**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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FORM 10-K

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended: September 30, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                to               **

**Commissionfile number 0-18083**

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Williams Controls, Inc.

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | ** ** | **84-1099587**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  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) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**CommonStock ($.01 par value)**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by checkmarkwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act)  Yes  o  No  x

The aggregate market valueof voting common shares (based upon the closing price of the shares as reportedon the over the counter bulletin board) of Williams Controls, Inc. held bynon-affiliates was approximately $12,385,675 as of March 31, 2004.

As of December 6, 2004, there were 46,629,411shares of Common Stock outstanding.

**DocumentsIncorporated by Reference**

Portions of the registrant’sdefinitive Proxy Statement for the Annual Meeting of Shareholders to be held February 17,2005, are incorporated by reference into Part III of this report.

 

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**WilliamsControls, Inc.**

**Index to 2004 Form 10-K**
|                   | ** **                                                                                       | ** ** | **Page** |
|-------------------|--------------------------------------------------------------------------------------------------|------------|----------|
| **Part I**   |                                                                                             |       |     |
| Item  1.          | Business                                                                                         |       | 3-8      |
| Item 2.           | Properties                                                                                       |       | 8        |
| Item 3.           | Legal Proceedings                                                                                |       | 8        |
| Item 4.           | Submission  of Matters to a Vote of Security Holders                                             |       | 9        |
| **Part II**  |                                                                                             |       |     |
| Item 5.           | Market  for Registrant’s Common Equity and Related Stockholder Matters                      |       | 10       |
| Item 6.           | Selected  Financial Data                                                                         |       | 10-11    |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       | 12-22    |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                      |       | 22       |
| Item 8.           | Financial  Statements and Supplementary Data                                                     |       | 23-61    |
| Item 9.           | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure            |       | 62       |
| Item 9A.          | Controls and  Procedures                                                                         |       | 62       |
| **Part III** |                                                                                             |       |     |
| Item 10.          | Directors  and Executive Officers of the Registrant                                              |       | 63       |
| Item 11.          | Executive  Compensation                                                                          |       | 63       |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |       | 63       |
| Item 13.          | Certain  Relationships and Related Transactions                                                  |       | 63       |
| Item 14.          | Principal  Accountant Fees and Services                                                          |       | 63       |
| **Part IV**  |                                                                                             |       |     |
| Item 15.          | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |       | 64       |
| **Signatures**    |                                                                                             | 65-66      |

 

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**WILLIAMS CONTROLS, INC.Form 10-KPart I(Dollar amounts in thousands, unless otherwise indicated)**

**Item1.   Business**

Williams Controls, Inc., including ourwholly-owned subsidiaries, Williams Controls Industries, Inc. (“Williams”);Aptek Williams, Inc. (“Aptek”); Premier Plastic Technologies, Inc. (“PPT”);ProActive Acquisition Corporation (“ProActive”); WMCO-Geo, Inc. (“GeoFocus”);NESC Williams, Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”);Williams World Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”);Agrotec Williams, Inc. (“Agrotec”) and our 80% owned subsidiaries HardeeWilliams, Inc. (“Hardee”) and Waccamaw Wheel Williams, Inc. (“Waccamaw”)are sometimes hereinafter referred to as the “Company,” “we,” “our” or “us.”

We maintain the corporateexistence of Aptek, PPT, ProActive, GeoFocus, NESC, Technologies, WWT, TWI,Agrotec, Hardee and Waccamaw; however none of these subsidiaries have currentbusiness operations.

***General***

We are a Delaware corporation formed in 1988 andcurrently operate solely in the vehicle components business segment. During2004, our product lines consisted of electronic throttle control systems forthe heavy truck, transit bus and off-highway markets and pneumatic andhydraulic controls, which are used primarily in trucks, utility and off-highwayequipment, transit busses and underground mining machines. We sold ourpassenger car and light truck product lines to Teleflex on September 30,2003.

Historically we also operated in the electricalcomponents and global positioning systems business segment. As a result ofterminating and selling certain product lines, however, by the end of fiscal2002 we had no significant operations in that segment.

We have a significant portion of the United Statesmarket for electronic throttle control systems for heavy trucks and busses anda lesser portion of the international markets for the same products. We sellthe majority of our products directly to large original equipment manufacturerssuch as Freightliner, Volvo, Navistar, and Paccar. We also sell our productsthrough a network of independent distributors who sell to smaller originalequipment manufacturers and to truck and bus owners as replacement parts.

Electronic throttle control devices are used to sendan electronic signal to electronically controlled engines. The initialapplications were in heavy trucks and busses in both the United States andEurope. The demand for electronic throttle control systems is expanding intooff highway vehicles as the major producers of those products begin to convertgasoline and diesel powered vehicles to electronic throttle control systems. Foroff-highway vehicles, the initial conversion has been in larger off-highwayvehicles. Additionally, vehicles manufactured in and for other markets,primarily in Asia, are beginning to convert to electronically controlledengines. Demand for electronic throttle controls will depend, in part, on howquickly manufacturers proceed with ongoing engine modifications that willrequire such systems.

Adjustable foot pedals are devices which move thethrottle, brake and, if applicable, the clutch pedal, closer or further awayfrom the vehicle driver to compensate for driver heights. During 2003, weentered into licensing agreements for an adjustable pedal technology, whichallows us to sell adjustable pedals in the medium and heavy truck and transitbus markets. We consider adjustable foot pedals to be a value 

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added addition to ourprimary electronic throttle control product line. During 2004, we had no salesof adjustable pedals

Prior to the sale of our passenger car and light truckproduct lines in fiscal 2003, we manufactured sensors that were used in ourpassenger car, light truck and a limited number of our heavy truck electronicthrottle controls. We did not have any outside customers for our sensors. Weretain the rights to our sensor technology and, as part of the sale of thepassenger car and light truck portion of our product lines, we licensed thesensor technology for use in the passenger car and light truck applications toTeleflex. As of September 30, 2004, we did not currently produce sensors,although we may do so in the future.

**FinancialRecapitalization****  **On September 30,2004 we completed a capital restructuring. As part of this recapitalization, weredeemed 98,114 shares of Series B Preferred stock for approximately$26,436. The remaining 55,436 shares of Series B Preferred stock were thenconverted into 11,761,495 shares of common stock. As part of thisrecapitalization, the 77,550 shares of Series A-1 Preferred stockoutstanding were also converted into 11,848,740 shares of common stock. As aresulting of this recapitalization, we had no shares of preferred stock issuedor outstanding as of September 30, 2004.

As additional elements ofthe recapitalization transaction, the Company (i) entered into a newfive-year revolving and term loan agreement with Merrill Lynch Capital (“MerrillLynch”); (ii) terminated the existing revolving and term loan agreementwith Wells Fargo Credit, Inc. (“Wells”); (iii) amended and restatedthe Management Services Agreement with American Industrial Partners (“AIPAdvisor”) and Dolphin Advisors, LLC (“Dolphin Advisor”); (iv) entered intoa put/call option agreement with American Industrial Partners Capital Fund III,L.P. (“AIP”); and (v) restructured the composition of the Board ofDirectors.

***Dispositions***

During the 1990’s we invested in several businessesoutside our core area of expertise. Generally, these investments were notsuccessful and resulted in significant losses and severe liquidity constraints.As of September 30, 2004, we have disposed of all such businesses.

**NaturalGas Conversion****  **Duringfiscal 2004 we completed the sale of our NESC natural gas conversion business.

**PassengerCar and Light Truck****  **OnSeptember 30, 2003, we sold the passenger car and light truck electronicthrottle control product lines to a competitor, Teleflex. This product lineincluded the design and production of Electronic Throttle Controls, includingthe related sensor, primarily for certain Ford Motor Company and General Motorsproduct lines. For fiscal 2003, sales of this product line were approximately$4.6 million and were projected to increase as further passenger car and lighttruck lines were introduced.

**ElectricalComponents and Global Positioning System****  **Prior to 2002 our electrical components product lineincluded the design and production of microcircuits, cable assemblies, sensorsand other electronic products used in the telecommunication, computer andtransportation industries. We have phased out of all of our electricalcomponent products.

Prior to 2001 we manufactured and distributed a globalpositioning system product line, GeoFocus, which included commuter railroadtrain tracking and agricultural cyber-farming systems using global positioningand geographic information technology. The financial results of this productline were not material to us as a whole, and it was sold in 2001.

**Agriculture Equipment****  **In 2000 we completed the sale of theagriculture operations. This business produced spraying equipment for the lawncare, nursery and pest control industries and mowers used in farming andmaintenance.

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***Competition***

We believe we are the market leader and largestdomestic producer in the market for electronic throttle control systems forheavy trucks and transit busses manufactured in the U.S. We have a much smallerportion of the European and Asian markets. The markets for our products arehighly competitive, with many of our competitors having substantial financialresources and significant technological capabilities. Our competitive positionvaries among our product lines.

The major competitors for our electronic throttlecontrols include Hella, AB Eletronik, Teleflex, VDO, and Felsted. Othercompanies including KSR, Dura and CTS that compete in the passenger car andlight truck market may attempt to compete in the heavy truck and transit busmarket in the future.

We also manufacture pneumatic and hydraulic controlsystems for the diesel heavy truck, transit bus and off-highway vehiclesmarkets. The market for these pneumatic and hydraulic control systems is highlycompetitive and characterized by many competitors. Many of the customers forthese products are the same customers as for our diesel heavy truck and transitbus electronic throttle control systems.

When choosing amongcompeting electronic throttle control systems, we believe purchasers of thesesystems focus on price, quality, value added engineering and reputation. Inaddition, we believe attainment of the ISO 9001 and QS 9000 qualitycertifications and ultimately obtaining TS 16949 quality certification and ISO14001 Environmental Management System certifications are critical to qualifyingas a supplier. Our Portland, Oregon manufacturing facility has attained the ISO9001 and QS 9000 certifications and is pursuing TS 16949 and ISO 14001certifications.

***Marketing and Distribution***

We sell our products to customers primarily in thetruck and heavy equipment industries. For the years ended September 30,2004, 2003 and 2002, Freightliner accounted for 20%, 21% and 21%, Volvoaccounted for 16%, 14% and 13%, Paccar accounted for 16%, 10% and 8%, andNavistar accounted for 8%, 11% and 11%, of net sales from continuingoperations, respectively. Approximately 33%, 31% and 28% of net sales in fiscal2004, 2003 and 2002 respectively, were to customers outside of the UnitedStates, primarily in Canada, Belgium, Sweden, Mexico and Korea, and, to alesser extent, in other European countries, South America, Pacific Rim nationsand Australia.

Prior to fiscal 2002approximately 95% of our sales were to consumers of products within our vehiclecomponents segment. As a result of the sale of GeoFocus and the phase out of allof our electrical component products, however, all of our sales are now tocustomers of the vehicle components segment. In fiscal 2004 and 2003, withinthe vehicle components segment, approximately 83% and 82% of our sales werefrom sales of electronic throttle controls, with the remainder being sales ofpneumatic and hydraulic control systems.

***Environment***

We produce small quantities of hazardous wastes in ouroperations and we are subject to federal and state air, water and landpollution control laws and regulations. Compliance with these laws generallyrequires operating costs and capital expenditures. Substantial liability mayresult from the failure to properly handle hazardous wastes. We use our bestefforts to ensure that all hazardous wastes are handled in accordance withapplicable federal, state and local laws and regulations.

The soil and groundwaterat the Company’s Portland, Oregon facility contain contaminants that theCompany believes were released on the property by previous property owners. Someof this contamination has migrated offsite to a neighboring property. TheCompany has retained an environmental consulting firm to investigate the extentof the contamination and to determine what, if any, remediation will berequired and the associated costs. During the third quarter of fiscal 2004 theCompany entered the Oregon 

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Departmentof Environmental Quality’s voluntary clean-up program and during fiscal 2004the Company established a liability reserve of $950 for this matter. TheCompany believes it has a contractual right to indemnification from the priorowner of the property and has notified the prior owner of this indemnity claim.The prior owner has disputed its liability, and the Company may seek judicialenforcement of the indemnity obligation.

***Government Regulation***

Our vehicle componentproducts must comply with the National Traffic and Motor Vehicle Safety Act of1966, as amended, and regulations promulgated there under, which areadministered by the National Highway Traffic Safety Administration (“NHTSA”). If,after an investigation, NHTSA finds that we are not in compliance with any ofits standards or regulations, among other things, it may require that we recallproducts found not to be in compliance, and repair or replace such products.During fiscal 2004, we had no product recalls. We are not aware of anyinstances of non-compliance with the statute and applicable regulations.

***Product Research and Development***

We conduct engineering,research and development and quality control activities to improve theperformance, reliability and cost-effectiveness of our products. Ourengineering staff works closely with our customers to design and develop newproducts and to adapt existing products for new applications. During fiscal2004, 2003 and 2002, the Company spent $3,042, $3,575 and $3,549, respectively,on these activities for continuing operations. We anticipate that theseexpenses may increase in the future with development of sensor productioncapability, as existing customers require additional product designs and withexpansion into new products such as adjustable pedals and off-roadapplications.

***Patents, Trademarks and Licenses***

We believe our products generally have strong namerecognition in their respective markets. We have obtained a number of productpatents, which expire at various times. We consider each patent to be of valueand aggressively protect our rights against infringement throughout the world. Weown two patents (expiring in 2009) that we believe improve the marketability ofcertain of our diesel heavy truck electronic throttle control systems. We donot consider that the loss or expiration of either patent would materiallyadversely affect us because of our history of quality and close workingrelationships with our customers; however, competition in themarket for diesel heavy truck electronic throttle control systems couldincrease without these patents.

During fiscal 2003, we obtained a license agreementfor use of an adjustable pedal design for our heavy truck and transit busproduct lines. The agreement required an initial payment of $125, which waspaid in fiscal 2003, and a $75 payment to be paid based on certain criteria. The$75 was accrued at September 30, 2004. We will also make royalty paymentsbased on the number of units sold by the Company. The agreement is for a periodof three years and is renewed annually if certain sales thresholds are met.

Additionally, as part of the sale of the Company’spassenger car and light truck product lines to Teleflex Incorporated on September 30,2003, we obtained the right to use certain of Teleflex’s adjustable pedalpatents in exchange for Teleflex receiving licenses for certain of the Company’spatents.

We own numerous patents,primarily under the “Williams” name. We believe that, in the aggregate, therights under our patents are generally important to our operations, but do notconsider that any patent or group of them related to a specific process orproduct is of material importance in relation to our total business except asdescribed above.

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***Raw Materials; Reliance on Single Source Suppliers***

We produce certain of our products from raw materials,including brass, aluminum, steel, plastic, rubber and zinc, which currently arewidely available at reasonable terms. Thereare currently multiple manufacturers that make sensors specifically for ourdiesel heavy truck and transit bus electronic throttle control systems. Wemanufacture foot pedals using a contact position sensor manufactured byCaterpillar, Inc., which is used exclusively on Caterpillar engines. Caterpillarsupplies this sensor and requires that its sensor be used on all Caterpillarengines; therefore, we do not consider the Caterpillar sensor supply to be atrisk. We purchase other component parts from suppliers, none of which isconsidered a single source supplier. Although these suppliers have been able tomeet our needs on a timely basis, and appear to be willing to continue beingsuppliers, there is no assurance that a disruption in a supplier’s business,such as a strike, would not disrupt the supply of a component.

Steel and energy commoditydemand has resulted in price increases causing higher costs for some of ourcomponents. Although component prices have increased, we have not been subjectto supply constraints as a result of the increased demand.

***Product Warranty***

We warrant our products tothe first purchaser and subsequent owners against malfunctions occurring duringthe warranty period resulting from defects in material or workmanship, subjectto specified limitations. The warranty on vehicle components is limited to aspecified time period, mileage or hours of use, and varies by product andapplication. We have established a warranty reserve based upon our estimate ofthe future cost of warranty and related service costs. We regularly monitor ourwarranty reserve for adequacy in response to historical experience and otherfactors.

***Employees***

Our employees engaged inthe manufacturing and vehicle components in the Portland, Oregon facility arerepresented by the International Union, United Automobile Workers of Americaand Amalgamated Local 492. The current five-year agreement expires on August 31,2008. Prior to signing the new agreement, the union employees engaged in aneleven month strike action, which was settled by agreement with no financialliability to the Company on August 16, 2003.

***Risk Factors***

This report on Form 10-K, including theNotes to Consolidated Financial Statements, contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995,that involve a number of risks and uncertainties. Forward-looking statementsinclude, without limitation, those statements relating to development of newproducts, the financial condition of the Company, the ability to increasedistribution of the Company’s products, integration of businesses the Companyacquires, and disposition of any of current business of the Company. Forward-lookingstatements can be identified by the use of forward-looking terminology, such as“may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, “plans”,“intends”, or other similar terminology. Although we believe that theexpectations reflected in such forward-looking statements are reasonable, suchforward-looking statements are subject to risks and uncertainties that couldcause actual results to differ materially from those indicated by theforward-looking statements. These risks and uncertainties are beyond ourcontrol and, in many cases, we cannot predict the risks and uncertainties thatcould cause our actual results to differ materially from those indicated by theforward-looking statements.

The forward-looking statements are made as of the datehereof, and we disclaim any intention or obligation to update or revise anyforward-looking statements or to update the reasons why the actual 

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results could differmaterially from those projected in the forward-looking statements, whether as aresult of new information, future events or otherwise.

Investors arecautioned to consider the following items when considering forward-lookingstatements. If any of these items actually occur, our business, results ofoperations, financial condition or cash flows could be materially adverselyaffected. Such matters involve risks and uncertainties that include, withoutlimitation, the following:

·       Changesin business relationships with and purchases by or from major customers orsuppliers, including delays or cancellations in shipments;

·       Demandfor and market acceptance of new and existing products;

·       Competitivemarket conditions and resulting effects on sales and pricing;

·       Increasesin raw material costs that cannot be recovered in product pricing due tocustomer driven pricing pressures;

·       Changesin volumes and the mix of products sold;

·       Thetiming and extent of product development costs;

·       Globaleconomic factors, including difficulties entering new markets and generaleconomic conditions such as interest rates;

·       Relianceon major customers, if a major customer were lost or if production levels forsuch customers was significantly reduced, the impact could be a materialadverse effect on existing and future net sales and net income;

·       Exposureto product liability claims from customers and consumers in the event that ourproducts fail to perform to specifications or result in personal injury ordeath;

·       Workstoppages and other labor matters;

·       Theinability to obtain sufficient working capital to fund operations;

·       Changesin environmental laws and other regulations;

***Available Information***

The Company maintains awebsite on the Internet at *www.wmco.com*. TheCompany makes available free of charge through its website, by way of ahyperlink to a third-party SEC filing website, its annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed or furnished pursuant to Section 13 (a) or15 (d) of the Exchange Act. Such information is available as soon as suchreports are filed with the SEC. The information on our website is not part ofthis report.

**Item2.   Properties**

We own a 120,000 squarefeet manufacturing facility and office building in Portland, Oregon. We believethe Portland facility is adequate for our existing needs and the needs for theforeseeable future. This manufacturing facility is equipped with the machineryand equipment necessary to manufacture and assemble our products. We believethat this facility has been maintained adequately

**Item 3.   Legal Proceedings**

We are parties to various pending judicial andadministrative proceedings arising in the ordinary course of business. Ourmanagement and legal counsel have reviewed the probable outcome of these 

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proceedings, the costs andexpenses reasonably expected to be incurred, the availability and limits of ourinsurance coverage, and our established reserves for uninsured liabilities. Whilethe outcome of the pending proceedings cannot be predicted with certainty,based on our review, we believe that any liability that may result is notreasonably likely to have a material effect on our liquidity, financialcondition or results of operations.

On October 1, 2004, the Company was named as aco-defendant in a product liability case (Cuesta v. Ford, et al,District Court for Bryant, Oklahoma) that seeks class action status. Thecomplaint seeks an unspecified amount of damages on behalf of the class. TheCompany believes the claims to be without merit and intends to vigorouslydefend this action. There can be no assurance, however, that the outcome of thelawsuit will be favorable to the Company or will not have a material adverseeffect on the Company’s business, consolidated financial condition and resultsof operations. In addition, the Company may be forced to incur substantiallitigation expenses in defending this litigation.

On May 12, 2003,Ronald Ziegler, the Company’s former president and chief executive officer,filed suit against the Company, American Industrial Partners, L.P.; AmericanIndustrial Partners Fund III, L.P., and American Industrial Partners Fund IIICorporation in the Circuit Court of the 15th Judicial Circuit in and for PalmBeach County, Florida. In the suit, Mr. Ziegler alleges that the Companybreached an “oral agreement” with Mr. Ziegler to pay him additionalcompensation, including a bonus of “at least” $500 for certain tasks performedby Mr. Ziegler while he was the Company’s president and chief executiveofficer and seeks additional compensation to which he claims he is entitled. TheCompany disputes the existence of any agreement with or liability to Mr. Ziegler,and is vigorously defending this action.

**Item 4.   Submission of Matters to a Vote ofSecurity Holders**

On September 16, 2004 we began a solicitation ofconsents from our shareholders to amend the rights of the Series A-1and B Preferred Shares of the Company, and to eliminate the authority of ourboard of directors to issue additional shares of preferred stock in the futurewithout the consent of the shareholders. These amendments were required inorder to complete the recapitalization described above. See “FinancialRecapitalization”. Sufficient consents were received from the holders of allclasses of the Company’s stock to make the required amendments by September 30,2004.

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**Part II**

**Item 5.   Marketfor Registrant’s Common Equity and Related Stockholder Matters**

Our common stock is quotedon the over the counter bulletin board (“OTC Bulletin Board”) under the symbol “WMCO.”

Therange of high and low bid-closing quotations for our common stock for eachfiscal quarter for the past two fiscal years is as follows:
|                          | ** ** | **2004**   | ** ** |
|--------------------------|------------|------------|------------|
| **Quarter Ended**   | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
| December 31, 2003   |       | $          | 0.85       |   | $ | 0.53 |   |
| March 31,  2004     |       | $          | 0.81       |   | $ | 0.64 |   |
| June 30, 2004       |       | $          | 0.95       |   | $ | 0.70 |   |
| September 30,  2004 |       | $          | 1.00       |   | $ | 0.57 |   |
| ** **               | ** ** | **2003**   | ** ** |
| **Quarter Ended**        | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
| December 31, 2002   |       | $          | 0.40       |   | $ | 0.25 |   |
| March 31,  2003     |       | $          | 0.51       |   | $ | 0.27 |   |
| June 30, 2003       |       | $          | 0.51       |   | $ | 0.38 |   |
| September 30,  2003 |       | $          | 0.62       |   | $ | 0.39 |   |
|                          |            |            |            |  |  |  |  |  |  |  |

 

Therewere 472 record holders of our common stock as of December 6, 2004. Wehave never paid a dividend with respect to our common stock and have no plansto pay a dividend on our common stock in the foreseeable future.

***Item 6.   Selected FinancialData*(Dollars in thousands**—*except pershare amounts)*
| ** **                                                         | ** ** | **Year ended September 30** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Consolidated Statement of Operations Data:** | ** ** | ** **                                 | ** ** | **2004(1)** | ** ** | **2003(2)(3)** | ** ** | **2002(4)** | ** ** | **2001(5)** | ** ** | **2000(6)** | ** ** |
| Net sales from continuing operations                               |       | $                                          | 58,050     |   |   | $ | 51,302 |   |   | $ | 51,917 |   | $ | 55,082 |   | $ | 67,725 |   |
| Net income (loss)  from continuing operations                      |       | (3,880                                     | )          |   | 1,044 |   |   | (2,198 | ) | (9,602 | ) | (16,744 | ) |
| Net income (loss)                                                  |       | (4,058                                     | )          |   | 936 |   |   | (961 | ) | (9,602 | ) | (16,744 | ) |
| Loss from  continuing operations per common share—basic       |       | (0.18                                      | )          |   | (0.05 | ) |   | (0.14 | ) | (0.54 | ) | (0.88 | ) |
| Loss from continuing operations per  common share—diluted     |       | (0.18                                      | )          |   | (0.05 | ) |   | (0.14 | ) | (0.54 | ) | (0.88 | ) |
| Net loss per  common share—basic                              |       | (0.19                                      | )          |   | (0.05 | ) |   | (0.08 | ) | (0.54 | ) | (0.88 | ) |
| Net loss per common share—diluted                             |       | (0.19                                      | )          |   | (0.05 | ) |   | (0.08 | ) | (0.54 | ) | (0.88 | ) |
| Cash dividends per  common share                                   |       | —                                     |       |   | — |   |   | — |   | — |   | — |   |
|                                                                    |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                          | ** ** | **September 30** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| **Consolidated Balance Sheet Data:** | ** ** | ** **            | ** ** | **2004(1)** | ** ** | **2003(2)(3)** | ** ** | **2002(4)** | ** ** | **2001(5)** | ** ** | **2000(6)** | ** ** |
| Current Assets                                      |       | $                     | 17,282     |   |   | $ | 18,684 |   |   | $ | 15,157 |   | $ | 14,178 |   | $ | 20,561 |   |
| Current  Liabilities                                |       | 13,747                |       |   | 17,481 |   |   | 16,266 |   | 33,710 |   | 40,279 |   |
| Working Capital (deficit)                           |       | 3,535                 |       |   | 1,203 |   |   | (1,109 | ) | (19,532 | ) | (19,718 | ) |
| Total Assets                                        |       | 31,125                |       |   | 24,907 |   |   | 26,322 |   | 29,339 |   | 49,149 |   |
| Long Term Liabilities                               |       | 24,413                |       |   | 24,569 |   |   | 9,915 |   | 6,337 |   | 7,826 |   |
| Redeemable  Preferred Stock                         |       | —                |       |   | — |   |   | 13,109 |   | — |   | — |   |
| Shareholder’s Equity (deficit)                 |       | (7,035                | )          |   | (17,143 | ) |   | (12,968 | ) | (10,708 | ) | 1,044 |   |
|                                                     |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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***Note:******  ***The above amounts reflect theAutomotive Accessories and Agricultural Equipment segments and NESC asdiscontinued operations.

(1)    The 2004data includes a loss on extinguishment of debt of $19,770, a loss of $178 fromdiscontinued operations, a gain of $209 from the settlement of a sales taxobligation of Aptek and a $210 gain from the extinguishment of old 

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outstanding accountspayable balances of various insolvent subsidiaries. See Notes 7, 15 and 18 ofNotes to Consolidated Financial Statements.

(2)    The 2003data includes a gain on a settlement with a customer of $951 and a net loss of$108 from discontinued operations. See Notes 7 and 18 of Notes to ConsolidatedFinancial Statements.

(3)    In 2003,the Company adopted Statement of Financial Accounting Standards No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity” (SFAS No. 150). In accordance with SFAS No. 150, theredeemable preferred stock of $16,072 at September 30, 2003 is included inlong-term liabilities. In addition, dividends and accretion on redeemablepreferred stock is classified as interest expense since July 1, 2003 inthe consolidated statement of operations data.

(4)    The 2002data includes losses on impairment of investment in Ajay, Inc. of $3,565,a net gain of $1,237 from discontinued operations, and a reduction in interestexpense of $720. See Notes 5, 7 and 18 of Notes to Consolidated FinancialStatements

(5)    The 2001data includes losses on impairment of assets related to the Company’s ProActivePedal and PPT operations of $4,366 and $1,796, respectively. Also included inthe 2001 data were gains on sale of land and buildings at Aptek and sale ofGeoFocus of $1,837 and $2,486, respectively. 

(6)    The 2000 data includes recognition of $5,044 expensefor equity interest in loss of affiliate. The 2000 data also includes a$6,896 expense for a valuation allowance for previously recognized deferredincome tax assets, which may no longer be realizable due to management’sassessment of their ultimate realizability.

11

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**Item 7.**   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations  *(Dollars inthousands—except per share amounts)*

This section summarizesthe significant factors affecting our consolidated operating results, financialcondition and liquidity position for the three year period ended September 30,2004. This section should be read in conjunction with our consolidatedfinancial statements and related notes appearing elsewhere in this document. Statementsin this report that relate to future results and events are based on ourcurrent expectations. Actual results in future periods may differ materiallyfrom those currently expected or desired because of a number of risks anduncertainties. For a discussion of factors affecting our business, see “Item 1—Business”in this Annual Report on Form 10-K. 

***Overview***

We primarily design,produce and sell electronic throttle control systems for heavy trucks andbusses. We have a significant portion of the United States market for theseproducts and a lesser portion of the international markets for the sameproducts. We also manufacture pneumatic and hydraulic control systems for thediesel heavy truck, transit bus and off-highway vehicles market. Many of thecustomers for pneumatic and hydraulic control systems are the same customers asfor our diesel heavy truck and transit bus electronic throttle control systems.

Until September 30,2003, we also produced a product line of electronic throttle controls forpassenger car and light trucks. We completed the sale of the assets related tothese product lines on September 30, 2003. During 2003, net sales ofpassenger car and light truck electronic throttle controls constitutedapproximately 9% of our total revenues. Following the sale of assets related tothe passenger car and light truck product lines, all of our products areproduced in our Portland, Oregon facility.

Demand for our electronicthrottle control devices and pneumatic and hydraulic control systems generallyfollow the economic cycles for heavy truck and transit bus manufacturing andsales. While we believe we are the leader in the market for electronic throttlecontrol systems for heavy trucks and transit busses manufactured in the U.S.,the markets for our products are highly competitive in the U.S. and even morecompetitive in the international markets. Certain of our competitors aresuppliers with substantial financial resources and significant technologicalcapabilities. Major areas of focus of management of the Company are workingclosely with our existing and potential customers to design and develop newproducts and adapt existing products to new applications, and improving theperformance, reliability and cost-effectiveness of our products. 

The demand for electronicthrottle control systems is expanding into countries, primarily outside ofNorth America and Europe, that have not converted heavy truck and bus vehiclesto electronic throttle controls and further into off-highway vehicles. Theinitial electronic throttle control conversion for off-highway vehicles hasbeen in the larger vehicles. Demand for electronic throttle controls willdepend, in part, on how quickly manufacturers proceed with ongoing enginemodifications that will require such systems. 

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***Results ofOperations***

**Financial Summary**(Dollars in Thousands)
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|------------------------|------------|------------------------|------------|
| Net sales                                                 |       | $        | 58,050     |     | $          | 51,302   |       | $                      | 51,917     |                   | 13.2       | % | -1.2 | % |
| Cost of sales                                             |       | 39,234   |       | 40,326   |       | 37,370   |       | -2.7                   | %          | 7.9                    | %          |
| Gross margin                                              |       | 18,816   |       | 10,976   |       | 14,547   |       | 71.4                   | %          | -24.5                  | %          |
| Research and development                                  |       | 3,042    |       | 3,575    |       | 3,549    |       | -14.9                  | %          | 0.7                    | %          |
| Selling                                                   |       | 1,192    |       | 1,367    |       | 1,252    |       | -12.8                  | %          | 9.2                    | %          |
| Administration                                            |       | 4,864    |       | 5,199    |       | 6,682    |       | -6.4                   | %          | -22.2                  | %          |
| Gain on settlement with  customer                         |       | —   |       | (951     | )          | —   | * *   | *NM*                   | * *   | *NM*                   | * *   |
| Loss on impairment of  investment—Ajay               |       | —   |       | —   |       | 3,565    | * *   | *NM*                   | * *   | *NM*                   | * *   |
| Operating income (loss)  from continuing operations       |       | $        | 9,718      |     | $          | 1,786    |       | $                      | (501       | )                      |       |   |   |   |
| Expenses as a percentage of net sales:                    |       |     |       |     |       |     |       |                   |       |                   |       |
| Cost of sales                                             |       | 67.6     | %          | 78.6     | %          | 72.0     | %          |                   |       |                   |       |
| Gross margin                                              |       | 32.4     | %          | 21.4     | %          | 28.0     | %          |                   |       |                   |       |
| Research and development                                  |       | 5.2      | %          | 7.0      | %          | 6.8      | %          |                   |       |                   |       |
| Selling                                                   |       | 2.1      | %          | 2.7      | %          | 2.4      | %          |                   |       |                   |       |
| Administration                                            |       | 8.4      | %          | 10.1     | %          | 12.9     | %          |                   |       |                   |       |
| Operating income (loss)  from continuing operations  |       | 16.7     | %          | 3.5      | %          | -1.0     | %          |                   |       |                   |       |

----

*NM—notmeaningful*

***Comparative YearsEnded September 30, 2004, 2003 and 2002***
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Net sales                                                     |       | $          | 58,050     |       | $          | 51,302     |       | $                       | 51,917     |   | 13.2 | % | -1.2 | % |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |

 

Net sales increased$6,748, or 13.2%, for the year ended September 30, 2004 compared to theyear ended September 30, 2003. The net increase is a combination of an$11,356 increase in sales to our heavy truck and transit bus customers offsetby a $4,608 sales decline related to our passenger car and light truck productlines, which were sold on September 30, 2003. The 24.3% increase in netsales to our heavy truck and transit bus customers is due to increased salesvolumes resulting from increases in truck production volumes and the additionin fiscal 2004 of a new customer in the heavy truck product line. We expectelectronic throttle controls sales will increase in line with changes in truckproduction volumes in the various geographic markets in which we serve, howevercompetitive pricing may reduce per unit pricing. For the year ended September 30,2004, all of the net sales were from sales to our heavy truck and transit buscustomers.

13

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Netsales decreased $615, or 1.2%, for the year ended September 30, 2003compared to the year ended September 30, 2002. Increases in sales volumesof our electronic throttle control systems to our heavy truck and transit buscustomers were offset by lower sales volumes for our passenger car and lighttruck product lines. Net sales to our heavy truck and transit bus customers in fiscal2003 increased $993, or 2.2%, compared to fiscal 2002. This increase was offsetby a decrease in overall net sales of electronic throttle controls to ourpassenger car and light truck customers of $1,608, or 25.9%.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Gross margin                                                  |       | $          | 18,816     |       | $          | 10,976     |       | $                       | 14,547     |   |   | 71.4 | % |   | -24.5 | % |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |

 

Gross margin was $18,816,or 32.4%, of net sales in fiscal 2004, an increase of $7,840 compared to thegross margin of $10,976, or 21.4% of net sales in fiscal 2003. Included ingross margin for fiscal 2003 were negative gross margins of $2,155 from ourpassenger car and light truck product lines, which were sold on September 30,2003.

Electronic throttle,pneumatic and hydraulic control systems for heavy truck and transit bussesgross margin increased $5,935 to 32.9% of net sales during fiscal 2004 from28.2% of net sales during the comparable period in fiscal 2003. The overallincrease in gross margin during fiscal 2004 is primarily driven by a 24.3%increase in sales of electronic throttle, pneumatic and hydraulic controlsystems to heavy truck and transit bus customers and reductions in per unitlabor and overhead costs. Labor costs as a percentage of sales improved betweenperiods mostly due to production process improvements and the absence ofinefficiencies caused by the strike of our union employees during fiscal 2003. Thestrike of our union employees was resolved in August 2003. Overheadexpenses remained constant between periods; however, they decreased as apercentage of sales. 

Included in gross marginfor heavy truck and transit busses during fiscal 2004 is an increase in cost ofsales of $322 related to product warranty issues with one customer. In fiscal2003, the Company recorded $1,321 in costs of sales for product warranty issueswith this same customer. The campaign associated with this customer isscheduled to conclude in December 2004, and as such, the Company believesany remaining warranty costs to be incurred with this campaign are minimal. 

Gross margin decreased$3,571 to $10,976, or 21.4% of sales in fiscal 2003 compared to gross margin of$14,547, or 28.0% of sales in fiscal 2002. The decline in gross margin resultedfrom a combination of higher warranty costs for heavy truck and transit busseselectronic throttle control systems and start up problems related to several ofour passenger car and light truck contracts. 

Gross margins as apercentage of sales for heavy trucks and transit busses, which accounted for91% of net sales during the year ended September 30, 2003, showed adecrease of $1,752 from 32.6% of net sales for fiscal 2002 compared to 28.2% ofnet sales during fiscal 2003. The decrease in gross margin for heavy trucks andtransit busses is primarily attributable to the Company recording a $1,321warranty charge to cost of sales related to product issues with one customer. Thisdecrease is partially offset by the Company recording a $198 reduction in costof sales related to its assessment of the remaining obligation for a productrecall identified in fiscal 2001. The Company also recorded a $163 reduction incost of sales in 2003 related to the settlement of accounts payable related tothis warranty product recall as described in Note 7 in the Notes toConsolidated Financial Statements. In addition, the Company recorded a $320reduction in benefit obligation for the Post Retirement Plan in 2003, asdiscussed in Note 11 in the Notes to Consolidated Financial Statements. Includedin cost of sales for the year ended September 30, 2002 is a $200 reductionin a previously provided product warranty recall reserve. 

In addition to thedecrease in gross margins in fiscal 2003 for heavy trucks and transit busses,the passenger car and light truck electronic throttle control system sales alsoshowed a decrease in gross margin. Passenger car and light truck electronicthrottle control system sales, which accounted for 9% of 

14

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netsales during fiscal 2003, had negative gross margins in fiscal 2003 of 46.8% ofnet sales compared to positive margin of 3.6% of net sales during fiscal 2002. Theresulting negative margin for passenger car and light truck electronic throttlecontrol systems in fiscal 2003 is primarily due to an increase in directmaterial costs, scrap, labor costs due to start-up problems associated withnumerous contracts and the elimination of sales for the Dodge Viper program. Inaddition, the Company recorded a $225 warranty charge to cost of sales infiscal 2003 related to higher than anticipated warranty claims with onecustomer.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Research and  development                                     |       | $          | 3,042      |       | $          | 3,575      |       | $                       | 3,549      |   | -14.9 | % |   | 0.7 | % |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses decreased $533, or 14.9%, for the year ended September 30, 2004compared to the year ended September 30, 2003. The decrease in researchand development spending is primarily attributable to a reduction of $1,383 ofresearch and development expenses associated with our passenger car and lighttruck product lines, which were sold on September 30, 2003, as discussedin Note 17 in the Notes to Consolidated Financial Statements. This reduction isoffset by an $850 increase in research and development expenses in our heavytruck and transit bus product lines. This increase is attributable to anincrease in overall personnel and project expenses for new electronic throttlecontrol and adjustable pedal designs. The Company’s research and developmentexpenditures will fluctuate based on the products under development at anygiven point in time, however, overall we expect research and developmentexpenses for our heavy truck and transit bus product lines to increase overfiscal 2004 levels due to additional pedal design projects and sensordevelopment efforts.       

Researchand development expenses remained constant for the year ended September 30,2003 compared to the year ended September 30, 2002. Research anddevelopment expenses associated with our heavy truck and transit bus productlines increased $169 or 8.3%. This increase was offset by a $143 or 9.4%reduction in research and development expenses for our passenger car and lighttruck product lines. 
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Selling                                                       |       | $          | 1,192      |       | $          | 1,367      |       | $                       | 1,252      |   | -12.8 | % |   | 9.2 | % |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |

 

Selling expenses decreased$175, or 12.8%, for the year ended September 30, 2004 compared to the yearended September 30, 2003. This decrease is mainly due to the sale of ourpassenger and light truck product lines, which accounted for $380 of totalselling expenses for fiscal 2003. This decrease was offset by an increase inselling expenses of $205 for our heavy truck and transit bus product lines,which was due to an increase in wages and increases in travel expenses to ourEuropean and Asian customers. We expect to continue to incur increased travelexpenses associated with our foreign customers.

Selling expenses increased$115 or 9.2% for fiscal 2003 compared to the comparable period in 2002. Theincrease in selling expenses is mainly due to an increase in spending for heavytruck and transit bus product lines, which increased $208 or 26.7% for the yearended September 30, 2003 compared to the year ended September 30,2002.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Administration                                                |       | $          | 4,864      |       | $          | 5,199      |       | $                       | 6,682      |   |   | -6.4 | % |   | -22.2 | % |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |

 

Administration expensesdecreased $335, or 6.4%, for the year ended September 30, 2004 compared tothe year ended September 30, 2003. Included in administrative expenses infiscal 2003 were expenses of $1,331 from our passenger car and light truckproduct lines, which were sold on September 30, 2003. Excluding theexpenses associated with our passenger car and light truck product lines, theincrease in 

15

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administrationexpense is primarily a result of recording an environmental accrual of $950 infiscal 2004, as discussed in Note 13 in the Notes to Consolidated FinancialStatements. In addition, there were increases in legal and professionalexpenses for employee matters of $135 and an increase of approximately $70 ininformation technology expenses in fiscal 2004 compared to the same period infiscal 2003. The Company also recorded a $209 gain during fiscal 2004 from thesettlement of a sales tax obligation of Aptek as discussed in Note 7 in theNotes to Consolidated Financial Statements.

Administration expensesfor the year ended September 30, 2003 of $5,199 were lower than the $6,682for the same fiscal period in 2002, a reduction of $1,483 or 22.2%. Thisdecrease is primarily due to significant reductions in officer’s salaries andlegal expenses of $1,292. These reductions are attributable to our improvedfinancial condition and due to the completion of the fiscal 2002recapitalization transaction, which is discussed in Note 15 in the Notes toConsolidated Financial Statements. In addition, a fee of $250 to a formerinvestment advisor is included in administration expense in fiscal 2002. Duringthe year ended September 30, 2002, the Company also entered into asettlement with the Department of Labor regarding certain of its employeebenefit plans. As part of this settlement, the Company recorded $170 inexpenses related to the Company’s ESOP Plan. The recording of this expense ispart of the overall decrease of administrative expenses from fiscal 2002 tofiscal 2003. Administrative expenses also decreased approximately $330, or19.9%, during fiscal 2003 because of a reduction in personnel and otherexpenses for our passenger car and light truck product lines.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Gain on  settlement with customer                             |       | $          | —     |       | $          | (951       | )          | $                       | —     | * * | *NM* | * * | *NM* | * * |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |

 

In the second quarter offiscal 2003, the Company reached a settlement with a prior customer on acancelled supply contract. Under the terms of the settlement, the Companyreceived $900 and a waiver of an accounts payable obligation of $51 with onevendor. Based on this obligation being waived, this amount is included in theoverall gain recognized from this settlement. The entire gain of $951 isreflected as a separate line “Gain from settlement with customer” withinoperating expenses of the consolidated statements of operations for the yearended September 30, 2003.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Loss on  impairment of investment—Ajay                   |       | $          | —     |       | $          | —     |       | $                       | 3,565      | * * | *NM* | * * | *NM* | * * |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |

 

The Company recorded animpairment loss of $3,565 related to its investment in and note receivable fromAjay in the second quarter of fiscal year 2002. This impairment loss wasrecorded based on the Company evaluating the realization of its investment in andnote receivable from Ajay and determining through this assessment that theCompany’s interests had been impaired. This amount has been reflected as aseparate line “Loss on impairment of investment—Ajay” within operating expensesof the consolidated statements of operations for the year ended September 30,2002.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Interest expenses, net                                        |       | $          | 3,314      |       | $          | 1,229      |       | $                       | 1,638      |   | 169.7 | % | -25.0 | % |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |

 

Interest expense on debtdecreased $451, or 86.2%, to $72 for the year ended September 30, 2004compared to $523 in fiscal 2003. This reduction is primarily the result ofreduced debt levels resulting from cash proceeds received from the sale of ourpassenger car and light truck product lines on September 30, 2003. Due tothe fiscal 2004 recapitalization transaction discussed in Note 15 in the Notesto Consolidated Financial Statements, we expect interest expense on debt toincrease in future periods due to increased debt levels effective September 30,2004.

16

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Interest expense on debt decreased $1,115, or 68.1%,to $523 for the year ended September 30, 2003 from $1,638 in fiscal 2002,however fiscal 2002 included the impact of the gain on settlement of interestpayable in fiscal 2002 of $720 as discussed in Note 7 in the Notes toConsolidated Financial Statements. The reduction in interest expense on debt isthe result of overall reduced interest rates and reduced debt levels resultingfrom the receipt of cash proceeds associated with the 2002 recapitalization transactiondiscussed in Note 15 in the Notes to Consolidated Financial Statements.

Interestexpense on Series B Preferred Stock relates to dividends accrued on the Series BPreferred Stock and the related accretion. Based on the guidelines of Statementof Financial Accounting Standards No. 150 (SFAS No. 150), beginningin the fourth quarter of fiscal 2003 the Company recorded all accrued dividendsassociated with the Series B Preferred Stock as a component of interestexpense. Prior to the fourth quarter of fiscal 2003, all accrued dividends onthe Series B Preferred Stock were recorded as a component of net lossallocable to common shareholders. Interest expense on Series B PreferredStock for the year ended September 30, 2004 was $3,245 compared to $731for the fourth quarter of fiscal 2003. Due to the fiscal 2004 recapitalizationtransaction discussed in Note 15 in the Notes to Consolidated FinancialStatements, the Company will no longer record interest expense on Series BPreferred Stock after fiscal 2004.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Other (income)  expense, net                                  |       | $          | (221       | )          | $          | (182       | )          | $                       | 190        |   |   | *NM* |   |   |   | *NM* |   |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

Otherincome was $221 in fiscal 2004 compared to income of $182 in fiscal 2003. Otherincome in fiscal 2004 primarily consisted of a $210 gain from theextinguishment of old outstanding accounts payable balances of variousinsolvent subsidiaries as discussed in Note 7. Other income was $182 in fiscal2003 and consisted primarily of a $100 gain from the release of escrow fundsrelated to the sale of GeoFocus as described in Note 20 in the Notes toConsolidated Financial Statements. The $190 of other expenses in fiscal 2002relates to costs from the exchange of Series A-1 Preferred Stock for Series APreferred Stock.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Loss on  extinguishment of debt                               |       | $          | 19,770     |       | $          | —     |       | $                       | —     |   |   | *NM* |   |   |   | *NM* |   |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

Duringthe fourth quarter of fiscal 2004 upon redemption of the 98,114 shares of Series BPreferred Stock and conversion of the remaining Series B Preferred Stockinto common stock, the Company recorded a $19,770 loss on extinguishment ofdebt. The loss on extinguishment of Series B Preferred Stock consists ofthe write-off of the remaining un-amortized capitalized Series B feesincurred in the fiscal 2002 recapitalization, the accrual of up to three yearsof dividends for Series B Preferred Stock shareholders as required underthe original agreement with the Series B Preferred Stock shareholders, aconversion premium, the write-off of the remaining un-amortized capitalizedloan fees with Wells, the net value of the of the put/call option agreementdescribed in Note 15 in the Notes to Consolidated Financial Statements, andfees and expenses associated with the fiscal 2004 recapitalization transaction.The loss on extinguishment of debt has been recorded in other (income) expensesin the accompanying Consolidated Statements of Operations for the year ended September 30,2004.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Income tax benefit                                            |       | $          | 9,265      |       | $          | 305        |       | $                       | 131        |   |   | *NM* |   |   |   | *NM* |   |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

17

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The Company is currently in a net operating losscarry-forward position. Federal netoperating losses are subject to provisions of the Internal Revenue Code, whichpotentially restrict the utilization of this type of tax attribute in the eventof an “ownership change” (as defined in the Internal Revenue Code Section 382).Changes in ownership associated with the recapitalization transactionsdiscussed in Note 15 in the Notes to Consolidated Financial Statements, coupledwith other future changes in ownership, may significantly defer the utilizationof net operating loss carry forwards in the future. The Company does notbelieve an ownership change has occurred as of September 30, 2004.

In fiscal 2004, the Company recorded an income taxbenefit from continuing operations of $9,265, which primarily consistedof the reversal of the valuation allowance on certain deferred tax assets asdiscussed in Note 12 in the Notes to Consolidated Financial Statements. A taxbenefit of $305 was recorded in the year ended September 30, 2003, whichis primarily attributable to a refund from the federal 1998 tax return. During July 2002,the Company received a refund of $276 on federal income taxes from the 1996fiscal year and reflected this amount as an income tax benefit in fiscal 2002. Thisamount was offset by payments made for certain state taxes during 2002. Therefunds in fiscal 2003 and 2002 were due to a recent change in the tax law,which allowed the Company to carry back certain net operating losses five yearsas opposed to two.
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------|------------|
| **For the Year Ended September 30:** | ** ** | ** ** | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**                | ** ** | **2003 to  2004** | ** ** | **2002 to  2003** | ** ** |
| Discontinued  operations, net of tax                          |       | $          | 178        |       | $          | 108        |       | $                       | (1,237     | ) |   | *NM* | * * |   |   | *NM* | * * |   |
|                                                               |            |            |            |            |            |            |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

During the second quarter of fiscal 2004, the Companysold the assets of its NESC operations. The Company recorded a total loss of$113 from the sale of discontinued operations based on the difference betweenthe proceeds received and the recorded book value of assets sold at the date ofthe sale. In addition, a loss of $65 from the operations of NESC was recordedin discontinued operations for the year ended September 30, 2004. For theyear ended September 30, 2003 and 2002, the Company recorded a loss indiscontinued operations of $228 and $147, respectively, from the operations ofNESC. Refer to Note 18 in the Notes to Consolidated Financial Statements forfurther discussion.

During the second quarter of fiscal 2003, the Companysettled a lease obligation of its previously discontinued Kenco Williamsbusiness. A gain of $120 resulted from this settlement, which has been recordedin discontinued operations for the year ended September 30, 2003 on theaccompanying consolidated statements of operations.

As of September 30,2001, the Company had recorded obligations on its consolidated balance sheet of$1,216 related to the discontinued Agricultural Equipment segment. The $1,216was comprised of a $417 mortgage payable on a building of the AgriculturalEquipment segment and an additional obligation to a former owner of $799. Thebuilding’s carrying value was $0 at September 30, 2001. During fiscal 2002the mortgage holder sold the building at auction for approximately the mortgagevalue and completely and fully released the Company from the mortgage. TheCompany recognized a gain from discontinued operations of $417 related to thesatisfaction of the mortgage. Since the estimated fair value of the buildingwas equal to or greater than the debt, the gain was recorded as a gain on saleof building from discontinued operations. Additionally, in fiscal 2002, theCompany satisfied the obligation to the prior owner by transferring to theprior owner all remaining machinery and equipment and inventory, with acarrying value of $0, for a complete release of the $799 obligation. TheCompany recognized a gain from discontinued operations of $799 related to thesatisfaction of the obligation. The gain was recorded as a gain fromdiscontinued operations. The Company also recognized a net gain of $168 in thefourth quarter of fiscal 2002 related to the settlement of other obligations ofthe discontinued Agricultural Equipment segment.

18

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***Financial Condition, Liquidity and Capital Resources***

Cash generated from continuingoperations was $5,560 for the year ended September 30,2004; an increase of $2,546 over the cash generatedfrom operations of $3,014 for the year ended September 30, 2003. Cashflows from operations included a net loss of $4,058, a non-cash reduction from continuingoperations of $9,467 for reduction of thevaluation allowance on our deferred taxassets at September 30, 2004, and a non-cash increase from continuing operationsof $19,770 for the loss on extinguishment of debt. As a result of the fiscal2004 recapitalization transaction, which is discussed in Note 15 in the Notesto Consolidated Financial Statements, all outstanding Series B PreferredStock and the associated accrued dividends have been either redeemed orconverted into common stock. The Company recorded a one-time loss onextinguishment of debt and will no longer record dividends and accretionassociated with the Series B Preferred Stock.

Cash flows from continuingoperations were reduced for the year ended September 30, 2004 due towarranty payments exceeding warranty accruals by $1,039, which was almostentirely due to payments to one customer for a warranty claim that was inexcess of normal warranty as discussed in Note 2 in the Notes to ConsolidatedFinancial Statements. In future periods, we expect warranty payments to be moreconsistent with warranty accruals. For the year ended September 30, 2003,warranty payments were $1,139 lower than warranty accruals, primarily due tothe recording of accruals associated with the one customer described above andin Note 2 in the Notes to Consolidated Financial Statements. Additionally, theCompany made required contributions of $2,499 to its pension plans duringfiscal 2004 compared to $1,424 in fiscal 2003.

We believe we will continue togenerate positive cash flow from continuing operations due to our improvedfinancial condition and elimination of our passenger car and light truckproduct lines, which were sold on September 30, 2003. These product linesgenerated negative gross margins in fiscal 2003. We expect operating expensesto remain more consistent with the amounts incurred in fiscal 2004 compared tofiscal 2003 due to the sale of the passenger car and light truck product lines.

Cash provided by investing activities was $4,977 forthe year ended September 30, 2004 and was comprised of $6,010 of netproceeds from the sale of ourpassenger car and light truck product lines offset by $1,046 of purchases ofproperty, plant and equipment. This compared to purchases of property, plantand equipment of $1,285 for the year ended September 30, 2003. Excludingthe net proceeds from the sale of our passenger car and light truck productlines, we expect our cash use for investing activities to increase in futureperiods as we continue to make purchases of capital equipment. We currentlyanticipate spending approximately $2,900 in capital expenditures for the yearended September 30, 2005.

Cash used in financing activities was $8,156 for the year ended September 30,2004 compared to cash used in financing activities of $2,483 for the year endedSeptember 30, 2003. In fiscal 2004, net payments on debt and capital leaseobligations were $4,977, which primarily relates to the payoff or our revolvingcredit facility and term loans with our prior lender Wells Fargo Credit, Inc.The Company received $20,011 of proceeds from the issuance of new debt withMerrill Lynch and incurred $568 of financing costs related to this new debt asdiscussed in Note 8 in the Notes to ConsolidatedFinancial Statements. The Company paid $26,436, whichincludes $2,995 of current year accrued dividends, for theredemption of certain Series B Preferred Stock as discussed in Note 15 inthe Notes to Consolidated Financial Statements from the proceeds of theissuance of the Merrill Lynch financing and available cash on hand. Inaddition, we paid $1,413 of Series A-1 Preferred Stock dividends duringthe first quarter of fiscal 2004. During the second quarter of fiscal 2004, theCompany received proceeds of $2,092 related to the issuance of common stockfrom the exercise of warrants as discussed in Note 8 in the Notes toConsolidated Financial Statements. As discussed in Note 19 in the Notes toConsolidated Financial Statements, the Company received proceeds of $162 fromthe issuance of common stock to certain employees during the third quarter offiscal 2004. In fiscal 2003, net payments on debt and capital lease obligationswere $2,646 and 

19

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included the prepayment of$2,139 of subordinated debt. Fiscal 2003 also included $119 of financing costsrelated to the fiscal 2002 recapitalization and $73 from the redemption of Series APreferred Stock. These net payments in 2003 were partially offset by proceedsfrom the issuance of additional Series B Preferred Stock of $355.

At September 30,2004, our contractual obligations consisted of bank debt, capital leasesobligations, and operating lease commitments. We do not have any materialletters of credit, purchase commitments, or debt guarantees outstanding at September 30,2004. Maturities of these contractual obligations consist of the following:
| ** **       | ** ** | **Payments Due for the Periods ending September 30,** | ** ** | ** ** | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **2005**                                                                                 | ** ** | **2006**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Total** | ** ** |
| Term loan        |       | $                                                                                        | 3,400      |       | $          | 3,400 |   | $ | 3,400 |   | $ | 3,400 |   | $ | 3,400 |   | $ | 17,000 |   |
| Revolver         |       | —                                                                                   |       | —     |       | — |   | — |   | 3,011 |   | 3,011 |   |
| Capital leases   |       | 54                                                                                       |       | 29         |       | — |   | — |   | — |   | 83 |   |
| Operating leases |       | 53                                                                                       |       | 36         |       | 16 |   | — |   | — |   | 105 |   |
|             |       | $                                                                                        | 3,507      |       | $          | 3,465 |   | $ | 3,416 |   | $ | 3,400 |   | $ | 6,411 |   | $ | 20,199 |   |

 

As discussed in Note 9 and 11 in theNotes toConsolidated Financial Statements, the Company has net obligations at September 30,2004 related to its pension plans and post retirement medical plan of $5,360and $3,320, respectively. Due to a change in legislation regarding funding ofpension plans, cash payments to fund our pension obligations are expected todecrease in future periods compared to the amounts funded over the last severalyears. The Company funded $2,499 to its pension plans in fiscal 2004; however,we expect to make payments of $1,240 in fiscal 2005. We had $4,989 availableunder our revolving credit facility with Merrill Lynch at September 30,2004 plus cash and cash equivalents at September 30, 2004 of $2,482, andwe believe this availability along with cash provided by operations will besufficient to meet our working capital needs on a short-term and long-termbasis.

Included in theaccompanying consolidated balance sheet is approximately $1,386 of old accountspayable related to closed insolvent subsidiaries of the Company. In accordancewith SFAS No. 140 “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities”, a debtor can only relieve itself ofa liability if it has been extinguished. Accordingly, a liability is consideredextinguished if (a) the debtor pays the creditor and is relieved of itsobligation for the liability or (b) the debtor is legally released frombeing the primary obligor under the liability, either judicially or by thecreditor. During the fourth quarter of fiscal 2004, the Company was judiciallyreleased from and reversed $210 of old accounts payable related to closedinsolvent subsidiaries of the Company resulting in a gain, which has beenrecorded in other (income) expense in the accompanying Consolidated Statementsof Operations. The Company expects to reverse amounts in future periods basedon the recognition of the liabilities being judicially released in accordancewith SFAS No. 140 of $60 in fiscal 2005; $561 in fiscal 2006; $731 infiscal 2007; and $34 in fiscal 2010.

***Critical Accounting Policies***

Inresponse to the SEC’s Release No. 33-8040, “Cautionary AdviceRegarding Disclosure About Critical Accounting Policies,” we have identifiedthe most critical accounting principles upon which our financial status depends.We have determined the critical principles considering accounting policies thatinvolve the most complex decisions or assessments. Our critical accountingpolicies are as follows:

**Revenue recognition:**

·       Revenueis recognized at the time of product shipment or delivery, depending on whentitle and risk of loss transfers to customers, and when all of the followinghave occurred: a firm sales agreement is 

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in place, pricingis fixed or determinable, and collection is reasonably assured. Revenues arereported net of estimated returns, rebates and customer discounts. Discountsand rebates are recorded during the period they are earned by the customer.

**Warranty:**

·       We provide awarranty covering defects arising from products sold. The productwarranty reserve is based on a percentage of product sales and is morespecifically based on historical return rates of products and amounts forsignificant and specific warranty issues. The warranty is limited to aspecified time period, mileage or hours of use, and varies by product andapplication. The Company has provided a reserve, which in the opinion ofmanagement is adequate to cover such warranty costs. While we believe our estimates are reasonable, they are subject to changeand such change could be material.

**Environmental:**

·       Wemust make estimates of the costs of investigation and remediation for certainsoil and groundwater contaminants at our Portland, Oregon facility. Theultimate costs to the Company for the investigation, remediation and monitoringof this site cannot be predicted with certainty due to the often unknownmagnitude of the pollution or the necessary cleanup, the varying costs ofalternative cleanup methods, the amount of time necessary to accomplish suchcleanups and the evolving nature of cleanup technologies and governmentalregulations. The Company has recognized a liability for environmentalremediation costs for this site in an amount that it believes is probable andreasonably estimable. When one estimate within the range of estimated costs ishigher than another, the Company accrues that amount; otherwise the minimumamount in the range is accrued. In making these judgments and assumptions, theCompany considers, among other things, the activity to-date at the site andinformation obtained through consultation with applicable regulatoryauthorities and third party consultants and contractors. The Company regularlymonitors its exposure to environmental loss contingencies. As additionalinformation becomes known, it is at least reasonably possible that a change inthe estimated liability accrual will occur in the near future.

**Pensions and Post-retirementBenefit Obligations:**

·       Incalculating our obligations and expense for pensions and post-retirementbenefits, we are required to select certain actuarial assumptions. Theseassumptions include a discount rate, expected long-term rate of return on planassets and rates of increase in compensation and healthcare costs. Ourassumptions are determined based on current market conditions, historicalinformation and consultation with and input from our actuaries. Changes ininterest rates and market performance could have a significant impact on ourpension expense and future payments.

**Accounting for Income Taxes:**

·       For eachjurisdiction that we operate in, we are required to estimate our current taxexpense together with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in our consolidatedbalance sheet. We must also assess the likelihood that our deferred tax assetswill be recovered from future taxable income and to the extent we believe thatrecovery is not likely, a valuation allowance is established. Our income taxprovision on the consolidated statement of operations is impacted by changes inthe valuation allowance. This process is complex and involves significantmanagement judgment in determining our provision for income taxes, deferred taxassets and liabilities and any valuation allowances recorded against our netdeferred tax assets.

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***Recently Adopted Accounting Standards***

In December 2003, theFASB issued SFAS No. 132R, “Employers’ Disclosures about Pensions andOther Postretirement Benefits—an amendment of FASB Statements No. 87, 88,and 106,” which replaced SFAS No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” SFAS No. 132R retains thedisclosure requirements of SFAS No. 132 and requires additionaldisclosures about the assets, obligations, cash flows, and net periodic benefitcost of defined benefit pension plans and other defined benefit postretirementplans. The disclosure requirements of SFAS No. 132R are generallyeffective for fiscal years ending after December 15, 2003. Disclosure ofthe estimated future benefit payments is effective for fiscal years endingafter June 15, 2004. The interim period disclosures required by thisStatement are effective for interim periods beginning after December 15,2003. The Company has incorporated the required disclosures of SFAS No. 132Rin Note 9 in the Notes to Consolidated Financial Statements. The adoption ofSFAS No. 132R did not have an impact on the Company’s financial position,results of operations or cash flows.

**Item 7A.   Quantitative and QualitativeDisclosures About Market Risk**

Market risk is thepotential loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and changes in the market valueof investments. The Company’s primary market risk results from fluctuations ininterest rates.

***Interest Rate Risk:***

·       TheCompany has a five-year revolving and term loan agreement with its primarylender Merrill Lynch.

·       Asof September 30, 2004, the outstanding balances on the term loan andrevolving loan were $17,000 and $3,011, respectively. The effective annualinterest rate on the term loan was 8.00% compared to 7.50% for the revolvingloan as of September 30, 2004. The Company does not believe that ahypothetical 10% change in end of the period interest rates or changes infuture interest rates on these variable rate obligations would have a materialeffect on its financial position, results of operations, or cash flows. TheCompany has not hedged its exposure to interest rate fluctuations.

***Foreign Currency Risk:***

·       Wesell our products to customers in the truck, transit bus and heavy equipmentindustries. For the fiscal years ended September 30, 2004 and 2003, theCompany had foreign sales of approximately 33% and 31% of net sales,respectively. The Company does not believe that changes in future exchangerates would have a material effect on its financial position, results ofoperations, or cash flows as all of its foreign sales transactions aredenominated in US dollars. As a result, the Company has not entered intoforward exchange or option contracts for transactions to hedge against foreigncurrency risk.

***Investment Risk:***

·       TheCompany does not use derivative financial or commodity instruments. The Company’sfinancial instruments include cash and cash equivalents, accounts and notesreceivable, accounts payable and long-term obligations. The Company’s cash andcash equivalents, accounts receivable and accounts payable balances areshort-term in nature, and, thus, the Company believes they are not exposed tomaterial investment risk.

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**Item 8.   Financial Statements and SupplementaryData**

**WilliamsControls, Inc.**

**Index toConsolidated Financial Statements**
|                                                                                                                            | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered  Public Accounting Firm                                                                   |       | 24       |
| Consolidated Balance Sheets at  September 30, 2004 and 2003                                                           |       | 25       |
| Consolidated Statements of Shareholders’ Equity  (Deficit) for the years ended September 30, 2004, 2003 and 2002 |       | 26-27    |
| Consolidated Statements of  Operations for the years ended September 30, 2004, 2003 and 2002                          |       | 28       |
| Consolidated Statements of  Comprehensive Loss for the years ended September 30, 2004, 2003 and 2002             |       | 29       |
| Consolidated  Statements of Cash Flows for the years ended September 30, 2004, 2003  and 2002                         |       | 30-31    |
| Notes to Consolidated Financial  Statements                                                                                |       | 32       |

 

See pages 67-68 for Index to Exhibits

23

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To The Board of Directorsof Williams Controls, Inc.:

We have audited the 2004, 2003 and 2002 consolidatedfinancial statements of Williams Controls, Inc. and subsidiaries as listedin the accompanying index. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 statementsreferred to above present fairly, in all material respects, the financialposition of Williams Controls, Inc. and subsidiaries as of September 30,2004 and 2003, and the results of their operations and their cash flows foreach of the years in the three year period ended September 30, 2004 inconformity with U.S. generally accepted accounting principles.

In fiscal year 2003, theCompany adopted Statement of Financial Accounting Standard No. 150, asdiscussed in Note 15 to the consolidated financial statements. In addition, asdiscussed in Note 7 to the consolidated financial statements, in fiscal year2002, the Company adopted early application of Statement of FinancialAccounting Standard No. 145.
| /s/ KPMG LLP |   |   |   |
|------------------------|--------|--------|--------|
| KPMG LLP               |
| Portland, Oregon,      |
| December 3, 2004  |

 

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**Williams Controls, Inc.Consolidated Balance Sheets(Dollars in thousands, except per share information)**
| ** **                                                                                                                                                     | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                     |       |                         |       |                         |       |   |   |   |   |
| Current Assets:                                                                                                                                                |       |                         |       |                         |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                     |       |                         | $          | 2,482                        |       |   |   | $ | 101 |   |   |
| Trade accounts receivable,  less allowance of $20 and $24 in 2004 and 2003, respectively                                                                       |       |                         | 8,193      |                         |       |   | 7,015 |   |   |
| Other accounts  receivable                                                                                                                                     |       |                         | 424        |                         |       |   | 7,185 |   |   |
| Inventories                                                                                                                                                    |       |                         | 3,777      |                         |       |   | 4,053 |   |   |
| Deferred income  taxes                                                                                                                                         |       |                         | 2,116      |                         |       |   | — |   |   |
| Prepaid expenses  and other current assets                                                                                                                     |       |                         | 290        |                         |       |   | 330 |   |   |
| Total current  assets                                                                                                                                          |       |                         | 17,282     |                         |       |   | 18,684 |   |   |
| Property, plant,  and equipment, net                                                                                                                           |       |                         | 5,402      |                         |       |   | 5,647 |   |   |
| Deferred income  taxes                                                                                                                                         |       |                         | 7,247      |                         |       |   | — |   |   |
| Other assets, net                                                                                                                                              |       |                         | 1,194      |                         |       |   | 576 |   |   |
| Total assets                                                                                                                                                   |       |                         | $          | 31,125                       |       |   |   | $ | 24,907 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT**                                                                                                                |       |                         |       |                         |       |   |   |   |   |
| Current Liabilities:                                                                                                                                           |       |                         |       |                         |       |   |   |   |   |
| Accounts payable                                                                                                                                               |       |                         | $          | 4,084                        |       |   |   | $ | 4,027 |   |   |
| Accrued expenses                                                                                                                                               |       |                         | 4,969      |                         |       |   | 6,698 |   |   |
| Current portion of  employee benefit obligations                                                                                                               |       |                         | 1,240      |                         |       |   | 2,098 |   |   |
| Current portion of  long-term debt and capital leases                                                                                                          |       |                         | 3,454      |                         |       |   | 4,658 |   |   |
| Total current  liabilities                                                                                                                                     |       |                         | 13,747     |                         |       |   | 17,481 |   |   |
| Long-term Liabilities:                                                                                                                                         |       |                         |       |                         |       |   |   |   |   |
| Long-term debt and  capital lease obligations                                                                                                                  |       |                         | 16,640     |                         |       |   | 402 |   |   |
| Employee benefit  obligations                                                                                                                                  |       |                         | 7,440      |                         |       |   | 8,095 |   |   |
| Other long-term  liabilities                                                                                                                                   |       |                         | 333        |                         |       |   | — |   |   |
| Mandatory  redeemable Convertible Series B Preferred Stock, net (0 and 153,550  issued and outstanding at September 30, 2004 and 2003, respectively) |       |                         | —     |                         |       |   | 16,072 |   |   |
| Commitments and contingencies                                                                                                                                  |       |                         |       |                         |       |   |   |   |   |
| Shareholders’ Deficit:                                                                                                                                    |       |                         |       |                         |       |   |   |   |   |
| Preferred stock  ($.01 par value, 50,000,000 authorized)                                                                                                       |       |                         |       |                         |       |   |   |   |   |
| Series A-1 (0  and 77,550 issued and outstanding at September 30, 2004 and 2003,  respectively)                                                      |       |                         | —     |                         |       |   | 1 |   |   |
| Series A (0  and 150 issued and outstanding at September 30, 2004 and 2003,  respectively)                                                           |       |                         | —     |                         |       |   | — |   |   |
| Series C  ($.01 par value, 100,000 authorized; 0 issued and outstanding at  September 30, 2004 and 2003)                                             |       |                         | —     |                         |       |   | — |   |   |
| Common stock ($.01  par value, 50,000,000 authorized; 46,629,411 and 20,125,492 issued and  outstanding at September 30, 2004 and 2003, respectively)     |       |                         | 466        |                         |       |   | 201 |   |   |
| Additional paid-in  capital                                                                                                                                    |       |                         | 35,960     |                         |       |   | 22,224 |   |   |
| Accumulated  deficit                                                                                                                                           |       |                         | (37,458    | )                            |       |   | (33,400 | ) |   |
| Treasury stock  (130,200 shares at September 30, 2004 and 2003, respectively)                                                                             |       |                         | (377       | )                            |       |   | (377 | ) |   |
| Other  comprehensive loss—Pension liability adjustment                                                                                                    |       |                         | (5,626     | )                            |       |   | (5,792 | ) |   |
| Total  shareholders’ deficit                                                                                                                              |       |                         | (7,035     | )                            |       |   | (17,143 | ) |   |
| Total liabilities and  shareholders’ deficit                                                                                                              |       |                         | $          | 31,125                       |       |   |   | $ | 24,907 |   |   |

 

See accompanying notes to Consolidated Financial Statements.

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**Williams Controls, Inc. Consolidated Statements of Shareholders’ Equity (Deficit) (Dollars in thousands)**
| ** ** | ** ** | **Issued**  Series A-1  Preferred Stock | ** ** | **Issued  Series A  Preferred Stock** | ** ** | **Issued  Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Treasury** | ** ** | **Note**    | ** ** | **Pension  Liability** | ** ** | **Shareholders’  Equity** | ** ** |
|------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|--------------------------------------|------------|--------------|------------|-------------|------------|------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **Shares**                                        | ** ** | **Amount**                                      | ** ** | **Shares**                    | ** ** | **Amount**              | ** ** | **Shares**                           | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Deficit)**           | ** ** | **Stock**                      | ** ** | **Receivable** | ** ** | **Adjustment** | ** ** | **(Deficit)** | ** ** |
|            |            |                                                   |            |                                                 |            |                               |            |                         |            |                                      |            |              |            |             |            |                        |            |                                |            |  |  |  |  |  |  |
| Balance, September 30,  2001                                        |   | — |   |   | $      | — |   |    | 78,400 |   |   | $      | 1      |       |   | 19,921,114 |   |   | $      | 199    |   |   |   | $      | 23,069  |   |   |   | $      | (30,721 | )      |   |   | $      | (377   | )      |   |   | $      | (500   | )       |   |   | $ | (2,379 | ) |   |   | $ | (10,708 | ) |   |
|-------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|------------|--------|------------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---|--------|---|--------|--------|---|---------|---|--------|
| Net loss                                                                      |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | (961    | )      |   |   | — |    |   |   | — |   |   |   | — |   |   |   | (961    | )      |   |
| Common stock issued from  conversion of preferred stock                       |   | — |   |   | — |   |   | (200    | )      |   | — |   |   | 7,408      |   |       | — |   |   |   | — |   |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | —  |   |   |
| Dividends on preferred stock  and accretion for Series B preferred stock |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | (1,566  | )      |   |   | — |    |   |   | — |   |   |   | — |   |   |   | (1,566  | )      |   |
| Accrued dividends reclassified to  preferred stock                            |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | 1,413  |   |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | 1,413   |   |   |
| Redemption of Series A  preferred stock for  Series A-1        |   | 77,550 |   |   | 1      |   |   | (77,550 | )      |   | (1     | )      |   | —     |   |       | — |   |   |   | (923   | )      |   |   | 923     |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | —  |   |   |
| Write off of note receivable                                                  |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | —  |   |   |   | — |    |   |   | 500    |   |   |   | — |   |   |   | 500     |   |   |
| Change in pension liability  adjustment                                       |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | (1,646 | )      |   |   | (1,646  | )      |   |
| Balance, September 30, 2002                                         |   | 77,550 |   |   | 1      |   |   | 650     |   |   | — |   |   | 19,928,522 |   |       | 199    |   |   |   | 23,559 |   |   |   | (32,325 | )      |   |   | (377   | )       |   |   | — |   |   |   | (4,025 | )      |   |   | (12,968 | )      |   |
| Net income                                                                    |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | 936     |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | 936     |   |   |
| Dividends on preferred stock and accretion for  Series B preferred stock |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | (2,011  | )      |   |   | — |    |   |   | — |   |   |   | — |   |   |   | (2,011  | )      |   |
| Accrued dividends reclassified to liabilities                                 |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | (1,413 | )      |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | (1,413  | )      |   |
| Common stock issuance                                                         |   | — |   |   | — |   |   | —  |   |   | — |   |   | 196,970    |   |       | 2      |   |   |   | 128    |   |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | 130     |   |   |
| Redemption of Series A preferred stock                                   |   | — |   |   | — |   |   | (500    | )      |   | — |   |   | —     |   |       | — |   |   |   | (50    | )      |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | — |   |   |   | (50     | )      |   |
| Change in pension liability adjustment                                        |   | — |   |   | — |   |   | —  |   |   | — |   |   | —     |   |       | — |   |   |   | — |   |   |   | —  |   |   |   | — |    |   |   | — |   |   |   | (1,767 | )      |   |   | (1,767  | )      |   |
| Balance, September 30, 2003                                         |   | 77,550 |   |   | 1      |   |   | 150     |   |   | — |   |   | 20,125,492 |   |       | 201    |   |   |   | 22,224 |   |   |   | (33,400 | )      |   |   | (377   | )       |   |   | — |   |   |   | (5,792 | )      |   |   | (17,143 | )      |   |

 

See accompanying notes to Consolidated FinancialStatements.

26

 

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**Williams Controls, Inc. Consolidated Statements of Shareholders’ Equity (Deficit) (Continued) (Dollars in thousands)**

 
| ** ** | ** ** | **Issued  Series A-1  Preferred Stock** | ** ** | **Issued  Series A  Preferred Stock** | ** ** | **Issued  Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Treasury** | ** ** | **Note**    | ** ** | **Pension  Liability** | ** ** | **Shareholders’  Equity** | ** ** |
|------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|--------------------------------------|------------|--------------|------------|-------------|------------|------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **Shares**                                        | ** ** | **Amount**                                      | ** ** | **Shares**                    | ** ** | **Amount**              | ** ** | **Shares**                           | ** ** | **Amount**   | ** ** | **Capital** | ** ** | **Deficit)**           | ** ** | **Stock**                      | ** ** | **Receivable** | ** ** | **Adjustment** | ** ** | **(Deficit)** | ** ** |
|            |            |                                                   |            |                                                 |            |                               |            |                         |            |                                      |            |              |            |             |            |                        |            |                                |            |  |  |  |  |  |  |
| Net loss                                                       |   | —  |   |   | — |   |   | — |   |   | — |   |   | —     |   |   | — |   |   |   | — |   |   |   | (4,058 | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (4,058 | )      |   |
|----------------------------------------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Exercise of common stock warrants                              |   | —  |   |   | — |   |   | — |   |   | — |   |   | 2,677,017  |   |   | 27     |   |   |   | 2,065  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,092  |   |   |
| Common stock issuance                                          |   | —  |   |   | — |   |   | — |   |   | — |   |   | 216,667    |   |   | 2      |   |   |   | 160    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 162    |   |   |
| Conversion of Series B preferred stock to common  stock   |   | —  |   |   | — |   |   | — |   |   | — |   |   | 11,761,495 |   |   | 118    |   |   |   | 11,644 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 11,762 |   |   |
| Conversion of Series A-1 preferred stock to  common stock |   | (77,550 | )      |   | (1     | )      |   | — |   |   | — |   |   | 11,848,740 |   |   | 118    |   |   |   | (118   | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1     | )      |   |
| Redemption of Series A preferred stock                         |   | —  |   |   | — |   |   | (150   | )      |   | — |   |   | —     |   |   | — |   |   |   | (15    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (15    | )      |   |
| Change in pension liability adjustment (net of tax of $104)    |   | —  |   |   | — |   |   | — |   |   | — |   |   | —     |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 166    |   |   |   | 166    |   |   |
| Balance, September 30, 2004  |   | — |   |   | $ | — |   |   | — |   |   | $ | — |   |   | 46,629,411 |   |   | $ | 466 |   |   |   | $ | 35,960 |   |   |   | $ | (37,458 | ) |   |   | $ | (377 | ) |   |   | $ | — |   |   |   | $ | (5,626 | ) |   |   | $ | (7,035 | ) |   |
|-----------------------------------|--------|--------|--------|--------|---|--------|--------|--------|--------|--------|--------|---|--------|--------|--------|------------|--------|--------|---|-----|--------|--------|--------|---|--------|--------|--------|--------|---|---------|---|--------|--------|---|------|---|--------|--------|---|--------|--------|--------|--------|---|--------|---|--------|--------|---|--------|---|--------|

 

See accompanying notes to Consolidated Financial Statements.

27

 

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**Williams Controls, Inc.Consolidated Statements ofOperations(Dollars in thousands, except share and per share information)**
| ** **                                                                                | ** ** | **For the year ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                                                                                 |       | $                                                             | 58,050     |   | $ | 51,302 |   | $ | 51,917 |   |
| Cost of sales                                                                             |       | 39,234                                                        |       | 40,326 |   | 37,370 |   |
| Gross margin                                                                              |       | 18,816                                                        |       | 10,976 |   | 14,547 |   |
| Operating expenses (income)                                                               |       |                                                          |       |   |   |   |   |
| Research and development                                                                  |       | 3,042                                                         |       | 3,575 |   | 3,549 |   |
| Selling                                                                                   |       | 1,192                                                         |       | 1,367 |   | 1,252 |   |
| Administration                                                                            |       | 4,864                                                         |       | 5,199 |   | 6,682 |   |
| Gain on settlement with  customer                                                         |       | —                                                        |       | (951 | ) | — |   |
| Loss on impairment of  investment—Ajay                                               |       | —                                                        |       | — |   | 3,565 |   |
| Total operating expenses                                                                  |       | 9,098                                                         |       | 9,190 |   | 15,048 |   |
| Operating income (loss) from  continuing operations                                       |       | 9,718                                                         |       | 1,786 |   | (501 | ) |
| Other  (income) expenses:                                                                 |       |                                                          |       |   |   |   |   |
| Interest income                                                                           |       | (3                                                            | )          | (25 | ) | — |   |
| Interest expense—Debt                                                                |       | 72                                                            |       | 523 |   | 1,638 |   |
| Interest expense—Series B  Preferred Stock dividends and accretion              |       | 3,245                                                         |       | 731 |   | — |   |
| Loss on extinguishment of debt                                                            |       | 19,770                                                        |       | — |   | — |   |
| Other (income) expense                                                                    |       | (221                                                          | )          | (182 | ) | 190 |   |
| Total other expenses                                                                      |       | 22,863                                                        |       | 1,047 |   | 1,828 |   |
| Income (loss) from continuing  operations before income taxes                             |       | (13,145                                                       | )          | 739 |   | (2,329 | ) |
| Income tax benefit                                                                        |       | 9,265                                                         |       | 305 |   | 131 |   |
| Net income (loss) from  continuing operations                                             |       | (3,880                                                        | )          | 1,044 |   | (2,198 | ) |
| Discontinued  operations:                                                                 |       |                                                          |       |   |   |   |   |
| Loss from operations of  discontinued operations (net of tax benefit of $41 in 2004) |       | 65                                                            |       | 228 |   | 147 |   |
| Loss from sale of discontinued  operations (net of tax benefit of $70 in 2004)       |       | 113                                                           |       | — |   | — |   |
| (Gain) from settlement of  obligations                                                    |       | —                                                        |       | (120 | ) | (1,384 | ) |
| Total discontinued operations                                                             |       | 178                                                           |       | 108 |   | (1,237 | ) |
| Net income (loss)                                                                         |       | (4,058                                                        | )          | 936 |   | (961 | ) |
| Adjustment for redemption of  preferred stock—Series A to A-1                   |       | —                                                        |       | — |   | 923 |   |
| Preferred dividends and  accretion for Series B Preferred Stock                      |       | —                                                        |       | (2,011 | ) | (1,566 | ) |
| Net (loss) allocable to common  shareholders                                              |       | $                                                             | (4,058     | ) | $ | (1,075 | ) | $ | (1,604 | ) |
| (Loss) per common share from  continuing operations—basic                            |       | $                                                             | (0.18      | ) | $ | (0.05 | ) | $ | (0.14 | ) |
| Income (loss) per common share  from discontinued operations—basic                   |       | (0.01                                                         | )          | (0.00 | ) | 0.06 |   |
| Net (loss) per common  share—basic                                                   |       | $                                                             | (0.19      | ) | $ | (0.05 | ) | $ | (0.08 | ) |
| Weighted average shares used in  per share calculation—basic                         |       | 21,867,137                                                    |       | 20,104,986 |   | 19,927,667 |   |
| (Loss) per common share from  continuing operations—diluted                          |       | $                                                             | (0.18      | ) | $ | (0.05 | ) | $ | (0.14 | ) |
| Income (loss) per common share  from discontinued operations—diluted                 |       | (0.01                                                         | )          | (0.00 | ) | 0.06 |   |
| Net (loss) per common  share—diluted                                                 |       | $                                                             | (0.19      | ) | $ | (0.05 | ) | $ | (0.08 | ) |
| Weighted average shares used in per share calculation—diluted                        |       | 21,867,137                                                    |       | 20,104,986 |   | 19,927,667 |   |

 

See accompanying notes to Consolidated Financial Statements.

28

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**Williams Controls, Inc.Consolidated Statements ofComprehensive Loss(Dollars in thousands)**
| ** **                                                          | ** ** | **For the year ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income (loss)                                                   |       | $                                                             | (4,058     | ) | $ | 936 |   | $ | (961 | ) |
| Change in pension liability adjustment, net  of tax of $104 in 2004 |       | 166                                                           |       | (1,767 | ) | (1,646 | ) |
| Comprehensive loss                                                  |       | $                                                             | (3,892     | ) | $ | (831 | ) | $ | (2,607 | ) |

 

See accompanying notes to Consolidated Financial Statements.

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**Williams Controls, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)**
| ** **                                                                                          | ** ** | **For the year **ended September 30, | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **    2004    **      | ** ** | **   2003   ** | ** ** | **   2002   ** | ** ** |
| Cash flows from operating  activities:                                                              |       |                                                          |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                                             | (4,058     | ) | $ | 936 |   | $ | (961 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities: |       |                                                          |       |   |   |   |   |
| Loss on extinguishment of debt                                                                      |       | 19,770                                                        |       | — |   | — |   |
| (Gain) loss from discontinued operations                                                            |       | 178                                                           |       | (120 | ) | (1,384 | ) |
| Loss from sale and disposal of fixed assets                                                         |       | 5                                                             |       | 84 |   | 495 |   |
| Gain from reversal of patent license liability                                                      |       | —                                                        |       | — |   | (580 | ) |
| Depreciation and amortization                                                                       |       | 1,313                                                         |       | 1,734 |   | 2,672 |   |
| Interest expense—Series B Preferred Stock dividends and accretion                         |       | 250                                                           |       | 731 |   | — |   |
| Gain on settlement with customer                                                                    |       | —                                                        |       | (51 | ) | — |   |
| Loss on debt modification                                                                           |       | —                                                        |       | — |   | 23 |   |
| Gain on settlement of liabilities                                                                   |       | (419                                                          | )          | (275 | ) | (720 | ) |
| Loss on impairment  of investment—Ajay                                                    |       | —                                                        |       | — |   | 3,565 |   |
| Deferred income taxes                                                                               |       | (9,467                                                        | )          | — |   | — |   |
| Changes  in operating assets and liabilities of continuing operations:                              |       |                                                          |       |   |   |   |   |
| Receivables                                                                                         |       | (1,382                                                        | )          | 194 |   | (533 | ) |
| Inventories                                                                                         |       | 66                                                            |       | (66 | ) | (215 | ) |
| Accounts payable and accrued expenses                                                               |       | 572                                                           |       | (601 | ) | (4,403 | ) |
| Other                                                                                               |       | (1,268                                                        | )          | 448 |   | (682 | ) |
| Net cash provided by (used in) operating activities of continuing  operations                       |       | 5,560                                                         |       | 3,014 |   | (2,723 | ) |
| Cash flows from investing  activities:                                                              |       |                                                          |       |   |   |   |   |
| Payments for property, plant and equipment                                                          |       | (1,046                                                        | )          | (1,285 | ) | (1,229 | ) |
| Proceeds from sale of assets                                                                        |       | 6,010                                                         |       | 12 |   | 48 |   |
| Proceeds from collection of notes receivable                                                        |       | 13                                                            |       | 14 |   | — |   |
| Net cash provided by (used in) investing activities of continuing  operations                       |       | 4,977                                                         |       | (1,259 | ) | (1,181 | ) |
| Cash flows from financing  activities:                                                              |       |                                                          |       |   |   |   |   |
| Net proceeds from issuance of Series B Preferred Stock                                         |       | —                                                        |       | 355 |   | 10,485 |   |
| Redemption of Series B Preferred Stock                                                         |       | (23,441                                                       | )          | — |   | — |   |
| Proceeds from issuance of debt                                                                      |       | 20,011                                                        |       | — |   | — |   |
| Net proceeds from exercise of warrants                                                              |       | 2,092                                                         |       | — |   | — |   |
| Net proceeds from issuance of common stock                                                          |       | 162                                                           |       | — |   | — |   |
| Payment of Series A-1 dividends                                                                |       | (1,413                                                        | )          | — |   | — |   |
| Financing costs related to recapitalizations                                                        |       | (568                                                          | )          | (119 | ) | (167 | ) |
| Net repayments of debt and lease obligations                                                        |       | (4,977                                                        | )          | (507 | ) | (2,287 | ) |
| Repayment of subordinated debt                                                                      |       | —                                                        |       | (2,139 | ) | (3,000 | ) |
| Redemption of Series A Preferred Stock and payment of dividends                                |       | (22                                                           | )          | (73 | ) | — |   |
| Net change in book overdraft                                                                        |       | —                                                        |       | — |   | (193 | ) |
| Net cash provided by (used in) financing activities of continuing  operations                       |       | (8,156                                                        | )          | (2,483 | ) | 4,838 |   |
| Cash flows from discontinued  operations:                                                           |       |                                                          |       |   |   |   |   |
| Net cash used in operations                                                                         |       | —                                                        |       | — |   | (105 | ) |
| Net cash used in discontinued operations                                                            |       | —                                                        |       | — |   | (105 | ) |
| Net increase (decrease) in cash and cash equivalents                                                |       | 2,381                                                         |       | (728 | ) | 829 |   |
| Cash and cash equivalents at beginning of year                                                      |       | 101                                                           |       | 829 |   | — |   |
| Cash and cash equivalents at end of year                                                            |       | $                                                             | 2,482      |   | $ | 101 |   | $ | 829 |   |

 

See attached Supplemental disclosure of cash flow information and non-cash investing and financing activities.

30

 

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**Williams Controls, Inc. Consolidated Statements of Cash Flows (Continued) (Dollars in thousands)**

 
| ** **                                                                                       | ** ** | **For the year ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **    2004    **      | ** ** | **   2003   ** | ** ** | **   2002   ** | ** ** |
| **Supplemental disclosure of cash  flow information:**                                           |       |                                                          |       |   |   |   |   |   |   |
| Interest paid                                                                                    |       | $                                                             | 3,059      |   | $ | 515 |   |   | $ | 1,708 |   |   |
| Income taxes paid (refunds), net                                                                 |       | $                                                             | 189        |   | $ | (228 | ) |   | $ | (231 | ) |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**                     |       |                                                          |       |   |   |   |   |   |   |
| Preferred dividends accrued but not paid and Series B accretion                             |       | $                                                             | —     |   | $ | 1,996 |   |   | $ | 1,566 |   |   |
| Pension liability adjustment                                                                     |       | 154                                                           |       | 1,898 |   |   | 1,613 |   |   |
| Conversion of Series B preferred stock to common stock                                      |       | 11,762                                                        |       | — |   |   | — |   |   |
| Conversion of Series A-1 preferred stock to common stock                                    |       | 118                                                           |       | — |   |   | — |   |   |
| Increase in other receivables from sale of passenger car and light truck  product lines     |       | —                                                        |       | 6,833 |   |   | — |   |   |
| Issuance of common stock for services previously accrued                                         |       | —                                                        |       | 130 |   |   | — |   |   |
| Issuance of notes receivable for sale of property                                                |       | —                                                        |       | 89 |   |   | — |   |   |
| Dividends transferred to (from) equity                                                           |       | —                                                        |       | (1,413 | ) |   | 1,413 |   |   |
| Accrued interest/fees converted to debt                                                          |       | —                                                        |       | — |   |   | 397 |   |   |
| Gain from sale of assets and settlement of liabilities from discontinued  operations        |       | —                                                        |       | — |   |   | 1,384 |   |   |
| Subordinated debt converted to Series B Preferred Stock                                     |       | —                                                        |       | — |   |   | 2,000 |   |   |
| Adjustment for redemption of Series A in exchange for  Series A-1 preferred stock |       | —                                                        |       | — |   |   | 923 |   |   |
| Debt modification fee accrued                                                                    |       | —                                                        |       | — |   |   | 225 |   |   |

 

See accompanying notes to Consolidated Financial Statements.

31

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**Notesto Consolidated Financial Statements**Years Ended September 30, 2004, 2003 and 2002(Dollars in thousands, except share and per share amounts)

**Note 1. Summary ofOperations 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”); WMCO-Geo (“GeoFocus”);NESC Williams, Inc. (“NESC”); Williams Technologies, Inc. (“Technologies”);Williams World Trade, Inc. (“WWT”); Techwood Williams, Inc. (“TWI”);Agrotec Williams, Inc. (“Agrotec”) and its 80% owned subsidiaries HardeeWilliams, Inc. (“Hardee”) and Waccamaw Wheel Williams, Inc. (“Waccamaw”)is herein referred to as the “Company” or “Registrant”. The subsidiaries are asfollows:

***Continuing Subsidiaries—***

**Williams ControlsIndustries,****Inc.:  **Manufacturesvehicle components sold in the commercial vehicle industry.

***Inactive subsidiaries—***

**ProActiveAcquisition Corporation:****  **ThroughSeptember 30, 2003, manufactured electronic throttle controls andadjustable pedal systems for passenger vehicles. This subsidiary also developedand produced electronic sensors. See Note 17.

**PremierPlastic Technologies,****Inc.:  **Manufacturedplastic components for the automotive industry. This operation was closed inMarch, 2001.

**WilliamsTechnologies,****Inc.:  **Supportedall subsidiaries of the Company by providing research and development anddeveloping strategic business relationships to promote “technology partnering”.This subsidiary ceased operations in fiscal 2000.

**WilliamsWorld Trade,****Inc.:  **Locatedin Kuala Lumpur, Malaysia, WWT managed foreign sourcing for subsidiaries of theCompany, affiliates and third party customers. Significant portions of WWT’srevenues were derived from Ajay Sports, Inc., an affiliate. Thissubsidiary ceased operations in fiscal 2000.

**AptekWilliams,****Inc.:  **Developedand produced sensors, microcircuits, cable assemblies and other electronicproducts for the transportation industry, and conducted research anddevelopment activities to develop commercial applications of sensor relatedproducts for the transportation market. This subsidiary ceased operations infiscal 2002.

**WMCO-Geo:****  **Developed train tracking and cyber-farming systemsusing global positioning systems (“GPS”) and geographical information systems (“GIS”).This operation was sold in June 2001.

***Discontinued Operations—***

**NESC Williams,****Inc.:  **Installed conversion kits to allow vehicles touse compressed natural gas and provided natural gas well metering services. Thisoperation was sold in February 2004.

***AgriculturalEquipment***

The operations of the subsidiaries comprising theAgricultural Equipment segment were sold in May 2000 and had previouslybeen reported as discontinued operations.

32

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**AgrotecWilliams,****Inc.:  **Manufacturedspraying equipment for the professional lawn care, nursery and pest controlindustries.

**HardeeWilliams,****Inc.:  **Manufacturedequipment used in farming, highway and park maintenance.

**Waccamaw Wheel Williams,****Inc.:  **Manufactured solid rubber tail wheels and otherrubber products used on agricultural equipment, from recycled truck and bus tires.

***Current Events—***

On September 30,2004, the Company completed a recapitalization transaction. In connection withthis transaction, the Company redeemed 98,114 shares of Series B Preferredstock for $26,436. The redemption of the shares of Series B Preferredstock resulted in the conversion of all outstanding shares of Series A-1Preferred stock into a total of 11,848,740 shares of common stock. Immediatelyfollowing the conversion of the Series A-1 Preferred stock, the remaining55,436 shares of Series B Preferred stock not redeemed were automaticallyconverted into a total of 11,761,495 shares of common stock. Further, theCompany obtained a $25,000 five year senior secured loan and revolving creditfacility with Merrill Lynch Capital, a division of Merrill Lynch BusinessFinancial Services, Inc. (“Merrill Lynch”). In connection with enteringinto the credit facility with Merrill Lynch, the Amended and Restated CreditAgreement between the Company and Wells Fargo Credit, Inc. (“Wells”),dated July 1, 2002, was terminated by the Company. Using proceeds from thenew credit facility with Merrill Lynch, the Company repaid the remaining $318of a term loan under the Wells credit agreement.

***Concentration of Risk and Sales by Customer***

For the years ended September 30,2004, 2003 and 2002, Freightliner accounted for 20%, 21% and 21%, Volvoaccounted for 16%, 14% and 13%, Paccar accounted for 16%, 10% and 8%, andNavistar accounted for 8%, 11% and 11%, of net sales from continuingoperations, respectively. Approximately 33%, 31% and 28% of net sales in fiscal2004, 2003 and 2002, respectively, were to customers outside of the UnitedStates, primarily in Canada, Belgium, Sweden, Mexico and Korea, and, to alesser extent, in other European countries, South America, Pacific Rim nationsand Australia. At September 30, 2004 and 2003, Freightliner represented14% and 15%, Volvo represented 13% and 14%, and Navistar represented 9% and12%, of trade accounts receivable, respectively.

**Note 2. Significant Accounting Policies**

***Principles of Consolidation***

The consolidated financialstatements include all of the accounts of Williams Controls, Inc. and itsmajority owned subsidiaries. All significant inter-company accounts andtransactions have been eliminated in consolidation.

***Cash and Cash Equivalents***

Cash and cash equivalentsinclude highly liquid investments with maturities of three months or less atthe date of acquisition.

***Inventories***

Inventories are valued atthe lower of cost or market. Cost is determined using standard costs, whichapproximate the first in, first out, or FIFO method. Cost includes theacquisition of purchased components, parts and subassemblies, labor andoverhead. Market with respect to raw materials is replacement cost and, withrespect to work-in-process and finished goods, is net realizable value.

33

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***Property, Plant and Equipment***

Property, plant andequipment are recorded at cost. Property, plant and equipment are depreciatedusing the straight-line method over the estimated useful lives of the assetsranging from 3 to 12 years for office furniture, machinery and equipment and31.5 years for buildings. Capitalized leases are amortized using thestraight-line method over the shorter of the estimated useful lives of theassets or the estimated remaining terms of the leases. Maintenance and repairsare expensed as incurred.

***Impairment of Long-Lived Assets***

In accordance with Statement of FinancialAccounting Standards (SFAS) No. 144,  “Accounting for the Impairment or Disposal of Long-Lived Assets”,management reviews long-lived assets for impairment whenever events orchanges in circumstances indicate the carrying amount of such assets may not berecoverable. Recoverability of these assets is determined by comparing theestimated undiscounted future cash flows of the operation to whichthe assets relate, to the carrying value of such assets. If thecarrying value of an asset exceeds its estimatedfuture cash flows, an impairment charge is recognized by the amount by which the carrying value of the assetexceeds the fairvalue of the asset. Assets to be disposed of are reported at the lower of the carrying value or fair value less costs to sell. TheCompany adopted SFAS No. 144 in fiscal year 2003 and it did not have a materialimpact on our financial position or resultsof operations. Prior to SFAS No. 144, the Company evaluated long lived assets for impairment pursuant to SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for  Long-Lived Assets to Be Disposed Of”.

Goodwilland Intangible Assets

The Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets” effective with the 2002 fiscal year. Goodwill,which represents the excess of cost over net assets of acquired companies, isno longer being amortized and is evaluated annually for impairment using fairvalue. During the fourth quarter of fiscal 2003, the Company recorded animpairment charge for the remaining goodwill balance of $36 associated withNESC based on the Company’s assessment of the fair value.

***Debt Issuance Costs***

Costs incurred in theissuance of debt financing are amortized over the term of the debt agreement,approximating the effective interest method, and are included in other assetson the accompanying consolidated balance sheets.

***Product Warranty***

In November 2002, the FASB issued FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN45”). This interpretation elaborates on the disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder certain guarantees that it has issued. It also clarifies that a guarantoris required to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee. The Companyadopted the disclosure requirements in this interpretation effective forfinancial statements of interim or annual periods ending after December 31, 2002.

TheCompany establishes a product warranty reserve based on a percentage of productsales. The established reserve is based on historical return rates of productsand amounts for significant and specific warranty issues, and is included inaccrued expenses on the accompanying Consolidated Balance Sheets. Warranty islimited to a specified time period, mileage or hours of use, and varies byproduct and application. The Company has provided a reserve, which in theopinion of management is adequate to 

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cover such warranty costs. Following is areconciliation of the changes in the Company’s warranty reserve for the yearsended September 30, 2004 and 2003, as required by FIN 45.
| *Balance  at September 30, 2002* |   | $      | 1,293  |   |
|---------------------------------------|--------|--------|--------|--------|
| Payments                              |   | (851   | )      |
| Additional accruals                   |   | 2,315  |   |
| Accrual adjustments                   |   | (325   | )      |
| *Balance at September 30, 2003*  |   | $      | 2,432  |   |
| Payments                              |   | (2,726 | )      |
| Additional accruals                   |   | 1,758  |   |
| Accrual adjustments                   |   | (71    | )      |
| *Balance  at September 30, 2004* |   | $      | 1,393  |   |

 

In January 2003, the Company was notified ofhigher than normal warranty claims on one of its electronic throttle controlsystems by one customer. Management estimated that the total potential unitsinvolved are approximately 30,500 units and in the second quarter of fiscal2003 recorded an accrual of $985 for the estimated cost of the repairs. Basedon continuing analysis, return experience and the extension of this campaign toDecember 2004, additional accruals were made consisting of $336 during thefourth quarter of fiscal 2003 and $322 during fiscal 2004. The Company has mademodifications to the product. All units that were in the customer’s inventoryhave been returned or replaced. The remaining possible defective parts areinstalled on vehicles and vehicle owners have been notified that the partsshould be replaced. For the year ended September 30, 2004, the Companymade payments of $1,390 related to this specific warranty claim. At September 30,2004, the accrual was $33 and is included in the amounts above.

In fiscal 2003, theCompany recorded a $127 reduction in its general warranty reserve and anaccrual adjustment of $198 to its 2001 product recall accrual based on theCompany’s assessment of its remaining obligations and revision of its accrualrate based on historical returns. In addition, the Company recorded a $175warranty reserve during 2003 related to products sold from our passenger carand light truck product lines during fiscal 2003. The Company’s obligation forproducts sold by these product lines relates only to products sold prior to September 30,2003 as the assets of the passenger car and light truck product lines were soldon September 30, 2003, as discussed in Note 17. In September 2003,the Company was notified of higher than normal warranty claims on one of itspassenger car and light truck electronic throttle control systems by onecustomer. Management estimates that the total potential units involved is nomore than 7,300 units and in the fourth quarter of fiscal 2003 recorded anaccrual of $225 for the estimated cost of the repairs. The units involved onlyinclude electronic throttle controls that were shipped prior to the sale of ourpassenger car and light truck product lines on September 30, 2003 asdiscussed in Note 17.

***Fair Value of Financial Instruments***

The carrying amountsreflected in the accompanying consolidated balance sheet for cash and cashequivalents, accounts receivable, other accounts receivable, prepaid expensesand other current assets, accounts payable, accrued expenses, and short-termborrowings approximate fair value due to the short-term nature of theinstruments. The carrying value of long-term debt also approximates fair value.The carrying value of redeemable preferred stock at September 30, 2003 isrecorded at fair value based on the rate implicit in the issuance of the stock.

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***Revenue Recognition***

The Company recognizesrevenue at the time of product shipment or delivery, depending on when titleand risk of loss transfers to customers, and when all of the following haveoccurred: a firm sales agreement is in place, pricing is fixed or determinable,and collection is reasonably assured. Revenues are reported net of estimatedreturns, rebates and customer discounts.

***Research and Development Costs***

Research and developmentcosts are expensed as incurred. Research and development costs consistprimarily of employee costs, cost of consumed materials, depreciation andengineering related costs.

***Income Taxes***

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the consolidated financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the consolidatedstatement of operations in the period that includes the enactment date. Valuationallowances are established as necessary to reduce deferred tax assets in theevent that realization of the assets is considered unlikely.

***Pensions and Post-retirement Benefit Obligations***

The Company accounts for pensions and post-retirementbenefits in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”,and SFAS No. 106, “Employers’ Accounting for Post Retirement BenefitsOther than Pensions”. SFAS No. 87 requires the Company to calculate itspension expense and liabilities using actuarial assumptions, including adiscount rate assumption and a long-term asset rate of return assumption. Changesin interest rates and market performance can have a significant impact on theCompany’s pension expense and future payments. SFAS No. 106 requires theCompany to accrue the cost of post-retirement benefit obligations. The accrualsare based on interest rates and the costs of health care. Changes in interestrates and health care costs could impact post-retirement expenses and futurepayments.

TheCompany provides health care and life insurance benefits for certain of itsretired employees, which includes prescription drug benefits. In December 2003,the Medicare Prescription Drug, Improvement and Modernization Act of 2003 waspassed, whereby a prescription drug benefit under Medicare was enacted as wellas a federal subsidy to sponsors of retiree health care plans. In January andMay 2004, the FASB issued FASB Staff Position No. 106-1 and 106-2, “Accountingand Disclosure Requirements Related to the Medicare Prescription DrugImprovement and Modernization Act of 2003” (“FSP 106-1” and “FSP 106-2”). Anymeasures of the APBO or net periodic postretirement benefit cost in theconsolidated financial statements or accompanying notes do not reflect theeffects of the Act on the Post Retirement Plan as the Company is unable toconclude whether the benefits provided by the plan are actuarially equivalentto Medicare Part D under the Act.

***Earnings (loss) Per Share***

Basic earnings per share (“EPS”) and diluted EPS arecomputed using the methods prescribed by SFAS No. 128, “Earnings Per Share”.Basic EPS is based on the weighted-average number of common shares outstandingduring the period. Diluted EPS is based on the weighted-average number ofcommon shares outstanding and the dilutive impact of common equivalent sharesoutstanding.

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Followingis a reconciliation of basic EPS and diluted EPS from continuing operations:
| ** **                                                                     | ** ** | **Year Ended  September 30, 2004** | ** ** | **Year Ended  September 30, 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | **Per Share** | ** ** | **Income** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                                                                     | ** ** | **Loss**                                          | ** ** | **Shares**                                        | ** ** | **Amount** | ** ** | **(loss)** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Income (loss) from continuing operations                                       |       | $                                                 | (3,880     | )                                                 |       |   |   |   |   |   | $ | 1,044 |   |   |   |   |   |   |   |
| Less—Preferred dividends and accretion for Series B preferred  stock |       | —                                            |       |                                              |       |   |   |   |   | (2,011 | ) |   |   |   |   |   |   |
| Basic EPS—                                                                |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss allocable to common  shareholders from continuing  operations        |       | (3,880                                            | )          | 21,867,137                                        |       |   | $ | (0.18 | ) |   | (967 | ) | 20,104,986 |   |   | $ | (0.05 | ) |   |
| Effect  of dilutive securities—                                           |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options and warrants                                                     |       | —                                            |       | —                                            |       |   |   |   |   | — |   | — |   |   |   |   |   |
| Preferred Stock—Series A                                             |       | —                                            |       | —                                            |       |   |   |   |   | — |   | — |   |   |   |   |   |
| Preferred Stock—Series A-1                                           |       | —                                            |       | —                                            |       |   |   |   |   | — |   | — |   |   |   |   |   |
| Preferred Stock—Series B                                             |       | —                                            |       | —                                            |       |   |   |   |   | — |   | — |   |   |   |   |   |
| Convertible subordinated debt                                                  |       | —                                            |       | —                                            |       |   |   |   |   | — |   | — |   |   |   |   |   |
| Diluted  EPS—                                                             |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss allocable to common  shareholders  from continuing  operations  |       | $                                                 | (3,880     | )                                                 | 21,867,137 |   |   | $ | (0.18 | ) |   | $ | (967 | ) | 20,104,986 |   |   | $ | (0.05 | ) |   |

 
| ** **                                                                                  | ** ** | **Year ended  September 30, 2002** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                  | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                                                                                  | ** ** | **Loss**                                          | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Loss from continuing operations                                                             |       | $                                                 | (2,198     | ) |   |   |   |   |   |   |
| Less—Preferred dividends and  accretion for Series B preferred stock                   |       | (1,566                                            | )          |   |   |   |   |   |   |
| Plus—Adjustment for redemption of Series A in exchange for Series A-1  Preferred stock |       | 923                                               |       |   |   |   |   |   |   |
| Basic EPS—                                                                             |       |                                              |       |   |   |   |   |   |   |
| Loss allocable to common  shareholders from continuing operations                           |       | (2,841                                            | )          | 19,927,667 |   |   | $ | (0.14 | ) |   |
| Effect  of dilutive securities—                                                        |       |                                              |       |   |   |   |   |   |   |
| Stock options and warrants                                                                  |       | —                                            |       | — |   |   |   |   |   |
| Preferred Stock—Series A                                                               |       | —                                            |       | — |   |   |   |   |   |
| Preferred Stock—Series A-1                                                             |       | —                                            |       | — |   |   |   |   |   |
| Preferred Stock—Series B                                                               |       | —                                            |       | — |   |   |   |   |   |
| Convertible subordinated debt                                                               |       | —                                            |       | — |   |   |   |   |   |
| Diluted  EPS—                                                                          |       |                                              |       |   |   |   |   |   |   |
| Loss allocable to common Shareholders from continuing operations                            |       | $                                                 | (2,841     | ) | 19,927,667 |   |   | $ | (0.14 | ) |   |

 

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At September 30,2004, 2003 and 2002, the Company had options and warrants covering 2,940,317,7,731,819, and 8,730,060 shares, respectively, of the Company’s common stockoutstanding that were not considered in the respective diluted EPS calculationssince they would have been anti-dilutive. In 2004, 2003 and 2002, conversion ofthe preferred shares, and in 2003 and 2002 conversion of the convertiblesubordinated debt would have been anti-dilutive and, therefore, was notconsidered in the computation of diluted earnings per share.

***Stock-Based Compensation***

In December 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” This standard amends the requirementsof SFAS No. 123, “Accounting for Stock-Based Compensation” to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,this statement amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both the annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results. The Company adopted thedisclosure provisions of this statement in the second quarter of fiscal 2003.

As permitted by SFAS No. 148, the Companyaccounts for stock-based employee compensation in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Entities electing tocontinue to use the accounting treatment in APB No. 25 must make pro formadisclosures of net earnings (loss) and, if presented, earnings per share, as ifthe fair value based method of accounting defined in SFAS No. 123 had beenadopted.

TheCompany has computed, for pro forma disclosure purposes, the value of alloptions granted during the years ended September 30, 2004, 2003 and 2002,using the Black-Scholes option pricing model as prescribed by SFAS No. 123using the following weighted average assumptions for grants:
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate |       | 3.43     | %          | 3.45     | %          | 4.50     | %          |
| Expected dividend yield |       | 0        | %          | 0        | %          | 0        | %          |
| Expected lives          |       | 7  years |       | 7  years |       | 7  years |       |
| Expected  volatility    |       | 100      | %          | 100      | %          | 100      | %          |

 

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Usingthe Black-Scholes methodology, the total value of options granted during theyears ended September 30, 2004, 2003 and 2002, was $638, $434 and $304,respectively, which would be amortized on a pro forma basis over the vestingperiod of the options (typically five years). The weighted average per sharefair value of options granted during the years ended September 30, 2004,2003 and 2002, was $.64, $.41 and $.28, respectively. If the Company hadaccounted for its stock-based compensation plans using the fair value-basedmethod in accordance with SFAS No.123, the Company’s net loss and net loss pershare would approximate the pro forma disclosures below:
| ** **                                                                                                                     | ** ** | **Year Ended**          | ** ** | **Year Ended**          | ** ** | **Year Ended**          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                     | ** ** | **September 30,  2004** | ** ** | **September 30,  2003** | ** ** | **September 30,  2002** | ** ** |
| Net loss allocable to common shareholders as reported                                                                          |       |                         | $          | (4,058                       | )          |                         |       | $ | (1,075 | ) |   |   | $ | (1,604 | ) |   |
| Add: Stock-based employee  compensation recorded                                                                               |       |                         | —     |                         |       |                         | —     |   |   |   | — |   |   |
| Deduct: Total stock-based  employee compensation expense determined under fair value based method, net  of related tax effects |       |                         | (186       | )                            |       |                         | (197       | ) |   |   | (304 | ) |   |
| Pro forma net loss                                                                                                             |       |                         | $          | (4,244                       | )          |                         |       | $ | (1,272 | ) |   |   | $ | (1,908 | ) |   |
| Loss per share:                                                                                                                |       |                         |       |                         |       |                         |       |   |   |   |   |   |   |
| Basic—as reported                                                                                                         |       |                         | $          | (0.19                        | )          |                         |       | $ | (0.05 | ) |   |   | $ | (0.08 | ) |   |
| Basic—pro forma                                                                                                           |       |                         | $          | (0.19                        | )          |                         |       | $ | (0.06 | ) |   |   | $ | (0.10 | ) |   |
| Diluted—as reported                                                                                                       |       |                         | $          | (0.19                        | )          |                         |       | $ | (0.05 | ) |   |   | $ | (0.08 | ) |   |
| Diluted—pro forma                                                                                                         |       |                         | $          | (0.19                        | )          |                         |       | $ | (0.06 | ) |   |   | $ | (0.10 | ) |   |

 

The effects of applyingSFAS 123 in this pro forma disclosure are not indicative of future amounts. SFASNo.123 does not apply to awards prior to the year ended September 30,1996, and additional awards are anticipated in future years.

***Use of Estimates in the Preparation of FinancialStatements***

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions, based upon all known facts and circumstances, that affect thereported amounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting periods. Managementmakes these estimates using the best information available at the time theestimates are made; however, actual results could differ materially from theseestimates. Estimates are used in accounting for, among other things, pensionbenefits, product warranty, excess and obsolete inventory, allowance fordoubtful accounts, useful lives for depreciation and amortization, future cashflows associated with impairment testing for long-lived assets, deferred taxassets and contingencies.

***Reclassifications***

Certain amounts previouslyreported in the 2003 and 2002 financial statements have been reclassified toconform to the 2004 financial statement classifications.

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***Recently Adopted Accounting Standards***

In December 2003, theFASB issued SFAS No. 132R, “Employers’ Disclosures about Pensions andOther Postretirement Benefits—an amendment of FASB Statements No. 87, 88,and 106,” which replaced SFAS No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” SFAS No. 132R retains the disclosure requirements of SFAS No. 132and requires additional disclosures about the assets, obligations, cash flows,and net periodic benefit cost of defined benefit pension plans and otherdefined benefit postretirement plans. The disclosure requirements of SFAS No. 132Rare generally effective for fiscal years ending after December 15, 2003. Disclosureof the estimated future benefit payments is effective for fiscal years endingafter June 15, 2004. The interim period disclosures required by thisStatement are effective for interim periods beginning after December 15,2003. The Company has incorporated the required disclosures of SFAS No. 132Rin Note 9. The adoption of SFAS No. 132R did not have an impact on theCompany’s financial position, results of operations or cash flows.

**Note 3. Inventories**

Inventoriesconsist of the following at September 30:
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Raw material    |       | $        | 2,461      |     | $          | 2,843 |   |
| Work in process |       | 305      |       | 477      |       |
| Finished goods  |       | 1,011    |       | 733      |       |
|            |       | $        | 3,777      |     | $          | 4,053 |   |

 

**Note 4. Property, Plant and Equipment**

At September 30,property, plant and equipment consist of the following:
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land and land improvements                      |       | $        | 828        |     | $          | 828 |   |
| Buildings                                       |       | 2,607    |       | 2,596    |       |
| Machinery and equipment                         |       | 8,318    |       | 7,626    |       |
| Office furniture and equipment                  |       | 3,984    |       | 3,854    |       |
| Construction in progress                        |       | 476      |       | 503      |       |
|                                            |       | 16,213   |       | 15,407   |       |
| Less accumulated depreciation  and amortization |       | (10,811  | )          | (9,760   | )          |
|                                            |       | $        | 5,402      |     | $          | 5,647 |   |

 

Capital leases formachinery and equipment and office furniture and equipment included above were$305 and $359 at September 30, 2004 and 2003, respectively. Accumulatedamortization of assets held under capital leases was $229 and $223 at September 30,2004 and 2003, respectively.

**Note 5. Investment in and Receivables from Affiliate**

At September 30, 2001, the Company had notes andaccounts receivable from Ajay Sports, Inc. (“Ajay”) with a carrying valueof $3,565, including a $500 note receivable, which was reflected as a reductionin the Company’s shareholders’ equity. The Company’s former chief executiveofficer and former Chairman of the Board, Thomas W. Itin, is an officer andshareholder of Ajay. The investment in and certain loans of the Company to Ajaywere guaranteed by Thomas W. Itin.

Upon evaluating the realizability of its investment inand receivables from Ajay and based on the Company’s collection efforts, it wasdetermined the investment in and receivables from Ajay were 

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impaired. Accordingly, animpairment loss of the entire carrying value of $3,565 was recorded in thesecond quarter of fiscal 2002, which is reflected on the ConsolidatedStatements of Operations as “Loss on impairment of investment—Ajay”. Additionally,the Company evaluated the collectability of the guarantees of Mr. Itin,including the cost of collections and concluded that these guarantees wereworthless.

In November 2002, theCompany settled all claims related to Ajay and Mr. Itin, includingpreviously filed suits in the Circuit Court for Oakland County, Michigan andthe Multnomah Circuit Court for the State of Oregon. As part of the settlement,the Company retained a $2,500 interest in the notes receivable owed to theCompany by Ajay; however, no amounts have been recorded on the financialstatements for these interests. Additionally, as part of the settlement,although the Company believed the guarantees of Mr. Itin were enforceable,based on the Company’s evaluation of the ultimate collectability of theguarantees, including the cost of collections, Mr. Itin was relieved ofhis guaranty obligation.

**Note 6. Patent License Agreements**

During fiscal 2003 the Company obtained a licenseagreement for use of an adjustable pedal design for its heavy truck and transitbus product lines. This agreement required an initial payment of $125, whichwas paid in fiscal 2003, and a $75 payment to be paid based on certain criteria.The $75 was accrued at September 30, 2004. The Company will also makeroyalty payments based on the number of units it sold. The Company willamortize the capitalized license fees based on units sold. The agreement is fora period of three years and is renewed annually if certain sales thresholds aremet.

Additionally, as part of the sale of the Company’spassenger car and light truck product lines to Teleflex Incorporated on September 30,2003, the Company obtained the right to use certain of Teleflex’s adjustablepedal patents in exchange for Teleflex receiving licenses for certain of theCompany’s patents.

In conjunction with the1999 acquisition of ProActive, the Company entered into a patent licenseagreement requiring fixed minimum payments with a private inventor. The Companyrecorded in 1999 a liability related to the minimum guaranteed payments. Theinventor terminated the license under the insolvency provisions of the licenseand based on the termination provisions enacted by the inventor, it wasdetermined in fiscal 2002 that the license agreement was no longer valid, and,accordingly the remaining liability was reversed resulting in a gain of $580reflected in the accompanying consolidated statements of operations.

**Note 7. Settlement of accounts payable and customercontingencies**

Included in the accompanying consolidated balancesheet is approximately $1,386 of old accounts payable related to closedinsolvent subsidiaries of the Company. In accordance with SFAS No. 140 “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”, a debtor can only relieve itself of a liability if it has beenextinguished. Accordingly, a liability is considered extinguished if (a) thedebtor pays the creditor and is relieved of its obligation for the liability or(b) the debtor is legally released from being the primary obligor underthe liability, either judicially or by the creditor. During the fourth quarterof fiscal 2004, the Company was judicially released from and reversed $210 ofold accounts payable related to closed insolvent subsidiaries of the Companyresulting in a gain, which has been recorded in other (income) expense in theaccompanying consolidated statements of operations. The Company expects toreverse amounts in future periods based on the recognition of the liabilitiesbeing judicially released in accordance with SFAS No. 140 of $60 in fiscal2005; $561 in fiscal 2006; $731 in fiscal 2007; and $34 in fiscal 2010.

Also during the fourth quarter of fiscal 2004, theCompany settled an outstanding sales tax obligation of Aptek resulting in again of $209, which has been included in administration expense in theaccompanying consolidated statements of operations. The Company paid $48 inprincipal and interest in 

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fiscal 2004 to settle theobligation. The Company received a final release from the creditor regardingthis obligation.

During fiscal 2001, the Company had a product recallrelated to weld failures on certain electronic throttle control systems. Torecover certain previously incurred costs of the recall, in November 2002,the Company reached a $163 total release and settlement of its accounts payablebalance to one of its vendors. The settlement was recorded as a reduction ofcost of sales during the first quarter of fiscal 2003 and is included in theaccompanying consolidated statements of operations.

In the second quarter of fiscal 2003, the Companyreached a settlement with a prior customer on a cancelled supply contract. Underthe terms of the settlement, the Company received $900 and a waiver of anaccounts payable obligation of $51 with a certain vendor. Based on thisobligation being waived, this amount is included in the overall gain recognizedfrom this settlement. The entire gain of $951 is reflected as a separate line “Gainfrom settlement with customer” within operating expenses of the consolidatedstatements of operations for the year ended September 30, 2003.

In June 2002, theCompany entered into an agreement with a vendor and customer of the Company,Caterpillar, Inc. (“Caterpillar”) to remedy past due accounts between theCompany and Caterpillar. As part of this agreement, Caterpillar agreed to a$720 reduction of previously accrued interest on past due payables. The $720 isshown as a reduction of interest expense in the accompanying consolidatedstatements of operations. In accordance with SFAS No. 145, the $720 wasnot reflected as an extraordinary item.

**Note8. Debt**

As part of the fiscal 2004 recapitalizationtransaction on September 30, 2004, the Company entered into a new five-yearsenior secured loan and revolving credit facility with Merrill Lynch, whichreplaced the Company’s prior loan facility with Wells. At the time of therecapitalization transaction, the Company’s existing term loan balances of $318were paid off and the credit agreement with Wells was terminated. Upontermination, the Company incurred and paid a termination fee to Wells for $103.The new loan facility with Merrill Lynch provides for $25,000, consisting of an$8,000 revolving loan facility and a $17,000 term loan. The loans are securedby substantially all the assets of the Company. Borrowings under the revolvingloan facility are subject to a borrowing base equal to 85% of eligible accountsreceivables and 60% of eligible inventories. Interest rates under the newagreement are based on the election of the Company of either a LIBOR rate orPrime rate. Under the LIBOR rate option, the revolving loan facility will bearinterest at the LIBOR rate plus 3.75% per annum for borrowings under therevolving credit facility and borrowings under the term loan facility will bearinterest at the LIBOR rate plus 4.25%. Under the Prime rate option, therevolving loan facility will bear interest at the Prime rate plus 2.75% perannum and the term loan facility will bear interest at the Prime rate plus3.25%. Fees under the loan agreement include an unused line fee of .50% perannum on the unused portion of the revolving credit facility.

The Company is required to repay the term loan inequal quarterly scheduled payments of $850. The Company is entitled to prepaythe term loan, in whole or in part, in minimum amounts without penalty. Mandatoryprepayments of the loans under the term loan are required in amounts equal to75% of the Company’s excess cash flow, as defined in the agreement, for eachfiscal year and 100% of (i) the insurance or condemnation proceedsreceived in connection with a casualty event, condemnation or other loss, lessany proceeds reinvested by the Company up to $500 per fiscal year; (ii) thenet proceeds from issuance of equity or debt securities and (iii) the netcash proceeds of asset sales or other dispositions subject to customaryexceptions. The revolving loan facility expires on September 29, 2009, atwhich time all outstanding amounts under the revolving loan facility are dueand payable. As part of this new credit agreement, the Company is subject tocertain quarterly and annual financial covenants, which commence with thefiscal quarter ended December 31, 2004.

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In connection with the new senior secured loanfacility, the Company was required to pay Merrill Lynch a commitment fee of $500. In addition, the Companymust pay Merrill Lynch an annual agency fee of $25 and reimburse Merrill Lynchfor any costs and expenses incurred in connection with the completion of thenew credit agreement. The commitment fee and expenses incurred by Merrill Lynchand paid for by the Company have been capitalized in the accompanying consolidatedbalance sheet and will be amortized over the five-year life of the loanfacility utilizing the effective interest method.

TheCompany had available under its revolving credit facilities $4,989 and $3,854at September 30, 2004 and 2003, respectively.
| **The Company’s long-term debt consists of the following at September 30,**                                                                          | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Bank revolving  credit facility due September 29, 2009, bearing interest at a variable  rate, (7.50% at September 30, 2004).                                                                      |       | $          | 3,011      |     | $          | —   |       |
| Bank term loan  due September 29, 2009, balance bearing interest at a variable rate,  (8.00% at September 30, 2004) payable in quarterly installments of $850.                                    |       | 17,000     |       | —   |       |
| Bank revolving  credit facility due July 1, 2007, balance bearing interest at a variable  rate, and included in current liabilities. Repaid remaining outstanding  balance on September 30, 2004. |       | —     |       | 3,578    |       |
| Bank Term Loan A  due July 1, 2007, balance bearing interest at a variable rate, payable  in monthly installments of $23. Repaid during the fourth quarter of fiscal  2004.                            |       | —     |       | 1,050    |       |
| Bank Term Loan B  due July 1, 2004, balance bearing interest at a variable rate, payable  in monthly installments of $33. Repaid during the first quarter of fiscal  2004.                             |       | —     |       | 300      |       |
|                                                                                                                                                                                                        |       | 20,011     |       | 4,928    |       |
| Less current  portion                                                                                                                                                                                       |       | 3,400      |       | 4,610    |       |
|                                                                                                                                                                                                        |       | $          | 16,611     |     | $          | 318      |       |

 

Maturities of long-termdebt for the years ending September 30 are as follows:
| 2005   |   | $     | 3,400  |   |
|--------|--------|-------|--------|--------|
| 2006   |   | 3,400 |   |
| 2007   |   | 3,400 |   |
| 2008   |   | 3,400 |   |
| 2009   |   | 6,411 |   |
|   |   | $     | 20,011 |   |

 

***Capital Leases***

The Company has acquired certain assets, primarilymachinery and equipment, through capital leases. At September 30, 2004,the Company has one capital lease outstanding, which has a lease term of fiveyears, and is payable in monthly installments with interest at 9.7%.

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Futureminimum lease payments under capital leases are as follows for the years endingSeptember 30:
| 2005                                            |   | $  | 59     |   |
|-------------------------------------------------|--------|----|--------|--------|
| 2006                                            |   | 30 |   |
| Total future minimum lease payments             |   | 89 |   |
| Less—Amount  representing interest         |   | 6  |   |
| Present value of  future minimum lease payments |   | 83 |   |
| Less—Current  portion                      |   | 54 |   |
|                                            |   | $  | 29     |   |

 

During 2004 and 2003, theCompany did not enter into any new capital leases. Current and long-termportions of capital leases were $48 and $84 at September 30, 2003.

***Secured Subordinated Debt***

In February 2001, theCompany issued 12% secured subordinated debentures. For each purchaser ofdebentures, the Company issued a three year warrant to purchase common stock ofthe Company, par value $0.01 per share at $0.78 per share. The Company alsoissued the placement agent a three year warrant to purchase shares of theCompany’s common stock equal to 7.0% of the number of warrants issued to thepurchasers. The exercise price of the placement agent warrants was $0.78 pershare. On March 1, 2004, certain warrant holders exercised 2,677,017warrants at a price of $0.78 per share. The remaining warrants that were notexercised expired on March 1, 2004.

***Subordinated Debt***

In April 2000, theCompany issued 7.5% convertible subordinated debentures. For each purchaser ofdebentures, the Company issued a three year warrant to purchase common stock,which expired unexercised in April 2003. TheCompany issued the placement agent a five year warrant to purchase shares ofthe Company’s common stock equal to 7.0% of the total shares of common stockissuable upon the conversion of the debentures. The exercise price of theplacement agent warrants is $2.40 per share and as of September 30, 2004,there were 74,900 warrants outstanding. The exercise price for the placementagent warrants are not adjustable. 

**Note 9. Pension Plans**

The Company maintains two pension plans, an hourlyemployee plan and a salaried employee plan. The hourly plan covers certain ofthe Company’s union employees. The salaried plan covers certain salariedemployees. Annual net periodic pension costs under the pension plans aredetermined on an actuarial basis. The Company’s policy is to fund these costsaccrued over 15 years and obligations arising due to plan amendments over theperiod benefited. The assets and liabilities are adjusted annually based on actuarialresults.

In fiscal 2004, the Company accelerated the date foractuarial measurement of the Company’s obligation for both the hourly plan andthe salaried plan from September 30 to August 31. The Companybelieves the one-month acceleration of the measurement date is a preferredchange as it allows for improved control procedures in regard to reviewing thecompleteness and accuracy of reporting of the actuarial pension measurements,as well as allowing more time to evaluate those results in making fundingdecisions. The effect of the change on the obligation and assets of the hourlyplan and salaried plan did not have a material effect on pension expense oraccrued benefit cost.

44

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During 2003, the Company modified the provisions ofthe salaried plan to limit the number of eligible employees to those currentlyin the plan at the time of the modification and to limit benefits under theplan to those earned to that date. The modifications to the plan were accountedfor as a partial termination of the plan for accounting purposes and resultedin a curtailment adjustment to the projected benefit obligation of $592. 

As part of the new contract and strike settlementagreement with the union hourly workers, the hourly plan was modified in 2003to limit participation in the plan to those employees in the plan at August 31, 2002.

Summarizedinformation on the Company’s pension plans is presented below:

***Obligations and Funded Status:***
| ** **                                                            | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **September 30,**                                                | ** ** | ** **             | ** ** | **2004**             | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Change in benefit obligation:**                                     |       |                   |       |                 |       |   |   |   |   |
| Benefit  obligation at beginning of year                              |       | $                      | 4,801      |                 | $          | 4,544 |   | $ | 7,204 |   | $ | 5,371 |   |
| Service cost                                                          |       | 106                    |       | 127                  |       | 255 |   | 242 |   |
| Interest cost                                                         |       | 280                    |       | 293                  |       | 422 |   | 356 |   |
| Actuarial (gain)  loss                                                |       | (21                    | )          | 700                  |       | 259 |   | 1,464 |   |
| Benefits paid                                                         |       | (232                   | )          | (271                 | )          | (406 | ) | (409 | ) |
| Curtailment gain                                                      |       | —                 |       | (592                 | )          | — |   | — |   |
| Plan amendments                                                       |       | —                 |       | —               |       | — |   | 180 |   |
| Other                                                                 |       | —                 |       | —               |       | 48 |   | — |   |
| Benefit obligation at end of year                                     |       | $                      | 4,934      |                 | $          | 4,801 |   | $ | 7,782 |   | $ | 7,204 |   |
| **Change  in plan assets:**                                           |       |                   |       |                 |       |   |   |   |   |
| Fair value of  plan assets at beginning of year                       |       | $                      | 2,269      |                 | $          | 2,102 |   | $ | 2,881 |   | $ | 2,168 |   |
| Actual return on  plan assets                                         |       | 155                    |       | 42                   |       | 190 |   | 94 |   |
| Employer  contributions                                               |       | 914                    |       | 396                  |       | 1,585 |   | 1,028 |   |
| Benefits paid                                                         |       | (232                   | )          | (271                 | )          | (406 | ) | (409 | ) |
| Fair value of plan assets at end of year                              |       | $                      | 3,106      |                 | $          | 2,269 |   | $ | 4,250 |   | $ | 2,881 |   |
| Funded status                                                         |       | $                      | (1,828     | )                    | $          | (2,532 | ) | $ | (3,532 | ) | $ | (4,323 | ) |
| Unrecognized  actuarial loss                                          |       | 1,862                  |       | 2,035                |       | 3,660 |   | 3,757 |   |
| Unrecognized  prior service cost                                      |       | —                 |       | —               |       | 295 |   | 307 |   |
| Net amount recognized                                                 |       | $                      | 34         |                 | $          | (497 | ) | $ | 423 |   | $ | (259 | ) |
| **Amounts  recognized in the consolidated balance sheet consist of:** |       |                   |       |                 |       |   |   |   |   |
| Accrued benefit liability                                             |       | $                      | (1,828     | )                    | $          | (2,532 | ) | $ | (3,532 | ) | $ | (4,323 | ) |
| Intangible asset                                                      |       | —                 |       | —               |       | 295 |   | 307 |   |
| Accumulated other comprehensive loss                                  |       | 1,862                  |       | 2,035                |       | 3,660 |   | 3,757 |   |
| Net amount recognized                                                 |       | $                      | 34         |                 | $          | (497 | ) | $ | 423 |   | $ | (259 | ) |
|                                                                       |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

45

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***Components of Net Periodic Benefit Cost:***
| **Components of net periodic benefit cost for the** | ** ** | ** ** | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|----------------------|------------|
| **years ended September 30:**                                           | ** ** | ** ** | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                                                                           |       | $          | 106        |                   | $          | 127                  |       | $ | 172 |   | $ | 255 |   | $ | 242 |   | $ | 183 |   |
| Interest cost                                                                          |       | 280        |       | 293                    |       | 306                  |       | 422 |   | 356 |   | 329 |   |
| Expected return  on plan assets                                                        |       | (135       | )          | (165                   | )          | (202                 | )          | (202 | ) | (193 | ) | (236 | ) |
| Amortization of  prior service cost                                                    |       | —     |       | (1                     | )          | (8                   | )          | 59 |   | 41 |   | 41 |   |
| Recognized net  actuarial loss                                                         |       | 133        |       | 86                     |       | 80                   |       | 368 |   | 240 |   | 99 |   |
| Net periodic  benefit cost                                                             |       | $          | 384        |                   | $          | 340                  |       | $ | 348 |   | $ | 902 |   | $ | 686 |   | $ | 416 |   |

 

***Weighted-averageassumptions used to determine benefit obligations at September 30,***
| ** **                     | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                  |       | 5.75                   | %          | 6.00                 | %          | 5.75 | % | 6.00 | % |
| Rate of compensation  increase |       | —                 |       | —               |       | — |   | — |   |

 

***Weighted-average assumptions used to determine NetPeriodic Benefit Cost for the years ended September 30,***
| ** **                      | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Discount rate                   |       | 6.00                   | %          | 6.75                 | %          | 7.50 | % | 6.00 | % | 6.75 | % | 7.50 | % |
| Expected return  on plan assets |       | 6.00                   | %          | 8.00                 | %          | 9.00 | % | 6.00 | % | 8.00 | % | 9.00 | % |
| Rate of compensation  increase  |       | —                 |       | —               |       | 3.00 | % | — |   | — |   | 3.00 | % |

 

The overall expectedlong-term rate of return assumption of 6.00% for fiscal 2004 was developedusing return expectations. The return expectations are created using long-termhistorical returns and current market expectations for forecasts of inflation,interest rates and economic growth, as well as the target asset allocation.

***Other Information:***

Theprojected benefit obligation, accumulated benefit obligation and the fair valueof plan assets as of September 30, 2004 and 2003 are as follows:
| ** **                      | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Projected benefit  obligation   |       | $                      | 4,934      |                 | $          | 4,801 |   | $ | 7,782 |   | $ | 7,204 |   |
| Accumulated  benefit obligation |       | 4,934                  |       | 4,801                |       | 7,782 |   | 7,204 |   |
| Fair value of plan  assets      |       | 3,106                  |       | 2,269                |       | 4,250 |   | 2,881 |   |
|                                 |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

At September 30, 2004and 2003 the accumulated benefit obligation was in excess of the plan assetsfor both the salaried plan and the hourly plan. Accordingly, in 2004 anadditional minimum liability was recorded with a decrease in other assets of$12 and a decrease in other comprehensive loss of $270. In 2003 an additionalminimum liability was recorded with an increase in other assets of $131 and anincrease in other comprehensive loss of $1,767. 

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***Plan Assets:***

TheCompany’s pension plan weighted-average asset allocations at September 30,2004, and 2003, by asset category are as follows:
| ** **          | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|------------|
| ** **          | ** ** | **2004**               | ** ** | **2003**             | ** ** | **Target  Allocation** | ** ** | **2004** | ** ** | **2003** | ** ** | **Target  Allocation** | ** ** |
| **Asset Category:** |       |                   |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity securities   |       | 21                     | %          | 0                    | %          |   | 18 | % |   | 4 | % | 1 | % |   | 0 | % |   |
| Debt securities     |       | 77                     | %          | 100                  | %          |   | 80 | % |   | 96 | % | 99 | % |   | 100 | % |   |
| Real estate         |       | 2                      | %          | 0                    | %          |   | 2 | % |   | 0 | % | 0 | % |   | 0 | % |   |
| Total               |       | 100                    | %          | 100                  | %          |   | 100 | % |   | 100 | % | 100 | % |   | 100 | % |   |

 

The Company’s investmentstrategy consists of a long-term, risk-controlled approach using diversifiedinvestment options with a minimal exposure to volatile investment options suchas derivatives and includes the use of a diversified allocation of equity,debt, and real estate exposures that are customized to each plan’s cash flowbenefit needs. 

***Cash Flows:***

The Company expects to recognize $921 in expense infiscal 2005 related to these plans and make payments of $1,240 in fiscal 2005.

Basedon current data and assumptions, the following benefit payments, which reflectexpected future service, as appropriate, are expected to be paid over the next10 fiscal years:
| ** **            | ** ** | **Benefits Paid** | ** ** |
|-----------------------|------------|------------------------|------------|
| **Year ending:** | ** ** | ** **             | ** ** | **Salaried Plan** | ** ** | **Hourly Plan** | ** ** |
| 2005                  |       |                   | $          | 308 |   |   |   | $ | 444 |   |   |
| 2006                  |       |                   | 308        |   |   |   | 453 |   |   |
| 2007                  |       |                   | 308        |   |   |   | 453 |   |   |
| 2008                  |       |                   | 319        |   |   |   | 455 |   |   |
| 2009                  |       |                   | 348        |   |   |   | 467 |   |   |
| Years 2010-2014       |       |                   | 2,137      |   |   |   | 2,830 |   |   |
|                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

**Note 10. Other Benefit Plans**

The Company has an Employee Stock Ownership Plan(ESOP) for non-union employees. The Company is in the process of terminatingthe ESOP plan and distributing all outstanding shares to participants. As of September 30,2004, all shares had been allocated under the plan and there were no amountsoutstanding under a loan. The Company does not anticipate a material gain orloss from the termination of the ESOP.

The Company sponsors amatching 401 (k) plan for salaried employees and certain union employees, inwhich eligible employees may elect to contribute a portion of theircompensation. Employer matching contributions in fiscal 2004, 2003 and 2002were $160, $183 and $72, respectively.

**Note 11. Post Retirement Benefits other than Pensions**

The Company provides health care and life insurancebenefits for certain of its retired employees (“Post Retirement Plan”). Thesebenefits are subject to deductibles, co-payment provisions and otherlimitations. The Company may amend or change the Post Retirement Planperiodically.

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In accordance with SFAS 106 “Employers Accounting forPost Retirement Benefits other than Pensions,” the Company elected to amortizethe accumulated post retirement benefit obligation (“APBO”) at October 1,1993 over twenty years as a component of post retirement benefits expense.

Thefollowing table provides information on the post retirement plan status at September 30:
| **Accumulated Post Retirement Benefit Obligation**                                           | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Retirees                                                                                                         |       | $          | (4,484     | )        | $          | (3,403   | )          |
| Fully eligible active participants                                                                               |       | (61        | )          | (234     | )          |
| Other active Plan participants                                                                                   |       | (158       | )          | (74      | )          |
|                                                                                                             |       | (4,703     | )          | (3,711   | )          |
| Plan assets                                                                                                      |       | —     |       | —   |       |
| Accumulated post retirement  benefit obligation in excess of plan assets                                         |       | (4,703     | )          | (3,711   | )          |
| Unrecognized loss                                                                                                |       | 2,360      |       | 1,446    |       |
| Unrecognized prior service cost                                                                                  |       | (1,158     | )          | (1,275   | )          |
| Unrecognized transition obligation                                                                               |       | 181        |       | 202      |       |
| Accrued post retirement  benefit cost included in other long-term liabilities in the consolidated  balance sheet |       | $          | (3,320     | )        | $          | (3,338   | )          |

 
| **Change in Benefit Obligation:**       | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Benefit obligation at beginning of year |       | $          | 3,711      |     | $          | 5,466    |       |
| Service cost                            |       | 7          |       | 149      |       |
| Interest cost                           |       | 216        |       | 363      |       |
| Plan amendment                          |       | —     |       | (2,507   | )          |
| Actuarial loss                          |       | 983        |       | 677      |       |
| Benefit payments                        |       | (214       | )          | (437     | )          |
| Benefit obligation at end of year       |       | $          | 4,703      |     | $          | 3,711    |       |

 
| **Post retirement benefits expense included the following  components for the years ended September 30:** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                                                                                                                                          |       | $          | 7          |     | $          | 149      |       | $        | 138        |   |
| Interest cost                                                                                                                                                         |       | 216        |       | 363      |       | 298      |       |
| Amortization                                                                                                                                                          |       | (28        | )          | 205      |       | 179      |       |
| Post retirement benefits expense                                                                                                                                      |       | $          | 195        |     | $          | 717      |       | $        | 615        |   |

 

The assumed health care cost trend rate used inmeasuring the APBO ranged between 5.5%-11% in the first year, declining to 5.0%after 7 years. The discount rate used in determining the APBO was 5.75%, 6.00%and 6.75% for the years ended September 30, 2004, 2003 and 2002,respectively.

If the assumed medical costs trends were increased by1%, the APBO as of September 30, 2004 would increase by $479, and theaggregate of the services and interest cost components of the net annual postretirement benefit cost would be increased by $26. If the assumed medical coststrends were decreased by 1%, the APBO as of September 30, 2004 woulddecrease by $405, and the aggregate of the services and interest costcomponents of the net annual post retirement benefit cost would be decreased by$20.

As part of the strike settlement agreement enteredinto in August 2003, the Company modified the provisions of the PostRetirement Plan to limit the number of eligible employees to those currently inthe plan at August 31, 2002. The plan was further modified so that thebenefits for any plan participant who had not retired under the union pensionplan as of September 17, 2003 would be limited to a one-time lump sumpayment under the plan of $6 at the time of a qualified retirement under theunion pension plan. 

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The plan amendmentresulted in a $2,507 reduction in benefit obligation and a reduction in the2003 accrued benefit obligation of $320, which was recorded in the accompanyingconsolidated statements of operations.

In December 2003,the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”)was passed whereby a prescription drug benefit under Medicare was enacted aswell as a federal subsidy to sponsors of retiree health care plans. In January andMay 2004, the FASB issued FASB Staff Position No. 106-1 and 106-2, “Accountingand Disclosure Requirements Related to the Medicare Prescription DrugImprovement and Modernization Act of 2003” (“FSP 106-1” and “FSP 106-2”). Anymeasures of the APBO or net periodic postretirement benefit cost in thefinancial statements or accompanying notes do not reflect the effects of theAct on the Post Retirement Plan as the Company is unable to conclude whetherthe benefits provided by the plan are actuarially equivalent to Medicare Part Dunder the Act. 

**Note 12. Income Tax Expense (Benefit)**

Theprovision for income tax expense (benefit) is as follows for the years ended September 30:
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    |       | $        | 91         |     | $          | (305     | )          | $ | (131 | ) |
| Deferred   |       | (9,356   | )          | —   |       | —   |       |
|       |       | $        | (9,265     | )        | $          | (305     | )          | $ | (131 | ) |

 

Thereconciliation between the effective tax rate and the statutory federal taxrate on income (loss) from continuing operations as a percent is as follows:
| **(Benefit) Provision**                    | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  income tax rate              |       | (34.0      | )%         | 34.0     | %          | (34.0    | )%         |
| State taxes, net  of federal income tax benefit |       | 0.2        |       | 4.3      |       | (4.0     | )          |
| Effect of change  in valuation allowance        |       | (86.5      | )          | (116.9   | )          | 38.0     |       |
| Preferred stock  dividends                      |       | 8.4        |       | 39.5     |       | —   |       |
| Extraterritorial  income exclusion              |       | (2.0       | )          | (20.6    | )          | —   |       |
| Extinguishment of  debt                         |       | 49.2       |       | —   |       | —   |       |
| Other                                           |       | (5.8       | )          | —   |       | (0.5     | )          |
|                                            |       | (70.5      | )%         | (59.7    | )%         | (0.5     | )%         |

 

At September 30, 2004, the Company reversed$11,374 of the valuation reserve on certaindeferred tax assets. The valuation allowance was reversed based upon currentand anticipated future taxable income generated by the Company and theconclusion that it is more likely than not that these deferred tax assets wouldbe realized in the future. At September 30, 2003 and 2002 the Company hadrecorded a full valuation allowance on all of its net deferred tax assets as itwas considered more likely than not the deferred tax assets would not berealized. The net change in total valuation allowance for the years ended September 30,2004, 2003, and 2002 was a decrease of $11,374 and $312 in fiscal 2004 and2003, respectively, and an increase of $3,533 in 2002.

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Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and deferred tax liabilities at September 30, 2004and 2003 are as follows:
| ** **                                                                                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred  tax assets:                                                                                                                             |       |     |       |     |       |
| Inventories, due to lower of cost or market adjustments and additional  costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 |       | $        | 203        |     | $          | 279 |   |
| Warranty reserves                                                                                                                                 |       | 711      |       | 1,135    |       |
| Accrual for compensated absences                                                                                                                  |       | 93       |       | 63       |       |
| Accrual for retiree medical benefits                                                                                                              |       | 1,169    |       | 1,214    |       |
| Accounts receivable reserves                                                                                                                      |       | 415      |       | 401      |       |
| Loss from investment in affiliate (Ajay Sports, Inc.)                                                                                        |       | 4,011    |       | 4,011    |       |
| Tax gain on sale/leaseback                                                                                                                        |       | 657      |       | 628      |       |
| In-process research and development                                                                                                               |       | —   |       | 434      |       |
| Accrued environmental obligations                                                                                                                 |       | 343      |       | —   |       |
| Accrued other reserves                                                                                                                            |       | 232      |       | 150      |       |
| Pension plan comprehensive loss adjustment                                                                                                        |       | 1,868    |       | 2,315    |       |
| Federal net operating loss carryforwards                                                                                                          |       | 4,549    |       | 6,919    |       |
| State net operating loss carryforwards                                                                                                            |       | 1,730    |       | 1,500    |       |
| Research and experimentation credit                                                                                                               |       | 876      |       | 354      |       |
| Total deferred tax assets                                                                                                                         |       | 16,857   |       | 19,403   |       |
| Less valuation allowance                                                                                                                          |       | (7,042   | )          | (18,416  | )          |
| Deferred tax assets, net of  valuation allowance                                                                                                  |       | 9,815    |       | 987      |       |
| Deferred tax liabilities:                                                                                                                         |       |     |       |     |       |
| Plant and equipment, principally due to differences in depreciation and  amortization                                                             |       | 452      |       | 987      |       |
| Net deferred income tax assets                                                                                                                    |       | $        | 9,363      |     | $          | — |   |
| Current deferred income tax  assets                                                                                                               |       | $        | 2,116      |     | $          | 2,118 |   |
| Long-term deferred income tax assets                                                                                                              |       | 14,741   |       | 17,285   |       |
| Long-term deferred income tax liabilities                                                                                                         |       | (452     | )          | (987     | )          |
| Valuation allowance                                                                                                                               |       | (7,042   | )          | (18,416  | )          |
|                                                                                                                                              |       | $        | 9,363      |     | $          | — |   |

 

At September 30,2004, the Company has approximately $13,378 of federal net operating loss carry-forwards,which are available to the Company and expire through 2020. At September 30,2004, the Company has approximately $29,330 of state net operating losscarry-forwards, which are available to the Company in certain state taxjurisdictions and expire in 2007 through 2015. Federal net operating losses aresubject to provisions of the Internal Revenue Code, which restrict theutilization of this type of tax attribute in the event of an “ownership change”(as defined in the Internal Revenue Code Section 382). Changes inownership resulting from the recapitalization transactions discussed in Note 15coupled with any future changes in ownership may significantly defer theutilization of net operating loss carry forwards in the future. The Companydoes not believe an ownership change hasoccurred as of September 30, 2004.

**Note 13. Commitments and Contingencies**

The Company and its subsidiaries are involved invarious lawsuits incidental to their businesses. It is the opinion ofmanagement that the ultimate outcome of these actions will not have a materialeffect on the Company’s financial position or its results of operations. SeeNote 5 for discussion of litigation regarding the Company’s investment in Ajay.

The soil and groundwater at the Company’s Portland,Oregon facility contain contaminants that the Company believes were released onthe property by previous property owners. Some of this contamination hasmigrated offsite to a neighboring property. The Company has retained anenvironmental consulting firm to investigate the extent of the contaminationand to determine what, if any, remediation will be required and the associatedcosts. During the third quarter of fiscal 2004 the Company entered the OregonDepartment of Environmental Quality’s voluntary clean-up program and duringfiscal 2004 the Company recorded $950 for this matter, representing the low endof the reasonable range of estimated future remediation and monitoring costs. Thereserve is for the estimated cost of investigation, remediation and postremediation monitoring. The Company believes it has a contractual right toindemnification from the prior owner of the property and has notified the priorowner of this indemnity claim. The prior owner has disputed its liability, andthe Company may seek judicial enforcement of the indemnity obligation.

On October 1, 2004, the Company was named as aco-defendant in a product liability case (Cuesta v. Ford, et al, District Courtfor Bryant, Oklahoma) that seeks class action status. The complaint seeks anunspecified amount of damages on behalf of the class.  The Company believes the claims to be withoutmerit and intends to vigorously defend against this action. There can be noassurance, however, that the outcome of the lawsuit will be favorable to theCompany or will not have a material adverse effect on the Company’s business,consolidated financial condition and results of operations. In addition, theCompany may be forced to incur substantial litigation expenses in defendingthis litigation.

On May 12, 2003, Mr. Ziegler, the Company’sformer president and chief executive officer, filed suit against the Company,American Industrial Partners, L.P.; American Industrial Partners Fund III,L.P., and American Industrial Partners Fund III Corporation in the CircuitCourt of the 15th Judicial Circuit in and for Palm Beach County, Florida. Inthe suit, Mr. Ziegler alleges that the Company breached an “oral agreement”with Mr. Ziegler to pay him additional compensation, including a bonus of “atleast” $500 for certain tasks performed by Mr. Ziegler while he was theCompany’s president and chief executive officer and seeks additionalcompensation to which he claims he is entitled. The Company disputes theexistence of an agreement and any liability to Mr. Ziegler.

The Company’s benefit plans were audited by theDepartment of Labor (DOL) during fiscal 2001. The Company accrued $170 in thefirst quarter of fiscal 2002 as an estimate of additional liability toparticipants of the Company’s ESOP. During the fourth quarter of fiscal 2002,the Company made payments totaling $125 into the Company’s ESOP fund at thesuggestion of the DOL, and now regards itself to be in full compliance with DOLregulations.

TheCompany leases certain facilities under non-cancelable operating leases. Inaddition, the Company leases certain equipment used in their operations. Futureminimum lease payments under all non-cancelable operating leases areapproximately as follows for annual periods ending September 30,
| 2005  |   | $  | 53     |   |
|-------|--------|----|--------|--------|
| 2006  |   | 36 |   |
| 2007  |   | 16 |   |
| Total |   | $  | 105    |   |

 

Rent expense underoperating leases was $50, $442 and $452 for the years ended September 30,2004, 2003 and 2002, respectively.

**Note 14. Common Stock Warrants**

In July 2004, commonstock warrants of 1,319,537 related to a private placement of common stock in1999 for both purchasers and a placement agent expired unexercised. At the timeof expiration, the conversion price of the warrants was $1.39 per share and theconversion price of the warrants issued to the placement agent was $1.43 pershare. Also in connection with the private placement, and as partialcompensation for services, the Company issued to the placement agent additionalwarrants to purchase 203,637 shares of the Company’s common stock at anexercise price of $3.30 per share. These warrants expired unexercised in April 2003.

**Note 15. Preferred Stock**

***Series A Preferred Stock***

In April 1998, theCompany completed a private placement of 80,000 shares of Series Aconvertible redeemable preferred stock at $100 per share.

***Fiscal 2002 Recapitalization***

On July 1, 2002 the Company completed arecapitalization transaction with American Industrial Partners Capital FundIII, L.P. (AIP) in which an affiliate of AIP invested $13,000 into the Companyby acquiring 130,000 shares of the Company’s newly authorized Series BPreferred stock, 15% Redeemable Convertible Series. The Company received net cashproceeds, after payment of fees and expenses, of $10,485. As a result of thetransaction, AIP was entitled to and did elect a majority of the members of theCompany’s Board of Directors. Along with the investment by AIP, an investorgroup that held $2,000 of the Company’s 12% secured Subordinated Debenturesexchanged those securities for $2,000 of Series B Preferred. As part ofthe recapitalization transaction, the Company (i) entered into a newfive-year revolving and term loan agreement with its then existing primarylender, Wells Fargo Credit, Inc.; (ii) repaid from the cash proceedsof sale of Series B Preferred stock the remaining $3,000 face amount of12% secured subordinated debentures, after giving consideration to the $2,000of debentures converted to Series B Preferred stock; (iii) eliminatedthe conversion feature, increased the interest rate to 12.0% (furtherincreasing to 15.0% in July, 2003) and extended the maturity to July 1,2004 of approximately $2,139 face amount of convertible subordinateddebentures; (iv) exchanged approximately $7,755 in Series A Preferredstock, 7 1/2% Convertible Redeemable Series shares for Series A-1Preferred stock, Non-Redeemable Convertible Series; (v) cancelled in thefourth quarter of fiscal 2002 accrued but unpaid dividends of $1,413 on Series APreferred stock exchanged for Series A-1 Preferred stock which wereoutstanding as of July 14, 2002 and (vi) accrued in the fourthquarter of 2002 a one-time dividend on the new Series A-1 Preferredstock in an amount equal to the dividends canceled as a result of the exchangeof the Series A Preferred stock. The remaining cash proceeds from therecapitalization were used for working capital purposes, including the paymentof certain past due accounts payable.

The Company exchanged the newly authorized Series A-1Preferred stock for approximately 99% of its Series A Preferred stock in atransaction that involved the cancellation of all unpaid dividends accrued onthe Series A Preferred stock being exchanged and the accrual in equity,commencing on the issue date and ending on September 30, 2002, of an equalamount of dividends on the Series A-1 Preferred stock, after whichthe Series A-1 Preferred ceased to bear dividends. The dividend wasoriginally expected to be settled by the issuance of common stock. At September 30,2003, based on the unexpected change in the Company’s liquidity as a result ofthe sale of its passenger car and light truck product lines, the Companyelected to settle the dividend for cash and accordingly, the accrued dividendwas reclassified to current liabilities as of September 30, 2003. Duringthe first quarter of fiscal 2004, the entire amount of $1,413 of Series A-1dividends was declared and paid. No further dividends have accrued on Series A-1Preferred stock after the payment of the previously accrued dividends. Theexchange of Series A Preferred stock for Series A-1 Preferredstock resulted in an adjustment of $923 to the net loss allocable to commonshareholders. This adjustment represented the difference between the carryingvalue of the Series A Preferred stock given up and the estimated fairvalue of the Series A-1 Preferred stock received. The conversionprice for the Series A-1 Preferred stock was $.66 per share, subjectto adjustment. The Series A Preferred stock was subordinate to the Series Band A-1 Preferred stock. The holders of the Series A-1Preferred stock could convert to common at the earlier of July 2005 orupon a change of control. Prior to such time, the holders of the Series A-1Preferred stock could convert to common only if the average of the closing bidprice of the common as listed on the over the counter bulletin board, orwherever the common then trades for at least twelve of the last thirteenconsecutive weeks prior to the date of conversion, is greater than or equal to$1.00 per share. Additionally, if certain conditions are met the Company couldforce conversion after three years, if the average weekly closing bid price ofthe common is greater than or equal to the conversion price for a period of atleast twelve out of thirteen consecutive weeks ending no more than ten daysprior to the date of conversion, or upon a change in control.

The Series A-1 Preferred stock hadparticipating dividend rights equal to common shareholders and equal votingrights for each share of common stock their Series A-1 Preferredstock could be converted into. After the exchange transaction described above,there were 650 shares of Series A Preferred stock remaining outstandingwith an adjusted conversion price of $1.29 per share. In August 2003, theCompany redeemed 500 shares of the outstanding Series A Preferred stockfor $73, which included accrued dividends of $23. During the first quarter offiscal 2004, the Company redeemed the remaining 150 shares of Series APreferred stock for $22, which included accrued dividends of $7.

The $15,000 of Series B Preferred stock issued inthe recapitalization transaction had a minimum dividend rate of 15%; thedividend rate could increase under certain circumstances. The Series BPreferred stock was convertible into shares of common stock at any time at aconversion price of $.85 per share, subject to adjustment, and was subject tomandatory redemption seven years after issuance or upon a change in control ofthe Company. The Series B Preferred stock had participating dividendrights equal to common shareholders and equal voting rights for each share ofcommon stock their Series B Preferred stock could be converted into. Additionally,the Series B Preferred stock had equal voting rights for each share ofcommon stock their Series B Preferred stock could be converted into inaddition to the right to elect a majority of the Board of Directors. Dividendson Series B Preferred stock were payable in cash when and if declared bythe Company’s board of directors and agreed to by a majority of the holders of Series BPreferred stock. Accrued dividends could be converted by the holders into theCompany’s common stock at the then current conversion rate. The Series BPreferred stock was recorded net of expenses and was being accreted to itsredemption value of $15,000 over seven years. Dividends accrued on the Series BPreferred stock were included in the carrying value of the Series BPreferred stock. In the second quarter of fiscal 2003, the Company recognizedadditional costs of $119 related to the issuance of the Series B Preferredstock, which was netted against the carrying value of the Series BPreferred stock. During the fourth quarter of fiscal 2003, the Company issued3,550 additional Series B Preferred stock for $355. These shares wereissued to three of the Company’s officers and one employee of AIP. The $355 of Series BPreferred stock issued in fiscal 2003 have a minimum dividend rate of 15% andis convertible into common stock at any time at a conversion price of $.85 pershare, subject to adjustment, and was subject to mandatory redemption and otherprovisions similar to the original issued shares of Series B Preferredstock.

Upon adoption of SFAS No. 150during the fourth quarter of fiscal 2003, the Company recorded its mandatoryredeemable Series B Preferred stock as a liability in the accompanyingconsolidated balance sheet since the Company did not have enough registeredshares of common stock outstanding into which the Series B Preferred stockcould be converted. The fair value of the Series B Preferred stock equaledits carrying value at the date the stock was recorded as a liability based onthe implicit rate included in the stock at issuance. Preferred dividendsassociated with the Series B Preferred stock starting with the fourthquarter of fiscal 2003 were recorded as a separate component of interestexpense in the accompanying consolidated statements of operations.

***Fiscal 2004Recapitalization***

On September 30, 2004, the shareholders approvedand the Company completed a recapitalization transaction with its Series Band Series A-1 Preferred stock shareholders. In connection with thistransaction, the Company redeemed 98,114 shares of Series B Preferredstock for $26,436; converted the outstanding shares of Series A-1Preferred stock into 11,848,740 shares of common stock; and converted theremaining 55,436 shares of Series B Preferred stock not redeemed into11,761,495 shares of common stock. Upon completion of this transaction, alloutstanding Series B and Series A-1 Preferred stock has eitherbeen redeemed or converted into common stock. Additionally, this transactioneliminated all Series A-1 Preferred stock, Series B Preferredstock and the related preferential dividends, including the elimination of allaccrued and unpaid Series B dividends as of September 30, 2004. Theliquidation preference rights held by all Series B Preferred stockshareholders were also eliminated. Prior to this transaction, the Series BPreferred stock shareholders, voting as a separate class, were entitled toelect a majority of the members of the Company’s board of directors. Thisvoting provision has been eliminated and the holders of the Series BPreferred stock are no longer entitled to elect a majority of the members ofthe board of directors.

The Company recorded a $19,770 loss on extinguishmentof debt related to the elimination of all outstanding Series B Preferredstock and accrued dividends. The loss on extinguishment of debt consists of thewrite-off of the remaining un-amortized capitalized Series B fees incurredin the fiscal 2002 recapitalization, which is described above, the accrual ofthe remaining portion of  thecontractually obligated three years of dividends for Series B Preferredstock, a conversion premium, the write-off of the remaining unamortizedcapitalized loan fees with Wells, the net value of the of the put/call optionagreement described below, and fees and expenses associated with the fiscal 2004recapitalization transaction. The loss on extinguishment of debt has beenrecorded in other (income) expenses in the accompanying consolidated statementsof operations for the year ended September 30, 2004.

Also on September 30, 2004, the Company enteredinto a put/call option agreement with American Industrial Partners Capital FundIII, L.P. (“AIP”). Under the option agreement, during the period commencing on September 30,2006 and ending on September 30, 2007, AIP will have the right to requirethe Company to repurchase, in whole or in part, up to a maximum of 7,000,000shares of the Company’s common stock held by AIP (the “Put”). The price for anyshares the Company is required to repurchase upon exercise of the Put by AIP isthe lesser of $1.00 per share or the average of the closing trading prices ofthe Company’s common stock for the 30 trading days immediately preceding thethird business day before the notice of exercise of the Put is delivered by AIP.The Put may only be exercised by AIP one time. If the Company fails, forwhatever reason, to pay the price of the Put for the shares required to berepurchased within 30 days after exercise of the Put by AIP, the Company isrequired to issue to AIP shares of the Company’s newly designated Series CPreferred stock. The number of shares of Series C Preferred stock to beissued to AIP will be determined by dividing the aggregate price of the sharesof common stock held by AIP that the Company was required to repurchase uponexercise of the Put, but failed to do so, by $100. If shares of Series CPreferred stock are issued due to the exercise of the Put by AIP, thesepreferred shares will be senior to the Company’s common stock and any otherclass or series of stock. The Series C Preferred stock will accruecumulative dividends on a daily basis at the rate of 15% per annum. In additionthe Company will have redemption rights to be able to redeem all or any portionof the Series C Preferred stock at any time in minimum increments of 500shares, at a price per share equal to $100 plus all accrued but unpaiddividends. Lastly, holders of the Series C Preferred stock will have aliquidation preference equal to $100 per share, plus accrued but unpaiddividends, in any liquidation of the Company. AIP also has the right to assignits rights to the Put to any person that holds at least 

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6,000,000 shares ofthe Company’s common stock prior to such assignment; however upon any suchassignment, the right to the issuance of Series C Preferred stock uponfailure of the Company to pay the price of the Put shall terminate. Inaddition, AIP may not assign the Put separately from the Call described below.

In exchange for the Put,under the option agreement, AIP granted the Company a right to elect topurchase from AIP (the “Call”) on October 31, 2007 all of the shares ofthe Company’s common stock then held by AIP, up to a maximum of 7,000,000shares, at a price of $2.00 per share. In order to exercise the Call, theCompany is required to deliver to AIP, not more than 30 nor fewer than ten daysprior to the call date a written notice of its election to exercise the Call. TheCompany used a valuation expert to value both the Put and Call under the optionagreement. The valuation as of September 30, 2004 resulted in a Put valueof $613 and a Call value of $280. The $333 difference between the value of thePut and the value of the Call has been recorded as part of the loss onextinguishment of debt discussed above and as a long-term liability in theaccompanying consolidated balance sheets at September 30, 2004. TheCompany will revalue both the Put and the Call on a quarterly basis, with thechange recorded to other (income) expense.

**Note 16. StockOptions**

The Company currently has two qualified stock optionplans. The Restated 1993 Stock Option Plan (“the 1993 Plan”) reserves anaggregate of 4,500,000 shares of the Company’s common stock for the issuance ofstock options which may be granted to employees, officers and directors of andconsultants to the Company. Under the terms of the 1993 Plan, the Company maygrant “incentive stock options” or “non-qualified options” at not less than thefair market value on the date of grant. Options granted under the 1993 Planhave a vesting schedule determined by the Compensation Committee of the Boardof Directors and expire ten years after the date of grant. Effective May 15,2003, the 1993 Plan was restated to incorporate various clarifying changes. Thesechanges neither increase the number of shares available nor expand the categoryof individuals that may be included in the plan. At September 30, 2004 and2003, the Company had 1,724,083 and 2,079,250 shares, respectively, availablefor future grants.

Stockoption activity during the periods indicated under the 1993 Plan is as follows:
| ** **                              | ** ** | **Shares Available** | ** ** | **Shares Subject** | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **For Grant**        | ** ** | **To Options**     | ** ** | **Option Prices** | ** ** |
| Outstanding at September 30, 2001  |       |                      | 2,250,280  |                    |       |                   | 2,179,220  |   |   | $1.50  – | 3.63 |   |
| Granted                                 |       |                      | (925,000   | )                       |       |                   | 925,000    |   |   |   | .66 |   |
| Canceled                                |       |                      | 450,000    |                    |       |                   | (450,000   | ) |   |   | 2.13 |   |
| Outstanding at  September 30, 2002 |       |                      | 1,775,280  |                    |       |                   | 2,654,220  |   |   | .66 – | 3.63 |   |
| Granted                                 |       |                      | (1,040,000 | )                       |       |                   | 1,040,000  |   |   |   | .66 |   |
| Canceled                                |       |                      | 1,343,970  |                    |       |                   | (1,343,970 | ) |   | .66  – | 2.94 |   |
| Outstanding at  September 30, 2003 |       |                      | 2,079,250  |                    |       |                   | 2,350,250  |   |   | .66 – | 3.63 |   |
| Granted                                 |       |                      | (961,667   | )                       |       |                   | 961,667    |   |   | .77  – | .78 |   |
| Canceled                                |       |                      | 606,500    |                    |       |                   | (606,500   | ) |   | .66  – | 2.94 |   |
| Outstanding at September 30, 2004  |       |                      | 1,724,083  |                    |       |                   | 2,705,417  |   |   | $  .66 – | 3.63 |   |

 

The non-employee Director Plan (the “1995 Plan”)reserves an aggregate of 400,000 shares of the Company’s common stock for theissuance of stock options which may be granted to non-employee directors of theCompany. Under this plan the non-employee directors are each automaticallygranted 10,000 options at a price equal to the market value on the date ofgrant which is the date of the annual shareholders’ meeting each year,exercisable for 10 years after the date of the grant. Directors who areaffiliated with American Industrial Partners or Dolphin Offshore Investmentsare not eligible to 

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participate in this planat this time. These options are exercisable as to 25% of the shares thereby onthe date of grant and as to an additional 25%, cumulatively on the first,second and third anniversaries of the date of grant. At September 30, 2004and 2003 there were 240,000 and 270,000 shares, respectively, available forgrant under the 1995 Plan.

Stockoption activity during the periods indicated under the 1995 Plan is as follows:
| ** **                              | ** ** | **Shares Available** | ** ** | **Shares Subject** | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **For Grant**        | ** ** | **To Options**     | ** ** | **Option Prices** | ** ** |
| Outstanding at September 30, 2001  |       |                      | 200,000    |                    |       |                   | 200,000    |   |   | $ | 2.13 – 3.66 |   |
| Granted                                 |       |                      | (100,000   | )                       |       |                   | 100,000    |   |   | .66 |   |
| Outstanding at  September 30, 2002 |       |                      | 100,000    |                    |       |                   | 300,000    |   |   | .66 – 3.66 |   |
| Granted                                 |       |                      | (30,000    | )                       |       |                   | 30,000     |   |   | .66 |   |
| Canceled                                |       |                      | 200,000    |                    |       |                   | (200,000   | ) |   | .66  – 3.66 |   |
| Outstanding at  September 30, 2003 |       |                      | 270,000    |                    |       |                   | 130,000    |   |   | .66 – 3.00 |   |
| Granted                                 |       |                      | (30,000    | )                       |       |                   | 30,000     |   |   | .75 |   |
| Outstanding at September 30, 2004  |       |                      | 240,000    |                    |       |                   | 160,000    |   |   | $ | .66 – 3.00 |   |

 

Thefollowing table summarizes information about stock options under both plansoutstanding at September 30, 2004:
| ** **                                   | ** ** | **Options Outstanding** | ** ** | ** **                                            | ** ** | **Options Exercisable**                                   | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Range of  Exercise  Prices**          | ** ** | ** **                   | ** ** | **Number  Outstanding  at  September 30,  2004** | ** ** | **Weighted  Average  Remaining  Contractual  Life—Years** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at  September 30,  2004** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  .66 –   .78 |       |                         | 2,459,167  |                                                  |       |                                                           | 8.9        |   |   |   | $ | .70 |   |   |   | 603,500 |   |   |   | $ | .70 |   |   |
|   1.50 – 2.69                 |       |                         | 359,750    |                                                  |       |                                                           | 3.5        |   |   |   | 2.37 |   |   |   | 359,750 |   |   |   | 2.37 |   |   |
|    2.88 – 3.63           |       |                         |       | 46,500                                                |       |                                                           |       | 0.5 |   |   |   | 3.32 |   |   |   | 46,500 |   |   |   | 3.32 |   |   |
| $  .66 – 3.63                 |       |                         | 2,865,417  |                                                  |       |                                                           | 8.1        |   |   |   | $ | .96 |   |   |   | 1,009,750 |   |   |   | $ | .96 |   |   |
|                                              |            |                              |            |                                                       |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At September 30, 2003and 2002, 989,905 and 1,910,345 options, respectively, were exercisable atweighted average exercise prices of $1.09 and $2.36 per share, respectively.

**Note 17. Dispositions**

***Passenger car and light truck ETC asset sale***

On September 30,2003, the Company sold substantially all of its assets used to manufacturepassenger car and light truck electronic throttle controls. The sold assetsincluded accounts receivable, inventories, deposits, prepaid expenses, andproperty, plant and equipment. In addition, certain liabilities such asaccounts payable and accrued expenses were assumed by the buyer. Included inother accounts receivable on the accompanying consolidated balance sheet at September 30,2003 is a $6,833 receivable for the cash proceeds associated with the sale ofassets of the passenger car and light truck product lines, which was receivedin October 2003. Proceeds from the sale of these assets were used toreduce the Company’s outstanding bank debt with Wells, including payment infull of the existing revolving loan, Term Loan B and a portion of Term Loan A. TheCompany recognized an $8 gain on the sale of its passenger car and light truckassets, which is included in administrative expenses in fiscal 2003 on theaccompanying consolidated statements of operations. The passenger car and lighttruck electronic throttle control products represented a component of theCompany’s continuing vehicle components segment, which consists of themanufacturing of electronic throttle controls primarily for heavy trucks andother vehicles.

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**Note 18. Discontinued Operations**

***NESC***

On February 13, 2004, the Company sold assetsassociated with its NESC operations for $74. The assets sold includedinventories, property, plant and equipment and the right to a product patent. TheCompany retained the accounts receivables. In accordance with SFAS No. 144“Accounting for Impairment or Disposal of Long-lived Assets”, the Companyrecognized a loss from sale and loss from operations in discontinued operationsin the accompanying consolidated statement of operations related to the sale ofits NESC assets. During the first quarter of fiscal 2004, the Company met therequirements of SFAS No. 144 to classify the assets to be sold as “NetAssets Held for Sale” and accordingly the assets were written down to theirfair market value resulting in a $151 loss before income taxes. The total lossbefore income taxes of $183 from the sale of discontinued operations for thefiscal year ended September 30, 2004 was calculated based on the netproceeds of the assets sold less the current book value at the date of thesale.

Net sales for NESC for the year ended September 30,2004 were $181, and are not included in total net sales in the accompanyingconsolidated statements of operations. For the year ended September 30,2004, NESC incurred negative gross margin of $16 and total operating expensesof $90, resulting in a net loss before income taxes of discontinued operationsof $106.

Net sales for NESC for the year ended September 30,2003 were $617, and are not included in total net sales in the accompanyingconsolidated statements of operations. For the year ended September 30,2003, NESC incurred negative gross margin of $9 and total operating expenses of$219, resulting in a loss from operations of discontinued operations of $228.

Net sales for NESC for theyear ended September 30, 2002 were $587, and are not included in total netsales in the accompanying consolidated statements of operations. For the yearended September 30, 2002, NESC generated gross margin of $67 and totaloperating expenses of $201, resulting in a loss from operations of discontinuedoperations of $147.

***Kenco***

During the second quarterof fiscal 2003, the Company settled a lease obligation of its previouslydiscontinued Kenco Williams business. A gain of $120 resulted from thissettlement, which has been recorded in discontinued operations for the yearended September 30, 2003 on the accompanying consolidated statements ofoperations.

***Agriculture Equipment Segment***

On May 3, 2000, theCompany completed the sale of the previously discontinued Agriculture EquipmentSegment operation. In October 2001, the Company exchanged a building ofits previously discontinued Agricultural Equipment segment with a carryingvalue of $0 in satisfaction of mortgage debt of $417. The resulting gain hasbeen recorded in discontinued operations on the accompanying statement ofoperations and reflected as a gain on sale of buildings, as the fair value ofthe building was estimated to equal or exceed the carrying value of the debt. InSeptember 2002, the Company was released from a note obligation of $799 inexchange for releasing certain assets and equipment with a carrying value of $0to the former owner of one of the operating entities of the agricultureequipment. Also, in September 2002, the Company negotiated the settlementof a commission due on the attempted sale of the previously discontinuedAgriculture Equipment Segment assets and recorded a gain of $145. The gainrelated to the discontinued agricultural equipment segment recorded in fiscal2002 was $1,384, and is reported as discontinued operations in the consolidatedstatements of operations for the year ended September 30, 2002.

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**Note 19. Related Parties**

On September 30, 2004, the Company entered intoan Amended and Restated Management Services Agreement with American IndustrialPartners (“AIP Advisor”) and Dolphin Advisors, LLC (“Dolphin Advisor”). AIPAdvisor is an affiliate of AIP, and Dolphin Advisor is an affiliate of DolphinOffshore Partners, L.P. and Dolphin Direct Equity Partners, L.P. (together, “Dolphin”).Prior to the fiscal 2004 recapitalization transaction discussed in Note 15,Dolphin held approximately 13% of the outstanding shares of the Series BPreferred Stock and 16.4% of the outstanding shares of Series A-1Preferred Stock. The restated management services agreement amends and restatesthe previously existing Management Services Agreement, dated July 1, 2002,between the Company and AIP Advisor.

Under the restated management services agreement, eachof AIP Advisor and Dolphin Advisor will provide advisory and managementservices to the Company and its subsidiaries. In consideration of the servicesto be provided by AIP Advisor and Dolphin Advisor, the Company is required topay each of AIP and Dolphin an annual management fee, payable in quarterlyinstallments commencing January 1, 2005, equal to $80 payable to AIPAdvisor and $120 payable to Dolphin Advisor. The Company’s obligation to paythe annual fee to AIP Advisor or Dolphin Advisor will terminate automaticallyas of August 1, 2007. If AIP exercises the Put, as discussed in Note 15,the restated management services agreement, including the obligation to pay theannual fee to AIP Advisor, will remain with respect to AIP Advisor until theCompany has satisfied its obligations to AIP under the Put. Under thepreviously existing Management Services Agreement, the Company paid an annualmanagement fee of $400 in both fiscal 2004 and 2003 and $100 in fiscal 2002,which were recorded in administration expenses in the accompanying consolidatedstatements of operations.

In March 2004, the Company issued 216,667 sharesof restricted common stock to certain employees at $0.75 per share, whichapproximated the market value price at the date of the transaction. Inaddition, the Company issued stock options to each employee that purchasedcommon stock. The total options granted were 866,667, which vest over a fiveyear period from the date of grant.

The Company engaged Taglich Brothers, Inc. (“Taglich”)pursuant to a retainer agreement dated August 14, 2001 as placement agentwith respect to various financings, including private equity financings. TheCompany paid a fee of $400 for assisting in the fiscal 2002 recapitalizationeffort, specifically completing the Series B investment transaction withAIP and $200 for (a) obtaining commitments from persons to purchaseadditional shares of Series B Preferred stock from investors other thanAIP and its affiliates; (b) obtaining tenders from the holders of at least90% of the Series A Preferred stock in the Exchange Offer; and (c) obtainingcommitments from at least 90% of the holders of 7.5% Convertible SubordinatedDebentures to extend the maturity date of such debentures to 24 months from theclosing of the purchase of the Series B Preferred stock under the StockPurchase Agreement. Douglas E. Hailey, who is a director of the Company, isaffiliated with Taglich. The $400 fee accrued in 2002 was paid as $280 in cashin fiscal 2002 and 181,819 shares of the Company’s common stock, valued at$120, were issued in fiscal 2003.

The Company paid to Mr. Samuel Greenawalt, adirector of the Company, a fee of $50 for his assistance in the sale of theCompany’s global positioning system business, GeoFocus. The fee accrued in theyear ended September 30, 2002 was paid as $40 cash in fiscal 2002 and15,151 shares of the Company’s common stock, valued at $10, were issued infiscal 2003.

During the fourth quarter of fiscal 2003, the Companyissued 3,550 additional Series B Preferred Stock for $355. These shareswere issued to three of the Company’s officers and one employee of AIP. All ofthese shares of Series B Preferred Stock were converted into common sharesas part of the fiscal 2004 recapitalization as discussed in Note 15.

58

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In August 2003, theCompany redeemed 500 shares from Company officers of the outstanding Series APreferred Stock for $73, which included accrued dividends of $23.

**Note 20. Business Segment Information**

TheCompany accounts for its segments in accordance with SFAS No.131 “Disclosuresabout Segments of an Enterprise and Related Information.” Inter-segmentrevenues and related earnings are not material. Management evaluates segmentperformance primarily based on revenue and operating income; therefore, otheritems included in pretax income, consisting primarily of interest income orexpense, are not reported in segment results. The Company used aggregationcriteria to present segment information through 2002. The Company operated intwo business segments: (1) vehicle components and (2) electricalcomponents. As a result of terminating and selling certain product lines, theCompany has no significant current operations in the electrical componentssegment. In prior years, the electrical components segment met certainquantitative thresholds for disclosure pursuant to SFAS No. 131, thereforefinancial information for the electrical components segment is shown for theyear ended September 30, 2002.
| ** **                                                               | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|
| **Net sales  by classes of similar products from continuing operations** |       |     |       |
| Vehicle components                                                       |       | $        | 51,598     |   |
| Electrical components and GPS                                            |       | 319      |       |
| Total net sales from  continuing operations                              |       | $        | 51,917     |   |
| **Income (loss) from continuing operations**                             |       |     |       |
| Vehicle components                                                       |       | $        | 3,868      |   |
| Electrical  components and GPS                                           |       | (804     | )          |
| Loss on impairment of assets—AJAY                                   |       | (3,565   | )          |
| Total loss from continuing  operations                                   |       | $        | (501       | ) |
| **Identifiable assets**                                                  |       |     |       |
| Vehicle components                                                       |       | $        | 26,115     |   |
| Electrical components and GPS                                            |       | 76       |       |
| Corporate                                                                |       | 131      |       |
| Total assets                                                             |       | $        | 26,322     |   |
| **Capital expenditures**                                                 |       |     |       |
| Vehicle components                                                       |       | $        | 1,229      |   |
| Total capital expenditures                                               |       | $        | 1,229      |   |
| **Depreciation and amortization**                                        |       |     |       |
| Vehicle components                                                       |       | $        | 2,487      |   |
| Electrical components and GPS                                            |       | 185      |       |
| Total depreciation and amortization                                      |       | $        | 2,672      |   |

 

In December 2002, the Company recorded a $100gain from the release of escrow funds related to the sale of GeoFocus, theCompany’s previously owned global positioning system business and part of theelectrical components segment. The gain has been recorded in other (income)expense on the accompanying consolidated statements of operations for yearended September 30, 2003.

Forgeographic information, revenues are allocated between the United States andInternational, depending on whether the shipments are to customers within theUnited States or located outside the 

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United States. Long-lived assets outside the UnitedStates were immaterial for all periods presented. Revenues for each geographiclocation are as follows:
| **Year ended September 30,** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Canada                                      |       | $          | 5,998      |     | $          | 5,387    |       | $        | 5,172      |   |
| Sweden/Belgium                              |       | 7,007      |       | 6,009    |       | 5,315    |       |
| Mexico                                      |       | 1,761      |       | 1,211    |       | 1,474    |       |
| Other                                       |       | 4,299      |       | 3,252    |       | 2,838    |       |
| Net Sales-export                            |       | 19,065     |       | 15,859   |       | 14,799   |       |
| United States                               |       | 38,985     |       | 35,443   |       | 37,118   |       |
|                                        |       | $          | 58,050     |     | $          | 51,302   |       | $        | 51,917     |   |

 

**Note 21. Employment Agreements**

In January 2003, the Company entered intoemployment agreements with its three executive vice presidents. Each contractis for a term of four years beginning October 1, 2002 and specifies aninitial base salary per year, plus bonus based on parameters established by theboard of directors. The agreements also provide for a one-year severancepayment under certain circumstances in the event the Company terminates theagreements prior to the end of the contract period. The employment agreementfor one of the above mentioned executive vice presidents was assigned toTeleflex, Incorporated as part of the sale of assets of the passenger car andlight truck product lines; however, the Company has retained an obligation forone-half of the severance associated with the employment agreement undercertain circumstances.

The Company has enteredinto an employment agreement with Patrick W. Cavanagh for the position ofPresident and Chief Executive Officer. The agreement was finalized in the fourthquarter of fiscal 2004 and Mr. Cavanagh’s employment commenced on October 4,2004. The contract specifies an initial base salary per year, bonus parametersestablished by the board of directors, relocation assistance and stock optionsgrants to be made in fiscal 2005. The agreement also provides for severancepayments under certain circumstances in the event the Company terminates theagreement prior to the end of the contract period.

**Note 22. QuarterlyData (unaudited)**
| ** **                                                    | ** ** | **First**  | ** ** | ** **  | **Second** | ** ** | ** **  | **Third**  | ** ** | **Fourth**  | ** ** | ** **     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|------------|-------------|------------|------------|-------------|------------|----------------|------------|
| **2004**                                                      | ** ** | ** ** | ** ** | **Quarter** | ** ** | ** ** | **Quarter** | ** ** | ** ** | **Quarter** | ** ** | **Quarter(1)** | ** ** | **Annual** | ** ** |
| Continuing  operations:                                       |       |       |       |        |       |       |        |       |       |        |       |           |       |   |   |
| Net sales                                                     |       | $          | 12,538     |        |       | $          | 14,477      |       |       | $           | 15,127     |           |       | $ | 15,908 |   |   | $ | 58,050 |   |
| Cost of sales                                                 |       | 8,696      |       |        | 10,016     |       |        | 10,098     |       |        | 10,424     |           |       | 39,234 |   |
| Gross margin                                                  |       | $          | 3,842      |        |       | $          | 4,461       |       |       | $           | 5,029      |           |       | $ | 5,484 |   |   | $ | 18,816 |   |
| Operating expenses (excluding  losses & gains)  |       | $          | 1,763      |        |       | $          | 2,353       |       |       | $           | 2,383      |           |       | $ | 2,599 |   |   | $ | 9,098 |   |
| (Gain) loss from discontinued  operations                     |       | $          | 164        |        |       | $          | 84          |       |       | $           | 41         |           |       | $ | (111 | ) |   | $ | 178 |   |
| Loss on extinguishment of  Series B Preferred Stock      |       | $          | —     |        |       | $          | —      |       |       | $           | —     |           |       | $ | 19,770 |   |   | $ | 19,770 |   |
| Net income (loss)                                             |       | $          | 1,090      |        |       | $          | 1,162       |       |       | $           | 1,472      |           |       | $ | (7,782 | ) |   | $ | (4,058 | ) |
| Income (loss) per common  share—basic                    |       | $          | 0.05       |        |       | $          | 0.06        |       |       | $           | 0.04       |           |       | $ | (0.33 | ) |   | $ | (0.19 | ) |
| Income (loss) per common  share—diluted                  |       | $          | 0.03       |        |       | $          | 0.03        |       |       | $           | 0.04       |           |       | $ | (0.33 | ) |   | $ | (0.19 | ) |
|                                                               |            |            |            |             |            |            |             |            |            |             |            |                |            |  |  |  |  |  |  |  |  |  |

 

60

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| ** **                                                    | ** ** | **First**  | ** ** | **Second**  | ** ** | **Third**      | ** ** | **Fourth**  | ** ** | ** **        | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|----------------|------------|-------------|------------|-------------------|------------|
| **2003**                                                      | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Quarter(2)** | ** ** | **Quarter** | ** ** | **Quarter(2)(3)** | ** ** | **Annual** | ** ** |
| Continuing  operations:                                       |       |       |       |        |       |           |       |        |       |              |       |   |   |   |   |
| Net sales                                                     |       | $          | 11,981     |        |       | $              | 13,054     |        |       | $                 | 12,381     |   |   | $ | 13,886 |   |   | $ | 51,302 |   |
| Cost of sales                                                 |       | 8,978      |       |        | 10,792     |           |       | 9,541       |       |              | 11,015     |   |   | 40,326 |   |
| Gross margin                                                  |       | $          | 3,003      |        |       | $              | 2,262      |        |       | $                 | 2,840      |   |   | $ | 2,871 |   |   | $ | 10,976 |   |
| Operating expenses (excluding  losses & gains)  |       | $          | 2,281      |        |       | $              | 2,571      |        |       | $                 | 2,457      |   |   | $ | 2,832 |   |   | $ | 10,141 |   |
| Gain from settlement with  customer                           |       | $          | —     |        |       | $              | (951       | )           |       | $                 | —     |   |   | $ | — |   |   | $ | (951 | ) |
| (Gain) loss from discontinued  operations                     |       | $          | 49         |        |       | $              | (70        | )           |       | $                 | (19        | ) |   | $ | 148 |   |   | $ | 108 |   |
| Net income (loss)                                             |       | $          | 895        |        |       | $              | 625        |        |       | $                 | 324        |   |   | $ | (908 | ) |   | $ | 936 |   |
| Income (loss) per common  share—basic                    |       | $          | 0.01       |        |       | $              | 0.00       |        |       | $                 | (0.02      | ) |   | $ | (0.05 | ) |   | $ | (0.05 | ) |
| Income (loss) per common share—diluted                   |       | $          | 0.01       |        |       | $              | 0.00       |        |       | $                 | (0.02      | ) |   | $ | (0.05 | ) |   | $ | (0.05 | ) |
|                                                               |            |            |            |             |            |                |            |             |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          In the fourth quarter of fiscal 2004, the Company recorded a $19,770 losson extinguishment of debt (see Note 15). The Company also recorded an incometax benefit of $9,265 primarily related to thereversal of the valuation allowance on its deferred taxassets as of September 30, 2004 (see Note 12).

(2)          In thesecond quarter of fiscal 2003, the Company recorded a $985 warranty accrualrelated to higher than normal warranty claims with one customer. In the fourthquarter of fiscal 2003, an additional accrual of $336 was recorded related tothese warranty claims based on actual results to date and the Company’sassessment of its remaining obligation. In addition, during the fourth quarterof fiscal 2003, the Company recorded a $225 warranty accrual related to higherthan normal warranty claims with one customer in the passenger car and lighttruck product lines (see Note 2).

(3)          In thefourth quarter of fiscal 2003, dividends and accretion of $731 for Series BPreferred stock was recorded as interest expense and thus deducted from netincome (see Note 15). In addition, in the fourth quarter of 2003 the Companyrecorded a $320 reduction in its post retirement medical liability (see Note11).

61

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**Item 9.   Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

None.

**Item 9A.   Controls and Procedures**

***Disclosure Controls and Procedures***

The Company’s ChiefExecutive Officer and Chief Financial Officer, have evaluated the effectivenessof the our “disclosure controls and procedures” as of the end of the periodcovered by this report pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 (the “Exchange Act”)). Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed in our Exchange Act reports is (1) recorded,processed, summarized and reported in a timely manner, and (2) accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

***Internal Controls Over Financial Reporting***

There has been no changein the Company’s internal controls over financial reporting that occurredduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

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**Part III**

**Item 10.   Directors and Executive Officers of theRegistrant**

Incorporated by referenceto the Company’s 2004 Proxy Statement to be filed February 17, 2005.

**Item 11.   Executive Compensation**

Incorporated by referenceto the Company’s 2004 Proxy Statement to be filed February 17, 2005.

**Item 12.   Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

Incorporated by referenceto the Company’s 2004 Proxy Statement to be filed February 17, 2005.

**Item 13.   Certain Relationships and RelatedTransactions**

Incorporated by referenceto the Company’s 2004 Proxy Statement to be filed February 17, 2005.

**Item 14.   Principal Accountant Fees and Services**

Incorporated by referenceto the Company’s 2004 Proxy Statement to be filed February 17, 2005.

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**Part IV**

**Item 15.   Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

(a)          Financial Statements.

(1)          See Index to FinancialStatements in Item 8 on page 23 of this Form 10-K.

(2)   All schedules are omitted because they arenot required, not applicable or the required information is given in theConsolidated Financial Statements.

(3)   The Exhibit Index beginning on page 67is incorporated herein by reference as the list of exhibits required as part ofthis Report.

(b)         Reports on Form 8-K.

On July 29, 2004, the Company filed a currentreport on Form 8-K to provide under Item 5 and 7 a press releasereporting the announcement of Patrick Cavanagh being named President and ChiefExecutive Officer effective October 4, 2004.

On August 16, 2004, the Company furnished acurrent report on Form 8-K to provide under Items 7 and 12 a pressrelease reporting the release of earnings for the third quarter of fiscal 2004.Such information shall not be deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934.

On August 30, 2004, the Company filed a currentreport on Form 8-K to provide under Items 8.01 and 9.01 a pressrelease reporting the approval by the Company’s board of directors ofrestructuring the capital structure of the Company subject to approval byshareholders.

(c)          The exhibits required byItem 601 of Regulation S-K to be filed as part of this Report or incorporatedherein by reference to the Exhibit Index beginning on page 67.

64

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**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
| WILLIAMS CONTROLS, INC. |                   |   |
|-------------------------|------------------------|--------|
| Date:                   | December 27, 2004 |   | By | /s/ R. EUGENE GOODSON |
|                    |                   |   |   | **R. Eugene Goodson, *Chairman  of the Board, President and Chief Executive Officer through  September 30, 2004*** |
| Date:                   | December 27, 2004 |   | By | /s/ PATRICK W. CAVANAGH |
|                    |                   |   |   | **Patrick W. Cavanagh, *President  and Chief Executive Officer commencing October 1, 2004*** |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
| Date:      | December 27, 2004 |   | By     | /s/ R. EUGENE  GOODSON                                                                                                  |
|------------|------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|       |                   |   |   | **R. Eugene Goodson, *Chairman  of the Board, President and Chief Executive Officer through  September 30, 2004*** |
| Date:      | December 27, 2004 |   | By     | /s/ PATRICK W. CAVANAGH                                                                                                 |
|       |                   |   |   | **Patrick W. Cavanagh, *President  and Chief Executive Officer commencing October 1, 2004***                       |
| Date:      | December 27, 2004 |   | By     | /s/ DENNIS E. BUNDAY                                                                                                    |
| ** ** |                   |   |   | **Dennis E. Bunday, *Executive  Vice President, Chief Financial Officer and  Principal Accounting Officer***            |
| Date:      | December 27, 2004 |   | By     | /s/ PETER E. SALAS                                                                                                      |
| ** ** |                   |   |   | **Peter E. Salas, *Director***                                                                                          |
| Date:      | December 27, 2004 |   | By     | /s/ CARLOS P. SALAS                                                                                                     |
|       |                   |   |   | **Carlos P. Salas, *Director***                                                                                         |
| Date:      | December 27, 2004 |   | By     | /s/ KIRK R. FERGUSON                                                                                                    |
|       |                   |   |   | **Kirk R. Ferguson, *Director***                                                                                        |

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| Date:  | December 27, 2004 |   | By     | /s/ WILLIAM I. MORRIS                |
|--------|------------------------|--------|--------|--------------------------------------|
|   |                   |   |   | **Williams I. Morris, *Director***   |
| Date:  | December 27, 2004 |   | By     | /s/ H. SAMUEL GREENAWALT             |
|   |                   |   |   | **H. Samuel Greenawalt, *Director*** |
| Date:  | December 27, 2004 |   | By     | /s/ DOUGLAS E. HAILEY                |
|   |                   |   |   | **Douglas E. Hailey, *Director***    |
| Date:  | December 27, 2004 |   | By     | /s/ DONN J. VIOLA                    |
|   |                   |   |   | **Donn J. Viola, *Director***        |

 

66

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**Williams Controls, Inc.**

**Exhibit Index**
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Description** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.01             |       | Asset Purchase  Agreement, dated as of September 30, 2003, by and among the Company,  Teleflex Incorporated and Teleflex Automotive Incorporated *(Incorporated by reference to Exhibit 2.1 to the Registrant’s  current report on Form 8-K filed on December 9, 2003).*                                                            |
| 3.01             |       | Certificate of  Incorporation of the Registrant as amended. *(Incorporated  by reference to Exhibit 3.1 to the Registrant’s annual report on form 10-K  for the fiscal year ended September 30, 1995)*                                                                                                                                        |
| 3.02             |       | Restated By-Laws of the  Registrant as amended July 1, 2002. *(Incorporated by  reference to Exhibit 3.6 to the Registrant’s quarterly report on  Form 10-Q for the quarter ended June 30, 2002)*                                                                                                                                   |
| 4.01             |       | Specimen Unit  Certificate (including Specimen Certificate for shares of Common Stock and  Specimen Certificate for the Warrants). *(Incorporated by  reference to Exhibits 1.1 and 1.2 to the Registrant’s Registration  Statement on Form 8-A, Commission File No. 0-18083, filed with the  Commission on November 1, 1989)*      |
| 4.02             |       | Certificate to Provide  for the Designation, Preferences, Rights, Qualifications, Limitations or  Restrictions Thereof, of the Series A Preferred Stock, 71¤2%  Redeemable Convertible Series *(Incorporated by  reference to Exhibit 3.1 to the Registrant’s quarterly report on form  10-Q for the quarter ended March 31, 1998)* |
| 4.03             |       | Certificate to Provide  for the Designation, Preferences, Rights, Qualifications, Limitations or  Restrictions Thereof, of the Series A-1 Preferred Stock, Non-Redeemable  Convertible Series. *(Incorporated by  reference to Exhibit 3.3 to the Registrant’s quarterly report on  Form 10-Q for the quarter ended June 30, 2002)* |
| 4.04             |       | Certificate to Provide  for the Designation, Preferences, Rights, Qualifications, Limitations or  Restrictions Thereof, of the Series B Preferred Stock, 15% Redeemable  Convertible Series *(Incorporated by  reference to Exhibit (d)(v) to the Schedule TO-I/A filed on  July 5, 2002).*                                              |
| 4.05             |       | Certificate of  Elimination for Mandatory Preferred Stock *(Incorporated by  reference to Exhibit (d)(vi) to the Schedule TO-I/A filed on  July 5, 2002)*                                                                                                                                                                                     |
| 4.06             |       | Certificate of Amendment  to the Designation, Preferences, Rights, Qualifications, Limitations or  Restrictions Thereof, of the Series A-1 Preferred Stock, Non-Redeemable  Convertible Series *(Incorporated by  reference to the Registrant’s report on Form 8-K, filed on  September 29, 2004)*                                       |
| 4.07             |       | Certificate to Provide  for the Designation, Preferences, Rights, Qualifications, Limitations or Restrictions  Thereof, of the Series C Preferred Stock, 15% Redeemable Non-Convertible  Series *(Incorporated by reference to the Registrant’s  report on Form 8-K, filed on September 29, 2004)*                                       |
| 4.08             |       | Certificate of Amendment  to the Certificate to Provide for the Designation, Preferences, Rights,  Qualifications, Limitations or Restrictions Thereof, of the Series B  Preferred Stock, 15% Redeemable Convertible Series *(Incorporated  by reference to the Registrant’s report on Form 8-K, filed on  September 29, 2004)*          |
| 10.01(a)         |       | Form of  Indemnification Agreement for H. Samuel Greenawalt. *(Incorporated  by reference to Exhibit 10.1(c) to the Registrant’s annual report  on Form 10-K for the fiscal year ended September 30, 1993)*                                                                                                               |

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| 10.01(b) |   | Form of  Indemnification Agreement for Douglas E. Hailey *(Incorporated  by reference to Exhibit 10.1(a) to the Registrant’s quarterly  report on Form 10-Q for the quarter ended December 31, 2001)*                                                                                                                              |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.02    |   | The Company’s  1995 Stock Option Plan for Non-Employee Directors. *(Incorporated  by reference to Exhibit 10.3 to the Registrant’s quarterly report on  Form 10-Q for the quarter ended March 31, 1995)*                                                                                                                                     |
| 10.03    |   | The Registrant’s  1993 Stock Option Plan as amended to date. *(Incorporated  by reference to Exhibit 10.4(b) to the Registrant’s annual report  on Form 10-k for the fiscal year ended September 30,1998)*                                                                                                                              |
| 10.05    |   | Master Services  Agreement, dated as of July 1, 2002, by and among American Industrial  Partners, a Delaware general partnership, and the Company *(Incorporated by reference to Exhibit (d)(ix) to the Schedule  TO-I/A filed on July 5, 2002).*                                                                                                 |
| 10.06    |   | Dolphin Side  Letter, dated as of July 1, 2002 *(Incorporated by  reference to Exhibit (d)(xi) to the Schedule TO-I/A filed on  July 5, 2002).*                                                                                                                                                                                                        |
| 10.07    |   | Form of  Amended and Restated Subordinated Debenture Due July 1, 2004 *(Incorporated by reference to Exhibit (d)(xii) to the Schedule  TO-I/A filed on July 5, 2002).*                                                                                                                                                                            |
| 10.08    |   | Amended and  Restated Credit Agreement, including Promissory Notes for the Revolving  Credit Loan and Terms Loans A and B, dated July 1, 2002 *(Incorporated by reference to Exhibit (d)(xiii) to the Schedule  TO-I/A filed on July 5, 2002).*                                                                                                   |
| 10.09    |   | Put/Call Option  Agreement, dated September 30, 2004, between Williams and American  Industrial Partners Capital Fund III, L.P. *(Incorporated  by reference to the Registrant’s report on Form 8-K, filed on  September 29, 2004)*                                                                                                               |
| 10.10    |   | Credit Agreement,  dated September 27, 2004, among Williams, Williams Controls  Industries, Inc., a wholly-owned subsidiary of Williams, and Merrill  Lynch Capital, a division of Merrill Lynch Business Financial  Services, Inc. *(Incorporated by  reference to the Registrant’s report on Form 8-K, filed on  September 29, 2004)* |
| 10.11    |   | Amended and  Restated Management Services Agreement, dated September 30, 2004, among  Williams, American Industrial Partners and Dolphin Advisors, LLC *(Incorporated by reference to the Registrant’s report on  Form 8-K, filed on September 29, 2004)*                                                                                         |
| 18       |   | Preferability  Letter of Independent Registered Public Accounting Firm related to the change  in the measurement date for Williams pension plans from September 30 to  August 31  *(Filed  herewith)*                                                                                                                                                  |
| 21       |   | List of  Subsidiaries *(Filed Herewith)*                                                                                                                                                                                                                                                                                                                              |
| 23       |   | Consent of  Independent Registered Public Accounting Firm *(Filed  herewith)*                                                                                                                                                                                                                                                                                         |
| 31.1     |   | Certification of  Chief Executive Officer required by Rule 13a-14(a) or  Rule 15d-14(a) *(Filed herewith)*                                                                                                                                                                                                                                             |
| 31.2     |   | Certification of  Chief Financial Officer required by Rule 13a-14(a) or  Rule 15d-14(a) *(Filed herewith)*                                                                                                                                                                                                                                             |
| 99.1     |   | Certification of  R Eugene Goodson and Patrick W. Cavanagh Pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                              |
| 99.2     |   | Certification of  Dennis E. Bunday Pursuant to 18 U.S.C. Section 1350 as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                       |

 

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