximately $1,222 of the additional financing was borrowed under an
amendment to the Company's existing Term Loan I which increased the Term
Loan I balance to $4,105. Term Loan I is payable in equal monthly
installments of $60 with the remaining balance of $2,897 due at maturity
on July 1, 2001. Approximately $1,278 of the additional financing was
provided under an amended Term Loan II payable in 18 equal monthly
installments of $71, plus variable interest (8.5% at June 30, 1999).
7. Acquisition
In July 1999 the Company purchased the ProActive Pedals division of
Active Tools Manufacturing Co., Inc. ProActive Pedal is a designer and
developer of patented adjustable foot pedal systems and modular pedal
systems. The purchase price was $5,750, plus the assumption of
approximately $350 in liabilities. In addition, the Company entered into
a patent license with the patent holder which required an initial payment
of $600 and minimum annual royalty payments of $95 per year for ten
years. Assets acquired include tooling designs, technology and patent
rights on adjustable foot pedal systems, as well as designs of modular
foot pedal systems. The acquisition will be accounted for as a purchase
which may result in a charge to operations for acquired in-process
research and development.
The purchase was financed through the private placement of 1,244,065
shares of the Company's common stock with net proceeds of approximately
$3,396. In addition, the Company borrowed $2,500 from its bank under a
new term loan facility ("Term Loan III"). The principal amount under Term
Loan III is payable in three equal monthly installments of $139 (plus
interest) beginning in November 1999 with the remaining balance of $2,083
due in February 2000. Interest on Term Loan III is computed at the prime
rate plus 1.25%. (9.25% at July 29, 1999).
8. Impairment of Assets
During the three and nine months ended June 30, 1999 the Company
recognized a $5,278 loss from the impairment of assets related to Kenco,
the Company's former Automotive Accessories business unit, consisting
of the following items:
Impairment of non-voting preferred stock and notes and
accounts receivable $ 4,655
Impairment of property $ 623
-------
Total loss from impairment of assets $ 5,278
=======
At June 30, 1999, the Company had non-voting preferred stock and notes
and accounts receivable related to Kenco of $797 and $3,858. Since the
sale of the operating assets of Kenco to Kenco Products, Inc. ("KPI") in
1998, KPI has reported operating losses and experienced cash flow and
other financing difficulties. In addition, KPI has not been able to make
payments on its notes and accounts payable to the Company. KPI's bank
has notified KPI it is in default under its loan agreement. In
consideration of this and after evaluation of the business prospects of
KPI and its need for additional capital, the Company determined it was
not probable that it would recover the value of the preferred stock and
notes and accounts receivable, and an impairment loss totaling $4,655 was
recorded for the three and nine months ended June 30, 1999.
6
In addition, the Company recorded an impairment loss related to certain
property retained from the Kenco sale. The majority of the impairment
loss for property related to the sale in July 1999 of a building and land
which were being leased by KPI from the Company. This property was sold
for cash resulting in estimated net proceeds of $1,818. In connection
with this sale the Company retired $891 of debt secured by the property.
Net proceeds to the Company of $927 are to be paid to a previous lender,
on behalf of an affiliated company, under the terms of an intercreditor
agreement. The estimated loss on the sale of land and building, which
has been recorded in loss from impairment of assets, is $528. The land
and buildings have been reclassified to property held for sale in the
June 30, 1999 consolidated balance sheet and are reflected at their
estimated net realizable value.
9. Reclassifications
Certain amounts previously reported in the statements of operations for
the three and nine months ended June 30, 1998 have been reclassified to
conform to current fiscal year presentation.
7
10. Segment Information
Three months Three months Nine months Nine months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
Sales by classes of similar products from continuing
operations
Vehicle components $ 15,379 $ 14,122 $ 45,604 $ 40,349
Electrical components and GPS 883 645 2,224 2,729
--------------- -------------- --------------- ---------------
$ 16,262 $ 14,767 $ 47,828 $ 43,078
=============== ============== =============== ===============
Earnings (loss) from continuing operations
Vehicle components:
Before loss from impairment of assets $ 2,155 $ 3,041 $ 8,598 $ 8,525
Loss from impairment of assets (5,278) - (5,278) -
--------------- -------------- --------------- ---------------
Vehicle components $(3,123) $ 3,041 $ 3,320 $ 8,525
Electrical components and GPS (292) (666) (1,723) (1,485)
--------------- -------------- --------------- ---------------
$(3,415) $ 2,375 $ 1,597 $ 7,040
=============== ============== =============== ===============
Capital expenditures
Vehicle components $ 417 $ 901 $ 1,517 $ 1,139
Electrical components and GPS 269 194 477 343
--------------- -------------- --------------- ---------------
Total capital expenditures - continuing operations 686 1,095 1,994 1,482
Agricultural equipment - discontinued operations 31 15 62 119
--------------- -------------- --------------- ---------------
Total capital expenditures $ 717 $ 1,110 $ 2,056 $ 1,601
=============== ============== =============== ===============
Depreciation and amortization
Vehicle components $ 371 $ 239 $ 1,071 $ 626
Electrical components and GPS 109 73 307 238
--------------- -------------- --------------- ---------------
Total depreciation and amortization - continuing operations 480 312 1,378 864
Automotive accessories - discontinued operations - 23 - 120
Agricultural equipment - discontinued operations 88 167 264 271
--------------- -------------- --------------- ---------------
Total depreciation and amortization $ 568 $ 502 $ 1,642 $ 1,255
=============== ============== =============== ===============
Identifiable assets
Vehicle components $ 36,999 $ 41,800
Electrical components and GPS 8,575 8,212
Corporate 7,551 4,750
--------------- ---------------
Total assets - continuing operations 53,125 54,762
Agricultural equipment - discontinued operations 6,946 7,308
--------------- ---------------
Total assets $ 60,071 $ 62,070
=============== ===============
The Company has classified the investment in and note receivable from affiliate
and the property held for sale as a corporate asset under identifiable assets.
Identifiable assets for discontinued segments reflect the net assets held for
disposition.
8
Item 2.
Williams Controls, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share amounts)
Financial Position and Capital Resources
Financial Condition, Liquidity and Capital Resources
The Company's principal sources of liquidity are funds generated from
operations, borrowings under its credit facilities and leases for equipment
purchases from various leasing companies. The Company anticipates that cash
generated from operations, bank borrowings and leases will be sufficient to
satisfy working capital and capital expenditure requirements for current
operations for the next twelve months. At June 30, 1999, the Company's working
capital was $19,669 compared to $19,186 at September 30, 1998 and the current
ratio was 2.9 compared to 2.6 at September 30, 1998.
Cash flows from continuing operations were $6,501 for the nine months ended
June 30, 1999 compared to $1,467 for the first nine months of fiscal 1998. In
the nine months ended June 30, 1999, decreased earnings of $2,780, offset by
the non-recurring charge of $5,278 and the $2,521 decrease in inventory levels
as compared to the 1998 period contributed to the increased cash flow from
operations in 1999 as compared to 1998.
Net cash used in investing activities was $2,669 for the nine months ended
June 30,1999 compared to $5,601 for the 1998 period. The primary reason for
the decrease is the loan made in 1998 for the sale/leaseback financing for the
Company's Portland, Oregon manufacturing facility.
During the nine months ended June 30, 1999 the note receivable decreased
$3,200 and total long-term debt and capital leases decreased $4,600 due to the
repurchase of the Portland, Oregon manufacturing facility. In April 1997 the
Company sold the facility in a sale/leaseback transaction for $4,600. The
transaction was accounted for as a financing and the capitalized lease
obligations of $4,600 were recorded as long-term liabilities. In April 1998,
under the terms of the agreement, the Company provided a mortgage note to the
purchaser in the amount of $3,200 which was reported as a note receivable at
September 30, 1998. In December 1998, the Company exercised a repurchase
option on the property and repurchased the building for $4,700 consisting of
cash of $1,500 and the note receivable of $3,200. Accordingly, the note
receivable of $3,200 and the capital lease obligation of $4,600 have been
eliminated from the balance sheet at June 30, 1999. The costs associated with
the building repurchase are reported in other expenses during the nine months
ended June 30, 1998.
The Company borrowed $2,500 from its bank under amended term loans to finance
the repurchase transaction and for working capital purposes. Approximately
$1,222 of the additional financing was borrowed under an amendment to the
Company's existing Term Loan I, the increased principal amount of which is
payable in equal monthly installments of $60 with the remaining balance of
$2,897 due at maturity on July 1, 2001. Approximately $1,278 of the additional
financing was provided under an amended Term Loan II which is payable in 18
equal monthly installments of $71, plus variable interest (8.5% at June 30,
1999).
Excluding proceeds from the sale of assets of the Automotive Accessories
business unit, the Company's discontinued operations used cash of $1,943
and $3,639 for the nine months ended June 30, 1999 and 1998, respectively.
Cash used by discontinued operations declined primarily because the
discontinued Automotive Accessories business unit, which was discontinued in
1998, used cash of $1,561 in the first nine months of fiscal 1998.
In July 1999 the Company consummated the private placement of common stock
with net proceeds of $3,396. In addition, during July the Company borrowed
$2,500 from its bank under an additional term loan. Proceeds from the initial
proceeds of the common stock offering and the new term loan were used to
purchase the net assets of ProActive Pedals. The purchase price of ProActive
Pedals was $5,750 plus the assumption of approximately $350 in liabilities.
In addition, the Company entered into a patent license with the patent holder
which required an initial payment of $600 and minimum annual royalty payments
of $95 per year for ten years. The primary assets acquired include tooling
designs, technology and patent rights on adjustable foot pedal systems, as
well as modular foot pedal systems. The additional bank financing was borrowed
under an amendment to the Company's existing financing facility under Term
Loan III. The principal amount under Term Loan III is payable in three equal
monthly installments of $139 (plus interest) beginning in November 1999 with
the remaining balance of $2,083 due in February 2000. Interest on Term Loan
III is computed at the prime rate plus 1.25%. (9.25% at July 29, 1999).
9
Market Risk - The Company has not entered into derivative financial
instruments. The Company may be exposed to future interest rate changes on its
debt. The Company does not believe that a hypothetical 10 percent change in
interest rates would have a material effect on the Company's cashflow.
Recent FASB Pronouncements - The Financial Accounting Standards Board ("FASB")
recently issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131")". This statement is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 revises existing
standards for reporting information about operating segments and requires the
reporting of selected information in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Management believes that
implementation of SFAS No. 131 (which has not been adopted with this quarterly
report) will not materially affect the Company's financial statements.
In June 1999 the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
137"). SFAS 137 is an amendment to SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 137 establishes accounting and
reporting standards for all derivative instruments. SFAS 137 is effective for
fiscal years beginning after June 15, 2000. The Company does not have any
derivative instruments and accordingly, the adoption of SFAS 137 will have
no impact on the Company's financial position or results of operations.
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 costs associated with this
problem, including communicating with suppliers, dealers and others with which
it does business to coordinate Year 2000 conversion. During 1998, the Company
began implementing the installation of new financial software that is Year
2000 compliant for the purpose of improving operations and service to its
existing and prospective truck and automotive customers. The decision to
upgrade the Company's software was made irrespective of Year 2000 compliance
issues.
Since January 1998 the Company has been engaged in achieving Year 2000
compliance. The Company's Year 2000 project is divided into several phases and
is progressing with corrective actions for major systems well under way. All
hardware, software, services and business relationships with trading partners
which could be affected by Year 2000 issues are being audited for Year 2000
compliance.
The Company relies on computer systems and software to operate its business,
including applications used in sales, purchasing, inventory management,
finance and various administrative functions. The Company has determined that
certain of its software applications will be unable to interpret appropriately
the calendar Year 2000 and subsequent years. As of June 30, 1999, 90% of the
Company's systems which may have a material Year 2000 liability are Year 2000
compliant. The target date for full compliance is September 30, 1999.
The Company's total budget for its Year 2000 project is $150, approximately
$87 of which had been spent through June 1999. The Year 2000 budget represents
approximately 17 percent of total information technology ("IT") expenditures
budgeted for the period from October 1998 through September 1999. The Company
continues to manage total IT expenses by re-prioritizing or curtailing less
critical investments, incorporating Year 2000 readiness into previously
planned system enhancements and by using existing staff to implement its Year
2000 program. The Company has hired outside consultants for its Year 2000
project, and it may need to purchase additional hardware or software.
The Company acquires a majority of its inventory from approximately 22
vendors. If these vendors have unresolved Year 2000 issues which affect their
ability to supply merchandise, the Company could be adversely affected. The
Company has conducted an initial assessment of vendors whose potential Year
2000 liability could materially affect operations. Based on this assessment
the Company believes that it is not materially at risk from a Year 2000
liability posed by its vendors. The Company plans to complete a more detailed
Year 2000 readiness survey of its top vendors by August 1999. In the event
that it appears a vendor will be adversely affected by Year 2000 issues, the
Company believes that it will be able to find alternative suppliers.
Should the Company not achieve full compliance in a timely manner or complete
its Year 2000 project within its current cost estimates, the Company's
business, financial condition and results of operations could be adversely
affected. However, in the event that the Company fails to meet the deadlines
above, the Company believes that the financial impact will not be material
since all systems believed by the Company to be critical are expected to be
Year 2000 compliant.
10
Williams Controls, Inc.
Management's Discussion and Analysis of
Results of Operations
(Dollars in thousands, except per share amounts)
Results of Operations
Three months ended June 30, 1999 compared to the three months ended June 30,
1998
Sales
Sales from continuing operations increased $1,495, or 10%, to $16,262 in the
third quarter of fiscal 1999 from $14,767 in the second quarter of fiscal
1998 primarily due to higher unit sales volumes in the Company's Vehicle
Components segment.
Sales from continuing operations in the Vehicle Components business unit
increased $1,257, or 9%, to $15,379 in the third quarter of fiscal 1999 over
levels achieved in the second quarter of fiscal 1998 due to higher
electronic throttle control ("ETC") unit sales. Sales from continuing
operations in the Company's Electrical Components and GPS business unit
increased $238, or 37%, due to increased unit sales of electrical
components.
Gross margin
Gross margin from continuing operations was $4,383 or 27% of sales in the
third quarter of 1999, compared to $4,699 or 32% of sales in the comparable
1998 period. Gross margin decreased $316 or 7%, in the third quarter of
fiscal 1999 as a result of reduced gross margins at the Vehicle Components
business unit of $508, partially offset by increases at the Electrical
Components and GPS business unit of $192. The reasons for the decrease in
gross margins at the Vehicle Components business unit include increased
management information service expenses of approximately $125 for
installation of a management information system, wide area network and year
2000 compliance, increased warranty costs of $81, and a decrease in the
gross margin realized at the Company's plastic injection molding and
tooling subsidiary of $208.
The Company's plastic injection molding and tooling subsidiary, the
operating results of which are included in the Vehicle Components business
unit, reported an increased loss from operations in the third quarter ended
June 30, 1999 of $217. Sales, gross margin (loss) and operating (losses)
for the quarter ended June 30, 1999 were $1,310, ($267) and ($491),
respectively compared to $1,089, $(59) and ($274) in the prior fiscal
period. The operation moved to a new facility in the fourth quarter of
fiscal 1998 which has a higher break-even sales level and plant capacity
than the prior facility. The operation has not achieved break-even sales to
date and is not expected to achieve break-even results until at least the
first quarter of fiscal 2000.
Operating expenses
During the three months ended June 30, 1999, the Company recognized a
$5,278 loss from the impairment of assets related to Kenco, the Company's
former automotive accessories business segment. The loss from impairment of
assets consisted of impairment of non-voting preferred stock and notes and
accounts receivable totaling $4,655 and impairment of property totaling
$623.
At June 30, 1999, the Company had non-voting preferred stock and notes and
accounts receivable related to Kenco of $797 and $3,858. Since the sale of
the operating assets of Kenco to Kenco Products, Inc. ("KPI") in 1998, KPI
has reported operating losses and experienced cash flow and other financing
difficulties. In addition, KPI has not been able to make payments on its
notes and accounts payable to the Company. KPI's bank has notified KPI it is
in default under its loan agreement. In consideration of this and after
evaluation of the business prospects of KPI and its need for additional
capital, the Company determined it was not probable that it would recover
the value of the preferred stock and notes and accounts receivable, and an
impairment loss totaling $4,655 was recorded for the three months ended June
30, 1999.
11
In addition, the Company recorded an impairment loss related to certain
property retained from the Kenco sale. The majority of the impairment loss
related to the sale in July 1999 of a building and land which was being
leased by KPI from the Company. This property was sold for cash resulting
in estimated net proceeds of $1,818. In connection with this sale the
Company retired $891 of debt securing the property. Net proceeds to the
Company of $927 are to be paid to a previous lender, on behalf of an
affiliated company, under the terms of an intercreditor agreement. The
estimated loss on the sale of land and building, which has been recorded in
loss from impairment of assets, is $528. The land and building have been
reclassified to property held for sale in the June 30, 1999 consolidated
balance sheet and are reflected at their net realizable value.
Operating expenses before loss from impairment of assets for continuing
operations were $2,520 for the three months ended June 30, 1999 compared to
$2,324 for the comparable 1998 period, or an increase of $196, or 8% as a
result of increased research and development expenses. Operating expenses
as a percent of net sales from continuing operations decreased to 15% in
the third quarter of fiscal 1999 compared to 16% in the comparable 1998
quarter.
Research and development expenses for continuing operations increased $297,
or 41%, to $1,017 during the third quarter of fiscal 1999 compared to $720
in the comparable 1998 quarter. As a percent of sales from continuing
operations research and development expenses increased from 5% to 6%.
Research and development expenses were increased to support new product
development for existing customers, for development of the automotive ETC
product and for development of sensor -related products.
Interest and Other Expenses
Interest expense from continuing operations increased $49, or 14%, to $389
in the third quarter of fiscal 1999 from $340 in the second quarter of
fiscal 1998. Allocated interest expense included in discontinued operations
for the quarters ended June 30, 1999 and 1998 was $149 and $119,
respectively.
Discontinued operations
The Company reported a net loss from discontinued operations of $336 in the
third quarter of fiscal 1998. The Company adopted a plan of disposal for
the Agriculture Equipment business unit in late fiscal 1998, and a plan of
disposal for the Automotive Accessories business unit in the third quarter
of fiscal 1997 and, accordingly, the estimated future operating losses of
the business units were expensed in the fourth quarter of fiscal 1998 and
third quarter of fiscal 1997, respectively.
Net sales from the Agriculture Equipment business unit declined $244, or
12% to $1,850 in the third quarter of fiscal 1999 compared to $2,094 in the
third quarter of fiscal 1998. The decline in sales was due to lower unit
sales attributable primarily to a weak farm economy. The loss from
operations for the discontinued Agriculture Equipment business unit
increased $90 to $630 due to a decrease in gross margin of $226 and a
decrease in operating expenses of $136.
Estimated future losses from discontinued Automotive Accessories operations
were accrued in fiscal 1997. The discontinued Automotive Accessories
operations were sold in the second quarter of fiscal 1998.
Net earnings available to common shareholders
Net earnings (loss) allocable to common shareholders was $(2,527) in the
quarter ended June 30, 1999 compared to $1,009 in the comparative prior year
period due to decreased gross margins as a percent of sales and loss from
impairment of assets.
The effective income tax rate was 38.4% and 30.4% for the quarters ended
June 30, 1999 and 1998, respectively.
12
Results of Operations
Nine months ended June 30, 1999 compared to the nine months ended June 30,
1998
Sales
Sales from continuing operations increased $4,750, or 11%, to $47,828 in
the nine months ended June 30, 1999 from $43,078 in the nine months ended
June 30, 1998 due to higher unit sales volumes in the Company's Vehicle
Components business unit offset by lower unit sales volumes in the
Electrical Components and GPS business unit.
Sales from continuing operations in the Vehicle Components business unit
increased $5,255, or 13%, to $45,604 in the nine months ended June 30, 1999
over levels achieved in the nine months ended June 30, 1998 due to higher
ETC unit sales. Sales from continuing operations in the Company's
Electrical Components and GPS business unit decreased $505, or 19%, due to
lower unit sales of electrical components.
Gross margin
Gross margin from continuing operations increased $635, or 5%, to $13,943
(29% of sales) compared to $13,308 (31% of sales) in the nine months ended
June 30, 1998. Gross margin increased $1,056 or 8%, in the nine months
ended June 30, 1999 in the Vehicle Components business unit due to higher
unit sales volumes of ETC products, partially offset by increased warranty
costs of $276.
The Company's plastic injection molding and tooling subsidiary, the
operating results of which are included in the vehicle components business
unit, reported an increased loss from operations in the nine months ended
June 30, 1999 of $422. The first nine months of 1998 benefited from a large
tooling order at the Company's plastic injection molding subsidiary which
did not recur in the same period in 1999. Sales, gross margin (loss) and
operating loss for the nine months ended June 30, 1999 were $4,123, (279),
and ($1,000) respectively compared to $3,599, $75 and ($578) in the prior
fiscal period. As noted previously, the operation moved to a new facility
in the fourth quarter of fiscal 1998 which has a higher breakeven sales
level and plant capacity than the prior facility. The operation has not
achieved break-even sales to date and is not expected to achieve break-even
results until at least the first quarter of fiscal 2000.
Increases in the Vehicle Components business unit were offset by a decrease
in gross margin of $213 in the Electrical Components and GPS business unit
attributable to lower unit sales volumes. Gross margins as a percent of
sales decreased to 11.1% in the nine months ended June 30, 1999 compared to
16.9% in the nine months ended June 30, 1998 primarily due to lower unit
sales.
Operating expenses
As discussed previously, during the nine months ended June 30, 1999 the
Company recognized a $5,278 loss from the impairment of assets related to
Kenco, the Company's former automotive accessories segment. The loss
consisted of an impairment of non-voting preferred stock and notes and
accounts receivable totaling $4,655 and impairment of property totaling
$623.
Operating expenses before the loss from impairment of assets increased $800,
or 13%, to $7,068 in the nine months ended June 30, 1999 compared to $6,268
in the nine months ended June 30, 1998 primarily as a result of increased
research and development expenses of $679. Research and development expenses
were increased to support new product development for existing customers,
for development of the automotive ETC product and for development of
sensor-related products. Operating expenses before the loss from impairment
of assets as a percentage of sales was 14.8% and 14.6% in the nine months
ended June 30, 1999 and 1998. Operating expenses before the loss from the
impairment of assets increased $774, or 17.9%, in the nine months ended June
30, 1999 in the Vehicle Components business unit and $26, or 1.3%, in the
Electrical Components and GPS business unit compared to the prior year
period.
13
Selling and administration expenses remained relatively stable for the nine
months ended June 30, 1999 and 1998. Selling and administration expenses as
a percent of sales decreased to 3.1% and 6.0%, respectively, in the nine
months ended June 30, 1999 compared to 3.5% and 6.4%, respectively in the
prior year period.
Interest and Other Expenses
Interest expense increased $147 to $1,187 in the nine months ended June 30,
1999 from $1,040 in the nine months ended June 30, 1998. Interest expense
increased primarily because of allocations of interest expense to the
Automotive Accessories discontinued operations in the prior year period.
Allocated interest expense included in discontinued operations for the nine
months ended June 30, 1999 and 1998 was $342 and $393, respectively.
Interest income increased $125 in the nine months ended June 30, 1999
primarily due to interest on a state tax refund of $85.
Discontinued operations
The Company reported a net loss from discontinued operations of $799 in the
nine months ended June 30, 1998. The Company adopted a plan of disposal for
the Agriculture Equipment business unit in late fiscal 1998 and a plan of
disposal for the Automotive Accessories business unit in the third quarter
of fiscal 1997, and accordingly, the estimated future operating losses of
these business units were expensed in the fourth quarter of fiscal 1998 and
third quarter of fiscal 1997, respectively.
The net loss from operations of the discontinued Agriculture Equipment
business unit as $639, net of taxes, in the nine months ended June 30,
1998. Net sales from the Agriculture Equipment segment declined $966, or
15% to $5,653 in the nine months ended June 30, 1999 compared to $6,619 in
the nine months ended June 30, 1998. The decline in sales was due to lower
unit sales attributable primarily to a weak farm economy. The loss from
operations of the discontinued Agriculture Equipment business unit
increased $690 from $887 in fiscal 1998 to $1,577 for the nine months ended
June 30, 1999 primarily as a result of a decrease in gross margin of $649.
Net losses from the discontinued Automotive Accessories business unit were
$160 net of taxes for the nine months ended June 30, 1998. Estimated future
losses from discontinued operations were accrued in fiscal 1997. The
Automotive Accessories business unit was sold in March 1998, and an
additional loss of $160 was incurred on the sale of this business unit.
Net sales from the discontinued business unit in the nine months ended June
30, 1998 was $2,928.
Net earnings available to common shareholders
Net earnings (loss) allocable to common shareholders were $(319) in the nine
months ended June 30, 1999 compared to $2,790 in the prior fiscal year due
to decreased earnings from operations as described above, partially offset
by decreased charges from discontinued operations totaling $799.
The effective income tax rate for continuing operations was 38.4% and 35.7%
for the nine months ended June 30, 1999 and 1998.
14
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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.
By: /s/ Gerard A. Herlihy
-----------------------------------
Gerard A. Herlihy,
Chief Financial Officer
By: /s/ Kim L. Childs
-----------------------------------
Kim L. Childs, Corporate Controller
and Principal Accounting Officer
Date: August 16, 1999
16
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:
-----------------------------------
Gerard A. Herlihy,
Chief Financial Officer
By:
-----------------------------------
Kim L. Childs, Corporate Controller
and Principal Accounting Officer
Date: August 16, 1999
16