10-K 1 fye9-00final.txt 10-K FOR FISCAL YEAR ENDED SEPTEMBER 30, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: September 30, 2000 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) 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. (1) Yes X No____ (2) Yes X No____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 31, 2000, 19,921,114 shares of Common Stock were outstanding and the aggregate market value of the shares (based upon the closing price of the shares on the NASDAQ National market) of Williams Controls, Inc. held by nonaffiliates was approximately $12,214,074. Documents Incorporated by Reference Portions of the definitive proxy statement for the 2000 Annual Meeting of Stockholders to be filed not later than February 28, 2001 are incorporated by reference in Part III hereof. Williams Controls, Inc. Index to 2000 Form 10-K Part I Page ---- Item 1. Description of Business 2-6 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Item 8. Financial Statements and Supplementary Data 18-55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 56 Part III Item 10. Directors and Executive Officers of the Registrant 56 Item 11. Executive Compensation 56 Item 12. Security Ownership of Certain Beneficial Owners and Management 56 Item 13. Certain Relationships and Related Transactions 56 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 56 Signatures 57 WILLIAMS CONTROLS, INC. Form 10-K Part I 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, and disposition of any current business of the Company, including its Agriculture Equipment segment. These forward-looking statements are subject to the business and economic risks faced by the Company including the ability of the Company to generate or obtain sufficient working capital to continue its operations. 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. Item 1. Description of Business (Dollars in thousands) 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"); 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 "we" "our" or "us." General ------- We are a Delaware corporation formed in 1988. The principal company in our Vehicle Components segment, our primary business segment, was founded by Norman C. Williams in 1939 and acquired by the Company in 1988. Our operating subsidiaries are divided into two operating segments and one discontinued segment that was sold in May 2000. Vehicle Components - Our vehicle component product lines primarily include electronic throttle control systems ("ETCs"), exhaust brakes and pneumatic, hydraulic controls and plastic injection molded products including automotive taillight systems. These products are used in trucks, utility and off-highway equipment, transit buses and underground mining machines. We estimate that we have over a 65% market share of electronic throttle control systems for Class 7 and 8 trucks. The majority of these products are sold directly to original equipment manufacturers such as Freightliner, Navistar, Volvo, Isuzu and Motor Coach Industries. We also sell these products through a well-established network of independent distributors. The major competitors in one or more of our product lines include Teleflex, VDO, Hella and Felsted. Markets for electronic throttle control systems are developing in smaller classes of trucks, diesel-powered pick-up trucks and automobiles. The major automotive manufacturers are converting gasoline-powered automobiles and pick-up trucks to the electronic throttle control system, although this requires engine redesign by the automotive manufacturers which is presently ongoing. In addition, the passenger vehicles market began the introduction of adjustable foot pedal systems during 1999. We purchased an adjustable foot pedal designer and manufacturer in July 1999. Electrical Components and Global Positioning System - Our electrical components product line includes the design and production of microcircuits, cable assemblies, position tilt sensors and other electronic products used in the telecommunication, computer and transportation industries. Major customers include Allied Signal, Raychem and Eaton Corp. Major competitors include CTS, Cooper, Wabash, AMP and Nethode. The global positioning system product line includes commuter railroad train tracking and agricultural cyber-farming using global positioning and geographic information systems. Our major customers include Chicago Metra, Tri-Rail, the Florida Department of Transportation, Los Angeles Metro and Via Tropical Fruit. Agricultural Equipment - Our agricultural equipment product lines were sold in May 2000. This segment's product lines included rotary cutters, discs, harrows and sprayers. These products were sold to independent equipment dealers located primarily in the Southeastern United States. Our major competitors had included Allied Industries (Bushhog), Wood Brothers, Taylor Industries, Inc. and Alamo Group. This business was previously reported as a discontinued operation. 2 These are our operating subsidiaries, all of which are 100% owned, and a brief description of each operating subsidiary's business (the subsidiaries that are reported as discontinued operations or are no longer operating in 2000 are not listed). Vehicle Components Williams Controls Industries, Inc.: Manufactures vehicle components sold primarily in the commercial vehicle industry. ProActive Acquisition Corporation.: Conducts research and development activities related to adjustable foot pedals and manufactures adjustable pedal systems. Premier Plastic Technologies, Inc.: Manufactures plastic components for the automotive industry. A definitive agreement has been entered into for the sale of this subsidiary. See Note 15 to the Notes to Consolidated Financial Statements. NESC Williams, Inc.: Installs conversion kits to allow vehicles to use compressed natural gas and provides natural gas well metering services. Williams Technologies, Inc.: Supports all subsidiaries of our company by providing research and development and developing strategic business relationships to promote "technology partnering." Electronic Components and Global Positioning System Aptek Williams, Inc.: Develops and produces sensors, microcircuits, cable assemblies and other electronic products for the telecommunications and the transportation industry, and conducts research and development activities to develop commercial applications of sensor related products for the electronics and automotive markets. GeoFocus, Inc.: Develops train tracking and cyber-farming systems using global positioning systems and geographical information systems. We signed a letter of intent to sell GeoFocus in October 2000. See Note 12 to the Notes to Consolidated Financial Statements. Acquisitions and Dispositions From fiscal 1994 through fiscal 1996, we pursued an acquisition strategy to integrate vertically through the acquisition of a sensor manufacturing company and horizontally through the acquisition of companies in similar industries that could benefit from our sensor and control experience. During this period, we acquired several companies with products that could benefit from sensor and control applications. In fiscal 1997, we changed our diversification acquisition strategy to focus our corporate and financial resources on opportunities emerging in our Vehicle Components segment. We may not be able to capitalize on opportunities emerging in our vehicle components segment, including the development of commercial applications of sensor related products. In addition, if we are successful in one or more endeavors, we cannot be certain that those endeavors will be profitable. In March 1998, we completed the sale of our subsidiary comprising the Automotive Accessories business unit. In June 1998, we restructured our investment in Ajay Sports, Inc. such agreement provides for a repayment of all loans and an increase in the dividend rate on our preferred stock investment on June 30, 2001. In July 1999, we purchased the ProActive pedals division of Active Tools Manufacturing, Co., Inc. ProActive Pedals is a designer and developer of adjustable foot pedal system and modular pedal systems. In May 2000, we completed the sale of our Agricultural Equipment segment operation. In July 2000, we signed an agreement to sell Premier Plastic Technologies, Inc., which has not been completed. In October 2000, we signed an agreement to sell Geo Focus, Inc., which has not been completed. 3 Competition In general, our products are sold in highly competitive markets to customers who are sophisticated and demanding concerning price, performance and quality. Products are sold in competition with other independent suppliers (some of which have substantial financial resources and significant technological capabilities), and many of these products are, or could be, produced by the manufacturers to which we sell these products. Our competitive position varies among our product lines. In the Vehicle Components segment, we are the largest domestic producer of ETCs sold in the truck ETC market. We have only one primary competitor in the diesel heavy truck market. We also manufacture pneumatic and air control systems for the heavy truck market, which is comprised of numerous highly fragmented competitors. We believe the principal method of competition for ETC in the trucking industry is quality and engineering added value and reputation. In addition, attainment of the ISO 9001 and QS 9000 quality certifications is critical to qualifying as a supplier to the automotive industry and certain manufacturers in the truck industry. Four of our manufacturing facilities in our Vehicle Components segment have attained these certifications. During fiscal 1999 and 2000, we began the introduction of our electronic throttle control systems product into the passenger vehicle market that consists of cars, small trucks, mini vans and sport utility vehicles. In August 2000, we began production of electronic throttle controls for the Ford Super Duty series trucks. In addition, we have been awarded production contracts for electronic throttle controls for the General Motors W (Midsize sedans) Car and Cadillac series, beginning in model year 2003. Our initial introduction of electronic throttle controls for passenger vehicles have been well accepted. A competitive advantage has been the durability and reliability of the low temperature co-fired ceramic (LTCC) sensor we developed that will be utilized in these designs. Continued introduction of electronic throttle controls in gasoline engines requires modification or redesign of engine components that is dependent upon the timing of development by the automotive manufacturers and their original equipment manufacturers. However, based on initial acceptance, we expect that by model year 2005, approximately 60-70% of passenger vehicles will have converted to electronic throttle controls. Our primary competitors in the United States are Teleflex, Hella and Felsted. Each of these companies is substantially larger and has greater financial resources than us. Furthermore, we have no control over the timing of the introduction of the electronic throttle control into the automotive, small truck and sport utility vehicle markets. We purchased substantially all of the assets and assumed certain liabilities of ProActive Pedals in July 1999. ProActive owns patent rights and designs for adjustable foot pedal systems and currently produces the adjustable foot pedal for the Dodge Viper. We hold the senior patents for rotational based adjustable pedal systems and are examining opportunities available to us to exploit this position, including strategic partnering and joint venture relationships. We currently compete against Teleflex, Magna, CTI, Delphi and KSR, Inc. in the adjustable foot pedal market, and we expect Dura Automotive and Hella to enter the market with adjustable foot pedal designs. Thus, we will be competing against much larger competitors in these markets with financial resources much greater than ours and with existing long-term supplier relationships with the automotive industry. Marketing and Distribution We sell our products to customers in the truck, automotive, heavy equipment, telecommunication and other diversified industries worldwide; approximately 96% of our sales from continuing operations are to customers in the Vehicle Components segment and 60% of our sales from continuing operations are from sales of ETC products. For the years ended September 30, 2000, 1999 and 1998, Freightliner accounted for 23%, 27% and 21%, Navistar accounted for 12%, 15%, and 16%, Volvo accounted for 6%, 8%, and 9%, Evart Corporation accounted for 9%, 1% and 0% and General Motors accounted for 6%, 5% and 3% of net sales from continuing operations, respectively. Approximately 15%, 20% and 15% of net sales from continuing operations in fiscal 2000, 1999, and 1998 respectively, were to customers outside of the United States, primarily in Canada, Mexico and Sweden, and, to a lesser extent, in Europe, South America and Australia. See notes 2 and 16 of Notes to Consolidated Financial Statements. The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. Actual losses and allowances have been within management's expectations. 4 Existing Future Sales Orders Future sales orders for our products were approximately $17,488 at September 30, 2000, compared to approximately $17,625 at September 30, 1999. These are orders for which customers have requested delivery at specified future dates within one year. We have not experienced significant problems delivering products on a timely basis. Environment Our operations result in the production of small quantities of materials identified by the Environmental Protection Agency of the United States Government as "hazardous waste substances" which must be disposed of in accordance with applicable local, state and federal guidelines. Substantial liability may result to a company for failure, on the part of itself or its contractors, to dispose of hazardous wastes in accordance with the established guidelines, including potential liability for the clean up of sites affected by improper disposals. We use our best efforts to ensure that any hazardous substances are disposed of in an environmentally sound manner and in accordance with these guidelines. We have identified certain contaminants in the soil of our Portland, Oregon manufacturing facility, which we believe was disposed on the property by a previous property owner. We intend to seek indemnification from such party for the costs of permanent monitoring, or cleanup if required. We have retained an environmental consulting firm that has conducted tests to determine the extent of any contamination. Based on the results of the tests and current regulations, the contamination is not a reportable event. We believe that we can enforce available claims against the prior property owner for any costs of monitoring or cleanup. We believe we are currently in compliance with environmental regulations. Government Regulation Our vehicle component products must comply with the National Traffic and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated thereunder which are administered by the National Highway Traffic Safety Administration ("NHTSA"). If, after an investigation, NHTSA finds that we are not in compliance with any of it's standards or regulations, among other things, it may require that we recall our products, which are found not to be in compliance, and repair or replace such products. We believe we are currently in compliance with NHTSA. Product Research and Development Our operating facilities engage in engineering, research and development and quality control activities to improve the performance, reliability and cost-effectiveness of our product lines. Our engineering staff works closely with our customers in the design and development of new products and adapting products for new applications. During fiscal 2000, 1999 and 1998, the Company spent $6,713, $3,424, and $2,778 respectively, on these activities for continuing operations. We increased our research and development expenditures in fiscal 2000 to design and validate ETC products compatible with gasoline powered vehicles, develop commercial applications for inertia, tilt and position sensor products, and for the development of adjustable foot pedal and ETC systems for automotive, sport utility vehicles, light trucks and heavy trucks. Research and development expenditures are expected to decrease in fiscal 2001 as we apply the applications developed to specific solutions for our customers and begin manufacture of these products. Patents and Trademarks Our product lines generally have strong name recognition in the markets in which they serve. We have a number of product patents over a period of years, which expire at various times. We consider each patent to be of value and aggressively protect our rights against infringement throughout the world. We own two patents (expiring in 2009) which we believe improve the marketability of the electronic product line of the heavy Vehicle Components segment. We do not consider that the loss or expiration of either patent would materially adversely affect us; however, competition in the electronic product line could increase without these patents. We have entered into a royalty bearing patent license agreement with a private inventor, under which we hold an exclusive, worldwide license for three patents covering adjustable foot pedals. The license agreement remains in effect for the life of the patents and requires yearly minimum payments to the inventor. We believe these licensed patents play a significant role in establishing our proprietary position in the adjustable foot pedal market, and the termination of the license or the loss of any of the licensed patents could materially adversely affect our ability to market adjustable foot pedals. We own numerous trademarks, enabling us to market our products worldwide. These trademarks include "Williams" and "Aptek". We believe that in the aggregate, the rights under our patents and trademarks are generally important to our operations, but do not consider that any patent or trademark or group of them related to a specific process or product is of material importance in relation to our total business except as described above. 5 Raw Materials; Reliance on Single Source Suppliers We produce our products from raw materials, including brass, aluminum, steel, plastic, rubber and zinc, which currently are widely available at reasonable terms. We rely upon CTS Corporation and Caterpillar, Inc. as single source suppliers for critical components and/or products as these suppliers are currently the only manufacturers of sensors made specifically for the Company's ETC system. We manufacture a foot pedal using a contact position sensor manufactured by Caterpillar, Inc. used exclusively on Caterpillar engines. Caterpillar supplies this sensor and requires that its sensor be used on all Caterpillar engines; therefore, the Company does not consider the Caterpillar sensor supply to be at risk. Although these suppliers have been able to meet our needs on a timely basis, and appear to be willing to continue being suppliers there is no assurance that a disruption in a supplier's business, such as a strike, would not disrupt the supply of a component. In addition, we have developed a high performance-high durability, cost effective sensor which we expect to further refine, with the expectation that volume production will begin in fiscal 2001. Production of these position sensors internally would tend to reduce our reliance on certain single source suppliers. Product Warranty We warrant our products to the first purchaser and subsequent owners against malfunctions occurring during the warranty period resulting from defects in material or workmanship, subject to specified limitations. The warranty on vehicle components is limited to a specified time period, mileage or hours of use, and varies by product and application. We have established a warranty reserve based upon our estimate of the future cost of warranty and related service costs. We regularly monitor our warranty reserve for adequacy in response to historical experience and other factors. Employees We employ approximately 434 employees, including 128 union employees. Our non-union employees are engaged in sales and marketing, accounting and administration, product research and development, production and quality control. Our union employees are engaged in manufacturing vehicle components in the Portland, Oregon facility and are represented by the International Union, United Automobile Workers of America and Amalgamated Local 492 (the "Union"). We have a collective bargaining agreement with the Union that expires in September 2002, which provides for wages and benefits (including pension, death, disability, health care, unemployment, vacation and other benefits) and contains provisions governing other terms of employment, such as seniority, grievances, arbitration and Union recognition. Our management believes that our relationship with our employees and the Union are good. We could experience a change in non-union labor costs as a result of changes in local economies and general wage increases. 6 Item 2. Properties (Dollars in thousands) The following table outlines the principal manufacturing and other facilities owned by us, subject to mortgages on all facilities except Williams and Agrotec. Entity Facility Location Type and Size of Facility -------- ----------------- ------------------------- Williams Controls Industries, Inc. Portland, Oregon Manufacturing and offices 120,000 square feet Aptek Deerfield Beach, Florida Manufacturing and offices 48,000 square feet Hardee Loris, South Carolina Manufacturing and offices 101,000 square feet Agrotec Pendleton, North Carolina Manufacturing and office 43,000 square feet Our manufacturing facilities are equipped with the machinery and equipment necessary to manufacture and assemble its products. Management believes that the facilities have been maintained adequately, and that we could increase our production output significantly at any of our facilities with additional equipment and work force. Facilities that are encumbered by mortgages at September 30, 2000 are as follows: Hardee, $467, and Aptek $2,248. A bank holds a deed of trust on the Williams facility. Additionally, the Company leases approximately 54,100 square feet of production and administrative office space in Sterling Heights Michigan, pursuant to a ten year lease signed in January 1998. The Company also holds various leases to maintain the operations of its subsidiaries. Item 3. Legal Proceedings Williams Controls, Inc. and its consolidated subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. Our management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of our insurance coverage, and our established reserves for uninsured liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on our review, management believes that any liabilities that may result are not reasonably likely to have a material effect on the Company's liquidity, financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders We did not submit any matters to a vote of its security holders during the fourth quarter of the year ended September 30, 2000. 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Our common stock is traded on the over-the-counter market of the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "WMCO." The range of high and low bid closing quotations for our common stock for each fiscal quarter for the past two fiscal years is as follows: 2000 ----------------- Quarter High Low ------- ---- --- October 1 - December 31 $2.56 $1.97 January 1 - March 31 2.44 2.00 April 1 - June 30 2.25 1.50 July 1 - September 30 1.90 1.25 1999 ----------------- Quarter High Low ------- ---- --- October 1 - December 31 $2.50 $2.00 January 1 - March 31 3.00 2.19 April 1 - June 30 3.25 2.19 July 1 - September 30 3.13 2.47 There were 430 record holders of our common stock as of November 30, 2000. We have never paid a dividend with respect to our common stock and have no plans to pay a dividend in the foreseeable future. 8 Item 6. Selected Financial Data (Dollars in thousands - except per share amounts)
Consolidated Statements of Operations Data: Year ended September 30, 2000* 1999** 1998 1997 1996*** ---------------------------------------------- -------- --------- -------- -------- --------- Net sales from continuing operations $ 67,725 $ 61,422 $ 57,646 $ 46,671 $ 40,253 Net earnings (loss) from continuing operations (16,744) (3,928) 4,611 2,515 2,975 Net earnings (loss) (16,744) (9,539) 312 (2,037) (561) Earnings (loss) from continuing operations per common share - basic (0.88) (0.24) 0.24 0.14 0.18 Earnings (loss) from continuing operations per common share - diluted (0.88) (0.24) 0.23 0.14 0.17 Net earnings (loss) per common share - basic (0.88) (0.54) 0.00 (0.12) (0.03) Net earnings (loss) per common share - diluted (0.88) (0.54) 0.00 (0.12) (0.03) Cash dividends per common share - - - - - Consolidated Balance Sheet Data September 30, 2000* 1999** 1998 1997 1996*** ---------------------------------------------- -------- --------- -------- -------- --------- Current assets $ 20,561 $ 27,777 $ 31,716 $ 25,156 $ 30,926 Current liabilities 38,239 18,865 12,767 9,028 29,600 Working capital (deficit) (17,678) 8,912 18,949 16,128 1,326 Total assets 49,149 64,504 68,565 48,313 53,049 Long-term liabilities 9,866 27,433 31,387 22,450 4,726 Minority interest in consolidated subsidiaries - - - - 713 Shareholders' equity 1,044 18,206 24,411 16,835 18,010
Note: Except for the balance sheet amounts for 1996, the above amounts reflect the Automotive Accessories and Agricultural Equipment segments as discontinued operations. See Note 14 to the Notes to Consolidated Financial Statements. * 2000 data includes recognition of $5,044 expense for equity interest in loss of affiliate. The recognition of the loss was significantly increased due to the implementation of Emerging Issues Task Force Bulletin 99-10 "Percentage Used to Determine the Amount of Equity Method Losses". The 2000 data also includes a $6,896 deferred tax expense for a valuation allowance for previously recognized deferred income tax assets which may no longer be realizable based on management's current assessment of their ultimate realizability. See also Notes 4 and 11 to Notes to Consolidated Financial Statements for information on the equity interest in loss of affiliate and the valuation allowance for deferred income taxes, respectively. ** 1999 data includes an acquisition made in July. Net sales, loss from operations (including expense of $1,750 for acquired in-process research and development), and total assets related to this acquisition were $55, $(2,066) and $6,320, respectively. The 1999 loss from continuing operations includes a loss from impairment of assets of $5,278. See Notes 10 and 19 to the Notes to Consolidated Financial Statements for information on the impairment loss and the acquisition, respectively. *** 1996 data includes acquisitions made in April and July 1996. Net sales, loss from operations and total assets related to these acquisitions were $2,782, $(46) and $2,869, respectively. 9 Item 7. 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 Position and Capital Resources Financial Condition, Liquidity and Capital Resources As shown in the consolidated financial statements during the years ended September 30, 2000, 1999 and 1998, the Company incurred (losses) income of ($16,744), ($9,539) and $312, respectively. In addition, accounts payable has increased from $9,223 at September 30, 1999 to $11,363 at September 30, 2000; working capital has decreased from $8,912 at September 30, 1999 to a deficit of ($17,678) at September 30, 2000; and stockholders' equity has decreased from $18,206 at September 30, 1999 to $1,044 at September 30, 2000. Also, as described in Note 6 to Consolidated Financial Statements, the Company was not in compliance with the covenants of its credit agreement at September 30, 2000. The credit agreement with the Company's primary bank matures on July 11, 2001, the Company has extended the debt due with another bank and the Company is in default on the payment of certain bank debt as discussed in Note 6 to Consolidated Financial Statements; as a result, the Company has classified its debt owed to its primary bank as a current liability at September 30, 2000. Subsequent to September 30, 2000, the Company reached the borrowing capacity under its credit agreement and required an overadvance from its primary bank to support operations. Due to the lack of borrowing capacity under the credit facility, the Company's working capital deficit, the Company's debts, including accounts payable, and other factors as outlined herein, the Company has a significant lack of liquidity. Accordingly, the Company's continuation as a going concern is dependent upon, among other things, its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its credit agreement, to obtain additional financing or refinancing as may be required, and ultimately to attain profitability. The North American truck market has seen a significant decline in sales of new trucks as a result of the large number of used trucks on the market, significantly increased gasoline prices and interest rates. As a result, the Company has experienced a significant decline in sales in the first three months of fiscal 2001 as compared to fiscal 2000, and expects the trend to continue for a period of time. As a result of the decline in sales, the Company has taken certain actions including reducing the hourly workforce to a four-day workweek and reducing the salaried workforce by approximately 15%. After reviewing its working capital needs, management of the Company estimates that additional working capital for fiscal 2001 of approximately $7,000 will be needed. Management is reviewing how it might reduce the amount of working capital needed and is pursuing alternatives to raise capital, both debt and/or equity. In addition, the Company is reviewing the sale of non-strategic assets and has engaged an investment banking firm to investigate alternatives available to it, including selling all or part of the Company to a third party, obtaining bridge financing to enable the Company to continue operating until such time as a buyer can be identified or sufficient equity and/or debt financing can be raised to support the operations of the Company. There is no assurance that the Company will be able to obtain adequate working capital in the amounts needed to sustain its operations or sell its business or parts of it in a timely fashion. The above matters raise a substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Cash decreased $2,293 at September 30, 2000 compared to September 30, 1999. Cash flow from continuing operations decreased from $7,644 for the year ended September 30, 1999 to $2,979 for the year ended September 30, 2000. The decrease was primarily due to the increase in the net loss between years. The positive cash flow from continuing operations for 2000 differs from the net loss from operations primarily because of (1) non cash operating expenses of $3,189 for deprecation and amoritzation, an increase of $1,133 over 1999, equity interest in loss of affiliate of $5,044 (see Note 4 of the Notes to Consolidated Financial Statements), an increase of $4,556 over 1999 and deferred tax provision of $6,896 (see Note 11 of the Notes to Consolidated Financial Statements), an increase of $9,461 over 1999 and (2) an increase in accounts payable and accrued expenses of $2,696 and a decrease in inventory of $1,819. 10 Cash flow used in investing activities decrease from $9,181 for the year ended September 30, 1999 to $2,343 for the year ended September 30, 2000. In 1999 the Company used cash of $6,350 for the acquisition of ProActive Pedals (see Note 19 of the Notes to Consolidated Financial Statements). Cash used for the acquisition of property, plant and equipment was $2,343 and $2,948 for 2000 and 1999, respectively. Capital expenditures are expected to be $2,850 in fiscal 2001, primarily for existing customers and new automotive ETC business. Cash flow from financing activities was a use of $2,718 for the year ended September 30, 2000, reflecting a net payment on long-term debt of $4,098 offset by an increase in cash of $1,965 representing the net proceeds from the issuance of convertible subordinated debt (see Note 6 of the Notes to Consolidated Financial Statements). In 1999, the Company had net cash provided by financing activities of $4,557 due primarily from a net increase in long-term debt of $1,605 and net proceeds from the issuance of common stock in a private placement of $3,379. Cash flow from financing activities in 1999 was used to purchase the net assets of ProActive Pedals. Market Risk - 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 end of period interest rates would have a material effect on the Company's cash flow. In June 2000 the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 138"). 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 133, as amended by SFAS 137 and 138 establishes accounting and reporting standards for all derivative instruments. SFAS 133 and 138 are effective for fiscal years beginning after June 15, 2000. The Company has made a preliminary assessment of its potential derivative instruments and based on that assessment does not expect that the adoption of SFAS 133 and 138 will have any material impact on the Company's financial position or results of operations. 11 Results of Operations Year ended September 30, 2000 compared to the year ended September 30, 1999 Net sales from continuing operations increased 10.3% to $67,725 in fiscal 2000 from $61,422 in fiscal 1999 due to higher unit sales volumes in the Company's Vehicle Components segment. In fiscal 2000, loss from continuing operations was $1,548, compared to loss from continuing operations of $3,031 in fiscal 1999. The decrease in losses, totaling $1,483, was partially the result of a $1,105 decrease in gross margin from the prior year caused by $7,610 in increased cost of sales in the Vehicle Components segment affected primarily by the plastic injection molding subsidiary, decreased absorption of overhead related to lower finished goods and work in process inventory levels, as well as the impact from product mix shifting away from higher margin ETC sales. Additionally, research and development expenses increased $3,289, selling expenses decreased $121 and administrative expenses increased $1,272 in 2000. These increases were offset by 1999 expenses of $1,750 for research and development efforts in process at the date of acquisition of ProActive and $5,278 loss from the impairment of assets related to Kenco, our former Automotive Accessories segment, which were not incurred in fiscal 2000. Net loss allocable to common shareholders increased $7,197 to $17,332 in fiscal 2000 compared to net loss allocable to common shareholders of $10,135 in the prior fiscal year due to the factors described above, as well as the recognition of $5,044 expense for equity interest in loss of affiliate. The recognition of the loss was significantly increased due to the implementation of Emerging Issues Task Force Bulletin 99-10 "Percentage Used to Determine the Amount of Equity Method Losses". The net loss allocable to common shareholders also includes a $6,896 deferred tax provision resulting from a valuation allowance for previously recognized deferred income tax assets which may no longer be realizable based on management's current assessment of their ultimate realizability. Net interest expense increased $968 due to increased bank borrowings, increased capital leases, the issuance of convertible subordinated debt in April 2000, and a decreased allocation of interest to the discontinued Agricultural Equipment Segment. Net Sales --------- Net sales from continuing operations increased $6,303, or 10.3%, to $67,725 in the year ended September 30, 2000 from $61,422 in the year ended September 30, 1999 primarily due to higher unit sales volumes in our Vehicle Components segment. Net sales from continuing operations in the Vehicle Components segment increased $7,127, or 12.3%, to $65,263 in the year ended September 30, 2000 over levels achieved in the year ended September 30, 1999 due to $4,893 higher plastic injection molding sales and automotive pedal sales. Sales from continuing operations in our Electrical Components and GPS segment decreased $824, or 25.1%, due to lower unit sales of electrical components. 12 Gross margin ------------ Gross margin from continuing operations decreased $1,105, or 6.5%, to $15,979 (23.6% of sales) compared to $17,084 (27.8% of sales) in the year ended September 30, 1999. Gross margin decreased $482 or 2.8%, in the year ended September 30, 2000 in the Vehicle Components segment due primarily to $1,133 reduction in margin loss in the plastic injection molding subsidiary driven by higher volume of production over which fixed costs were allocated offset by $1,741 decrease in margins in our Portland and Florida subsidiaries due to decreased absorption of overhead related to lower finished goods inventory levels, as well as the impact from product mix shifting slightly away from higher margin ETC sales. The Electrical Components and GPS segment also recognized an increase in gross margin loss of $623 to $735 compared to prior fiscal year's gross margin loss of $112. Our plastic injection molding and tooling subsidiary ("PPT"), the operating results of which are included in the Vehicle Components segment, reported a $3,638 loss from operations for the year ended September 30, 2000, a decrease of $807 compared to the prior year's loss from operations of $4,445. Sales, gross margin (loss) and operating loss for the year ended September 30, 2000 were $10,146, ($1,950), and ($3,638) compared to $5,253, ($3,083), and ($4,445), respectively, in the prior fiscal year. The increase in sales is the result of new business that was awarded and began production in the second quarter of fiscal 2000. The Company has signed a definitive agreement for the merger of PPT into 3DM International, Inc. ("3DMI"). No loss is expected to be realized under the terms of the definitive agreement. Closing of the transaction is subject to customary closing conditions and 3DMI's payment of all advances relating to PPT under the secured lending facility with the Bank and subject to 3DMI obtaining sufficient financing. Financing has not been completed and there is no assurance that the transaction will be completed. No other plan to dispose of PPT has been adopted. In addition, the Company has entered into an operating agreement whereby an affiliate of the potential buyer is managing the operations of PPT during the interim period until the sale is consummated. Gross margin loss at the Electrical Components and GPS segment increased $623 from $112 for the year ended September 30, 1999 to $735 for the year ended September 30, 2000, primarily as a result of fixed overhead combined with declining sales at the electronic components operations, offset by increased margins of $171 at the GPS operations, primarily due to the completion of a GPS contract in the current fiscal year. Operating expenses ------------------ In conjunction with the acquisition of the ProActive Pedal Division of Active Tool and Manufacturing Co., Inc. in July, 1999, we expensed $1,750 of the purchase price as acquired in-process research and development during the year ended September 30, 1999. Also, during the year ended September 30, 1999, we 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 (see Note 10 to the Notes to Consolidated Financial Statements). These items did not recur in fiscal 2000. Operating expenses before the charge for acquired in-process research and development and the loss from impairment of assets increased $4,440, or 33.9%, to $17,527 for the year ended September 30, 2000 compared to $13,087 for the year ended September 30, 1999, primarily as a result of increased research and development expenses of $3,289, a decrease in selling expenses of $121, and an increase in administration expenses of $1,272. Research and development expenses increased to support new product development for the automotive and truck ETC and adjustable foot pedal products, and for development of sensor-related products and for existing customers. Research and development expenses as a percentage of sales were 9.9% for the year ended September 30, 2000 compared to 5.6% for the year ended September 30, 1999. However, they are expected to decrease in the fiscal year ending September 30, 2001 as the focus shifts to production of automotive pedals and sensor-related products. Operating expenses before the charge for acquired in-process research and development and loss from the impairment of assets increased $4,899, or 47.8%, in the year ended September 30, 2000 in the Vehicle Components segment and decreased $459, or 16.2%, in the Electrical Components and GPS segment compared to the prior year period. Selling expenses were reduced $121 for the year ended September 30, 2000 compared to 1999. Selling expenses as a percent of sales decreased to 2.8% in the year ended September 30, 2000 compared to 3.3% in the prior year. 13 Administration expenses increased $1,272 to $8,938 for the year ended September 30, 2000 from $7,666 for the comparable period in the prior year, due primarily to increased costs of $339 to support the increased volume of sales at the plastics injection molding subsidiary, increased amortization of intangibles totaling $540 as a result of an acquisition completed in fiscal year 1999, as well as start-up costs of $474 related to the implementation of operations at the automotive pedal plant, offset by decreased costs of $285 at our Portland subsidiary due to reduction in bad debt expense. Acquired In-Process Research and Development -------------------------------------------- In connection with its acquisition of the assets of ProActive Pedals in July 1999, the Company recorded a pretax charge of $1,750 for research and development efforts in process at the date of the acquisition. See Note 19 of Notes to Consolidated Financial Statements. The value assigned to the in-process research and development efforts represents those efforts in process at the date of acquisition that had not reached the point where technological feasibility had been established and that had no alternative future uses. Accounting rules require that these costs be expensed as incurred. The significant projects in process at the time of the acquisition were for the development of commercially viable designs and concepts for adjustable pedal systems. The value was determined by estimating the costs to further develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such products, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable in 2001. Expenditures to complete these projects were expected to total approximately $3.5 million. This estimate is subject to change, given the uncertainties of the development process, and no assurances can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. To date, expenditures and results have not differed significantly from the forecast assumptions. Interest and Other Expenses --------------------------- Interest expense increased $856 to $3,010 in the year ended September 30, 2000 from $2,154 in the year ended September 30, 1999. The reasons for the increase were increased debt owing to a Bank, increased capital leases and a decreased allocation of interest to the discontinued Agricultural Equipment Segment. Allocation of interest to the discontinued Agricultural Equipment Segment decreased by $192 in fiscal 2000 compared to fiscal 1999 as a result of significantly decreased net assets at this segment. In addition, the issuance of convertible subordinated debt in April 2000 increased interest expense approximately $72. Allocated interest expense included in discontinued operations for the year ended September 30, 2000 and 1999 was $85 and $277, respectively. Discontinued operations ----------------------- The Company reported a net loss from discontinued operations of $5,611 for year ended September 30, 1999. The Company adopted a plan of disposal for the Agriculture Equipment segment in late 1998. As a result, a net loss on disposal totaling $1,403 was recorded for this segment. However, during the year ended September 30, 1999, an additional net loss on disposal totaling $5,611 was recorded for the disposal of this segment. The loss in fiscal 1999 was based on events and information, which resulted in management's revised estimate of the net realizable value of the Agricultural Equipment Segment. The revised estimate was based on contract negotiations and lower than anticipated bids for portions or the entire segment. During fiscal 2000, the Agricultural Equipment segment was sold. No loss in excess of that previously provided was realized as a result of the sale. Income Taxes ------------ The income tax expense of $7,527 for the year ended September 30, 2000 is primarily the result of a valuation allowance recorded for previously recognized deferred income tax assets as of September 30, 2000 which may no longer be realizable based on management's current assessment of their ultimate realizability. Net earnings (loss) allocable to common shareholders ---------------------------------------------------- Net earnings (loss) allocable to common shareholders was ($17,332) in the year ended September 30, 2000 compared to ($10,135) in the prior fiscal year due to the factors described above. 14 Results of Operations Year ended September 30, 1999 compared to the year ended September 30, 1998 Overview -------- Net sales from continuing operations increased 6.6% to $61,422 in fiscal 1999 from $57,646 in fiscal 1998 due to higher unit sales volumes in the Company's vehicle components segment. In fiscal 1999, loss from continuing operations was $3,031, compared to earnings from continuing operations of $8,991 in fiscal 1998. The decrease, totaling $12,022, was the result of reduced gross margin of $2,284, primarily due to increased warranty expenses and increased inventory reserves based on events in the fourth quarter of fiscal 1999. Also in fiscal 1999, we expensed $1,750 for research and development efforts in process at the date of acquisition of ProActive and recognized a $5,278 loss from the impairment of assets related to Kenco, our former Automotive Accessories segment. Net loss allocable to common shareholders was $10,135 in fiscal 1999 compared to net income allocable to common shareholders of $42 in the prior fiscal year due to the factors described above, as well as an increased net loss from discontinued operations based upon events and information that resulted in management's revised estimates of the net realizable value of the Agricultural Equipment segment. Net Sales --------- Sales from continuing operations increased $3,776, or 6.6%, to $61,422 in the year ended September 30, 1999 from $57,646 in the year ended September 30, 1998 primarily due to higher unit sales volumes in our Vehicle Components segment. Sales from continuing operations in the Vehicle Components segment increased $4,065, or 7.5%, to $58,136 in the year ended September 30, 1999 over levels achieved in the year ended September 30, 1998 due to higher ETC unit sales. Sales from continuing operations in our Electrical Components and GPS segment decreased $289, or 8.1%, due to lower unit sales of electrical components. Gross Margin ------------ Gross margin from continuing operations decreased $2,284, or 11.8%, to $17,084 (27.8% of sales) compared to $19,368 (33.6% of sales) in the year ended September 30, 1998. Gross margin decreased $977 or 5.4%, in the year ended September 30, 1999 in the Vehicle Components segment due primarily to increased losses at the company's plastic injection molding and tooling subsidiary and increased warranty costs of $781. Our plastic injection molding and tooling subsidiary, the operating results of which are included in the Vehicle Components segment, reported an increased loss from operations in the year ended September 30, 1999 of $3,673 over the prior year. Sales, gross margin (loss) and operating loss for the year ended September 30, 1999 were $5,253, ($3,083), and ($4,445), respectively compared to $4,949, $205 and ($772) in the prior fiscal year. The operation moved to a new facility in the fourth quarter of fiscal 1998 that has a higher breakeven sales level and plant capacity than the prior facility. In addition, the plastic injection and molding subsidiary experienced operating problems resulting from inefficient production from defective molds supplied by customers and operating problems on the manufacturing floor. Also, in response to the issues previously mentioned, in the fourth quarter of fiscal 1999, the tooling operation was closed down. Gross margin at the Electrical Components and GPS segment decreased $852 from $740 for the year ended September 30, 1998 to ($112) for the year ended September 30, 1999 primarily due to fixed expenses and other charges. Operating expenses ------------------ In conjunction with the acquisition of the ProAIn conjunction with the acquisition of the ProActive Pedal Division of Active Tool and Manufacturing Co., Inc. in July, 1999, we expensed $1,750 of the purchase price as acquired in-process research and development during the year ended September 30, 1999. Also, during the year ended September 30, 1999, we 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 (see Note 10 to the Notes to Consolidated Financial Statements). 15 Operating expenses before the charge for acquired in-process research and development and the loss from impairment of assets increased $2,710, or 26.1%, to $13,087 for the year ended September 30, 1999 compared to $10,377 for the year ended September 30, 1998 primarily as a result of increased research and development expenses of $646 and an increase in administration expenses of $2,132. Research and development expenses were increased to support new product development for development of the automotive ETC product, for development of sensor-related products and for existing customers. Operating expenses before the charge for acquired in-process research and development and loss from impairment of assets as a percentage of sales, was 21.3% and 18.0% in the year ended September 30, 1999 and 1998. Operating expenses before the charge for acquired in-process research and development and loss from the impairment of assets increased $3,383, or 47.1%, in the year ended September 30, 1999 in the Vehicle Components segment and decreased $219, or 8.0%, in the Electrical Components and GPS segment compared to the prior year period. Selling expenses were reduced $68 for the year ended September 30, 1999 compared to 1998. Selling and expenses as a percent of sales decreased to 3.3% in the year ended September 30, 1999 compared to 3.6% in the prior year . In addition, administration expenses increased $2,132, primarily to support management information service needs with the recent implementation of new ERP systems, as well an increased bad debt expense, totaling $225, primarily related to closing the tooling operation at the plastic injection molding facility, and increased payroll and related costs totaling $160 to support the sophisticated machinery and expanded operations at our plastic injection molding and tooling subsidiary. Acquired In-Process Research and Development -------------------------------------------- In connection with its acquisition of the assets of ProActive Pedals in July 1999, the Company recorded a pretax charge of $1,750 for research and development efforts in process at the date of the acquisition. See Note 19 of Notes to Consolidated Financial Statements. The value assigned to the in-process research and development efforts represents those efforts in process at the date of acquisition that had not reached the point where technological feasibility had been established and that had no alternative future uses. Accounting rules require that these costs be expensed as incurred. The significant projects in process at the time of the acquisition were for the development of commercially viable designs and concepts for adjustable pedal systems. The value was determined by estimating the costs to further develop the acquired in-process technology into commercially viable products, estimating the resulting net cash flows from such products, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the uncertainty surrounding the successful development of the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable in 2001. Expenditures to complete these projects were expected to total approximately $3.5 million. This estimate is subject to change, given the uncertainties of the development process, and no assurances can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. To date, expenditures and results have not differed significantly from the forecast assumptions. Interest and Other Expenses --------------------------- Interest expense increased $349 to $2,154 in the year ended September 30, 1999 from $1,805 in the year ended September 30, 1998. Interest expense increased primarily as a result of increased capital lease obligations that are at a higher average interest rate than bank debt. Allocated interest expense included in discontinued operations for the year ended September 30, 1999 and 1998 was $277 and $477, respectively. Discontinued operations ----------------------- The Company reported a net loss from discontinued operations of $5,611 for year ended September 30, 1999 compared to a net loss of $4,299 for the year ended September 30, 1998. The Company adopted a plan of disposal for the Agriculture Equipment segment in late 1998. As a result, a net loss on disposal totaling $1,403 was recorded for this segment. However, during the year ended September 30, 1999, an additional net loss on disposal totaling $5,611 was recorded for the disposal of this segment. The loss in fiscal 1999 is based on events and information, which resulted in management's revised estimate of the net realizable value of the Agricultural Equipment Segment. The revised estimate is based on contract negotiations and lower than anticipated bids for portions or all of the segment. 16 Net sales from the Agriculture Equipment segment declined $1,275, or 15.0% to $7,225 in the year ended September 30, 1999 compared to $8,500 in the year ended September 30, 1998. The decline in sales was due to lower unit sales attributable primarily to a weak farm economy. Estimated future losses from discontinued operations for the Automotive Accessories segment were accrued in fiscal 1997. The Automotive Accessories segment was sold in March 1998, and the loss was $1,625 net of income tax benefits of $1,001. The additional loss in fiscal 1998 over that accrued in fiscal 1997 resulted from the loss on the actual disposition of the Automotive Accessories segment which was sold in 1998. Net earnings (loss) allocable to common shareholders ---------------------------------------------------- Net earnings (loss) allocable to common shareholders were $(10,135) in the year ended September 30, 1999 compared to $42 in the prior fiscal year due to decreased earnings from operations, including the charge for acquired in-process research and development and the loss from impairment of assets as described above. The effective income tax rate for continuing operations was (27.5)% and 33.9% for the year ended September 30, 1999 and 1998. 17 Item 8. Financial Statements and Supplementary Data Williams Controls, Inc. Index to Consolidated Financial Statements Page ---- Consolidated Balance Sheets at September 30, 2000 and 1999 19 Consolidated Statements of Shareholders' Equity for the years ended September 30, 2000, 1999 and 1998 20 Consolidated Statements of Operations for the years ended September 30, 2000, 1999 and 1998 21 Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2000, 1999 and 1998 22 Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999 and 1998 23 Notes to Consolidated Financial Statements 24-54 Report of Independent Public Accountants 55 See page 58 for Index to Schedules and page 60 for Index to Exhibits. 18
Williams Controls, Inc. Consolidated Balance Sheets (Dollars in thousands, except share information) September 30, September 30, ASSETS 2000 1999 ----------------- ----------------- Current Assets: Cash and cash equivalents $ $ 30 $ 2,323 Trade and other accounts receivable, less allowance of $508 and $484 in 2000 and 1999, respectively 11,357 10,941 Inventories, net 8,016 9,828 Deferred income taxes and other 1,158 4,325 Net assets held for disposition - 360 ----------------- ----------------- Total current assets 20,561 27,777 Property plant and equipment, net 21,486 20,775 Investment in and note and accounts receivable from 1,615 6,398 affiliate Net assets held for disposition - 500 Goodwill and intangible assets, net 5,165 5,764 Deferred income taxes - 3,025 Other assets 322 265 ----------------- ----------------- Total assets $ 49,149 $ 64,504 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 11,363 $ 9,223 Accrued expenses 4,574 3,449 Non-refundable deposit 500 - Current portion of long-term debt and capital leases 21,802 5,193 Estimated loss on disposal - 1,000 ----------------- ----------------- Total current liabilities 38,239 18,865 Long-term debt and capital lease obligations 4,567 24,743 Other liabilities 3,259 2,690 Convertible subordinated debt, net 2,040 - Commitments and contingencies (Note 23) Shareholders' Equity: Preferred stock ($.01 par value, 50,000,000 authorized; 78,400 and 78,500 issued and outstanding at September 30, 2000 and 1999, respectively) 1 1 Common stock ($.01 par value, 50,000,000 authorized; 19,921,114 and 19,898,728 issued and outstanding at September 30, 2000 and 1999, respectively) 199 199 Additional paid-in capital 21,744 21,574 Accumulated deficit (20,023) (2,691) Treasury stock (130,200 shares at September 30, 2000 and 1999) (377) (377) Note receivable (500) (500) ----------------- ----------------- Total shareholders' equity 1,044 18,206 ----------------- ----------------- Total liabilities and shareholders' equity $ 49,149 $ 64,504 ================= =================
The accompanying notes are an integral part of these balance sheets. 19
Williams Controls, Inc. Consolidated Statements of Shareholders' Equity (Dollars in thousands) Issued Retained Preferred Issued Additional Earnings Unearned Pension Share- Stock Common Stock Paid-in (Accumulated ESOP Treasury Note Liability holders' Shares Amount Shares Amount Capital Deficit) Shares Stock Receivable Adjustment Equity ----------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 - $ - 17,912,240 $ 179 $ 9,822 $ 7,402 $ (191) $ (377) $ - $ - $16,835 Net earnings - - - - - 312 - - - - 312 Issuance of preferred stock 80,000 1 - - 7,336 - - - - - 7,337 Dividends on preferred stock - - - - - (270) - - - - (270) Common stock issued in satisfaction of note payable - - 42,329 1 99 - - - - - 100 Issuance of stock upon exercise of stock options - - 150,000 1 61 - - - - - 62 Common stock issued to affiliate for note receivable - - 206,719 2 498 - - - (500) - - Reduction of unallocated ESOP Shares - - - - 7 - 118 - - - 125 Change in pension liability adjustment - - - - - - - - - (184) (184) Income tax benefit of non-qualified stock option exercises - - - - 94 - - - - - 94 ----------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 80,000 1 18,311,288 183 17,917 7,444 (73) (377) (500) (184) 24,411 Net loss - - - - - (9,539) - - - - (9,539) Dividends on preferred stock - - - - - (596) - - - - (596) Common stock issued private placement - - 1,331,149 13 4,539 - - - - - 4,552 Equity issuance costs - - - - (1,173) - - - - - (1,173) Issuance of stock upon exercise of stock options - - 201,750 2 167 - - - - - 169 Common stock issued from conversion of preferred stock (1,500) - 54,541 1 (1) - - - - - - Change in pension liability adjustment - - - - - - - - - 184 184 Reduction of unallocated ESOP shares - - - - 7 - 73 - - - 80 Income tax benefit of non-qualified stock option exercise - - - - 118 - - - - - 118 ----------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 78,500 1 19,898,728 199 21,754 (2,691) - (377) (500) - 18,206 Net loss - - - - - (16,744) - - - - (16,744) Dividends on preferred stock - - - - - (588) - - - - (588) Equity issuance costs - - - - (33) - - - - - (33) Warrants issued in connection with convertible subordinated debt - - - - 166 - - - - - 166 Issuance of stock upon exercise of stock options - - 18,750 - 37 - - - - - 37 Common stock issued from conversion of preferred stock (100) - 3,636 - - - - - - - - ----------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 78,400 $ 1 19,921,114 $ 199 $21,744 $ (20,023) $ - $ (377) $ (500) $ - $ 1,044 =================================================================================================================
The accompanying notes are an integral part of these statements. 20 Williams Controls, Inc. Consolidated Statements of Operations (Dollars in thousands, except share and per share information)
For the year ended September 30, 2000 1999 1998 ----------------- ---------------- ---------------- Net sales $ 67,725 $ 61,422 $ 57,646 Cost of sales 51,746 44,338 38,278 ----------------- ---------------- ---------------- Gross margin 15,979 17,084 19,368 Operating expenses: Acquired-in process research and development - 1,750 - Research and development 6,713 3,424 2,778 Selling 1,876 1,997 2,065 Administration 8,938 7,666 5,534 Loss from impairment of assets - 5,278 - ----------------- ---------------- ---------------- Total operating expenses 17,527 20,115 10,377 Earnings (loss) from continuing operations (1,548) (3,031) 8,991 Other (income) expenses: Interest income (231) (343) (297) Interest expense 3,010 2,154 1,805 Other (income) expense (154) 85 - Equity interest in loss of affiliate 5,044 488 506 ----------------- ---------------- ---------------- Total other expenses 7,669 2,384 2,014 ----------------- ---------------- ---------------- Earnings (loss) from continuing operations before income taxes (9,217) (5,415) 6,977 Income tax (benefit) expense 7,527 (1,487) 2,366 ----------------- ---------------- ---------------- Net earnings (loss) from continuing operations (16,744) (3,928) 4,611 Discontinued operations: Net loss from operations of the agricultural equipment segment - - (1,271) Net loss on disposal of the agricultural equipment segment, including $638 and $496 for operating losses during phase-out period, respectively - (5,611) (1,403) Net loss on disposal of automotive accessories segment, including $387 for operating losses during phase-out period - - (1,625) ----------------- ---------------- ---------------- Net loss from discontinued operations - (5,611) (4,299) ----------------- ---------------- ---------------- Net earnings (loss) (16,744) (9,539) 312 Dividends on preferred stock (588) (596) (270) ----------------- ---------------- ---------------- Net earnings (loss) allocable to common shareholders $ (17,332) $ (10,135) $ 42 ================= ================ ================ Earnings (loss) per common share from continuing operations - $ (0.88) $ (0.24) $ 0.24 ----------------- ---------------- ---------------- Loss per common share from discontinued operations - basic $ - $ (0.30) $ (0.24) ----------------- ---------------- ---------------- Net earnings (loss) per common share - basic $ (0.88) $ (0.54) $ 0.00 ----------------- ---------------- ---------------- Weighted average shares used in per share calculation - basic 19,788,031 18,603,057 17,922,558 ================= ================ ================ Earnings (loss) per common share from continuing operations - diluted $ (0.88) $ (0.24) $ 0.23 ----------------- ---------------- ---------------- Loss per common share from discontinued operations - diluted $ - $ (0.30) $ (0.23) ----------------- ---------------- ---------------- Net earnings (loss) per common share - diluted $ (0.88) $ (0.54) $ 0.00 ----------------- ---------------- ---------------- Weighted average shares used in per share calculation - diluted 19,788,031 18,603,057 19,808,460 ================= ================ ================
The accompanying notes are an integral part of these statements. 21 Williams Controls, Inc. Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) For the year ended September 30, 2000 1999 1998 ----------- ------------ ------------ Net earnings (loss) $ (16,744) $ (9,539) $ 312 Change in pension liability adjustment - 184 (184) ----------- ------------ ------------ Comprehensive income (loss) $ (16,744) $ (9,355) $ 128 =========== ============ ============ The accompanying notes are an integral part of these statements. 22 Williams Controls, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
For the year ended September 30, 2000 1999 1998 ----------- ---------- ---------- Cash flows from operating activities: Net earnings (loss) $(16,744) $ (9,539) $ 312 Adjustments to reconcile net earnings (loss) to net cash provided by continuing operations: Loss from discontinued operations - 5,611 4,299 Depreciation and amortization 3,189 2,056 1,406 Equity interest in loss of affiliate 5,044 488 506 Deferred income taxes 6,896 (2,565) (96) Acquired in-process research and development - 1,750 - Loss from impairment of assets - 5,278 - Changes in working capital of continuing operations, net of acquisition: Receivables (458) (141) (3,739) Inventories 1,819 974 (2,213) Accounts payable and accrued expenses 2,696 3,277 722 Other 494 475 886 ----------- ---------- ---------- Net cash provided by operating activities of continuing operations 2,936 7,664 2,083 Cash flows from investing activities: Investment in and loans to affiliate - (500) (2,292) Proceeds from sale of building - 1,192 - Investment in note receivable - (575) (3,200) Payment for acquisition of ProActive - (6,350) - Payments for property, plant and equipment (2,343) (2,948) (2,685) Other, net 43 - - ----------- ---------- ---------- Net cash used in investing activities of continuing (2,300) (9,181) (8,177) Cash flows from financing activities: Proceeds from long-term debt 1,800 5,592 4,201 Repayments of long-term debt and capital lease obligations (5,898) (3,987) (2,079) Net proceeds from issuance of convertible subordinated debt 1,965 - - Net proceeds from issuance of common stock for private placement and upon exercise of stock options 3 3,548 62 Preferred dividends (588) (596) (270) Issuance of preferred stock - - 7,337 ----------- ---------- ---------- Net cash provided by (used in) financing activities of continuing operations (2,718) 4,557 9,251 Cash flows from discontinued operations: Proceeds from sale of Automotive Accessories segment - - 1,124 Proceeds from sale of Agricultural Equipment segment 1,460 - - Net cash used in operations (1,671) (1,998) (3,700) ----------- ---------- ---------- Net cash used in discontinued operations (211) (1,998) (2,576) ----------- ---------- ---------- Net increase (decrease) in cash and cash (2,293) 1,042 581 Cash and cash equivalents at beginning of period 2,323 1,281 700 ----------- ---------- ---------- Cash and cash equivalents at end of period $ 30 $ 2,323 $ 1,281 =========== ========== ========== Supplemental disclosure of cash flow information: Interest paid $ 2,677 $ 1,993 $2,189 Income taxes paid $ 122 $ 503 $ 90 =========== ========== ==========
The non-cash activity related to the Company's investing activity is described in notes 4 and 12 and 20, non-cash activity related to the Company's financing activity is described in note 6 and non-cash activity related to the Company's acquisition is described in note 19. The accompanying notes are an integral part of these statements. 23 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999 and 1998 (Dollars in thousands, except share and per share amounts) Note 1. Summary of Operations and Current Events 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"); 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 herein referred to as the "Company" or "Registrant". The subsidiaries are detailed as follows: Vehicle Components ------------------ Williams Controls Industries, Inc.: Manufactures vehicle components sold primarily in the commercial vehicle industry. ProActive Acquisition Corporation: Conducts research and development activities related to adjustable foot pedals and manufactures electronic throttle controls and adjustable pedal systems for passenger vehicles. Premier Plastic Technologies, Inc.: Manufactures plastic components for the automotive industry. In July 2000, an agreement to sell Premier Plastic Technologies was signed. See Note 15 of Notes to Consolidated Financial Statements. NESC Williams, Inc.: Installs conversion kits to allow vehicles to use compressed natural gas and provides natural gas well metering services. Williams Technologies, Inc.: Supports all subsidiaries of the Company by providing research and development and developing strategic business relationships to promote "technology partnering". Williams World Trade, Inc.: Located in Kuala Lumpur, Malaysia, WWT managed foreign sourcing for subsidiaries of the Company, affiliates and third party customers. Significant portions of WWT's revenues were derived from Ajay Sports, Inc., an affiliate. This subsidiary ceased operations in fiscal 2000. Electrical Components and GPS ----------------------------- Aptek Williams, Inc.: Develops and produces sensors, microcircuits, cable assemblies and other electronic products for the telecommunications and the transportation industry, and conducts research and development activities to develop commercial applications of sensor related products for the electronics and automotive markets. GeoFocus, Inc.: Develops train tracking and cyber-farming systems using global positioning systems ("GPS") and geographical information systems ("GIS"). A letter of intent to sell Geo Focus, Inc. was signed in October 2000. See Note 12 of Notes to Consolidated Financial Statements. Agricultural Equipment ---------------------- The operations of the subsidiaries comprising the Agricultural Equipment segment were sold in May 2000 and had previously been reported as discontinued operations. Agrotec Williams, Inc.: Manufactured spraying equipment for the professional lawn care, nursery and pest control industries. 24 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Hardee Williams, Inc.: Manufactured equipment used in farming, highway and park maintenance. Waccamaw Wheel Williams, Inc.: Manufactured solid rubber tail wheels and other rubber products used on agricultural equipment, from recycled truck and bus tires. Automotive Accessories ---------------------- Kenco/Williams, Inc.: Manufactured, assembled, packaged and distributed truck and auto accessories for the after market parts industries. Substantially all of the assets of Kenco were sold in fiscal 1998. Current Events -------------- Going Concern Matters The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements during the years ended September 30, 2000, 1999 and 1998, the Company incurred (losses) income of ($16,744), ($9,539) and $312, respectively. In addition, accounts payable has increased from $9,223 at September 30, 1999 to $11,363 at September 30, 2000; working capital has decreased from $8,912 at September 30, 1999 to a deficit of ($17,678) at September 30, 2000; and stockholders' equity has decreased from $18,206 at September 30, 1999 to $1,044 at September 30, 2000. Also, as described in Note 6 to Consolidated Financial Statements, the Company was not in compliance with the covenants of its credit agreement at September 30, 2000. The credit agreement with the Company's primary bank matures on July 11, 2001, the Company has extended the debt due with another bank and the Company is in default on the payment of certain bank debt as discussed in Note 6 to Consolidated Financial Statements; as a result, the Company has classified its debt owed to its primary bank as a current liability at September 30, 2000. Subsequent to September 30, 2000, the Company reached the borrowing capacity under its credit agreement and required an overadvance from its primary bank to support operations. Due to the lack of borrowing capacity under the credit facility, the Company's working capital deficit, the Company's debts, including accounts payable, and other factors as outlined herein, the Company has a significant lack of liquidity. Accordingly, the Company's continuation as a going concern is dependent upon, among other things, its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its credit agreement, to obtain additional financing or refinancing as may be required, and ultimately to attain profitability. After reviewing its working capital needs, management of the Company estimates that additional working capital for fiscal 2001 of approximately $7,000 will be needed. Management is reviewing how it might reduce the amount of working capital needed and is pursuing alternatives to raise capital, both debt and/or equity. In addition, the Company is reviewing the sale of non-strategic assets and has engaged an investment banking firm to investigate alternatives available to it, including selling all or part of the Company to a third party, obtaining bridge financing to enable the Company to continue operating until such time as a buyer can be identified or sufficient equity and/or debt financing can be raised to support the operations of the Company. There is no assurance that the Company will be able to obtain adequate working capital in the amounts needed to sustain its operations or sell its business or parts of it in a timely fashion. The above matters raise a substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 25 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 2. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include all of the accounts of Williams Controls, Inc. and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents - All short-term highly liquid investments purchased with maturity at purchase of three months or less are considered to be cash equivalents. Inventories - Inventories are valued at the lower of standard cost, which approximates actual cost, or market. Property, Plant and Equipment - Land, buildings, equipment and improvements to existing facilities are recorded at cost. Maintenance and repairs are expensed as incurred. Depreciation has been computed using the straight-line method over the estimated useful lives of property and equipment as follows: buildings 31.5 years, furniture, machinery and equipment 3 to 12 years. Capitalized leases are amortized using the same method over the shorter of the estimated useful lives or the lease term. Goodwill and Intangible Assets - Goodwill, which represents the excess of cost over net assets of acquired companies, is being amortized using the straight-line method over periods from 15 to 40 years. At each balance sheet date, management assesses whether there has been an impairment in the carrying value of cost in excess of net assets of businesses acquired, primarily by comparing current and projected sales, operating income and annual cash flows, on an undiscounted basis, with the related annual amortization expenses as well as considering the equity of such companies. Other intangible assets includes developed technology which is being amortized on a straight line basis over the estimated useful life of the asset, or seven years. In addition, intangible assets include the cost of a patent license agreement, which is being amortized on a straight line basis over the shorter of the legal or estimated useful life of the asset, which is eleven years. Concentration of Risk - The Company invests a portion of its excess cash in debt instruments of financial institutions with strong credit ratings and has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company has not experienced any losses on its cash equivalents. The Company sells its products to customers in diversified industries worldwide; however, approximately 96% of its sales from continuing operations are to customers in the Vehicle Components segment. Approximately 60% of the Company's sales from continuing operations are electronic throttle controls ("ETC"). For the years ended September 30, 2000, 1999 and 1998, Freightliner accounted for 23%, 27% and 21%, Navistar accounted for 12%, 15% and 16%, Evart Corporation accounted for 9%, 1% and 0%, Volvo accounted for 6%, 8% and 9% and General Motors accounted for 6%, 5% and 3% of net sales from continuing operations, respectively. Approximately 15%, 20% and 15% of net sales from continuing operations in fiscal 2000, 1999 and 1998, respectively, were to customers outside of the United States, primarily in Canada, Sweden and Mexico, to a lesser extent, in Europe, South America and Australia. See Note 16 of Notes to Consolidated Financial Statements. Debt Issuance Costs - Costs incurred in the issuance of debt financing are amortized over the term of the debt agreement, approximating the effective interest method. Revenue Recognition - The Company recognizes revenue upon shipment, when title passes to the customer. 26 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Product Warranty - The Company provides a warranty covering defects arising from products sold. The warranty is limited to a specified time period, mileage or hours of use, and varies by product and application. The Company has provided a reserve, which in the opinion of management is adequate to cover such warranty costs. Research and Development Costs - Research and development costs are expensed as incurred. Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date. Post-retirement Benefits - Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions" requires the Company to accrue retiree insurance benefits over the period in which employees become eligible for such benefits. The Company implemented SFAS No. 106 by amortizing the transition obligation over twenty years. Earnings (loss) Per Share - Basic earnings per share ("EPS") and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic EPS is calculated using the weighted-average number of common shares outstanding for the period and diluted EPS is computed using the weighted-average number of common shares and dilutive common equivalent shares outstanding. 27 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Following is a reconciliation of basic EPS and diluted EPS from continuing operations:
Year Ended Year Ended September 30, 2000 September 30, 1999 Per Per Share Share Loss Shares Amount Loss Shares Amount ---------- ----------- -------- --------- ----------- -------- Loss from continuing operations $ (16,744) $ (3,928) Less - Preferred stock dividends (588) (596) ---------- --------- Basic EPS- Earnings (loss) allocable to common shareholders (17,332) 19,788,031 $ (0.88) (4,524) 18,603,057 $ (0.24) --------- --------- Effect of dilutive securities- Stock options and warrants - - - - Convertible preferred stock - - - - Convertible subordinated debt - - - - ---------- ---------- --------- ---------- Diluted EPS- Earnings (loss) allocable to common shareholders $ (17,332) 19,788,031 $ (0.88) $ (4,524) 18,603,057 $ (0.24) ========== ========== ======== ========= ========== ======== Year Ended September 30, 1998 Per Share Loss Shares Amount ---------- ----------- -------- Earnings from continuing operations $ 4,611 Less - Preferred stock dividends (270) ---------- Basic EPS- Earnings allocable to common shareholders 4,341 17,922,558 $ 0.24 -------- Effect of dilutive securities- Stock options and warrants - 564,766 Convertible preferred stock 270 1,321,136 ---------- ----------- Diluted EPS- Earnings allocable to common shareholders $ 4,611 19,808,460 $ 0.23 ========== ========== ========
At September 30, 2000, 1999 and 1998, the Company had options and warrants covering 3,690,629, 3,548,797 and 582,236 shares, respectively of the Company's common stock outstanding that were not considered in the respective diluted EPS calculations since they would have been antidilutive. In 2000 and 1999, conversion of the preferred shares, and in 2000, conversion of the convertible subordinated debt, would have been anti-dilutive and, therefore, was not considered in the computation of diluted earnings per share. 28 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Reclassifications - Certain amounts previously reported in the 1999 and 1998 financial statements have been reclassified to conform to 2000 financial statement classifications. Fair Value of Financial Instruments - The carrying values of the Company's current assets and liabilities approximate fair values primarily because of the short maturity of these instruments. The fair values of the Company's long-term debt approximated its carrying values because the debt is primarily variable rate debt. The fair value of preferred stock and receivables from an affiliate is not practicable to estimate due to the related party nature of the underlying transaction. The carrying value of the convertible subordinated debt, excluding the value of warrants recorded as debt discount, approximates fair value due to its recent issuance. Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") allows companies to choose whether to account for stock-based compensation on a fair value method, or to continue accounting for such compensation under the method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has chosen to continue to account for stock-based compensation using APB 25 (see Note 13 of Notes to Consolidated Financial Statements). Recent FASB Pronouncements - In June 2000 the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 138"). 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 133 and 138 establish accounting and reporting standards for all derivative instruments. SFAS 133 and 138 are effective for fiscal years beginning after June 15, 2000. The Company has made a preliminary assessment of its potential derivative instruments and, based on that assessment does not expect the adoption of SFAS 133 and 138 will have any material impact on the Company's financial position or results of operations. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. Note 3. Inventories Inventories consist of the following at September 30: 2000 1999 ------- ------- Raw materials $ 6,108 $ 6,867 Work in process 1,088 697 Finished goods 820 2,264 ------- ------- $ 8,016 $ 9,828 ======= ======= Finished goods include finished product ready for shipment. 29 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 4. Investment in and Receivables from Affiliate At September 30, 2000 the Company had notes and accounts receivable from Ajay Sports, Inc. ("Ajay") with a carrying value of $2,115, including a $500 note receivable, reflected as a reduction in the Company's shareholders' equity, relating to the issuance of 206,719 shares of the Company's common stock to Ajay. Ajay manufactures and distributes golf accessories and outdoor leisure furniture primarily to retailers in the United States and during 1999, purchased ProGolf Discount ("Pro Golf"), a franchisor of golf equipment and accessories retail stores. The Company has manufacturing rights in certain Ajay facilities through 2002 under a joint venture agreement. On June 1, 2000 Ajay adopted a strategic plan calling for the liquidation of its Delavan, Wisconsin operations (Ajay Leisure Products, Inc., Palm Springs Golf Inc., and Prestige Golf Inc.) and the sale of its Baxter, Tennessee operation (Leisure Life, Inc.). During June 2000, Ajay closed its Mexicali, Mexico facility and in August 2000, completed the closing of the Wisconsin facility. The Company's note and accounts receivable from affiliate at September 30, 2000 is comprised of a secured note receivable with a carrying amount of $1,020 and accounts receivable of $595. In addition, the Company could be obligated to advance to Ajay up to an additional $1,515 under the terms of an intercreditor agreement. The chairman of the Company has provided a guarantee of certain of the loans to Ajay. The accounts receivable due from Ajay are for unpaid interest and fees incurred during the years ended September 30, 2000 and 1999. At September 30, 1999 the Company had an investment in Ajay preferred stock, note and accounts receivable with carrying amounts of $4,565, $1,587 and $246, respectively. Prior to July 11, 1997, the Company had guaranteed Ajay's $13,500 credit facility and charged Ajay a fee of 1/2 of 1% per annum on the outstanding loan amount for providing this guaranty. From July 11, 1997 through June 30, 1998, the Company and Ajay had a joint and several loan obligation to a bank. On June 30, 1998, the Company restructured its investment in Ajay (the "Ajay Restructuring"). The objective of the Ajay Restructuring was to separate the Company's and Ajay's financing, eliminate Ajay's dependency on the Company for capital and provide Ajay with adequate working capital to grow its operations and improve shareholder value, which would benefit the Company. The restructuring provides Ajay three years to improve shareholder value at which time the notes receivable become due and payable. No dividends are accrued and payable on the preferred stock through July 31, 2001. The preferred stock dividend rate increases to an annual rate of 17% in 2001 and 24% in 2002, rates which the Company believes would require Ajay to raise capital from new sources to redeem the preferred stock. As a result of the Ajay Restructuring, the bank provided separate loan facilities to the Company and Ajay. As consideration to the bank for the separate loan facilities, the Company provided Ajay $2,000 in additional capital during 1998 which included the purchase of Ajay notes payable of $948 previously provided by affiliated parties of the Company, and agreed to convert $5,000 of advances to Ajay into a new cumulative convertible preferred stock. The preferred stock is convertible into 3,333,333 shares of Ajay common stock. The secured promissory notes bear an annual interest rate of 16% payable monthly, subject to increase based upon a calculation provided for in the agreement. In addition, Ajay has agreed to pay the Company annual administrative fees of $90 and a management fee for sourcing products overseas in the amount of $80 annually. The Company owns 686,274 shares of common stock in Ajay, which represents approximately 16% of Ajay's outstanding common stock at September 30, 2000. In addition, the company has options to purchase 1,851,813 shares of common stock at an exercise price of $1.08. The investment is recorded on the equity method of accounting due to the common ownership of Ajay and the Company by the chairman of the Company, who is also the chairman of Ajay. For the three years ended September 30, 2000, 1999, and 1998, the Company reported losses on its investment in Ajay in the amount of $5,044, $488, and $506, respectively. During the year ended September 30, 2000, the Company applied the provisions of Emerging Issues Task Force 99-10 "Percentage Used to Determine the Amount of Equity Method Losses" ("EITF 99-10") in the calculation of Equity Interest in Loss of Affiliate in the Consolidated Financial Statements. This pronouncement provides for the percentage of ownership to be determined by the liquidation order of the investment held to the total of each particular level of investment held by the investor contained in the financial statements of the investee. For the years ended September 30, 1999 and 1998, the Equity Interest in Loss of Affiliate was computed utilizing the percentage of common stock ownership held 30 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) by Williams in Ajay. The effect of EITF 99-10 in 2000 was to substantially increase the Company's equity interest in loss of affiliate from amounts that would have been recorded using only the percentage of common stock ownership. During 1999, the investment in Ajay common stock was reduced to zero in the Consolidated Balance Sheet as a result of the Company's equity interest in Ajay's losses since acquisition. During the year ended September 30, 2000 and 1999, the Company's investment in Ajay's preferred stock was reduced by $4,565 and $435, respectively, as a result of continuing recognition of the Company's equity interest in Ajay's losses. In addition, during the year ended September 30, 2000, the Company's investment in note receivable from Ajay was reduced from $1,587 to $1,020, as a result of continuing recognition of the Company's equity interest in Ajay's losses. Based upon the closing bid price, the market value of the investment in Ajay common shares was approximately $182 at September 30, 2000. Following is a summary of condensed unaudited financial information of Ajay as of and for the twelve months ended September 30, 2000, 1999 and 1998. 2000 1999 1998 (unaudited) (unaudited) (unaudited) ----------- ----------- ----------- Current assets $ 2,539 $ 9,193 $ 9,584 Other assets 29,093 15,243 4,212 ----------- ----------- ----------- $31,632 $24,436 $13,796 =========== =========== =========== Current liabilities $ 2,276 $ 4,949 $ 2,030 Other liabilities 25,796 18,128 8,003 Common and preferred shareholders' equity 3,560 1,359 3,763 ----------- ----------- ----------- $31,632 $24,436 $13,796 =========== =========== =========== Loss, including loss from discontinued operations, before income tax benefit $(9,956) $(2,713) $(2,858) =========== =========== =========== At September 30, 2000, Ajay had approximately 4,120,000 common shares outstanding. In addition to the company's options and convertible preferred stock at September 30, 2000, Ajay had outstanding preferred stock that is convertible to approximately 1,686,000 shares of Ajay common stock and outstanding options and warrants to purchase approximately 834,000 shares of Ajay common stock at prices ranging from $1.08 to $6.00 per share (unaudited). An officer of Ajay provided management services to the Company as an officer of the Company. Ajay was reimbursed approximately $114 in total for his fiscal 1999 and 1998 time and services. The Company accepted the officer's resignation in December 1998. 31 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 5. Goodwill and Intangible Assets At September 30, goodwill and intangible assets consist of the following: 2000 1999 ------------ ------------ Goodwill $ 2,955 $ 2,955 Developed technology 1,820 1,820 Patent and patent license agreement 1,439 1,439 Less accumulated amortization (1,049) (450) ------------ ------------ $ 5,165 $ 5,764 ============ ============ Amortization expense on intangible assets was $599, $173 and $85 for the years ended September 30, 2000, 1999 and 1998, respectively. Note 6. Financing Arrangements Debt - On June 30, 1998, the Company restructured its credit facility with a bank (the "Bank") to consist of a revolving credit facility of up to $16,500, a $3,100 term loan (Term Loan I) and a $2,700 real estate loan. In December 1998, the Company borrowed $2,500 under Term Loan II. In July 1999, the Company borrowed $2,500 under Term Loan III. In February 2000, the Company borrowed $1,000 as an overadvance (Term Loan IV) of its credit agreement. Under the revolver, the Company can borrow up to $14,000 (as per amendment to the credit agreement) based upon a borrowing base availability calculated using specified percentages of eligible accounts receivable and inventory. The revolver bears interest at the Bank's prime rate plus 2.00% (11.50% at September 30, 2000.) The Real Estate and Term Loan I loans bear interest at the Bank's prime rate plus 2.25% and Term Loan III and an overadvance bear interest at the banks prime rate plus 3.25%. The loans under the revolving credit facility mature on July 11, 2001. The Real Estate loan is being amortized over twenty years and Term Loan I is being amortized over seven years with all remaining principal outstanding due at July 11, 2001. The advance under Term Loan II was repaid during 2000. Term Loan III is being amortized over eighteen months, with an original maturity date of February 2000. The overadvance is non-amortizing with an original maturity of July 15, 2000. Subsequent amendments to the credit agreement provide for payment by November 15, 2000, of both Term Loan III and the overadvance. The Company did not repay Term Loan III or the overadvance as per the amended due date, and is in default under the terms of the credit agreement under this provision. All loans are secured by substantially all of the assets of the Company. The loan agreement prohibits payment of dividends by the Company except for the Series A Preferred dividend, and requires the Company to maintain minimum working capital of $12,000 and minimum tangible net worth, as defined, of $11,500. The loan also prohibits additional indebtedness and common stock repurchases except for through the use of proceeds from stock options exercised, and restricts capital expenditures to an amount not to exceed $10,500 for the two years ended September 30, 1999 and not to exceed $2,500 annually thereafter. In addition, the loan limits incremental operating lease obligations to $600 annually. Fees under the loan agreement include an unused revolver fee of .25% and a prepayment penalty fee declining from 3% in 1998 to .5% in the year 2001. The prepayment fee is waived if the loan is repaid with proceeds from the sale of assets or is refinanced with an affiliate of the Bank. At September 30, 2000, the Company was not in compliance with its debt covenants for debt with the Bank and was in default on debt payments to the Bank for Bank Term Loans III and IV. No waivers have been obtained and the default has not been cured. Accordingly, all of the debt with the Bank of $20,362 has been classified as current liabilities in the accompanying Consolidated Balance Sheet at September 30, 2000. From July 11, 1997 through June 30, 1998, the Company and Ajay had a joint and several loan with the Bank. Under the restructured facility, all joint and several liability, cross collateral agreements and guarantees of the Company with respect to the Ajay portion of the credit facility prior to the restructuring have been terminated. In consideration to the Bank for the restructured facility, the Company agreed to invest $2,000 in Ajay and convert $5,000 of advances to Ajay into preferred stock. 32 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Prior to July 11, 1997, the Company had guaranteed the bank debt of Ajay with a previous lender which debt was in default under Ajay's loan agreement. The Company and Ajay refinanced their bank debt on July 11, 1997 with the Bank under a $34,088 three-year revolving joint and several liability credit and term loan agreement. As a result of a shortfall in Ajay's available collateral, the previous lender provided bridge financing of $2,340 to Ajay under an inter-creditor agreement. The bridge loan is to be repaid from any proceeds from the sale of Kenco, the sale of other assets, from a specified percentage of future Ajay and Company cash flow and from monthly principal payments by Ajay. The balance of the bridge loan was $1,515 at September 30, 2000. The Company's long-term debt consists of the following at September 30: 2000 1999 -------- -------- Bank revolving credit facility $ 12,547 $ 14,278 due July 11, 2001; balance bearing interest at a variable rate of 11.50% at September 30, 2000. Bank Term Loan I, due July 11, 2001, 3,595 3,426 balance bearing interest at a variable interest rate of 11.75% at September 30, 2000, payable in monthly installments of $47 through November then increasing to $137 commencing on December 1, 2000, with remaining balance of $2,405 due at maturity. Bank Term Loan II, balance paid on July 1, 2000 - 709 Bank Term Loan III, due November 15, 972 2,500 2000 with variable interest rate of 12.75% at September 30, 2000, payable in monthly installments of $139 with remaining balance of $694 due at maturity. Bank Term Loan IV, due November 15, 1,000 - 2000 with variable interest rate of 12.75% at September 30, 2000, with principal and accrued interest payable at maturity. Bank Real Estate loan, due July 11, 2,248 2,381 2001, variable interest rate 11.75% at September 30, 2000, payable in monthly installments of $11, with remaining balance of $2,138 due at maturity. Unsecured debt, due February 1, 2005, 700 700 variable interest rate (10.5% at September 30, 2000), interest only, balance due at maturity. Real Estate loan, due October 15, 2001, 467 570 variable interest rate (11.5% at September 30, 2000), payable in monthly installments of $8, with remaining balance of $367 due at maturity. Other - 5 ------------ ------------- 21,529 24,569 Less current portion 20,462 4,188 ------------ ------------- $ 1,067 $ 20,381 ============ ============ 33 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Maturities of long-term debt at September 30, 2000, reflecting debt in default as current, are as follows: 2001 $ 20,462 2002 367 2003 - 2004 - 2005 700 Thereafter - -------- $ 21,529 ======== Capital Leases - The Company has acquired certain assets, primarily machinery and equipment, through capital leases. The leases have terms ranging from three to seven years, and are payable in monthly and quarterly installments with interest (at rates ranging from 7.5% to 10.5%). Future minimum lease payments under capital leases are as follows for the years ending September 30: 2001 1,691 2002 1,644 2003 956 2004 765 2005 535 Thereafter 34 ------ Total future minimum lease payments 5,625 Less - amount representing interest 785 ------ Present value of future minimum lease payments 4,840 Less - current portion 1,340 ------ $3,500 ====== During 2000 and 1999, the Company incurred additional capital leases of $458 and $1,819, respectively. Capital lease obligations totaled $5,367 at September 30, 1999. The current portion of capital lease obligation totaled $1,005 at September 30, 1999. Capital lease obligations, all of which were incurred in fiscal 1998, totaled $4,146 at September 30, 1998. Convertible Subordinated Debt - In April, 2000, the Company issued 7.5% convertible subordinated debentures in an aggregate principal amount of $2,140, due March 31, 2003 including $140 issued in lieu of the underwriting fee. Net proceeds to the Company after expenses, excluding the value of warrants issued, were $1,965 and were used for general working capital purposes. The debentures are unsecured obligations, subordinate to all senior indebtedness (as defined). The debentures are convertible into shares of the Company's common stock, par value $.01 per share, at a conversion price of $2.00 per share. In addition, the Company issued to each purchaser of debentures a three year warrant to purchase common stock of the Company equal to 20% of the shares of common stock into 34 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) which such purchaser's debenture is convertible. The exercise price of the warrants is $2.375 per share. The Company issued the placement agent a five year warrant to purchase shares of the Company's common stock equal to 7.0% of the total shares of common stock issuable upon the conversion of the debentures. The exercise price of the placement agent warrants is $2.40 per share. The fair value of warrants issued, totaling $166, is included as "Warrants issued in connection with convertible subordinated debt" in the accompanying Consolidated Statements of Shareholders' Equity with an offset of $110 against the "Convertible Subordinated Debt" for the warrants issued to debenture holders and an increase of $56 in other assets for the placement agent warrants in the accompanying Consolidated Balance Sheet. The discount of the debentures and the debt issuance costs are being amortized using the effective interest method over the lives of the debentures. The conversion price for the convertible subordinated debt shall be adjusted if the Company sells or distributes common stock, options or warrants to purchase common stock or securities convertible into common stock at a price below the conversion price of the convertible subordinated debt, subject to certain exceptions defined in the agreement. The formula for adjustment is as defined in the agreement. Upon a change in control, each holder of convertible subordinated debt, within 15 days of the change in control, may elect to accelerate the maturity date of the convertible subordinated debt held by such holder to a date not less than 30 but not more than 45 days after the date of notice by the Company of the change in control. In the event of default by the Company on any debt agreement in excess of $250,000, a holder owning 15% or more of the convertible subordinated debt may, at their option, declare the principal and accrued interest due and payable immediately. No holders own 15% or more of the convertible subordinated debt and therefore the default by the Company on certain of its debt payments with its primary Bank has had no impact on the maturity date of the convertible subordinated debt. Note 7. Patent License Agreement In conjunction with the acquisition in 1999 of the ProActive Pedals division of Active Tool & Manufacturing Co., Inc., (Note 19) the Company entered into a patent license agreement with a private inventor, under which the Company holds an exclusive, worldwide license for three patents covering adjustable foot pedals. The license agreement remains in effect for the life of the patents. The Company paid an initial license fee of $600 and the agreement requires yearly minimum payments of $95 to the inventor for a period of approximately ten years. Accrued minimum royalties consist of the following at September 30: 2000 1999 -------------- ------------- Minimum future royalties $ 950 $ 1,045 Less imputed interest (389) (406) -------------- ------------- Present value of payments 561 639 Less current portion included in Accrued expenses (34) (78) -------------- ------------- Long-term portion included in Other Liabilities $ 527 $ 561 ============== ============= Note 8. Pension Plans The Company maintains two pension plans; one plan covers salaried employees and the other plan covers the Company's hourly employees. Annual net periodic pension costs under the pension plans are determined on an actuarial basis. The Company's policy is to fund these costs accrued over 15 years and obligations arising due to plan amendments over the period benefited. The assets and liabilities are adjusted annually based on actuarial results. 35 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts)
Salaried Employees Plan Hourly Employees Plan September 30, 2000 1999 2000 1999 ------------------------------- ------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $ 3,546 $ 3,300 $ 3,732 $ 3,792 Service cost 147 103 159 133 Interest cost 269 219 283 251 Actuarial (gain) (560) 42 (221) (313) Benefits paid (144) (118) (139) (131) ------------------------------- ------------------------------ Benefit obligation at end of year $ 3,258 $ 3,546 $ 3,814 $ 3,732 ------------------------------- ------------------------------
36 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts)
Salaried Employees Plan Hourly Employees Plan September 30, 2000 1999 2000 1999 ------------------------------- ------------------------------ Change in plan assets: Fair value of plan assets at beginning of year $ 3,191 $ 2,916 $ 3,608 $ 3,180 Actual return on plan assets 308 393 244 559 Benefits paid (144) (118) (139) (131) ------------------------------- ------------------------------ Fair value of plan assets at end of year $ 3,355 $ 3,191 $ 3,713 $ 3,608 ------------------------------- ------------------------------ Funded status 97 (355) (101) (124) Unrecognized actuarial (gain) loss (381) 209 (272) (123) Unrecognized prior service cost (102) (114) 250 292 ------------------------------- ------------------------------ Net amount recognized $ (386) $ (260) $ (123) $ 45 ------------------------------- ------------------------------ Amounts recognized in the statement of Financial position consist of: Prepaid benefit cost $ - $ - $ - $ 45 Accrued benefit liability (386) (260) (123) (74) Intangible asset - - - 74 ------------------------------- ------------------------------ Net amount recognized $ (386) $ (260) $ (123) $ 45 ------------------------------- ------------------------------ Weighted-average assumptions as of September 30, 2000 1999 2000 1999 ------------------------------- ------------------------------ Discount rate 7.75% 8.00% 7.75% 8.00% Expected return on plan assets 9.00 9.00 9.00 9.00 Rate of compensation increase 4.00 4.00 - - Salaried Employees Plan Hourly Employees Plan 2000 1999 1998 2000 1999 1998 --------------------------------- ----------------------------- Components of net periodic benefit cost for the years ended September 30: Service Cost $ 147 $ 103 $ 105 $ 159 $ 133 $ 129 Interest Cost 269 219 213 283 251 266 Expected return on plan assets (278) (257) (273) (315) (280) (307) Amortization of prior service cost (12) (12) (12) 41 41 41 Amortization of (gain) loss - - - - 7 - --------------------------------- ----------------------------- Net periodic benefit cost $ 126 $ 53 $ 33 $ 168 $ 152 $ 129 --------------------------------- -----------------------------
The projected benefit obligation, accumulated benefit obligation, and the fair value of plan assets for the hourly employees plan with accumulated benefit obligations in excess of plan assets were $3,732, $3,637 and $3,608, respectively as of September 30, 1999. 37 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 9. Property, Plant and Equipment At September 30, 2000 and 1999, property, plant and equipment consist of the following: 2000 1999 ------- ------- Land and land improvements $ 2,545 $ 2,499 Buildings 7,953 6,241 Machinery and equipment 16,791 15,966 Office furniture and equipment 8,516 4,368 ------- ------- $35,805 $29,074 Less accumulated depreciation (14,319) ( 8,299) ------- ------- $21,486 $20,775 ======= ======= Capital leases for machinery and equipment and office furniture and equipment included above were $5,257 and $6,490 at September 30, 2000 and 1999, respectively. Accumulated depreciation on capital leases was $1,092 and $673 at September 30, 2000 and 1999, respectively. Note 10. Impairment of Assets During the year ended September 30, 1999 the Company recognized a $5,278 loss from the impairment of assets related to Kenco, the Company's former Automotive Accessories segment, 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 the date the impairment loss was taken, 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 made any payments on its notes and accounts payable to the Company. In 1999, KPI filed for bankruptcy 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 year ended September 30, 1999. 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 that were being leased by KPI from the Company. This property was sold, and after retiring $891 of debt secured by the property, resulted in cash proceeds of $1,192. The proceeds to the Company, after deducting approximately $692 of expenses to assist in the relocation of KPI and to ready the building for sale were 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. 38 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 11. Income Tax Expense (Benefit) The provision for income tax expense (benefit) is as follows for the years ended September 30: 2000 1999 1998 ------ -------- ------- Continuing operations: Current $ 631 $1,078 $2,462 Deferred 6,896 (2,565) (96) ------ -------- ------- 7,527 (1,487) 2,366 Discontinued operations - (3,189) (2,932) ------ -------- ------- $7,527 $(4,676) $ (566) ====== ======== ======= The reconciliation between the effective tax rate and the statutory federal tax rate on earnings (loss) from continuing operations as a percent for 1999 and 1998 is as follows: 1999 1998 -------- ------ Statutory federal income tax rate (34.0) 34.0 State taxes, net of federal income tax benefit (4.0) 4.0 Credits for state income tax refunds - (8.4) Effect of change invaluation 8.8 3.2 allowance Other 1.7 1.1 -------- ------ (27.5) 33.9 ======== ====== The Company recorded an income tax expense of $7,527, as opposed to an expected benefit, for the 2000 loss as a result of providing a 100% valuation allowance on the net deferred tax assets. 39 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2000 and 1999 are as follows:
2000 1999 ---------------------------------- Deferred tax assets: Inventories, due to obsolescence reserve and additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 $ 394 $ 253 Warranty reserves 307 550 Accrual for compensated absences 177 130 Accrual for retiree medical benefits 856 689 Accounts receivable reserves 361 225 Estimated loss from writedown of assets of automotive accessories segment - 1,824 Estimated loss on disposal of agriculture equipment segment 2,522 3,105 Equity interest in loss on affiliate 2,642 705 Tax gain on sale/leaseback 628 628 In-process research and development 627 672 Accrued other reserves 263 249 Federal net operating loss carryforwards 2,280 - State net operating loss carryforwards 2,245 1,835 ---------------------------------- Total deferred tax assets 13,302 10,865 Less valuation allowance (11,356) (2,310) ---------------------------------- Deferred tax assets, net of valuation allowance 1,946 8,555 ---------------------------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and amortization 1,946 1,659 ---------------------------------- Net deferred income tax assets $ - $ 6,896 ================================== Current deferred income tax assets $ 4,024 $ 3,871 Long-term deferred income tax assets 9,278 6,994 Long-term deferred income tax liabilities (1,946) (1,659) Valuation allowance (11,356) (2,310) ---------------------------------- $ - $ 6,896 ==================================
At September 30, 2000, the Company has approximately $6,700 of federal net operating loss carryforwards which are available to the Company and expire through 2019. At September 30, 2000, the Company has approximately $38,000 of state net operating loss carry forwards which are available to the Company in certain state tax jurisdictions and expire in 2006 through 2014. During the year ended September 30, 2000, in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company increased its valuation allowance by $9,046 such that the net deferred tax assets are fully reserved, due to the uncertain realizability of the amounts. 40 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 12. Sale of GeoFocus, Inc. On October 25, 2000, the Company announced it had signed a letter of intent for the sale of the GPS equipment subsidiary, GeoFocus, Inc. Proceeds are expected to be $2,750 and the assumption of certain liabilities, with incentives that could increase cash payment to $3,350 if certain operating objectives are met. A gain is expected to be realized under the terms of the letter of intent. Closing of the transaction is subject to customary closing conditions, and the buyer's ability to obtain sufficient financing. The transaction has not been completed and there is no assurance that the transaction will be completed. No other plan to dispose of GeoFocus has been adopted. Accordingly, GeoFocus continues to be consolidated in the accompanying consolidated financial statements. Total assets of GeoFocus at September 30, 2000 were not material to the consolidated financial statements. Net sales and loss from operations of GeoFocus were $737 and $(561), respectively, for the year ended September 30, 2000. Note 13. Shareholders' Equity Common Stock - In July 1999, the Company completed a private placement of 1,244,065 shares of common stock of the Company and received net proceeds of $3,379. In addition, 87,084 shares of the Company's common stock were issued in lieu of the underwriting fee, for a total of 1,331,149 shares issued in conjunction with the offering. For every share issued in the private placement, the purchasing shareholders received warrants to purchase .35 common shares or 465,902 additional shares of common stock, at $3.125 per share. In addition, for every share issued to the placement agent, the placement agent received warrants to purchase .35 common shares, or 87,084 additional shares of common stock, at $3.30 per share. The warrants issued may be exercised at any time over the next five years. The fair value of such warrants and the shares in lieu of the underwriting fee, totaling $1,118, is included in "Common stock issued in private placement" with a corresponding charge to "Equity issuance costs" in the accompanying Consolidated Statements of Shareholders' Equity. Preferred Stock - In April 1998, the Company completed a private placement of 80,000 shares of Series A convertible redeemable preferred stock at $100 per share, or $8,000 in gross proceeds and received net proceeds of $7,337. The preferred stock bears a dividend rate of 7.5%, which is payable quarterly, and was convertible at the option of the holder into 2,909,091 shares of the Company's common stock. Dividends are cumulative and have preference over other equity distributions. The preferred stock conversion price shall be adjusted if the Company sells or distributes common stock, options or warrants to purchase common stock or securities convertible into common stock at a price below the preferred stock conversion price. The formula for adjustment is as defined in the agreement. As a result of the issuance of the convertible subordinated debt in April 2000, the preferred stock conversion price was adjusted to approximately $2.70. The revised conversion price does not represent a beneficial conversion feature to the holders of the preferred stock. The preferred stock is redeemable at the Company's option anytime after April 21, 2001. The preferred stock is not mandatorily redeemable. In addition, the Company can force conversion of the preferred stock into common shares if the Company's common stock trades at or above $4.125 for twenty out of thirty consecutive trading days. Holders of the Series A preferred stock are entitled to a number of votes equal to those they would have assuming conversion into common stock, without taking into account fractional shares. The preferred stock has priority over other classes of capital stock upon liquidation. The preferred stock also has change of control provisions that allow the holders to, upon the occurrence of certain events, maintain the value of the preferred stock or convert at the lower of the conversion price at the time of a transaction or the price per share of common stock payable in the change of control transaction. 41 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Commencing with the quarterly period beginning July 1, 2001, the annual dividend rate will increase each quarter by 2.5% up to a maximum dividend of 24% per annum. The Company used the proceeds of the offering to provide $3,200 of debt financing to the purchaser of the Portland, Oregon manufacturing facility, repayment of a bank term loan of $667 and an investment of $1,500 in Ajay. The remaining balance was used for general working capital purposes. Stock Options and Warrants - The Company had issued stock options and warrants at exercise prices ranging from $.41 - $3.63 per share, the market value at the date of issuance. All remaining unexercised options and warrants under this plan expired in fiscal 2000. The stock option activity during the periods indicated is as follows: Shares Subject to Option Options Prices ---------- ---------- Outstanding at September 30, 1997 340,000 $0.41-3.63 Exercised (150,000) 0.41 ---------- ---------- Outstanding at September 30, 1998 190,000 0.41-3.63 Exercised (150,000) 0.41 Cancelled (10,000) - ---------- ---------- Outstanding at September 30, 1999 30,000 3.63 Cancelled (30,000) 3.63 ---------- ---------- Outstanding at September 30, 2000 - $ - ========== ========== The Company currently has two qualified stock option plans. The Company adopted the 1993 Stock Option Plan ("the 1993 Plan") which reserves an aggregate of 1,500,000 shares of the Company's common stock for the issuance of stock options which may be granted to employees, officers and directors of and consultants to the Company. Under the terms of the 1993 Plan, the Company may grant "incentive stock options" or "non-qualified options" at not less than the fair market value on the date of grant. Options granted under the 1993 Plan are exercisable as to 25 percent of the shares covered thereby commencing six months after the earlier of the date of grant or the date of employment, and as to an additional 25%, cumulatively, on the first, second and third anniversaries of the date of grant, and expire ten years after the date of grant. In each of January, 1998 and in February, 1999, the Company reserved an additional 1,500,000 shares of the Company's common stock for the issuance of stock options under the 1993 Plan. At September 30, 2000, the Company had 1,984,393 shares available for future grants. 42 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Stock option activity during the periods indicated under the 1993 Plan is as follows: Shares Shares Available for Subject to Option Grant Options Prices -------------------------------------------- Outstanding at September 30, 1997 388,125 1,111,875 $ 1.94 - 3.63 Additional shares reserved 1,500,000 - - Granted (1,183,887) 1,183,887 2.31 - 3.00 Canceled 117,975 (117,975) 1.94 - 2.94 -------------------------------------------- Outstanding at September 30, 1998 822,213 2,177,787 1.94 - 3.63 Additional shares reserved 1,500,000 - - Granted (744,000) 744,000 2.06 - 3.00 Exercised - (51,750) 1.94 - 2.50 Canceled 137,862 (137,862) 1.94 - 3.63 -------------------------------------------- Outstanding at September 30, 1999 1,716,075 2,732,175 1.94 - 3.00 Granted (64,000) 64,000 1.50 - 2.50 Exercised - (18,750) 1.94 Canceled 332,318 (332,318) 1.94 - 3.00 -------------------------------------------- Outstanding at September 30, 2000 1,984,393 2,445,107 $ 1.50 - 3.00 -------------------------------------------- During 1996 the shareholders of the Company approved a stock option plan which reserves an aggregate of 200,000 shares of the Company's stock for non-employee Directors of the Company (the "1995 Plan"). The 1995 Plan provides for automatic granting of 10,000 options to each non-employee director of the Company at a price equal to the market value on the date of grant which is the date of the annual shareholders' meeting each year, exercisable for 10 years after the date of the grant. These options are exercisable as to 25% of the shares thereby on the date of grant and as to an additional 25%, cumulatively on the first, second and third anniversaries of the date of grant. In March 2000, the company reserved an additional 200,000 share of the Companies common stock for the issuance of stock options under the 1995 plan. At September 30, 2000 there were 200,000 shares available for grant under the 1995 Plan. 43 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Stock option activity during the periods indicated under the 1995 Plan is as follows: Shares Shares Available for Subject to Grant Options Option Prices -------------- ---------- ------------- Outstanding at September 30, 1997 110,000 90,000 $ 2.66 - 3.66 Granted (30,000) 30,000 2.44 --------------------------------------------- Outstanding at September 30, 1998 80,000 120,000 2.44 - 3.66 Granted (50,000) 50,000 2.68 --------------------------------------------- Outstanding at September 30, 1999 30,000 170,000 2.44 - 3.66 Additional shares reserved 200,000 Granted (30,000) 30,000 2.125 --------------------------------------------- Outstanding at September 30, 2000 200,000 200,000 $ 2.125 - 3.66 ============================================= Statement of Financial Accounting Standards No. 123 During 1995, the Financial Accounting Standards Board issued SFAS 123 which defines a fair value based method of accounting for employee stock options and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB 25. Entities electing to continue to use the accounting treatment in APB 25 must make pro forma disclosures of net earnings (loss) and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation plans under APB 25; however, the company has computed, for pro forma disclosure purposes, the value of all options granted during the years ended September 30, 2000, 1999 and 1998, using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants: 2000 1999 1998 -------- -------- ------- Risk-free interest rate 6.40% 5.13% 6.00% Expected dividend yield 0% 0% 0% Expected lives 7 years 7 years 7 years Expected volatility 53.6% 55.5% 57.1% Using the Black-Scholes methodology, the total value of options granted during the years ended September 30, 2000, 1999 and 1998, was $133, $1,064 and $1,458 respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically three years). The weighted average per share fair value of options granted during the years ended September 30, 2000, 1999 and 1998, was $1.28, $1.36 and $1.60 respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net earnings (loss) and net earnings (loss) per share would approximate the pro forma disclosures below: 44 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts)
Year Ended Year Ended Year Ended September 30, 2000 September 30, 1999 September 30, 1998 ------------------------- ------------------------- ------------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- ----------- --------- Net earnings (loss) $ (16,744) $ (17,747) $ (9,539) $ (10,203) $ 312 $ (176) Basic net earnings (loss) per share (0.88) (0.93) (0.54) (0.60) 0.00 (0.02) Diluted net earnings (loss) per share (0.88) (0.93) (0.54) (0.60) 0.00 (0.02)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to the year ended September 30, 1996, and additional awards are anticipated in future years. The following table summarizes information about stock options outstanding at September 30, 2000:
Options Outstanding Options Exercisable ----------------------------------------- ---------------------------------- Weighted Number of shares Number Average Weighted Exercisable at Weighted Range of Outstanding at Remaining Average September 30, Average Exercise Prices September 30, 2000 Contractual Exercise Price 2000 Exercise Life - Years Price ------------------ -------------------- ---------------- --------------- ------------------ ------------ $1.50 - 2.57 2,284,507 7.4 $2.25 1,728,895 $2.23 2.58 -3.66 360,600 6.3 2.91 298,100 2.95 ------------------ -------------------- ---------------- --------------- ------------------ ------------ $ 1.50 - 3.66 2,645,107 7.2 $2.34 2,026,995 $2.33
At September 30, 1999 and 1998, 1,653,987 and 1,171,121 options, respectively, were exercisable at weighted average exercise prices of $2.38 and $2.13 per share, respectively. 45 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 14. Discontinued Operations Agriculture Equipment Segment - On May 3, 2000, the Company completed the sale of the previously discontinued Agriculture Equipment Segment operation. Proceeds at closing were $1,760 in cash and a note plus the assumption by the buyer of $200 of liabilities. In conjunction with the sale the Company has received notes for $300 at 8% interest, payable April 30, 2003. No amounts have been recorded for the notes due to the uncertainty of their collectibility. No loss in excess of that previously provided was realized as a result of the sale of the discontinued Agriculture Equipment Segment. In December 1998, the Company announced its intention to divest its Agriculture Equipment segment. The operations are reflected as discontinued operations for all periods prior to 2000 presented in the Company's Statements of Operations. During 1999, the Company recorded an estimated net loss on disposal of $5,611, net of tax benefit of $3,189, or $(0.30) per common share, associated with the divestiture of the Agriculture Equipment segment. The loss was based upon events and information that resulted in management's revised estimate of the net realizable value of the Agriculture Equipment segment. The revised estimate was based upon contract negotiations and lower than anticipated bids for portions of the segment which resulted in a write-down of certain assets and a provision for associated costs. Liabilities of the Agriculture Equipment segment to be retained by the Company as of September 30, 1999, amounted to $462 included in accounts payable and $217 included in the accrued expenses caption of the accompanying Consolidated Balance Sheet for current payables and accruals. Additionally, $570 was included in the current portion of Long-term Debt and Capital Leases and $700 was included in the Long-term Debt and Capital Leases obligations caption for debt to be retained. The summarized results for the Agriculture Equipment segment for the years ended September 30 are as follows: 2000 1999 ---- ---- Net sales $ 3,915 $ 7,225 ========================= Loss from operations before allocated interest expense and income tax benefits $ - $ - Allocated interest expense - - ------------------------- Loss from operations before income tax benefit - - Income tax benefit - - Loss allocable to minority interest - - ------------------------- Loss from operations - - Loss on disposal before interest and income taxes - (8,700) Allocated interest expense - (100) ------------------------- Loss on disposal before income tax benefit - (8,800) Income tax benefit - 3,189 Loss allocable to minority interest - - ------------------------- Loss on disposal - (5,611) ------------------------- Total loss on discontinued operations $ - $ (5,611) ========================= 46 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) The net assets of the Agriculture Equipment segment held for disposition included in the accompanying Consolidated Balance Sheet, net of writedown to estimated net realizable value, as of September 30, 1999, was as follows: Current assets: Accounts receivable and inventory, net $ 360 ====== Long term assets: Property, plant and equipment, net $ 500 ====== The Company elected to allocate interest expense to discontinued operations based upon the net assets of the segment being disposed of at each respective year-end. In 2000, certain assets of the Agricultural Equipment segment, primarily property and equipment, were retained by the Company and are being leased to a third party. These amounts, totaling approximately $371, have been reclassified from net assets held for disposition to property, plant and equipment in the accompanying Consolidated Balance Sheet at September 30, 2000. Automotive Accessories Segment - On March 16, 1998, the Company completed the sale of a substantial portion of the assets of Kenco, to Kenco Products, Inc. ("KPI"). 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. Colfax Group, Inc. is unrelated to the Company. Consideration to the Company consisted of $1,000 cash, $430 of receivables, assumption of $1,000 of liabilities and 2,000 shares of non-voting convertible preferred stock of KPI. Under the agreement, KPI agreed to purchase $2,600 of Kenco inventory during the six months following the sale. Approximately $430 of inventory was unsold at September 30, 1998, which was purchased subsequent to year-end. The sale was recorded based upon the estimated fair market value of the assets disposed of. The Company previously reported Kenco as a discontinued operation beginning with the measurement date of May 8, 1997. For the year ended September 30, 1998, the Company reported an additional loss on the sale of Kenco in the amount of $2,626 before income tax benefit resulting in an additional net loss on disposal of discontinued operations of $1,625. Colfax and one of the principal owners of Colfax Group, Inc. guaranteed the obligations of KPI to Kenco. The Company had a security interest in all of the assets of KPI subordinate to the security interest of KPI's bank. During the year ended September 30, 1999, KPI filed for bankruptcy. 47 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) The summarized results for Kenco for the year ended September 30, 1998 are as follows reflecting operating results through the measurement date: Net sales $ 4,964 ========= Loss from operations before allocated interest expense and income tax benefit - Allocated interest expense - --------- Loss from operations before income tax benefit - Income tax benefit - --------- Loss from operations - Loss on disposal before interest and income taxes (2,428) Allocated interest expense (198) --------- Loss on disposal before income tax benefit (2,626) Income tax benefit 1,001 --------- Loss on disposal (1,625) --------- Total loss on discontinued operations $ (1,625) ========= Note 15. Sale of Premier Plastic Technologies, Inc On July 11, 2000, the Company announced it had signed a definitive agreement for the merger of the plastic injection molding subsidiary, Premier Plastic Technologies, Inc. ("PPT"), into 3DM International, Inc. (3DMI). Proceeds are expected to be 1.4 million shares of 3DMI stock, representing approximately 7% of the outstanding 3DMI shares. The transaction is intended to qualify as a tax-free reorganization under IRC Section 368(a)(1)(A). No loss is expected to be realized under the terms of the definitive agreement. Closing of the transaction is subject to customary closing conditions, and 3DMI's payment of all advances relating to Premier Plastic Technologies under the secured lending facility with the Bank, subject to 3DMI obtaining sufficient financing. Financing has not been completed and there is no assurance that the transaction will be completed. No other plan to dispose of PPT has been adopted. Accordingly, PPT continues to be consolidated in the accompanying consolidated financial statements. Total assets of PPT at September 30, 2000 consisted primarily of accounts receivable and inventory of $3,812 and property, plant and equipment, net of $5,161. 3DM International has also advanced $500 as a nonrefundable deposit for the benefit of Premier Plastic Technologies, Inc., to be used for working capital purposes. The amount is shown as Nonrefundable Deposit on the accompanying consolidated balance sheet. Note 16. Business Segment Information In the fourth quarter of 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 changes the method of disclosing segment information to the manner in which the Company's chief operating decision maker organizes the components for making operating decisions, assessing performance and allocating resources. The Company has organized the segments based on the type of products sold, which are described in Note 1. As required by SFAS 131, all prior years' segment data has been restated. The Company accounts for its segments under the same policies as described in the principal accounting policies footnote. Intersegment revenues and related earnings are not material. Management evaluates segment performance primarily based on revenue and operating income; therefore, other items included in pretax income, consisting primarily of interest income or expense, are not reported in segment results. Operating income is net of all corporate expenses, which are allocated based on measurable services provided to each segment or for general corporate expenses, which are allocated on a revenue and capital basis. 48 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Identifiable corporate assets consist primarily of investment in an affiliated company and other assets including assets retained of the previously discontinued Agricultural Equipment segment in 2000, and deferred taxes.
2000 1999 1998 -------------------------------------------- Net sales by classes of similar products from continuing operations Vehicle Components $ 65,263 $ 58,136 $ 54,071 Electrical Components and GPS 2,462 3,286 3,575 -------------------------------------------- $ 67,725 $ 61,422 $ 57,646 ============================================ Earnings (loss) from continuing operations Vehicle Components: Before loss from impairment of assets and acquired in-process research and developed expense $ 1,572 $ 6,632 $ 10,992 Loss from impairment of assets - (5,278) - Acquired in-process research and development expense - (1,750) - -------------------------------------------- Total Vehicle Components 1,572 (396) 10,992 Electrical Components and GPS (3,120) (2,635) (2,001) -------------------------------------------- $ (1,548) $ (3,031) $ 8,991 ============================================ Identifiable assets Vehicle Components $ 32,582 $ 41,358 $ 38,694 Electrical Components and GPS 14,498 8,992 8,353 Corporate 2,069 13,294 8,344 -------------------------------------------- Total assets - continuing operations 49,149 63,644 55,391 Automotive accessories - discontinued operations - - 3,963 Agricultural equipment - discontinued operations - 860 9,211 -------------------------------------------- Total assets $ 49,149 $ 64,504 $ 68,565 ============================================ Capital expenditures Vehicle Components $ 1,094 $ 3,721 $ 6,446 Electrical Components and GPS 1,707 1,046 386 -------------------------------------------- Total capital expenditures - continuing operations 2,801 4,767 6,832 Agricultural equipment - discontinued operations - 92 191 -------------------------------------------- Total capital expenditures $ 2,801 $ 4,859 $ 7,023 ============================================ Depreciation and amortization Vehicle Components $ 2,823 $ 1,652 $ 1,077 Electrical Components and GPS 366 404 329 -------------------------------------------- Total depreciation and amortization - continuing operations 3,189 2,056 1,406 Automotive accessories - discontinued operations - - 179 Agricultural equipment - discontinued operations - 92 309 -------------------------------------------- Total depreciation and amortization $ 3,189 $ 2,148 $ 1,894 ============================================
49 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) For geographic information, revenues are allocated between the United States and International, depending on whether the shipments are to customers within the United States or located outside the United States. Long-lived assets outside the United States were immaterial for all periods presented. Year ended September 30, 2000 1999 1998 ------- ------- ------- Canada $ 3,536 $ 5,493 $ 3,377 Sweden 1,895 1,868 2,073 Mexico 1,284 2,276 35 Other 3,231 2,947 3,201 ------- ------- ------- 9,946 12,584 8,686 Net sales-export 57,779 48,838 48,960 ------- ------- ------- $67,725 $61,422 $57,646 ======= ======= ======= United States Note 17. Other Benefit Plans The Company maintains an Employee Stock Ownership Plan (ESOP) for non-union employees. The ESOP may buy shares of the Company's stock from time to time on the open market or directly from the Company. The ESOP has been authorized to borrow up to $1,000 from the Company or financial institutions to finance its purchases. At September 30, 2000 all shares had been allocated under the plan and there were no amounts under the loan outstanding. The Company sponsors salaried employees and union employees matching 401(k) plans, in which eligible employees may elect to contribute a portion of their compensation. Note 18. Post Retirement Benefits other than Pensions The Company provides health care and life insurance benefits for certain of its retired employees ("Post Retirement Plan"). These benefits are subject to deductibles, co-payment provisions and other limitations. The Company may amend or change the Post Retirement Plan periodically. Effective October 1, 1993 the Company adopted SFAS No. 106, "Employers' Accounting for Post Retirement Benefits other than Pensions" ("SFAS 106"). SFAS 106 requires companies to accrue the cost of post retirement health care and life insurance benefits within employees' active service period rather than recognizing these costs on a cash basis as had been prior practice. The Company elected to amortize the Accumulated Post Retirement Benefit obligation at October 1, 1993 over twenty years as a component of post retirement benefits expense. 50 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) The following table provides information on the post retirement plan status at September 30: Accumulated Post Retirement Benefit Obligation 2000 1999 ------------------------- Retirees $ 1,185 $ 1,503 Fully eligible active participants 778 662 Other active Plan participants 1,194 1,312 ------------------------- 3,157 3,477 Plan assets - - ------------------------- Accumulated post retirement benefit obligation in excess of Plan assets 3,157 3,477 Unrecognized gain 1,068 500 Unrecognized prior service cost (504) (576) Unrecognized transition obligation (1,491) (1,606) ------------------------- Accrued post retirement benefit cost in the consolidated balance sheet $ 2,230 $ 1,795 ========================= Post retirement benefits expense included the following components for the years ended September 30: 2000 1999 1998 ------------------------------------- Service cost $ 89 $ 92 $ 74 Interest cost 264 239 218 Amortization of unrecognized net obligation at transition 178 190 165 ------------------------------------- Post retirement benefits expense $ 531 $ 521 $ 457 ===================================== The assumed health care cost trend rate used in measuring the accumulated post retirement benefit obligation (APBO) ranged between 4.5%-10% in the first year, declining to 4.5% - 5.0% after 8 years. The discount rate used in determining the APBO was 7.75%, 8.00% and 6.75% for the years ended September 30, 2000, 1999 and 1998, respectively. If the assumed medical costs trends were increased by 1%, the APBO as of September 30, 2000 would increase by $159, and the aggregate of the services and interest cost components of the net annual post retirement benefit cost would be increased by $25. If the assumed medical costs trends were decreased by 1%, the APBO as of September 30, 2000 would decrease by $270, and the aggregate of the services and interest cost components of the net annual post retirement benefit cost would be decreased by $38. 51 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 19. Acquisition In July, 1999, the Company purchased the ProActive Pedals division of Active Tools Manufacturing Co., Inc. ProActive Pedals is a designer and developer of patented adjustable foot pedal systems and modular pedal systems. The purchase price included $5,750 in cash, plus the assumption of approximately $286 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 was accounted for using the purchase method of accounting and the results of operations of ProActive Pedals have been included in the consolidated results of operations of the Company from the acquisition date. The purchase price allocation resulted in a $1,750 charge to operations for acquired in-process research and development, for the year ended September 30, 1999. The technological feasibility of the acquired technology, which has no alternative future use, had not been established prior to the purchase. The significant projects in process at the acquisition date were for the development of commercially viable designs and concepts for adjustable pedal systems. The value was determined by estimating the resulting net cash flows from such products, and discounting the net cash flows back to their present value. The discount rate included a factor that took into account the undertainty surrounding the successful development of the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable in 2001. Expenditures to complete these products were expected to total approximately $3.5 million. These estimates are subject to change, given the uncertainties of the development process, and no assurances can be given that deviations from these estimates will not occur. Additionally, these projects will require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. To date, expenditures and results have not differed significantly from the forecast assumptions. The allocation of the purchase price also resulted in $1,820 being allocated to developed technology, which is being amortized over a seven year period. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed of $2,162 was recorded as goodwill and is being amortized on a straight line basis over a 15 year period. The following unaudited proforma results of operations for the Company, for the years ended 1999 and 1998 includes the results of ProActive Pedals assuming such acquisition occurred as of October 1, 1997 and includes the acquired in-process research and development charge in the period where incurred: 1999 1998 --------- --------- Net sales $ 63,059 $ 57,856 Operating income (loss) (5,401) 6,360 Loss from continuing operations (11,137) (1,495) Net loss per share - basic (0.63) (0.09) Net loss per share - diluted (0.63) (0.09) The purchase was financed through the private placement of 1,331,149 shares of the Company's common stock with net proceeds of approximately $3,379. In addition, the Company borrowed $2,500 from its bank under a new term loan facility ("Term Loan III"). Note 20. Sale Leaseback 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 September 30, 1999. The costs associated with the building repurchase are reported in other expenses during the year ended September 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 $3,150 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. Term Loan II was paid off in July 2000. 52 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) Note 21. Quarterly Data (unaudited)
Restated --------------------------------------- First Second Third Fourth 2000 (1) Quarter (2) Quarter (2) Quarter (2) Quarter (3) Annual ------------------------------------------ ------------ ------------ ----------- ------------ ------------- Continuing operations: Net sales $ 15,877 $ 17,596 $ 18,022 $ 16,230 $ 67,725 Cost of sales 11,386 13,089 13,368 13,903 51,746 ------------ ------------ ----------- ------------ ------------- Gross margin $ 4,491 $ 4,507 $ 4,654 $ 2,327 $ 15,979 ============ ============ =========== ============ ============= Operating expenses $ 3,989 $ 4,303 $ 4,892 $ 4,343 $ 17,527 ============ ============ =========== ============ ============= Net earnings (loss) $ (1,312) $ (988) $ (1,173) $(13,271) $(16,744) ============ ============ =========== ============ ============= Earnings (loss) per common share - basic $ (0.07) $ (0.06) $ (0.07) $ (0.68) $ (0.88) ============ ============ =========== ============ ============= Earnings (loss) per common share - diluted $ (0.07) $ (0.06) $ (0.07) $ (0.68) $ (0.88) ============ ============ =========== ============ ============= First Second Third Fourth 1999 (1) Quarter Quarter Quarter (4) Quarter (5) Annual ------------------------------------------- ------------ ------------ ----------- ------------ ------------- Continuing operations: Net sales $ 14,399 $ 16,257 $ 15,749 $ 15,017 $ 61,422 Cost of sales 9,005 10,611 10,606 14,116 44,338 ------------ ------------ ----------- ------------ ------------- Gross margin $ 5,394 $ 5,646 $ 5,143 $ 901 $ 17,084 ============ ============ =========== ============ ============= Operating expenses $ 3,070 $ 2,958 $ 8,558 $ 5,529 $ 20,115 ============ ============ =========== ============ ============= Earnings (loss) from continuing operations $ 1,031 $ 1,477 $ (2,378) $ (4,058) $ (3,928) Loss from discontinued operations - - - (5,611) (5,611) ============ ============ =========== ============ ============= Net earnings (loss) $ 1,031 $ 1,477 $ (2,378) $ (9,669) $ (9,539) ============ ============ =========== ============ ============= Earnings per common share from continuing operations - basic $ 0.05 $ 0.07 $ (0.14) $ (0.22) $ (0.24) (Loss) per common share from discontinued operations - basic - - - (0.29) (0.30) ------------ ------------ ----------- ------------ ------------- Earnings (loss) per common share - basic $ 0.05 $ 0.07 $ (0.14) $ (0.51) $ (0.54) ============ ============ =========== ============ ============= Earnings per common share from continuing operations - diluted $ 0.05 $ 0.07 $ (0.14) $ (0.22) $ (0.24) (Loss) per common share from discontinued operations - diluted - - - (0.29) (0.30) ------------ ------------ ----------- ------------ ------------- Earnings (loss) per common share - diluted $ 0.05 $ 0.07 $ (0.14) $ (0.51) $ (0.54) ============ ============ =========== ============ =============
53 Notes to Consolidated Financial Statements Years Ended September 30, 2000, 1999, and 1998 (Dollars in thousands, except per share amounts) (1) Certain reclassifications have been made to the first three quarters for the year ended September 30, 2000 and to all quarters for the year ended September 30, 1999 from amounts previously reported to conform with the year end September 30, 2000 financial statement classification. (2) The first three quarters of 2000 net loss have been restated to include recognition of an additional $1,146, $717 and $594 of loss, over amounts previously reported, for equity interest in loss of affiliate. The recognition of the loss was significantly increased due to the implementation of Emerging Issues Task Force Bulletin 99-10 "Percentage Used to Determine the Amount of Equity Method Losses". (3) The fourth quarter of 2000 net loss includes a $6,896 expense for deferred tax provision resulting from a 100% valuation allowance for previously recognized deferred income tax assets which may no longer be realizable due to management's assessment of their ultimate realizability, $633 for the elimination of previously provided income tax benefits in the first three quarters for the year ended September 30, 2000 and changes in estimated amounts for warranty reserves. (4) The third quarter of 1999 operating expenses includes a $5,278 loss from the impairment of assets related to Kenco, our former Automotive Accessories segment, consisting of $4,655 for the impairment of non-voting preferred stock and notes and accounts receivable and $623 for the impairment of property. (5) The fourth quarter of 1999 operating expenses includes $1,750 expense for acquired in-process research and development and changes in estimated amounts for warranty and inventory reserves based on fourth quarter events. The fourth quarter of 1999 loss from discontinued operations includes an additional loss for the Agricultural Equipment Segment which reflects events and information which resulted in management's revised estimate of the net realizable value of this segment. Note 22. Related Parties In addition to related party transactions discussed elsewhere in the notes to the consolidated financial statements, during the years ended September 30, 2000 and 1999, $94 and $157, respectively, was paid to an affiliated company, for website development and e-commerce designs. The chairman of the Company is a controlling shareholder of the affiliated company. Note 23. Contingencies The Company and its subsidiaries are involved in various lawsuits incidental to their businesses. It is the opinion of management that the ultimate outcome of these actions will not have a material effect on the Company's financial position or results of operations. The Company has identified certain contaminants in the soil and groundwater of a manufacturing facility located in an industrial area, which the Company believes, was disposed of on the property by a previous property owner. The Company's environmental consulting firm has conducted tests to determine the levels of contaminants. The Company has been advised by counsel that the contamination is not a reportable condition under current statutes. In the event that remediation were required in the future, the Company would seek indemnification from the prior property owner under the terms of the asset purchase agreement. The prior property owner has advised the Company that it would dispute any liability for remediation costs. The Company believes it can enforce available claims against the prior property owner for any costs of investigation and remediation. 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Williams Controls, Inc.: We have audited the accompanying consolidated balance sheets of Williams Controls, Inc. and subsidiaries as of September 30, 2000 and 1999, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States.. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Williams Controls, Inc. and subsidiaries as of September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to Consolidated Financial Statements, the Company has suffered recurring losses from operations, is out of compliance with it debt covenants, is in default on payment of certain debt and has significant negative working capital. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Schedule of Valuation and Qualifying accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein, in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Portland, Oregon, January 12, 2001 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant Incorporated by reference from the Company's 2000 Proxy Statement. Item 11. Executive Compensation Incorporated by reference from the Company's 2000 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference from the Company's 2000 Proxy Statement. Item 13. Certain Relationships and Related Transactions Incorporated by reference from the Company's 2000 Proxy Statement. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1. See Exhibit Index on page 59 of this Form 10-K. 2. See Index to Financial Statements in Item 8 of this Form 10-K. 3. See Index to Schedules on page 57 of this Form 10-K. 4. Reports on Form 8-K. 56 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILLIAMS CONTROLS, INC. Date: January 12, 2001 By /s/ Thomas K. Ziegler ----------------------------- Thomas K. Ziegler, President, Chief Executive Officer and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: January 12, 2001 By /s/ Thomas K. Ziegler ----------------------------- Thomas K. Ziegler, Principal Executive Officer, President, Chief Executive Officer and Chief Operating Officer and Director Date: January 12, 2001 By /s/ Kim L. Childs ----------------------------- Kim L. Childs Principal Accounting Officer Date: January 12, 2001 By /s/ Thomas W. Itin ----------------------------- Thomas W. Itin, Chairman of the Board and Director Date: January 12, 2001 By /s/ H. Samuel Greenawalt ----------------------------- H. Samuel Greenawalt, Director Date: January 12, 2001 By /s/ Timothy Itin ----------------------------- Timothy Itin, Director Date: January 12, 2001 By ----------------------------- Charles G. McClure, Director 57 Williams Controls, Inc. Index to Schedules Page Schedule II Valuation and Qualifying Accounts 58 All other schedules are omitted because they are not required, not applicable or the required information is given in the Consolidated Financial Statements. 58 Williams Controls, Inc. Valuation and Qualifying Accounts Schedule II (Dollars in thousands) Beginning Ending Description balance balance ----------- --------- ------- For Year Ended September 30, 2000 Total reserves for doubtful accounts and obsolete inventory $1,066 $ 759 For Year Ended September 30, 1999 Total reserves for doubtful accounts and obsolete inventory $569 $1,066 For Year Ended September 30, 1998 Total reserves for doubtful accounts and obsolete inventory $855 $ 569 NOTE: Valuation and qualifying accounts were not individually significant; and, therefore, additions and deductions information has not been provided in this schedule. Charges to the accounts are for the purposes for which the reserves were created. 59 Williams Controls, Inc. Exhibit Index Exhibit Number Description ------- ----------- 3.1 Certificate of Incorporation of the Registrant as amended. (Incorporated by reference to Exhibit 3.1 to the Registrants' annual report on form 10-K for the fiscal year ended September 30, 1995 (the "1995 form 10-K")) 3.2 By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-18, Registration No. 33- 30601-S, as filed with the Commission on August 18, 1989 (the "1989 Form S-18")) 4.1 Specimen Unit Certificate (including Specimen Certificate for shares of Common Stock and Specimen Certificate for the Warrants). (Incorporated by reference to Exhibits 1.1 and 1.2 to the Registrant's Registration Statement on Form 8-A, Commission File No. 0-18083, filed with the Commission on November 1, 1989) 4.2 Form of Placement Agent's Warrant Agreement (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-3, Registration No. 333-59397 as filed with the Commission on July 20, 1998) 10.1(a) Indemnification Agreement for Thomas W. Itin ("Itin Indemnification Agreement"). (Incorporated by reference to Exhibit 10.9 to the 1989 Form S-18) 10.1(b) Amendment No. 1 to Itin Indemnification Agreement. (Incorporated by reference to Exhibit 10.1(b) to the Registrant's Annual Report on form 10-K for the Fiscal Year Ended September 30, 1993 (the "1993 Form-10K")) 10.1(c ) Form of Indemnification Agreement for H. Samuel Greenawalt and Timothy Itin. (Incorporated by reference to Exhibit 10.1(c) to the Registrant's 1993 Form 10-K) 10.2(a) Credit Agreement dated July 11, 1997 among Registrant and its subsidiaries and Ajay Sports, Inc. ("Ajay") and its subsidiaries, all as borrowers, and Wells Fargo Bank, National Association, as lender (the "Credit Agreement"). (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (the "June 1997 Form 10-Q")) 10.2(b) Promissory Notes under the Credit Agreement: (a) Revolving Credit Loans Promissory Note (b) Term Loan I Promissory Note (c) Term Loan II Promissory Note (d) Real Estate Loan Promissory Note (All incorporated by reference to Exhibit 10.2 to the Registrant's June 1997 Form 10-Q) (e) Term Loan III Promissory Note (Incorporated by reference to the Form 10-K for the year ended September 30, 1999) 60 Exhibit Number Description ------- ----------- 10.2(c) Mortgage and Security Agreement between Aptek Williams, Inc. and Wells Fargo Bank. (Incorporated by reference to Exhibit 10.3 to the Registrant's June 1997 Form 10-Q) 10.2(d) Patent Assignment and Security Agreements for: (a) Williams Controls Industries, Inc. (b) Hardee Williams, Inc. (c) Aptek Williams, Inc. (All incorporated by reference to Exhibit 10.4 to the Registrant's June 1997 Form 10-Q) 10.2(e) Trademark Security Agreements for: (a) Agrotec Williams, Inc. (b) Hardee Williams, Inc. (All incorporated by reference to Exhibit 10.5 to the Registrant's June 1997 Form 10-Q) 10.2(f) Continuing Unconditional Guaranty of Thomas W. Itin in favor of Wells Fargo Bank. (Incorporated by reference to Exhibit 10.6 to the June 1997 Form 10-Q) 10.2(g) First Amendment to Credit Agreement dated June 30, 1998 (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, Date of report June 30, 1998) 10.2(h) Replacement Term Loan I Promissory Note, dated June 30, 1998 made by Registrant payable to Wells Fargo Bank (Incorporated by reference to Exhibit 10.2 to the Registrant's June 30, 1998 Form 8-K) 10.3(a) Intercreditor Agreement dated July 11, 1997 among Registrant and subsidiaries, Ajay Sports, Inc. and subsidiaries, United States National Bank of Oregon ("US Bank"), Thomas W. Itin and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.7 to the Registrant's June 1997 Form 10-Q) 10.3(b) Consent, Reaffirmation and Release Agreement with US Bank. (Incorporated by reference to Exhibit 10.8 to the Registrant's June 1997 Form 10-Q) 10.3(c) Promissory Note of Ajay for $2,340,000 to US Bank. (Incorporated by reference to Exhibit 10.9 to the Registrant's June 1997 Form 10-Q) 10.3(d) Mortgage, Assignment of Rents, Security Agreement and Fixture Filing by Aptek Williams, Inc. in favor of US Bank. (Incorporated by reference to Exhibit 10.10 to the Registrant's June 1997 Form 10-Q) 10.3(e) Guaranty to US Bank. (Incorporated by reference to Exhibit 10.11 to the Registrant's June 1997 Form 10-Q) 10.4(a) The Company's 1995 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1995 (the "March 1995 Form 10-Q")) 10.4(b) The Registrant's 1993 Stock Option Plan as amended to date 10.5 Williams/Ajay Loan and Joint Venture Implementation Agreement dated May 6, 1994, as amended by letter agreement dated April 3, 1995. (Incorporated by reference to Exhibit 10.4 to the Registrant's March 1995 Form 10-Q) 61 Exhibit Number Description ------- ----------- 10.6(a) Guaranty dated as of October 2, 1995 by Thomas W. Itin to the Registrant (the "Itin Guaranty"). (Incorporated by reference to Exhibit 10.9 to the Registrant's 1995 Form 10-K) 10.6(b) Amendment One to the Itin Guaranty. (Incorporated by reference to Exhibit 10.7(b) to the Registrant's Annual Report on Form 10-K for the period ended September 30, 1997 (the "1997 Form 10-K")) 10.7 Security Agreement between Ajay and its subsidiaries, as debtors, and the Registrant and its subsidiaries, as secured parties. (Incorporated by reference to Exhibit 10.8 to the 1997 Form 10-K) 10.8 Agreement, dated June 30, 1998, by and among the Registrant and Ajay Sports, Inc. and its subsidiaries (Incorporated by reference to Exhibit 10.3 to the Registrant's June 30, 1998 Form 8-K) 10.9 Asset Purchase Agreement and related Exhibits between Kenco Williams, Inc. and Kenco Products, Inc. (Incorporated by reference to exhibit 10.1 to the Registrant's current report on Form 8-K, date of report March 16, 1998) 10.10(a) Asset Purchase Agreement, dated July 28, 1999, by and between Active Tool & Manufacturing Co., Inc., and the Registrant and its subsidiary, ProActive Acquisition Corporation (Incorporated by reference to the Form 10-K for the year ended September 30, 1999) 10.10(b) Patent License Agreement, dated July 28, 1999, by and between Edmond B. Cicotte and the Registrant and its subsidiary, ProActive Acquisition Corporation (Incorporated by reference to the Form 10-K for the year ended September 30, 1999) 21.1 List of Subsidiaries. See Item 1 in this report 23 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule (Filed Herewith) 62 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 12, 2001, included in this Form 10-K, into the Company's previously filed Registration Statement Nos. 333-59397 and 333-90565 on Form S-3 and No. 333-56591 on Form S-8. /s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Portland, Oregon, January 12, 2001 Exhibit 27.1 Financial Data Schedule for FYE 9-30-00 ARTICLE 5 CIK 0000854860 NAME Williams Controls, Inc. MULTIPLIER 1,000 CURRENCY US DOLLARS PERIOD-TYPE 12-MOS FISCAL-YEAR-END SEP-30-2000 PERIOD-START OCT-01-1999 PERIOD-END SEP-30-2000 EXCHANGE-RATE 1 CASH 30 SECURITIES 0 RECEIVABLES 11,865 ALLOWANCES 508 INVENTORY 8,016 CURRENT-ASSETS 20,561 PP&E 35,805 DEPRECIATION 14,319 TOTAL-ASSETS 49,149 CURRENT-LIABILITIES 38,239 BONDS 0 PREFERRED-MANDATORY 0 PREFERRED 1 COMMON 199 OTHER-SE 844 TOTAL-LIABILITY-AND-EQUITY 49,149 SALES 67,725 TOTAL-REVENUES 67,725 CGS 51,746 TOTAL-COSTS 17,527 OTHER-EXPENSES 0 LOSS-PROVISION 0 INTEREST-EXPENSE 3,010 INCOME-PRETAX (9,217) INCOME-TAX 7,527 INCOME-CONTINUING (16,744) DISCONTINUED 0 EXTRAORDINARY 0 CHANGES 0 NET-INCOME (17,332) EPS-BASIC (0.88) EPS-DILUTED (0.88)