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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: September 30, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 0-18083

Williams Controls, Inc.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:
(503) 684-8600

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1) Yes /x/    No / /

(2) Yes /x/    No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  / /

As of December 31, 2001, 19,921,114 shares of Common Stock were outstanding and the aggregate market value of the shares (based upon the closing price of the shares as reported on the over the counter bulletin board) of Williams Controls, Inc. held by nonaffiliates was approximately $9,078,011.

Documents Incorporated by Reference

NONE

Williams Controls, Inc.
Index to 2001 Form 10-K

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WILLIAMS CONTROLS, INC.
Form 10-K

Part I
(Dollar amounts in thousands, unless otherwise indicated)

    Cautionary Statement:  This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, those statements relating to development of new products, the financial condition of the Company, the ability to increase distribution of the Company's products, integration of businesses the Company acquires, and disposition of any current business of the Company. These forward-looking statements are subject to the business and economic risks faced by the Company including the ability of the Company to generate or obtain sufficient working capital to continue its operations. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described above and other factors described elsewhere in this report.

Item 1. Description of Business (Dollars in thousands)

    Williams Controls, Inc., ("Company") including its wholly-owned subsidiaries, Williams Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier Plastic Technologies, Inc. ("PPT"); ProActive Acquisition Corporation ("ProActive"); GeoFocus, Inc. ("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc. ("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc. ("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec") and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to "we" "our" or "us."

General

    We are a Delaware corporation formed in 1988. The principal company in our Vehicle Components segment, our primary business segment, was founded by Norman C. Williams in 1939 and acquired by the Company in 1988. Our operating subsidiaries are divided into two operating segments and one discontinued segment, which was sold in May 2000.

    Vehicle Components—Our vehicle component product lines primarily include electronic throttle control systems ("ETCs"), exhaust brakes and pneumatic and hydraulic controls. These products are used in trucks, utility and off-highway equipment, transit buses and underground mining machines. We estimate that we have over a 65% market share of electronic throttle control systems for Class 7 and 8 trucks and essentially 100% of the transit bus market produced in the United States. The majority of these products are sold directly to original equipment manufacturers such as Freightliner, Navistar, Volvo, Isuzu, Ford and Motor Coach Industries. We also sell these products through a well-established network of independent distributors. The major competitors in one or more of our product lines include Teleflex, VDO, Hella and Felsted.

    Markets for electronic throttle control systems are developing in smaller classes of trucks, diesel-powered pick-up trucks and automobiles. The Company currently supplies a limited number of ETC's to Ford and Chrysler. The major automotive manufacturers are converting gasoline-powered automobiles and pick-up trucks to the electronic throttle control system, although this requires engine redesign by the automotive manufacturers which is presently ongoing.

    As discussed below, we closed our plastic injection molded products operation, Premier Plastics Technology, Inc. (PPT), which was part of our Vehicle Components segment, in March 2001 as a result

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of continuing losses. We recorded a net loss on impairment of assets of $1,796 in the second quarter related to this operation. Products produced included taillight systems for the automotive industry.

    Electrical Components and Global Positioning System—Our electrical components product line has included the design and production of microcircuits, cable assemblies, position tilt sensors and other electronic products used in the telecommunication, computer and transportation industries. Although the Company is committed to the development and production of sensors and sensor related products, the Company phased out a number of its traditional electrical component products in fiscal 2001. Major competitors for sensors include CTS, Cooper, Wabash, AMP and Nethode. Major customers for other electrical components included Allied Signal, Raychem and Eaton Corp.

    As discussed below, we had a global positioning system product line, GeoFocus, Inc., which included commuter railroad train tracking and agricultural cyber-farming systems using global positioning and geographic information technology. This operation, whose financial results were not material to the Company as a whole, was sold in June 2001 for a gain of $2,486. Our major customers included Chicago Metra, Tri-Rail, and the Florida Department of Transportation, Los Angeles Metro and Via Tropical Fruit.

    Agricultural Equipment—Our agricultural equipment product lines were sold in May 2000. This segment's product lines included rotary cutters, discs, harrows and sprayers. These products were sold to independent equipment dealers located primarily in the Southeastern United States. Our major competitors had included Allied Industries (Bushhog), Wood Brothers, Taylor Industries, Inc. and Alamo Group. This business was previously reported as a discontinued operation.

Vehicle Components

Ongoing operations at September 30,2001:

Williams Controls Industries, Inc.: Manufactures vehicle components sold primarily in the commercial vehicle industry.

Aptek Williams, Inc.: Manufactures Electronic Throttle Controls for the automotive industry.

NESC Williams, Inc.: Installs conversion kits to allow vehicles to use compressed natural gas and provides natural gas well metering services.

ProActive Acquisition Corporation: Conducted research and development activities related to adjustable foot pedals and manufactures adjustable pedal systems. Although this operation continues to manufacture one adjustable pedal product, as a result of capital limitations and other factors within the market, we have modified our strategy in the adjustable foot pedal market to focus on being a supplier of components to adjustable pedal manufacturers as opposed to our original strategy of providing complete adjustable pedal assemblies to the automotive manufacturers. Accordingly the research and development activities were terminated in June 2001.

Williams Technologies, Inc.: Supports all subsidiaries of our company by providing research and development and developing strategic business relationships to promote "technology partnering."

Terminated operations at September 30, 2001:

Premier Plastic Technologies, Inc.: Manufactured plastic components for the automotive industry. This operation was shut down in March 2001. See Note 12 of Notes to Consolidated Financial Statements.

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Electronic Components and Global Positioning System

Ongoing operations at September 30, 2001:

Aptek Williams, Inc.: Development and production of sensors and sensor related products. During fiscal 2001 phased out of a number of its traditional electrical component products including microcircuits, cable assemblies and other electronic products for the telecommunications and the transportation industry.

Terminated operations at September 30, 2001:

GeoFocus, Inc.: Developed train tracking and cyber-farming systems using global positioning systems and geographical information systems. GeoFocus was sold in June 2001. See Note 12 of the Notes to Consolidated Financial Statements.

Acquisitions and Dispositions

    From fiscal 1994 through fiscal 1996, we pursued an acquisition strategy to integrate vertically through the acquisition of a sensor manufacturing company and horizontally through the acquisition of companies in similar industries that could benefit from our sensor and control experience. During this period, we acquired several companies with products that could benefit from sensor and control applications.

    In fiscal 1997, we changed our diversification acquisition strategy to focus our corporate and financial resources on opportunities emerging in our Vehicle Components segment. We have not been able to fully capitalize on opportunities emerging in our vehicle components segment, and may not be able to fully capitalize in the future on these opportunities, including the development of commercial applications of sensor related products. Specifically, we have terminated the plastic injection molded products operation and sold our global positioning operation. As a result of capital limitations and other factors within the market, we have modified our strategy in the adjustable foot pedal market, which we entered through our acquisition of ProActive Pedals in July, 1999, to focus on being a supplier of components to adjustable pedal manufacturers as opposed to our original strategy of providing complete adjustable pedal assemblies to the automotive manufacturers. Finally, if we are successful in one or more endeavors, we cannot be certain that those endeavors will be profitable.

Competition

    In general, our products are sold in highly competitive markets to customers who are sophisticated and demanding concerning price, performance and quality. Products are sold in competition with other independent suppliers (some of which have substantial financial resources and significant technological capabilities), and many of these products are, or could be, produced by the manufacturers to which we sell these products. Our competitive position varies among our product lines.

    In the Vehicle Components segment, we are the largest domestic producer of ETCs sold in the truck ETC market. We have only one primary competitor in the diesel heavy truck market. We also manufacture pneumatic and air control systems for the heavy truck market, which is comprised of numerous highly fragmented competitors. We believe the principal method of competition for ETC in the trucking industry is quality and engineering added value and reputation. In addition, attainment of the ISO 9001 and QS 9000 quality certifications is critical to qualifying as a supplier to the automotive industry and certain manufacturers in the truck industry. All of our existing manufacturing facilities in our Vehicle Components segment have attained these certifications.

    During fiscal 1999 and 2000, we began the introduction of our electronic throttle control systems product into the passenger vehicle market that consists of cars, small trucks, mini vans and sport utility vehicles. In August 2000, we began production of electronic throttle controls for the Ford Super Duty

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series trucks. In addition, we have been awarded production contracts for electronic throttle controls for the General Motors X (Midsize sedans) Car and Cadillac series, beginning in model year 2003. Our initial introduction of electronic throttle controls for passenger vehicles has been well accepted. A competitive advantage has been the durability and reliability of the low temperature co-fired ceramic (LTCC) sensor we developed that will be utilized in these designs. Continued introduction of electronic throttle controls in gasoline engines requires modification or redesign of engine components that is dependent upon the timing of development by the automotive manufacturers and their original equipment manufacturers. However, based on initial acceptance, we expect that by model year 2005, approximately 60-70% of passenger vehicles will have converted to electronic throttle controls. Our primary competitors in the United States are Teleflex, Hella and Felsted. Each of these companies is substantially larger and has greater financial resources than Williams. Furthermore, we have no control over the timing of the introduction of the electronic throttle control into the automotive, small truck and sport utility vehicle markets.

Marketing and Distribution

    We sell our products to customers in the truck, automotive, heavy equipment, and other diversified industries worldwide; approximately 95% of our sales from continuing operations are to customers in the Vehicle Components segment and approximately 59% of our sales are from sales of ETC products.

    For the years ended September 30, 2001, 2000 and 1999, Freightliner accounted for 18%, 23% and 27%, Navistar accounted for 12%, 12% and 15%, Volvo accounted for 9%, 6% and 8%, Evart Corporation accounted for 4%, 9% and 1%, General Motors accounted for 7%, 6% and 5% and Ford accounted for 5%, 0% and 0% of net sales from continuing operations, respectively. Approximately 16%, 15% and 20% of net sales in fiscal 2001, 2000 and 1999 respectively, were to customers outside of the United States, primarily in Canada, Mexico and Sweden, and, to a lesser extent, in Europe, South America and Australia. See Notes 2 and 15 of Notes to Consolidated Financial Statements.

    The Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potential credit losses. Actual losses and allowances have been within management's expectations.

Existing Future Sales Orders

    Future sales orders for our products were approximately $17,349 at September 30, 2001, compared to approximately $17,488 at September 30, 2000. These are orders for which customers have requested delivery at specified future dates within one year.

Environment

    Our operations result in the production of small quantities of materials identified by the Environmental Protection Agency of the United States Government as "hazardous waste substances" which must be disposed of in accordance with applicable local, state and federal guidelines. Substantial liability may result to a company for failure, on the part of itself or its contractors, to dispose of hazardous wastes in accordance with the established guidelines, including potential liability for the clean up of sites affected by improper disposals. We use our best efforts to ensure that any hazardous substances are disposed of in an environmentally sound manner and in accordance with these guidelines.

    We have identified certain contaminants in the soil of our Portland, Oregon manufacturing facility, which we believe was disposed on the property by a previous property owner. We intend to seek indemnification from such party for the costs of permanent monitoring, or cleanup if required. We have retained an environmental consulting firm that has conducted tests to determine the extent of any contamination. Based on the results of the tests and current regulations, the contamination is not a

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reportable event. We believe that we can enforce available claims against the prior property owner for any costs of monitoring or cleanup. We believe we are currently in compliance with environmental regulations.

Government Regulation

    Our vehicle component products must comply with the National Traffic and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated thereunder which are administered by the National Highway Traffic Safety Administration ("NHTSA"). If, after an investigation, NHTSA finds that we are not in compliance with any of it's standards or regulations, among other things, it may require that we recall our products, which are found not to be in compliance, and repair or replace such products. During fiscal 2001, we had one product recall related to weld failures on certain ETC's produced for the heavy truck markets. We have made all required disclosures to NHTSA and are testing, repairing or replacing the defective parts as necessary. We estimate that the total potential units involved are no more than 15,000 units, and have recorded an accrual of $674 which represents the low end of an estimated range to complete the recall of $674 to $1,230. We are also seeking potential recovery of certain of these costs from one of our vendors. However no amounts have been recorded for this potential recovery. We believe we are currently in compliance with NHTSA.

Product Research and Development

    Our operating facilities engage in engineering, research and development and quality control activities to improve the performance, reliability and cost-effectiveness of our product lines. Our engineering staff works closely with our customers designing and developing new products and adapting existing products for new applications. During fiscal 2001, 2000 and 1999 the Company spent $4,005, $6,713 and $3,424, respectively, on these activities for continuing operations. We increased our research and development expenditures in fiscal 2000 to design and validate ETC products compatible with gasoline powered vehicles, develop commercial applications for inertia, tilt and position sensor products, and for the development of adjustable foot pedal and ETC systems for automotive, sport utility vehicles, light trucks and heavy trucks.

Patents and Trademarks

    Our product lines generally have strong name recognition in the markets in which they serve. We have obtained a number of product patents, which expire at various times. We consider each patent to be of value and aggressively protect our rights against infringement throughout the world. We own two patents (expiring in 2009) which we believe improve the marketability of the electronic product line of the Heavy Vehicle Components segment. We do not consider that the loss or expiration of either patent would materially adversely affect us; however, competition in the electronic product line could increase without these patents. We have allowed the royalty bearing patent license agreement providing us an exclusive license for three adjustable pedal patents to lapse as a result of the shift in our strategy to the supply of components to adjustable pedal manufacturers. We would still be able to use these patents under a non-exclusive arrangement, however there are currently no plans to use these patents in the future. We own numerous trademarks, enabling us to market our products worldwide. These trademarks include "Williams" and "Aptek". We believe that in the aggregate, the rights under our patents and trademarks are generally important to our operations, but do not consider that any patent or trademark or group of them related to a specific process or product is of material importance in relation to our total business except as described above.

Raw Materials; Reliance on Single Source Suppliers

    We produce our products from raw materials, including brass, aluminum, steel, plastic, rubber and zinc, which currently are widely available at reasonable terms. We rely upon CTS Corporation and

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Caterpillar, Inc. as single source suppliers for critical components and/or products as these suppliers are currently the only manufacturers of sensors made specifically for the Company's ETC system. We manufacture a foot pedal using a contact position sensor manufactured by Caterpillar, Inc. used exclusively on Caterpillar engines. Caterpillar supplies this sensor and requires that its sensor be used on all Caterpillar engines; therefore, the Company does not consider the Caterpillar sensor supply to be at risk. Although these suppliers have been able to meet our needs on a timely basis, and appear to be willing to continue being suppliers there is no assurance that a disruption in a supplier's business, such as a strike, would not disrupt the supply of a component. In addition, we have developed a high performance-high durability, cost effective sensor which we expect to further refine, with the expectation that volume production will begin in fiscal 2002. Production of these position sensors internally would tend to reduce our reliance on certain single source suppliers.

Product Warranty

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

Employees

    We employ approximately 303 employees, including 118 union employees. Our non-union employees are engaged in sales and marketing, accounting and administration, product research and development, production and quality control. Our union employees are engaged in manufacturing vehicle components in the Portland, Oregon facility and are represented by the International Union, United Automobile Workers of America and Amalgamated Local 492 (the "Union"). We have a collective bargaining agreement with the Union that expires in September 2002, which provides for wages and benefits (including pension, death, disability, health care, unemployment, vacation and other benefits) and contains provisions governing other terms of employment, such as seniority, grievances, arbitration and Union recognition. Our management believes that our relationship with our employees and the Union is good. We could experience a change in non-union labor costs as a result of changes in local economies and general wage increases.

Item 2. Properties (Dollars in thousands)

    The following table outlines the principal manufacturing and other facilities owned by us, subject to mortgages on all facilities except Williams and Agrotec.

    Our manufacturing facilities are equipped with the machinery and equipment necessary to manufacture and assemble its products. Management believes that the facilities have been maintained

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adequately, and that we could increase our production output significantly at any of our facilities with additional equipment and work force.

    The Hardee facility is encumbered by a $417 mortgage at September 30, 2001. A bank holds a deed of trust on this facility. This facility was returned to the bank in November 2001 in full satisfaction of the mortgage. See Note 23 of Notes to Consolidated Financial Statements.

    The Company is currently in the process of consolidating its Aptek operations in Sarasota, Florida. Currently, these operations are located in Deerfield Beach, Florida and Sarasota, Florida. As part of the consolidation process, the Company sold its Deerfield Beach facility in fiscal 2001 and is leasing the existing space until the consolidation is completed, which is expected in January 2002. The Company leases approximately 43,000 square feet of production and administrative office space in Sarasota pursuant to leases, which expire in February 2003.

Item 3. Legal Proceedings

    Williams Controls, Inc. and its consolidated subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. Our management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of our insurance coverage, and our established reserves for uninsured liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on our review, management believes that any liabilities that may result are not reasonably likely to have a material effect on the Company's liquidity, financial condition or results of operations. Mr. Thomas Itin, the company's Chairman of the board and former President and Chief Executive Officer of the Corporation, has guaranteed certain investments in and advances to Ajay Sports, Inc., an affiliate of the Company. Mr. Itin is an officer and shareholder of Ajay Sports, Inc. Mr. Itin has taken the position that, as a result of his retirement as President and Chief Executive Officer of the Company, these guarantees are no longer in effect. The Company disagrees with the position taken by Mr. Itin and based on advice of legal counsel believes the guarantees are enforceable. Mr. Itin has filed suit in the Circuit Court for Oakland County, Michigan seeking a determination as to the enforceability of these guarantees. The Company has filed suit against Ajay and Mr. Itin in the Multnomah Circuit Court for the State of Oregon seeking payment of all amounts due from Ajay and Mr. Itin. At September 30, 2001, the recorded net book value of our investments in and receivable from Ajay was $3,065, excluding the $500 note reflected in Shareholders' Deficit.

Item 4. Submission of Matters to a Vote of Security Holders

    We did not submit any matters to a vote of its security holders during the year ended September 30, 2001.

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

    Our common stock is quoted on the over the counter bulletin board ("OTC Bulletin Board") under the symbol "WMCO." The Company no longer meets the listing requirements of the National Association of Securities Dealer Automated Quotation ("NASDAQ") National Market System and was de-listed from NASDAQ on July 2, 2001.

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    The range of high and low bid-closing quotations for our common stock for each fiscal quarter for the past two fiscal years is as follows:

    There were 387 record holders of our common stock as of December 26, 2001. We have never paid a dividend with respect to our common stock and have no plans to pay a dividend in the foreseeable future.

Item 6. Selected Financial Data (Dollars in thousands—except per share amounts)

Note: The above amounts reflect the Automotive Accessories and Agricultural Equipment segments as discontinued operations. See Note 14 to the Notes to Consolidated Financial Statements.

*

The 2001 data includes losses on impairment of assets related to the Company's ProActive Pedal and PPT operations of $4,366 and $1,796, respectively. Also included in the 2001 data were gains on sale of land and buildings at Aptek and sale of GeoFocus of $1,837 and $2,486, respectively. See Notes 5, 10 and 12 of Notes to Consolidated Financial Statements.

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**

2000 data includes recognition of $5,044 expense for equity interest in loss of affiliate. The recognition of the loss was significantly increased due to the implementation of Emerging Issues Task Force Bulletin 99-10 "Percentage Used to Determine the Amount of Equity Method Losses". The 2000 data also includes a $6,896 expense for a valuation allowance for previously recognized deferred income tax assets, which may no longer be realizable due to management's assessment of their ultimate realizability. See also Notes 4 and 11 to Notes to Consolidated Financial Statements for information on the equity interest in loss of affiliate and the valuation allowance for deferred income taxes, respectively.

***

1999 data includes the acquisition of ProActive Pedal made in July,1999. Net sales, loss from operations (including expense of $1,750 for acquired in-process research and development), and total assets related to this acquisition were $55, $(2,066) and $6,320, respectively. The 1999 loss from continuing operations includes a loss from impairment of assets of $5,278. See Notes 10 and 18 to the Notes to Consolidated Financial Statements for information on the impairment loss and the acquisition, respectively.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands—except per share amounts)

    See "Cautionary Statement" contained at the beginning of this report.

Financial Condition, Liquidity and Capital Resources

    During fiscal 2001 several significant actions were taken to improve the Company's financial condition and liquidity position, however at September 30, 2001, the Company continued to experience a significant lack of liquidity. As noted in the Consolidated Financial Statements, the Company again incurred losses from operations in fiscal 2001. During the years ended September 30, 2001, 2000 and 1999, the Company incurred (losses) of ($9,602), ($16,744) and ($9,539), respectively. In addition, at September 30, 2001, essentially all of the Company's $9,434 of trade accounts payable was significantly past due, the working capital deficit was ($19,532), and the Company stockholders' equity was a deficit of ($10,708). The Company also ceased making payments of preferred stock dividends in the second quarter of fiscal 2001. As described in Note 6 to Consolidated Financial Statements, the Company has obtained extensions until June 30, 2002 on the credit agreement with the Company's primary bank. This credit agreement matured on July 11, 2001. The Company was not, however, in compliance with the covenants of its credit agreement at September 30, 2001. As a result, the Company has classified the $6,542 owed to its primary bank as a current liability at September 30, 2001.

    The Company has outstanding past due payables with essentially all of its suppliers of raw materials, components and services and is currently on C.O.D. or prepayment status with essentially all of its vendors. Although the Company has not experienced any significant supply disruptions in the past several months, and is not anticipating any, these vendors could decide, as a result of the past due payables, to discontinue or delay the Company's supply of raw materials, components and services which could cause a disruption in the Company's production and operations. Such disruption or delay could materially adversely affect the Company's business, prospects, financial condition and results of operation.

    During the second quarter of fiscal 2001, the Company raised $4,576, net of expenses, from a private placement of debt in February 2001. The $4,576 raised was in the form of $4,950 of secured subordinated debentures which are due March 1, 2002, bearing interest at 12% and include warrants to purchase the Company's common stock at $1.375 per share for each $2.00 of principal amounts of the debentures purchased. The Private Placement funds were used to pay down bank debt, including an over-advance from the Bank and to support the operations of the Company. As part of the Placement Agent Agreement Taglich Brothers, Inc. was permitted one board seat at the time of funding and the right to place a candidate for an additional board seat on the proxy for the next annual meeting. Accordingly, in March 2001 Douglas Hailey was appointed to fill a vacant position on the Board of Directors. Mr. Hailey is a Vice President of the Investment Banking Division of Taglich Brothers, Inc. Mr. Hailey's term expires in 2002. As the Company did not hold an annual meeting during 2001, the second board candidate has not been nominated for election.

    Actions during fiscal 2001 to improve the financial condition and liquidity of the Company included sale of its Aptek-Deerfield Beach facility, sale of its GeoFocus operations, shutdown of non-profitable, non-essential operations, including PPT, and reductions in working capital requirements at its remaining operations. These actions, together with obtaining the $4,950 of secured subordinated debentures, have improved borrowing capacity under the Company's credit facility and reduced the Company's outstanding indebtedness to its primary secured lender by $13,820 over the amount owed at September 30, 2000. However, due to the Company's continued working capital deficit, the Company's debts, including accounts payable and the secured subordinated debentures due March 1, 2002, and other factors, the Company continues to have a significant lack of liquidity. Accordingly, the Company's continuation as a going concern is dependent upon, among other things, its ability to generate sufficient

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cash flow to meet its obligations on a timely basis, to comply with the terms of its credit agreement, to obtain additional financing or refinancing as may be required, and ultimately to attain profitability.

    Management is pursuing alternatives to raise capital, both equity and debt and is continuing to pursue all alternatives available to it, including selling all or part of the Company to a third party. There is no assurance that the Company will be able to obtain adequate working capital in the amounts needed to sustain its operations or sell its business or parts of it in a timely fashion. The above matters raise a substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

    Cash flow from operations increased to $3,953 in fiscal 2001 from $2,936 in fiscal 2000. The increase was primarily due a lower net loss in fiscal 2001, a decrease in receivables and inventories between years, offset by no equity interest in loss of affiliates or deferred income taxes in fiscal 2001, both of which were non-cash items that increased the cash flow from operations in fiscal 2000.

    The positive cash flow from operations for fiscal 2001 differs from the net loss from operations primarily because of non-cash operating expenses of $3,993 for depreciation and amortization, an impairment loss on assets at PPT of $1,796, an impairment loss on assets at ProActive of $4,366, a decrease in receivables of $2,859, a decrease in inventories of $3,231 and an increase in accounts payable and accrued expenses of $924 offset by the gains from sale of Geofocus and Aptek land and building of $2,486 and $1,837, respectively.

    Cash of $6,067 was provided from investing activities in fiscal 2001 compared to a $2,300 use of cash for investing activities in fiscal 2000. The Company's spending on property plant and equipment was $1,583 in fiscal 2001 compared to $2,343 in fiscal 2000. Additionally, in fiscal 2001 the Company was required to fulfill a $1,450 guaranty obligation on amounts owed to US Bank by Ajay. See Note 4 to Notes to Consolidated Financial Statements. In fiscal 2001, the Company generated cash from investing activities of $3,150 from the sale of GeoFocus and $5,750 from the sale of the Company's Deerfield Beach, Florida facility. See Note 12 of Notes to Consolidated Financial Statements.

    Cash used in financing activities was $10,050 for fiscal 2001 as compared to a use of $2,718 in fiscal 2000. In fiscal 2001, net payments on debt and capital lease obligations of $14,479, and $147 of preferred stock dividends were partially offset by $4,576 of net proceeds received from the secured subordinated debentures issued in February 2001. Cash used to make payments on debt primarily were generated from the sale of the Deerfield Beach property, the sale of GeoFocus and liquidation of the inventory and collection of the receivables related to the closure of PPT.

Market Risk

    The Company may be exposed to future interest rate changes on its debt. The Company does not believe that a hypothetical 10 percent change in end of period interest rates would have a material effect on the Company's cash flow.

De-listing from the NASDAQ National Market

    The Company stock was de-listed from the NASDAQ National Market on July 2, 2001 as its net tangible assets were below the required minimum for listing on the NASDAQ National Market. The price of its common stock may be obtained on the OTC Bulletin Board.

Recent FASB Pronouncements

    In June 2000 the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.

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133" ("SFAS 138"). In June 1999 the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS 137") SFAS 137 is an amendment to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" SFAS 133, as amended by SFAS 137 and 138 establishes accounting and reporting standards for all derivative instruments. SFAS 133 and 138 are effective for fiscal years beginning after June 15, 2000. The Company adopted SFAS 138 in 2001 and it did not have any material impact on the Company's financial position or results of operations.

    In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which for the Company will be fiscal year 2002. As of September 30, 2001, the Company does not have any significant remaining goodwill. Accordingly, the Company does not expect the adoption of either SFAS 141 or SFAS 142 to have a significant impact on the financial condition or results of operations of the Company. Goodwill and other intangible amortization, including write-off's, was $4,739, $599 and $173 in 2001, 2000 and 1999, respectively.

    In June and August 2001, the FASB issued SFAS No.'s 143 and 144, "Accounting for Asset Retirement Obligations" and "Accounting for the Impairment or Disposal of long-lived Assets." Under SFAS No. 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 144 retains SFAS No.121's ("Accounting for the Impairment of long-lived Assets to be disposed of") fundamental provisions for the: 1) recognition and measurement of impairment of long-lived assets to be held and used; and 2) measurement of long-lived assets to be disposed of by sale. These statements are effective for the Company's fiscal year ended 2003. The Company has not performed an analysis of the effect of SFAS No. 143 or 144.

Results of Operations—Year-ended September 30, 2001 Compared to Year-ended September 30, 2000

    The Company's loss from continuing operations was $5,172 in fiscal 2001 compared to a loss of $1,548 in fiscal 2000. The most significant factor in the reduced earnings were lower sales volumes and resulting lower gross profit margins from the Company's electronic throttle controls (ETC's) for the heavy truck market. The lower gross profit margins were partially offset by reduced spending in research and development of $2,708 and lower spending on sales and administrative of $1,241. Additionally, during fiscal 2001, the Company recognized an asset impairment loss of $1,796 related to the Company's plastic injection molding business (PPT) which was shut down during the year, impairment loss of $4,366 on the goodwill and intangible assets of the Company's adjustable pedal business, and gains on sales of assets of $4,323.

    The Net loss allocable to common shareholders declined from $17,332 in fiscal 2000 to $10,698 in fiscal 2001, or an improvement of $6,634. In addition to the factors discussed above, the fiscal 2000 net loss allocable to common shareholders included $6,896 expense for a valuation allowance for previously recognized deferred income tax assets as of September 30, 2000 which may no longer be realizable due to the going concern matters discussed in Note 1 of Notes to Consolidated Financial Statements. No income tax (benefit) expense was recognized in fiscal 2001. Included in the fiscal 2000 net loss allocable to common shareholders was recognition of an expense of $5,044 for equity interest in loss of affiliate. No income or loss for equity interest in income or loss from affiliate was recognized in fiscal 2001. Net interest expense increased $1,500 due to providing for interest on certain operating liabilities, issuance

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costs related to the issuance of debentures in February 2001 and amortization of costs related to obtaining the additional financing.

Net Sales

    Net sales from continuing operations decreased $12,643, or 18.7% to $55,082 in the year ended September 30, 2001 compared to $67,725 during the prior period, primarily due to the closure of the PPT operations and lower unit sales volumes in the remaining portion of the Company's vehicle components segment.

    Sales in the Vehicle component business segment decreased $13,075, or 20.0% to $52,188 from sales of $65,263 in fiscal 2000. A significant factor in the decline was lower unit sales of electronic throttle controls primarily caused by the general slowdown in all of the major markets the Company's serves. Additionally, in February the management of the Company began closing the operations of PPT. Except for some completion of existing orders, PPT ceased operations on March 31, 2001. PPT sales were $4,029 in fiscal 2001, $6,117 lower than the $10,146 in fiscal 2000.

    The Electrical Components and GPS component business segment sales for fiscal 2001 were $2,894, an increase of $432 over the 2000 sales levels. Although the Company is committed to the development and production of sensors and sensor related products, sales from this segment may be significantly lower during fiscal 2002 as the Company phased out a number of its traditional electrical component products in fiscal 2001 and sold the global positioning system product line (GPS) in June 2001.

Gross Margin

    Gross Margins were $10,245, or 18.6% of sales in fiscal 2001 a reduction of $5,734 compared to the gross margin of $15,979, or 23.6% of sales in fiscal 2000. The reduced gross profit margins were primarily due to the lower overall sales levels previously discussed. Additionally, the Company's liquidity constraints during the first two quarters of the year caused disruptions in the Company's materials flow, resulting in production inefficiencies and higher shipping costs, reducing gross profit margins. The Company has not experienced any significant materials flow disruptions during the last half of fiscal 2001. The PPT operations, which were shut down earlier in the year, negatively affected gross profit margins in both fiscal 2001 and 2000. Negative operating margins on sales and costs of shutting down PPT resulted in a negative gross profit margin of $2,194 during the 6 months of operations in fiscal 2001. The negative gross profit margin in fiscal 2000 was $1,950.

Operating Expenses

    Operating expenses, excluding Loss on Impairment of Assets and Gains on the sale of Aptek land and building and Geofocus, were $13,578 for fiscal 2001 compared to $17,527 for fiscal 2000. The decrease of $3,949, or 22.5% was primarily the result of decreased research and development expenses and to a lesser degree lower selling and administrative costs. Operating expenses, excluding the gains and loss on Impairment of Assets, as a percentage of net sales, was 24.7% in fiscal 2001 and lower than the 25.9% in fiscal 2000.

    Research and development expenses decreased $2,708, to $4,005 in fiscal 2001 compared to $6,713 in fiscal 2000, a 40.3% decline. As a percent of net sales, research and development expenses decreased from 9.9% to 7.3%. This is partially due to significant expenditures and higher payroll for employees working for the Chrysler RS program in fiscal 2000. This program was cancelled late in the third quarter of fiscal 2000. Additionally, during fiscal 2000, research and development expenses increased to support new product development for the automotive and truck ETC and adjustable foot pedal products, and for development of sensor-related products for existing customers. Research and development costs were lower for these activities in fiscal 2001 as further development of the truck

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adjustable pedal was not pursued and the Company's strategy regarding the automotive adjustable foot has changed from providing complete adjustable pedal assemblies to the automotive manufacturer to being a supplier of components to adjustable foot pedal manufacturers, reducing the amount of research and development required.

    Fiscal 2001 administrative expenses of $8,261 were slightly lower than the $8,938 of administrative expenses incurred in fiscal 2000. As a percent of net sales, administrative expenses were 15.0% in fiscal 2001 compared to 13.2% in fiscal 2000. Lower plant administrative expenses were partially offset by higher legal and accounting costs.

    After reviewing PPT's history of operating losses and operating problems and profitability, the PPT operations have been terminated. See Note 12 of Notes to Consolidated Financial Statements. The Company has recorded an impairment loss based on the realiziability and disposition of PPT's property, plant and equipment of $1,796, net of a gain of $200 from the sale of certain fixed assets.

    In July 1999 the Company acquired the adjustable pedal business and patent rights and contributed additional working capital for product development of the Company's adjustable pedal design. As a result of capital constraints and other factors within the market, the Company has modified its strategy in the adjustable foot pedal market to focus on being a supplier of components to adjustable pedal manufacturers as opposed to our original strategy of providing complete adjustable pedal assemblies to the automotive manufacturers. The Company's current sales volume of this product is limited and as a result of the Company's change in strategic focus most likely will not achieve the sale volumes of adjustable pedals originally projected. The current level of cash flows from the adjustable pedal business does not support the realization of the carrying value of the adjustable pedal business' intangible assets. Accordingly, the Company recognized an impairment loss of $4,366 in the quarter ended March 31, 2001 for the Goodwill and other intangible assets related to this business.

    The Company also recorded gains in fiscal 2001 on the sales of land and buildings at Aptek and sale of GeoFocus of $1,837 and $2,486, respectively. These sales generated net cash of $8,900.

Interest and Other Expenses

    Interest expense increased $1,500 or 49.8%, to $4,510 in fiscal 2001 from $3,010 in fiscal 2000 due to amortization of the Secured Subordinated Debenture warrant discounts (Note 6), amortization of costs related to obtaining the additional financing and providing interest on certain operating liabilities.

Income Taxes

    An income tax benefit on the current year loss was not provided for in fiscal 2001 based on management's assessment of the ultimate realizability of any benefit provision. The income tax expense of $7,527 for fiscal 2000 was primarily the result of a valuation allowance recorded for previously recognized deferred income tax assets as of September 30, 2000, which may no longer be realizable based on management's assessment of their ultimate realizability.

Net Loss allocable to common shareholders

    Net loss allocable to common shareholders was $10,698, or $0.54 per fully diluted share in the year ended September 30, 2001 compared to $17,332, or $0.88 per fully diluted share in the year ended September 30, 2000 due to the factors described above and higher preferred dividends due primarily to a charge of $455 for change in conversion price. See Note 13 of Notes to Consolidate Financial Statements.

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Results of Operations—Year-ended September 30, 2000 Compared to the Year-ended September 30, 1999

    Net sales from continuing operations increased 10.3% to $67,725 in fiscal 2000 from $61,422 in fiscal 1999 due to higher unit sales volumes in the Company's vehicle components segment.

    In fiscal 2000, loss from continuing operations was $1,548, compared to loss from continuing operations of $3,031 in fiscal 1999. The decrease in losses, totaling $1,483, was the result of $7,610 in increased cost of sales in the vehicle segment affected primarily by the plastic injection molding subsidiary, increased information technology costs, decreased absorption of overhead related to lower finished goods and work in process inventory levels, as well as the impact from product mix shifting away from higher margin ETC sales. Research and development expenses increased $3,289, selling expenses decreased $121 and administrative expenses increased $1,272. These increases were offset by $1,750 for research and development efforts in process at the date of acquisition of ProActive and $5,278 loss from the impairment of assets related to Kenco, our former Automotive Accessories segment, incurred during fiscal 1999, which are no longer applicable to fiscal 2000.

    Net loss allocable to common shareholders increased $7,197 to $17,332 in fiscal 2000 compared to net loss allocable to common shareholders of $10,135 in the prior fiscal year due to the factors described above, as well as the recognition of $5,044 expense for equity interest in loss of affiliate. The recognition of the loss was significantly increased due to the implementation of Emerging Issues Task Force Bulletin 99-10 "Percentage Used to Determine the Amount of Equity Method Losses". The net loss allocable to common shareholders also includes a $6,896 expense for a valuation allowance for previously recognized deferred income tax assets as of September 30, 2000 which may no longer be realizable due to the going concern matter discussed in Note 1 to Consolidated Financial Statements. Interest expense increased $856 due to increased bank borrowings, increased capital leases, the issuance of convertible subordinated debt in April 2000, and a decreased allocation of interest to the discontinued Agricultural Equipment Segment.

Net Sales

    Net sales from continuing operations increased $6,303, or 10.3%, to $67,725 in the year ended September 30, 2000 from $61,422 in the year ended September 30, 1999 primarily due to higher unit sales volumes in our Vehicle Components segment.

    Net sales from continuing operations in the Vehicle Components segment increased $7,127, or 12.3%, to $65,263 in the year ended September 30, 2000 over levels achieved in the year ended September 30, 1999 due to $4,893 higher plastic injection molding sales and automotive pedal sales. Sales from continuing operations in our Electrical Components and GPS segment decreased $824, or 25.1%, due to lower unit sales of electrical components.

Gross Margin

    Gross margin from continuing operations decreased $1,105, or 6.5%, to $15,979 (23.6% of sales) compared to $17,084 (27.8% of sales) in the year ended September 30, 1999. Gross margin decreased $482 or 2.8%, in the year ended September 30, 2000 in the Vehicle Components segment due primarily to $1,133 reduction in gross margin losses in the plastic injection molding subsidiary driven by higher volume of production over which fixed costs were allocated offset by $1,741 decrease in margins in our Portland and Florida subsidiaries due to decreased absorption of overhead related to lower finished goods inventory levels, as well as the impact from product mix shifting slightly away from higher margin ETC sales. The Electrical Components and GPS segment also recognized an increase in gross margin losses of $623 to $735 compared to prior fiscal year's gross margin loss of $112.

    Our plastic injection molding and tooling subsidiary ("PPT"), the operating results of which are included in the Vehicle Components segment, reported a $3,638 loss from operations for the year

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ended September 30, 2000, a decrease of $807 compared to the prior year's loss from operations of $4,445. Sales, gross margin (loss) and operating loss for the year ended September 30, 2000 were $10,146, ($1,950), and ($3,638) compared to $5,253, ($3,083), and ($4,445), respectively, in the prior fiscal year. The increase in sales is the result of new business that was awarded and began production in the second quarter of fiscal 2000.

    Gross margin loss at the Electrical Components and GPS segment increased $623 from $112 for the year ended September 30, 1999 to $735 for the year ended September 30, 2000, primarily as a result of fixed overhead combined with declining sales at the electronic components operations, offset by increased margins of $171 at the GPS operations, primarily due to the completion of a GPS contract in the current fiscal year.

Operating Expenses

    In conjunction with the acquisition of the ProActive Pedal Division of Active Tool and Manufacturing Co., Inc. in July, 1999, we expensed $1,750 of the purchase price as acquired in-process research and development during the year ended September 30, 1999. Also, during the year ended September 30, 1999, we recognized a $5,278 loss from the impairment of assets related to Kenco, the Company's former Automotive Accessories segment. The loss consisted of an impairment of non-voting preferred stock and notes and accounts receivable totaling $4,655 and impairment of property totaling $623 (see Note 10 to the Notes to Consolidated Financial Statements). These items did not recur in fiscal 2000.

    Operating expenses before the charge for acquired in-process research and development and the loss from impairment of assets increased $4,440, or 33.9%, to $17,527 for the year ended September 30, 2000 compared to $13,087 for the year ended September 30, 1999, primarily as a result of increased research and development expenses of $3,289, a decrease in selling expenses of $121, and an increase in administration expenses of $1,272. Research and development expenses increased to support new product development for the automotive and truck ETC and adjustable foot pedal products, and for development of sensor-related products and for existing customers. Research and development expenses as a percentage of net sales were 9.9% for the year ended September 30, 2000 compared to 5.6% for the year ended September 30, 1999. However, they are expected to decrease in the fiscal year ending September 30, 2001 as the focus shifts to production of automotive pedals and sensor-related products. Operating expenses before the charge for acquired in-process research and development and loss from the impairment of assets increased $4,899, or 47.8%, in the year ended September 30, 2000 in the Vehicle Components segment and decreased $459, or 16.2%, in the Electrical Components and GPS segment compared to the prior year period.

    Selling expenses were reduced $121 for the year ended September 30, 2000 compared to 1999. Selling expenses as a percent of net sales decreased to 2.8% in the year ended September 30, 2000 compared to 3.3% in the prior year.

    Administration expenses increased $1,272 to $8,938 for the year ended September 30, 2000 from $7,666 for the comparable period in the prior year, due primarily to increased costs of $339 to support the increased volume of sales at the plastics injection molding subsidiary, increased amortization of intangibles totaling $540 as a result of an acquisition completed in fiscal year 1999, as well as start-up costs of $474 related to the implementation of operations at the automotive pedal plant, offset by decreased costs of $285 at our Portland subsidiary due to reduction in bad debt expense.

Acquired In-Process Research and Development

    In connection with its acquisition of the assets of ProActive Pedals in July 1999, the Company recorded a pretax charge of $1,750 for research and development efforts in process at the date of the acquisition. See Note 18 of Notes to Consolidated Financial Statements.

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    The value assigned to the in-process research and development efforts represents those efforts in process at the date of acquisition that had not reached the point where technological feasibility had been established and that had no alternative future uses. Accounting rules require that these costs be expensed as incurred. The significant projects in process at the time of the acquisition were for the development of commercially viable designs and concepts for adjustable pedal systems. The value was determined by estimating the costs to further develop the acquired in-process technology. At the time of the acquisition, the in-process technology under development was expected to be commercially viable in 2001. Expenditures to complete these projects were expected to total approximately $3.5 million. This estimate was subject to change, given the uncertainties of the development process, and no assurances can be given that deviations from these estimates will not occur. Additionally, these projects would require expenditures for additional research and development after they have reached a state of technological and commercial feasibility. As discussed above, in fiscal 2001, the Company modified its strategy in the adjustable foot pedal market and, accordingly, recorded an impairment loss of $4,366 for goodwill and other intangible assets related to this business.

Interest and Other Expenses

    Interest expense increased $856 to $3,010 in the year ended September 30, 2000 from $2,154 in the year ended September 30, 1999. The reasons for the increase were increased debt owing to a Bank, increased capital leases and a decreased allocation of interest to the discontinued Agricultural Equipment Segment. Allocation of interest to the discontinued Agricultural Equipment Segment decreased by $100 in fiscal 2000 compared to fiscal 1999 as a result of significantly decreased net assets at this segment. In addition, issuance of subordinated debt in April 2000 increased interest expense approximately $72. Allocated interest expense included in discontinued operations for the year ended September 30, 2000 and 1999 was $0 and $100, respectively.

Discontinued Operations

    The Company reported a net loss from discontinued operations of $5,611 for the year ended September 30, 1999 compared to a net loss of $4,299 for the year ended September 30, 1998. The Company adopted a plan of disposal for the Agriculture Equipment segment in late 1998. As a result, a net loss on disposal totaling $1,403 was recorded for this segment. However, during the year ended September 30, 1999, an additional net loss on disposal totaling $5,611 was recorded for the disposal of this segment. The loss in fiscal 1999 was based on events and information, which resulted in management's revised estimate of the net realizable value of the Agricultural Equipment Segment. The revised estimate was based on contract negotiations and lower than anticipated bids for portions or all of the segment.

Income Taxes

    The income tax expense of $7,527 for the year ended September 30, 2000 is primarily the result of a valuation allowance recorded for previously recognized deferred income tax assets as of September 30, 2000 which may no longer be realizable based on management's current assessment of their ultimate realizability.

Net loss allocable to common shareholders

    Net loss allocable to common shareholders was $17,332 in the year ended September 30, 2000 compared to $10,135 in the prior fiscal year due to factors described above.

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Item 8. Financial Statements and Supplementary Data

Williams Controls, Inc.
Index to Consolidated Financial Statements

20

Williams Controls, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share information)

The accompanying notes are an integral part of these balance sheets.

21

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

The accompanying notes are an integral part of these statements.

22

Williams Controls, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share information)

The accompanying notes are an integral part of these statements.

23

Williams Controls, Inc.
Consolidated Statements of Comprehensive Loss
(Dollars in thousands)

The accompanying notes are an integral part of these statements.

24

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

25

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

The accompanying notes are an integral part of these statements.

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Notes to Consolidated Financial Statements
Years Ended September 30, 2001, 2000 and 1999
(Dollars in thousands, except share and per share amounts)

Note 1. Summary of Operations and Current Events

    Williams Controls, Inc, including its wholly-owned subsidiaries, Williams Controls Industries, Inc. ("Williams"); Aptek Williams, Inc. ("Aptek"); Premier Plastic Technologies, Inc. ("PPT"); ProActive Acquisition Corporation ("ProActive"); GeoFocus, Inc. ("GeoFocus"); NESC Williams, Inc. ("NESC"); Williams Technologies, Inc. ("Technologies"); Williams World Trade, Inc. ("WWT"); Kenco/Williams, Inc. ("Kenco"); Techwood Williams, Inc. ("TWI"); Agrotec Williams, Inc. ("Agrotec") and its 80% owned subsidiaries Hardee Williams, Inc. ("Hardee") and Waccamaw Wheel Williams, Inc. ("Waccamaw") is herein referred to as the "Company" or "Registrant". The subsidiaries are detailed as follows:

Vehicle Components

    Williams Controls Industries, Inc.:  Manufactures vehicle components sold primarily in the commercial vehicle industry.

    ProActive Acquisition Corporation:  Manufactures electronic throttle controls and adjustable pedal systems for passenger vehicles.

    Premier Plastic Technologies, Inc.:  Manufactures plastic components for the automotive industry. This operation was closed in March, 2001. See Note 12 of Notes to Consolidated Financial Statements.

    NESC Williams, Inc.:  Installs conversion kits to allow vehicles to use compressed natural gas and provides natural gas well metering services.

    Williams Technologies, Inc.:  Supports all subsidiaries of the Company by providing research and development and developing strategic business relationships to promote "technology partnering".

    Williams World Trade, Inc.:  Located in Kuala Lumpur, Malaysia, WWT managed foreign sourcing for subsidiaries of the Company, affiliates and third party customers. Significant portions of WWT's revenues were derived from Ajay Sports, Inc., an affiliate. This subsidiary ceased operations in fiscal 2000.

Electrical Components and GPS

    Aptek Williams, Inc.:  Develops and produces sensors, microcircuits, cable assemblies and other electronic products for the telecommunications and the transportation industry, and conducts research and development activities to develop commercial applications of sensor related products for the electronics and automotive markets.

    GeoFocus, Inc.:  Developed train tracking and cyber-farming systems using global positioning systems ("GPS") and geographical information systems ("GIS"). This operation was sold in June 2001. See Note 12 of Notes to Consolidated Financial Statements.

Agricultural Equipment

    The operations of the subsidiaries comprising the Agricultural Equipment segment were sold in May 2000 and had previously been reported as discontinued operations.

    Agrotec Williams, Inc.:  Manufactured spraying equipment for the professional lawn care, nursery and pest control industries.

    Hardee Williams, Inc.:  Manufactured equipment used in farming, highway and park maintenance.

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

Automotive Accessories

    Kenco/Williams, Inc.:  Manufactured, assembled, packaged and distributed truck and auto accessories for the after market parts industries. Substantially all of the assets of Kenco were sold in fiscal 1998.

Current Events

Going Concern Matters

    The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements during the years ended September 30, 2001, 2000 and 1999, the Company incurred (losses) of ($9,602), ($16,744) and ($9,539), respectively. In addition, at September 30, 2001, essentially all of the Company's $9,434 of trade accounts payable is significantly past due, the working capital deficit was ($19,532), and the Company stockholders' equity was a deficit of $(10,708). The Company also ceased making payments of preferred stock dividends in the second quarter of fiscal 2001. Also, as described in Note 6 of Notes to Consolidated Financial Statements, the Company was not in compliance with the covenants of its credit agreement at September 30, 2001. The credit agreement with the Company's primary bank matured on July 11, 2001, and the Company has obtained extensions on this debt through June 30, 2002. As a result, the Company has classified the $6,542 owed to its primary bank as a current liability at September 30, 2001.

    During the second quarter of fiscal 2001, the Company raised $4,576, net of expenses, from a private placement of debt in February 2001. The $4,576 raised was in the form of $4,950 of secured subordinated debentures which are due March 1, 2002, bearing interest at 12% and include warrants to purchase the Company's common stock at $1.375 per share for each $2.00 of principal amounts of the debentures purchased. The Private Placement funds were used to pay down bank debt, including an over-advance from the Company's primary bank and to support the operations of the Company.

    During fiscal 2001, the Company has taken several actions to improve the financial condition of the Company, including the sale of its Deerfield Beach facility, sale of its GeoFocus operations, shutdown of non-profitable, non-essential operations, including PPT, and reductions in working capital requirements at its remaining operations. These actions together with raising $4,576 through the issuance of the $4,950 of secured subordinated debentures have reduced the Company's amount owing its primary secured lender by $13,820 and improved borrowing capacity under its credit facility over the amount available at September 30, 2000. However, due to the Company's continued working capital deficit, the Company's debts, including accounts payable and the secured subordinated debentures due March 1, 2002, and other factors as outlined herein, the Company continues to have a significant lack of liquidity. Accordingly, the Company's continuation as a going concern is dependent upon, among other things, its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its credit agreement, to obtain additional financing or refinancing as may be required, and ultimately to attain profitability.

    Management is pursuing alternatives to raise capital, both equity and debt and is continuing to pursue all alternatives available to it, including selling all or part of the Company to a third party.

    There is no assurance that the Company will be able to obtain adequate working capital in the amounts needed to sustain its operations or sell its business or parts of it in a timely fashion.

    The above matters raise a substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and

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classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Note 2. Significant Accounting Policies

Principles of Consolidation

    The consolidated financial statements include all of the accounts of Williams Controls, Inc. and its majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Cash and Cash Equivalents

    All short-term highly liquid investments purchased with maturity at purchase of three months or less are considered to be cash equivalents.

Inventories

    Inventories are valued at the lower of standard cost, which approximates actual cost, or market.

Property, Plant and Equipment

    Land, buildings, equipment and improvements to existing facilities are recorded at cost. Maintenance and repairs are expensed as incurred. Depreciation has been computed using the straight-line method over the estimated useful lives of property and equipment as follows: buildings 31.5 years, furniture, machinery and equipment 3 to 12 years. Capitalized leases are amortized using the same method over the shorter of the estimated useful lives or the lease term.

    In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", management reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted non-discounted net cash flows of the operation to which the assets relate, to the carrying amount of such assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

Goodwill and Intangible Assets

    Goodwill, which represents the excess of cost over net assets of acquired companies, is being amortized using the straight-line method over periods from 15 to 40 years. At each balance sheet date, management assesses whether there has been an impairment in the carrying value of cost in excess of net assets of businesses acquired, primarily by comparing current and projected sales, operating income and annual cash flows, on an un-discounted basis, with the related annual amortization expenses as well as considering the equity of such companies. Other intangible assets includes developed technology which is being amortized on a straight-line basis over the estimated useful life of the asset, or seven years. In addition, intangible assets include the cost of a patent license agreement, which is being amortized on a straight-line basis over the shorter of the legal or estimated useful life of the asset, which is eleven years. In fiscal 2001, the Company recorded an impairment charge of $4,366 related to the remaining carrying value of ProActive Pedals' goodwill and intangible assets. See Note 10 of Notes to Consolidated Financial Statements.

Concentration of Risk

    In the event excess cash would become available, the Company would invest a portion of its excess cash in debt instruments of financial institutions with strong credit ratings and has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company has not experienced any losses on its cash equivalents.

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    The Company sells its products to customers in diversified industries worldwide; however, approximately 95% of its sales from continuing operations are to customers in the Vehicle Components segment. Approximately 59% of the Company's sales from continuing operations are electronic throttle controls ("ETC").

Sales by Customer

    For the years ended September 30, 2001, 2000 and 1999, Freightliner accounted for 18%, 23% and 27%, Navistar accounted for 12%, 12% and 15%, Volvo accounted for 9%, 6% and 8%, Evart Corporation accounted for 4%, 9% and 1%, General Motors accounted for 7%, 6% and 5% and Ford accounted for 5%, 0% and 0% of net sales from continuing operations, respectively. Approximately 16%, 15% and 20% of net sales in fiscal 2001, 2000 and 1999 respectively, were to customers outside of the United States, primarily in Canada, Mexico and Sweden, and, to a lesser extent, in Europe, South America and Australia.

Debt Issuance Costs

    Costs incurred in the issuance of debt financing are amortized over the term of the debt agreement, approximating the effective interest method.

Revenue Recognition

    The Company recognizes revenue upon shipment, when title passes to the customer.

Product Warranty

    The Company provides a warranty covering defects arising from products sold. The warranty is limited to a specified time period, mileage or hours of use, and varies by product and application. The Company has provided a reserve, which in the opinion of management is adequate to cover such warranty costs. During fiscal 2001, the Company had one product recall related to weld failures on certain ETC's produced for the heavy truck markets. The Company has made all required disclosures to the National Highway Traffic Safety Administration (NHTSA) and are testing, repairing or replacing the defective parts as necessary. Management estimates that the total potential units involved are no more than 15,000 units, and has recorded an accrual of $674, which represents the low end of an estimated range to complete the recall of $674 to $1,230. The Company is also seeking potential recovery of certain of these costs from one of its vendors. However, no amounts have been recorded for this potential recovery.

Research and Development Costs