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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-4041
HATHAWAY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0518115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8228 PARK MEADOWS DRIVE
LITTLETON, COLORADO 80124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 799-8200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
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. 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 August 31, 2000, the aggregate market value of voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of such stock approximated $26,539,000.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated September
21, 2000 are incorporated by reference in Part III of this Report.
--------------------------
TABLE OF CONTENTS
PART I. PAGE
Item 1. Business...............................................................................1
Item 2. Properties.............................................................................4
Item 3. Legal Proceedings......................................................................4
Item 4. Submission of Matters to a Vote of Security Holders....................................4
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................4
Item 6. Selected Financial Data................................................................5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................5
Item 8. Financial Statements and Supplementary Data...........................................12
Report of Independent Public Accountants..............................................13
Item 9. Disagreements on Accounting and Financial Disclosure..................................33
PART III.
Item 10. Directors and Executive Officers of the Registrant....................................33
Item 11. Executive Compensation................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management........................33
Item 13. Certain Relationships and Related Transactions........................................33
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................34
Consent of Independent Public Accountants.............................................37
Signatures............................................................................38
Financial Statement Schedule .........................................................39
Officers and Directors / Investor Information.........................................41
PART I
ITEM 1. BUSINESS.
Hathaway Corporation (the Company) was organized under the laws of Colorado
in 1962. The Company is engaged in the business of designing, manufacturing
and selling advanced systems and instrumentation to the worldwide power and
process industries, as well as motion control products to a broad spectrum
of customers throughout the world. The Company operates primarily in the
United States and the United Kingdom and has three joint venture
investments in China.
POWER AND PROCESS BUSINESS
POWER INSTRUMENTATION
Hathaway's power instrumentation products helps ensure that electric
utilities provide high quality service to consumers of electricity. With
manufacturing facilities in Seattle and Belfast, Northern Ireland, and
sales and engineering functions in Seattle, Belfast and Denver, the power
products group produces a comprehensive and cost-effective range of
products designed exclusively for the power industry worldwide. Hathaway's
equipment assists the electric power system operators in operating and
maintaining proper system performance. The products, which are used to
monitor and control the power generation, transmission and distribution
processes, include fault recording products, fault location products,
condition monitoring (circuit breaker) products and remote terminal units
for Supervisory Control and Data Acquisition (SCADA) systems.
The Company also has three joint venture investments in China - Hathaway Si
Fang Protection and Control Company (Si Fang), Zibo Kehui Electric Company
Ltd. (Kehui) and Hathaway Power Monitoring Systems Company, Ltd. (HPMS).
The Company holds a 20% interest in Si Fang, a 25% interest in Kehui and a
40% interest in HPMS. Si Fang designs, manufactures and sells a new
generation of digital protective relays, control equipment and
instrumentation products for substations in power transmission and
distribution systems in China and is now the largest Chinese supplier of
digital relays in China. The Company may sell these products outside of
China. Kehui designs, manufactures and sells cable and overhead fault
location products, SCADA systems and other test instruments within the
China market and the Company may sell these products outside of China. HPMS
manufactures and sells, under a license from the Company, instrumentation
products designed by the Company to electric power companies in China.
PROCESS INSTRUMENTATION
The process instrumentation products group manufactures and markets
products for the process and power industries including monitoring systems,
calibration equipment and process measurement instrumentation. The
monitoring systems, called visual annunciators and sequential event
recorders, provide both visual and audible alarms and are used to control
processes in various plants, including chemical, petroleum, food and
beverage, pulp and paper, and textiles. Calibration equipment is used to
test and adjust instrumentation for proper and accurate operation in
measuring electricity, temperatures and pressure within the process
industry. Process measurement instrumentation includes signal conditioning
products and transducers used to measure such variables as temperature,
voltage, current and power in various industrial applications.
SYSTEMS AUTOMATION
Effective September 30, 1996, the Company acquired Tate Integrated Systems
("TIS") which has since operated under the ownership of Hathaway Industrial
Automation (HIA), a wholly owned subsidiary of the Company. HIA is located
near Baltimore, Maryland and is a full service supplier of process
automation systems for industrial applications. HIA has developed a
state-of-the-art software system for Supervisory Control and Data
Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA system
has been used to fully automate such industrial applications as water and
wastewater treatment plants, glass manufacturing plants, oil and gas
terminals and tank farm facilities. In addition to expanding into its
traditional process markets, HIA's system is being marketed to the power
utility industry that is beginning to operate in a deregulated environment.
The Company has been successful at integrating the HIA system with certain
other Hathaway products and targeting the integrated product at substation
automation and integration applications used in power transmission and
distribution facilities. The automation system allows for the measurement,
control and communication of information including the data for the
metering of electricity to ensure the reliable delivery of power, provide
data privacy and to control security.
1
MOTION CONTROL BUSINESS
The motion control group offers quality, cost-effective products that suit
a wide range of applications in the telecommunications, semi-conductor
processing, industrial, medical, military and aerospace industries, as well
as in manufacturing of analytical instruments and computer peripherals. The
end products using Hathaway technology include tuneable lasers, wavelength
meters, spectrum analyzers, special industrial and technical products such
as satellite tracking systems, MRI scanners, and high definition printers.
The motion control group is organized into one division and two
subsidiaries, respectively, of Hathaway Motion Control Corporation, a
wholly owned subsidiary of the Company: Motors and Instruments Division
(MI - Tulsa), Emoteq Corporation (Emoteq - Tulsa) and Computer Optical
Products, Inc. (COPI - Chatsworth, CA).
Effective July 1, 1998, Emoteq Corporation acquired all of the outstanding
shares of Ashurst Logistic Electronics Limited of Bournemouth, England
(Ashurst) for $317,000. Ashurst manufactures drive electronics and position
controllers for a variety of motor technologies as well as a family of
static frequency converters for military and aerospace applications and has
extensive experience in power electronics design and software development
required for the application of specialized drive electronics technology.
The acquired company was renamed Emoteq UK Limited.
The MI division manufactures precision direct-current fractional horsepower
motors and certain motor components. Industrial equipment and military
products are the major application for the motors. This division also
supplies spare parts and replacement equipment for general-purpose
instrumentation products.
Emoteq designs, manufactures and markets direct current brushless motors,
related components, and drive and control electronics. Markets served
include semiconductor manufacturing, industrial automation, medical
equipment, and military and aerospace. A new motion technology center was
established in Evergreen, Colorado in fiscal year 1998 to develop more
automated methods of manufacturing and advance the state of Emoteq's core
technology base.
Optical encoders are manufactured by COPI. They are used to measure
rotational and linear movements of parts in diverse applications such as
tuneable lasers, spectrum analyzers, machine tools, robots, printers and
medical equipment. The primary markets for the optical encoders are in the
telecommunications, computer peripheral manufacturing, industrial and
medical sectors. COPI also designs, manufactures and markets fiber
optic-based encoders with special characteristics, such as immunity to
radio frequency interference and high temperature tolerance, suited for
industrial, aerospace and military environments. Applications include
airborne navigational systems, anti-lock braking transducers, missile
flight surface controls and high temperature process control equipment.
PRODUCT DISTRIBUTION AND PRINCIPAL MARKETS
The Company maintains a direct sales force. In addition to its own
marketing and sales force, the Company has developed a worldwide network of
independent sales representatives and agents to market its various product
lines.
The Company faces competition in all of its markets, although the number of
competitors varies depending upon the product. The Company believes there
are only a small number of competitors in the power and process markets,
but there are numerous competitors in the motion control market. No clear
market share data is available for the Company's other product areas.
Competition involves primarily product performance and price, although
service and warranty are also important.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The information required by this item is set forth in Note 9 of the Notes
to Consolidated Financial Statements on page 30 herein.
AVAILABILITY OF RAW MATERIALS
All parts and materials used by the company are in adequate supply. No
significant parts or materials are acquired from a single source.
2
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS
The Company holds several patents and trademarks regarding components used
by the various subsidiaries; however, none of these patents and trademarks
are considered to be of major significance.
SEASONALITY OF THE BUSINESS
The Company's business is not of a seasonal nature; however, revenues
derived from the power market may be influenced by customers' fiscal year
ends and holiday seasons.
WORKING CAPITAL ITEMS
The Company currently maintains inventory levels adequate for its
short-term needs based upon present levels of production. The Company
considers the component parts of its different product lines to be readily
available and current suppliers to be reliable and capable of satisfying
anticipated needs.
SALES TO LARGE CUSTOMERS
During fiscal 2000, 1999 and 1998 no single customer accounted for more
than 10% of the Company's consolidated revenue from continuing operations.
SALES BACKLOG
The Company's backlog at June 30, 2000 consisted of sales orders totaling
approximately $23,827,000. The Company expects to ship goods filling
$20,912,000 of those purchase orders within fiscal 2001. This compares to a
backlog of $18,260,000 at June 30, 1999, of which $16,128,000 was scheduled
for shipment in fiscal 2000.
GOVERNMENT SALES
Approximately $181,000 of the Company's backlog as of June 30, 2000
consisted of contracts with the United States Government. The Company's
contracts with the government contain a provision generally found in
government contracts which permits the government to terminate the contract
at its option. When the termination is attributable to no fault of the
Company, the government would, in general, have to pay the Company certain
allowable costs up to the time of termination, but there is no compensation
for loss of profits.
ENGINEERING AND DEVELOPMENT ACTIVITIES
The Company's expenditures on engineering and development were $4,274,000
in fiscal 2000, $4,466,000 in fiscal 1999 and $4,411,000 in fiscal 1998. Of
these expenditures, no material amounts were charged directly to customers.
ENVIRONMENTAL ISSUES
No significant pollution or other types of emission result from the
Company's operations and it is not anticipated that the Company's proposed
operations will be affected by Federal, State or local provisions
concerning environmental controls. However, there can be no assurance that
any future regulations will not affect the Company's operations.
FOREIGN OPERATIONS
The information required by this item is set forth in Note 9 of the Notes
to Consolidated Financial Statements on page 32 herein.
EMPLOYEES
As of the end of fiscal 2000, the Company had approximately 374 full-time
employees.
3
ITEM 2. PROPERTIES.
The Company leases its administrative offices and manufacturing facilities as
follows:
APPROXIMATE SQUARE
DESCRIPTION / USE LOCATION FOOTAGE
- ------------------------------------------------------- -------------------------------------- ----------------------
Corporate headquarters and sales and engineering Littleton, Colorado 14,000
offices
Engineering and development facility Evergreen, Colorado 3,000
Office and manufacturing facility Carrolton, Texas 20,000
Office and manufacturing facility Kent, Washington 21,000
Engineering, development and administrative office Hunt Valley, Maryland 14,000
Office and manufacturing facility Tulsa, Oklahoma 17,000
Office and manufacturing facility Chatsworth, California 22,000
Office and manufacturing facility Tulsa, Oklahoma 10,000
Office facility Hoddesdon, England 3,000
Office and manufacturing facility Belfast, Northern Ireland 17,000
Office and manufacturing facility Bournemouth, England 2,000
The Company's management believes the above-described facilities are adequate to
meet the Company's current and foreseeable needs. All facilities described above
are operating at or near full capacity.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain actions that have arisen out of the ordinary
course of business. Management believes that resolution of the actions will not
have a significant adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of the Company in the
fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Hathaway Corporation's common stock is traded on the Nasdaq Small Cap Market
System and trades under the symbol HATH. The number of holders of record of the
Company's common stock as of the close of business on August 31, 2000 was 484.
The Company did not pay or declare any dividends during fiscal years 2000 and
1999 as the Company's long-term financing agreement prohibits the Company from
doing so without prior approval.
The following table sets forth, for the periods indicated, the high and low
prices of the Company's common stock on the Nasdaq National Market (through
March 18, 1999) and on the Nasdaq Small Cap Market System (after March 18,
1999), as reported by Nasdaq.
PRICE RANGE
HIGH LOW
---------------- -------------------
FISCAL 1999
First Quarter $ 2.06 $ 0.75
Second Quarter 2.31 0.75
Third Quarter 2.38 0.82
Fourth Quarter 2.00 1.38
FISCAL 2000
First Quarter $ 3.13 $ 1.63
Second Quarter 2.56 0.88
Third Quarter 19.75 1.38
Fourth Quarter 9.25 3.00
4
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes data from the Company's annual financial
statements for the fiscal years 1996 through 2000 and notes thereto; the
Company's complete annual financial statements and notes thereto for the current
fiscal year appear in Item 8 beginning on page 12 herein. See Item 1 in the
Business section of this report and Note 2 to Consolidated Financial Statements
on page 22 for discussion of business acquisitions completed in fiscal years
1999 and 1997.
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- --------------
IN THOUSANDS (EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenues $ 45,133 $ 41,691 $ 41,317 $ 39,946 $ 35,411
============= ============= ============= ============= ==============
Income (loss) before income taxes $ 1,604 $ (1,317) $ (2,161) $ (2,192) $ (1,398)
Benefit (provision) for income taxes (129) (208) 184 763 385
------------- ------------- ------------- ------------- --------------
Net income (loss) $ 1,475 $ (1,525) $ (1,977) $ (1,429) $ (1,013)
============= ============= ============= ============= ==============
Diluted net income (loss) per share $ 0.31 $ (0.36) $ (0.46) $ (0.34) $ (0.24)
============= ============= ============= ============= ==============
Cash dividends:
Per share $ -- $ -- $ -- $ -- $ 0.10
Total amount paid $ -- $ -- $ -- $ -- $ 426
BALANCE SHEET DATA:
Total assets at June 30 $ 19,937 $ 16,398 $ 17,820 $ 20,477 $ 21,139
Total current and long-term debt
at June 30 $ 1,546 $ 1,308 $ 1,245 $ 1,769 $ 1,777
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, ANY STATEMENT THAT MAY PREDICT, FORECAST, INDICATE, OR
IMPLY FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS, AND MAY CONTAIN THE WORD
"BELIEVE," "ANTICIPATE," "EXPECT," "PROJECT," "INTEND," "WILL CONTINUE,"
"WILL LIKELY RESULT," "SHOULD" OR WORDS OR PHRASES OF SIMILAR MEANING.
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHERS, THE FOLLOWING: INTERNATIONAL, NATIONAL AND LOCAL
GENERAL BUSINESS AND ECONOMIC CONDITIONS; THE WORLDWIDE POWER AND PROCESS
PRODUCT MARKET, INCLUDING A MOVEMENT FROM SINGLE PURPOSE PRODUCTS TO THOSE
WITH MULTIPLE USES; THE MOTION CONTROL PRODUCT MARKET; THE ABILITY OF THE
COMPANY TO SUSTAIN, MANAGE OR FORECAST ITS GROWTH AND PRODUCT ACCEPTANCE; NEW
PRODUCT DEVELOPMENT AND INTRODUCTION; INCREASED COMPETITION AND CHANGES IN
COMPETITOR RESPONSES TO THE COMPANY'S PRODUCTS AND SERVICES; THE ABILITY TO
PROTECT THE COMPANY'S INTELLECTUAL PROPERTY; BUSINESS DISRUPTION; CHANGES IN
GOVERNMENT REGULATIONS; CONTINUED UNCERTAINTY ABOUT THE IMPACT OF
DEREGULATION OF THE POWER BUSINESS ON THE COMPANY'S PRODUCTS; THE ABILITY TO
ATTRACT AND RETAIN QUALIFIED PERSONNEL; AVAILABILITY OF FINANCING; AND OTHER
FACTORS REFERENCED OR INCORPORATED HEREIN.
THE COMPANY OPERATES IN A VERY COMPETITIVE ENVIRONMENT. NEW RISK FACTORS EMERGE
FROM TIME TO TIME AND IT IS NOT POSSIBLE FOR MANAGEMENT TO PREDICT ALL SUCH RISK
FACTORS, NOR CAN IT ASSESS THE IMPACT OF ALL SUCH RISK FACTORS ON ITS BUSINESS
OR THE EXTENT TO WHICH ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING
STATEMENTS. THE COMPANY'S EXPECTATIONS, BELIEFS AND PROJECTIONS ARE EXPRESSED IN
GOOD FAITH AND ARE BELIEVED TO HAVE A REASONABLE BASIS; HOWEVER, THE COMPANY
MAKES NO ASSURANCE THAT EXPECTATIONS, BELIEFS OR PROJECTIONS WILL BE ACHIEVED.
BECAUSE OF THE RISKS AND UNCERTAINTIES, INVESTORS SHOULD NOT PLACE UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS AS A PREDICTION OF ACTUAL RESULTS. THE
COMPANY HAS NO OBLIGATION OR INTENT TO RELEASE PUBLICLY ANY REVISIONS TO ANY
FORWARD LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE.
5
OPERATING RESULTS
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
The Company recorded net income of $1,475,000 in fiscal year 2000, compared
to a net loss of $1,525,000 in fiscal 1999. Revenues increased 8% from
$41,691,000, in fiscal 1999 to $45,133,000 in fiscal 2000. The increase in
revenues was due to a 43.2% increase in revenues from the Company's motion
control products, partially offset by a 7.6% decrease in revenues from the
Company's power and process systems and instrumentation products.
The increase in Motion Control revenues was primarily due to expansion into new
high growth applications such as test instrumentation for the fiberoptic
telecommunications industry as well as the expansion of existing applications.
At June 30, 2000 backlog for Motion Control orders was in excess of $12 million,
69% higher than at June 30, 1999. This is a reflection of Motion Control's
continued expansion into new markets and broader segments of its existing
markets. The increased order rate and backlog indicate that the segment should
continue to achieve growth in sales and profitability in fiscal year 2001.
The decrease in Power and Process revenues was due to a decline in orders and
sales from the process instrumentation business partially as a result of the
Company's delay in releasing a new calibration product line which has now been
completed and shipments started in May 2000. In addition, the decline was
partially due to higher sales being achieved in fiscal year 1999 from customers
purchasing upgrade products to comply with Year 2000 requirements which reduced
their funds available for projects in our fiscal year 2000. At June 30, 2000
backlog for Power and Process orders was $11,522,000 which was 5% higher than at
the end of the previous year. This reflects higher backlog for power
instrumentation and systems automation products partially offset by a decreased
backlog for process instrumentation products.
Sales to international customers decreased 9% from $12,902,000, or 31% of sales,
in fiscal 1999, to $11,779,000 or 26% of sales, in fiscal 2000 due to a decrease
in sales of fault recording and maintenance products in foreign markets.
Sales order backlog increased 30% from $18,260,000 at June 30, 1999 to
$23,827,000 at June 30, 2000. Cost of products sold decreased 2% from 64% of
revenues in fiscal 1999 to 62% of revenues in fiscal 2000 due to increased sales
volume and changes in the mix of products sold.
Selling expenses decreased 6% from $6,852,000 in fiscal 1999 to $6,433,000 in
fiscal 2000 resulting from savings due to the continued overall cost reduction
efforts of the Company. General and administrative expenses increased 5% from
$4,958,000 in fiscal 1999 to $5,194,000 in fiscal 2000 primarily due to bonuses
paid to the management of profitable operations. Engineering and development
expenses decreased 4% from $4,466,000 in 1999 to $4,274,000 in 2000.
Amortization of intangibles and other assets decreased from $481,000 in 1999 to
$83,000 in 2000. The decrease was primarily due to the $125,000 of amortization
and $249,000 write off in fiscal 1999 of the goodwill from the 1991 acquisition
of Hathaway Systems Limited (HSL). This goodwill was fully written off in fiscal
1999.
The Company also has three joint venture investments in China - Hathaway Si Fang
Protection and Control Company (Si Fang), Zibo Kehui Electric Company Ltd.
(Kehui) and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). The Company
holds a 20% interest in Si Fang, a 25% interest in Kehui and a 40% interest in
HPMS. Si Fang designs, manufactures and sells a new generation of digital
protective relays, control equipment and instrumentation products for
substations in power transmission and distribution systems in China and is now
the largest Chinese supplier of digital relays in China. The Company may sell
these products outside of China. Kehui designs, manufactures and sells cable and
overhead fault location products, SCADA systems and other test instruments
within the China market and the Company may sell these products outside of
China. HPMS manufactures and sells, under a license from the Company,
instrumentation products designed by the Company to electric power companies in
China.
During fiscal 2000 the Company sold a portion of its investment in its Si Fang
joint venture to another partner, reducing its ownership from 23% to 20%. The
Company received $143,000 and recognized a $126,000 gain on the sale. The gain
is included in other income in the consolidated statement of operations. The
Company reinvested the proceeds from the sale plus an additional $283,000 in
cash to maintain this 20% ownership interest. During fiscal
6
2000, the Company received $139,000 in cash dividends from this joint venture.
The Company has no future commitments relating to its Chinese investments.
The Company accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and until the beginning of fiscal 1998, the Company determined that due
to the start-up nature of the entities, their untested products and political
uncertainty in China, the realization of the initial investments and subsequent
earnings (which were not significant) was uncertain; and, therefore, the Company
fully reserved against the original investments and its share of any equity in
income.
Beginning in fiscal year 1998 and continuing during fiscal years 1999 and 2000,
Si Fang and Kehui's operations matured, their products have gained significant
acceptance and both companies have achieved sustained profitability. Because of
the sustained positive operating results, offset by a certain amount of
political and business uncertainty in China, the Company recognized a portion of
its share of equity income from these two joint ventures, totaling $698,000 and
$329,000 in fiscal years 2000 and 1999, respectively. These amounts are included
in equity income from investments in joint ventures in the consolidated
statements of operations. The amounts recognized represent management's best
estimate of the future amounts that will be realized from the joint ventures as
of June 30, 2000. The Company will continue to recognize its share of equity in
income (loss) from these two joint ventures to the extent it believes such
amounts are realizable.
The Company acquired Tate Integrated Systems (TIS) effective September 30, 1996.
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a
wholly owned subsidiary of the Company, since October 1, 1996. HIA is a full
service supplier of process automation systems for industrial applications. HIA
has developed a state-of-the-art software system for Supervisory Control and
Data Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA system
has been used to fully automate such industrial applications as water and
wastewater treatment plants, glass manufacturing plants, oil and gas terminals
and tank farm facilities. In addition to expanding into its traditional process
markets, HIA's system is being marketed to the deregulated power utility
industry. The Company has been successful at integrating the HIA system with
certain other Hathaway products and targeting the integrated product at
substation automation and integration applications used in the generation,
transmission and distribution of power. The automation system allows for the
measurement, control and communication of information including data for the
metering of electricity to ensure the reliable delivery of power, provide data
privacy and to control security.
For the years ended June 30, 2000, 1999 and 1998, HIA had losses before income
taxes of approximately $871,000, $1.2 million and $2.7 million, respectively.
HIA's traditional business is highly dependent on sales to the industrial market
which typically encompasses a long sales cycle, significant customization to
specific customer requirements, long performance periods and large contract
values which are subject to a high degree of scrutiny and negotiation with
customers.
Consistent with the Company's strategy to develop applications for the HIA
software for the deregulated power industry, the Company has continued to invest
substantial resources in HIA. HIA's system is now successfully installed at
generator sites in California and as part of pilot projects for several power
companies where the system has been installed for evaluation in both
transmission substations and generating plants. The Company also has a contract
to install the technology at over eighty generating plants that supply electric
power to the New England area. The systems are designed to adapt to the power
industry's future needs by allowing for the addition of future enhancements and
systems capabilities.
Management believes that the software products developed by HIA, as modified for
the power industry and combined with other Company products, will provide power
companies with automated and integrated systems solutions that will both reduce
their operating costs and improve the reliability of their power supply.
However, there can be no assurance that such modifications will be successful
and/or economically viable. Management believes that there is significant demand
in the power industry for such solutions as a result of the business environment
created by the recent industry deregulation.
The successful implementation of the Company's current business plan continues
to be partially dependent on the Company's ability to successfully market HIA's
products to the deregulated power industry. The factors that will affect the
success of implementing this business plan include, but are not limited to, the
ability to win sufficient amount of project work on favorable terms to the
Company, the ability to complete projects in a timely and cost-
7
effective manner, and the existence of sufficient demand for the HIA
products. An inability to achieve this plan in the planned timeframe may have
a material adverse effect on the Company's operating results and financial
condition.
In fiscal year 2000 the Company recognized a provision for income taxes of
$129,000 compared to $208,000 in fiscal year 1999. The effective tax rate as a
percentage of the income or loss before income taxes was a provision of 8% in
fiscal 2000 and 16% in fiscal 1999. The difference is primarily due to the
change in the valuation allowance recorded against the deferred tax asset. In
year fiscal 2000, the valuation allowance was decreased due to the utilization
of net operating loss carryforwards, whereas in fiscal year 1999, the valuation
allowance was increased due to the increase in net operating losses being
carried forward. The difference is also due to a decrease in nondeductible
expenses and goodwill amortization. Realization of the Company's remaining net
deferred tax asset is dependent upon the Company generating sufficient taxable
income in future years to obtain benefit from the reversal of net deductible
temporary differences and the remaining net operating loss and tax credit
carryforwards. The Company's management believes that, on a more likely than not
basis, the recorded net deferred tax asset is realizable. The amount of deferred
tax assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are changed.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
The Company recorded a net loss of $1,525,000 in fiscal year 1999, compared to a
net loss of $1,977,000 in fiscal 1998. Revenues increased 1% from $41,317,000,
in fiscal 1998 to $41,691,000 in fiscal 1999. The increase in revenues was due
to a 4.5% increase in revenues from the Company's power and process
instrumentation products partially offset by a 6.2% decrease in revenues from
the Company's motion control products. The decrease in Motion Control revenues
was primarily due to decreased orders as a result of the Asian economic crises
and the slowdown in the semi-conductor industry partially offset by the addition
of revenues from Emoteq UK. Motion Control orders, however, increased over the
prior year, with the order rate progressively increasing over the last three
quarters of fiscal 1999. At June 30, 1999 backlog for Motion Control orders was
24% higher than at June 30, 1998. This is a reflection of Motion Control's
expansion into new markets and broader segments of its existing markets.
Sales to international customers decreased 8% from $13,955,000, or 34% of sales,
in fiscal 1998, to $12,902,000, or 31% of sales, in fiscal 1999. Sales order
backlog increased 31% from $13,892,000 at June 30, 1998 to $18,260,000 at June
30, 1999. Cost of products sold remained at 64% of revenues in fiscal 1998 and
1999.
Selling expenses decreased 11% from $7,697,000 in fiscal 1998 to $6,852,000 in
fiscal 1999 resulting from savings due to the overall cost reduction efforts of
the Company as well as from HIA's change in its primary focus to the deregulated
power industry in 1999 from industrial markets in previous periods. General and
administrative expenses increased 14% from $4,358,000 in fiscal 1998 to
$4,958,000 in fiscal 1999 primarily due to bonuses paid to the management of
profitable operations and the addition of Emoteq UK. Engineering and development
expenses increased 1% from $4,411,000 in 1998 to $4,466,000 in 1999.
Amortization of intangibles and other assets decreased from $738,000 in 1998 to
$481,000 in 1999. The decrease was primarily due to the $406,000 impairment
write-off in fiscal 1998 of the unamortized portion of goodwill which resulted
from the HIA acquisition, partially offset by the $249,000 impairment write-off
in fiscal 1999 of the unamortized portion of goodwill from the 1991 acquisition
of Hathaway Systems Limited (HSL), and fiscal 1999 amortization expense related
to the Ashurst acquisition. (See further discussion under "Business Acquisition"
below.)
As a result of its acquisition of HSL, the Company had previously recorded
goodwill of $1,197,000. At June 30, 1999 and in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121),
the Company determined that the unamortized cost in excess of net assets
acquired from its acquisition of HSL was impaired; and, therefore, wrote-off the
remaining unamortized balance of $249,000. The Company's determination was based
on projections of undiscounted cash flows of HSL, which were based on current
marketplace conditions, low orders and continuing losses. Such undiscounted cash
flow estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such projections
and discounting the estimated cash flows, the Company determined that the entire
unamortized amount was impaired. The current year amortization of $125,000
8
and impairment write-off of $249,000, totaling $374,000, is included in
amortization of intangibles and other in the fiscal year 1999 consolidated
statement of operations.
The Company recognized a portion of its share of equity income from Kehui and Si
Fang, two of its joint venture investments in China, totaling $329,000 and
$222,000 in fiscal years 1999 and 1998, respectively. These amounts are included
in equity income from investments in joint ventures in the consolidated
statements of operations.
During fiscal 1999, the Company sold 2% of its investment in Si Fang for $57,000
in cash and recognized a $49,000 gain on the sale, which is included in other
income in the accompanying statement of operations. The Company also invested an
additional $92,000 in the joint venture and received $121,000 cash dividends
during the fiscal year. At June 30, 1999, the Company has recorded a net
investment in Si Fang and Kehui of $467,000 and $47,000, respectively, which is
included in investment in joint ventures, net in the consolidated balance
sheets.
Prior to June 30, 1999, the Company also had an 11.4% interest in a joint
venture (JV) with KUB Holdings BHD, a Malaysian firm, acquired from TIS, which
had a carrying value of $0. The JV was created for the purpose of marketing and
selling the TIS-4000 system of HIA in certain Asian countries. As of June 30,
1998, the JV had ceased all operations due to unprofitability and the Asian
economic downturn. During fiscal year 1999, the JV was dissolved and settled its
existing obligations from its existing assets. The license to manufacture,
market and sell the TIS-4000 system reverted back to the Company and the Company
has no further obligations related to this JV.
In fiscal year 1999 the Company recognized a provision for income taxes of
$208,000 compared to a benefit of $184,000 in fiscal year 1998. The effective
tax rate was a provision of 16% in fiscal 1999 and a benefit of 9% in fiscal
1998. The difference is primarily due to a decrease in nondeductible expenses
and goodwill amortization plus an increase in the valuation allowance against
the deferred tax asset. The increase is also due to income taxes payable in
local tax jurisdictions where the Company has no net operating losses. The
valuation allowance was increased primarily due to the increased level of net
operating losses being carried forward and the Company's continued operating
losses. Realization of the Company's net deferred tax asset is dependent upon
the Company generating sufficient United States federal taxable income
(approximately $1,859,000) in future years to obtain benefit from the reversal
of net deductible temporary differences and from tax credit and net operating
loss carryforwards. The Company's management believes that, on a more likely
than not basis, the recorded net deferred tax asset is realizable. The amount of
deferred tax assets considered realizable is subject to adjustment in future
periods if estimates of future United States federal taxable income are changed.
BUSINESS ACQUISITION
Effective July 1, 1998, Emoteq Corporation, a wholly-owned subsidiary of the
Company, acquired all the outstanding shares of Ashurst Logistic Electronics
Limited of Bournemouth, England (Ashurst) for $281,000 in cash, net of cash
acquired. Ashurst manufactures drive electronics and position controllers for a
variety of motor technologies as well as a family of static frequency converters
for military and aerospace applications and has extensive experience in power
electronics design and software development required for the application of
specialized drive electronics technology. The acquired company was renamed
Emoteq UK Limited. The acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price has been allocated to
the assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
(excluding restricted cash) increased $512,000 during the year to a balance
of $2,928,000 at June 30, 2000. Fiscal 2000 operating activities generated
$678,000, compared to $81,000 used in fiscal 1999 and $1,450,000 generated in
1998. The amounts used to fund the operations of the HIA business in 2000,
1999 and 1998 was $1,052,000, $1,379,000 and $1,628,000, respectively, while
the amounts generated from the operating activities of the Company's other
businesses was $1,730,000, $1,298,000 and $3,078,000, respectively, for the
same periods. The increased cash generated from operations during 1998 was
primarily due to income tax refunds received.
Cash of $970,000, $987,000 and $914,000 was used by investing activities in
fiscal 2000, 1999 and 1998, respectively. The 2000 cash used for investing
activities includes $143,000 net cash used in investments in joint ventures. The
1999 cash used for investing activities includes $281,000 net cash paid for the
interest acquired in Ashurst. The 1998 cash used for investing activities
includes $229,000 paid for the interest acquired in TIS.
9
Financing activities generated $809,000 and $63,000 in fiscal years 2000 and
1999, respectively, and used $526,000 in fiscal year 1998. The increase in cash
generated from financing activities in 2000 was due to proceeds from the
exercise of employee stock options, as well as increased net borrowings on the
line-of-credit. The increased cash used in financing activities in 1998 was due
to repayments, net of borrowings, on the line-of-credit of $524,000.
At June 30, 2000, the Company had $1,546,000 of bank debt, compared with
$1,308,000 at June 30, 1999, an increase of $238,000. The debt at June 30, 2000
represents borrowings on the Company's current long-term financing agreement
(Agreement) with Silicon Valley Bank (Silicon). The Agreement matures on May 7,
2001 and, accordingly, the $1,546,000 balance has been classified as a current
liability as of June 30, 2000. The Agreement is subject to automatic and
continuous annual renewal for successive additional terms of one year each
unless either party notifies the other of its intention to terminate the
Agreement at least sixty days before the next maturity date. Borrowings on the
loan are restricted to the lesser of $3,000,000 or 85% of the Company's eligible
receivables (Maximum Credit Limit). As of June 30, 2000, 85% of the Company's
eligible receivables exceeded the maximum loan amount, therefore, the Company
could borrow an additional $1,454,000 up to the Maximum Credit Limit of
$3,000,000.
The loan bears interest at Silicon's prime borrowing rate (prime rate, 9.5% at
June 30, 2000) plus 2%. The interest rate is adjustable on a quarterly basis to
prime rate plus 1.5% if the Company achieves a net loss less than $750,000 for
each previous twelve-month rolling period. The Company must continue to meet
this quarterly financial goal, or the rate will be re-adjusted to prime rate
plus 2%. In addition to interest, the loan bears a monthly unused line fee at
0.125% of the Maximum Credit Limit less the average daily balance of the
outstanding loan during a month. The unused line fee is also adjustable on a
quarterly basis, if the Company achieves a net loss less than $750,000 for each
previous twelve-month rolling period, the monthly unused line fee will be
adjusted to 0.0625%. The Company must continue to meet this quarterly financial
goal, or the rate will be re-adjusted to 0.125%. The Company qualified for the
lower interest rate and unused line fee beginning January 1, 2000.
The debt is secured by all assets of the Company. The Agreement requires that
the Company maintain compliance with certain covenants related to tangible net
worth. At June 30, 2000, the Company was in compliance with such covenants.
As in the three-year period ended June 30, 2000, the Company's fiscal 2001
working capital, capital expenditure and debt service requirements are expected
to be funded from cash provided by operations, the existing cash balance of
$2,928,000 and the $1,454,000 available under the long-term financing agreement
at June 30, 2000. The Company believes that such amounts are sufficient to fund
operations and working capital needs for at least the next twelve months. As
explained above, the Company's Agreement with Silicon matures on May 7, 2001 but
will continue for successive additional terms of one each year unless either
party gives notice of termination at least sixty days before the maturity date.
The Company has not received notice of termination and does not anticipate
receiving or giving such notice.
In June 1998, the Company filed a request for an income tax ruling by the
Internal Revenue Service (IRS) with respect to the tax-free treatment of the
possible spin-off of its Power and Process Business from its Motion Control
Business. In December 1998, the IRS issued a favorable ruling on the proposed
transaction; however, because of the downturn in results of the Motion Control
business in fiscal 1999 and losses being incurred by the Power and Process
business, the Company did not believe it was prudent to proceed with the
spin-off. The Company will continue to explore opportunities for increasing
shareholder value that could include consideration of a spin-off of the Power
and Process Business as well as other alternatives.
YEAR 2000 COMPLIANCE
In fiscal 1999, the Company adopted a "Y2K Readiness Program" and prepared for
Year 2000 effects on the proper functioning of computer systems included in its
products, software systems used in its business and items purchased from its
suppliers. The Company has not experienced, and does not anticipate experiencing
in the future any Year 2000 related failures in its products. In addition there
was no interruption in or failure of normal business activities or operations
due to Year 2000 failures experienced in its internal systems, processes and
facilities or from its key vendors, suppliers or subcontractors nor are any
anticipated in the future.
10
The Company's activities related to Year 2000 compliance were performed with
internal resources. All payroll and associated costs related to the Year 2000
issue were expensed as incurred. Year 2000 activities did not delay other
projects or materially impact the Company's business however, certain customers
may have deferred purchases of certain power products due to their own Year 2000
concerns. With the Year 2000 rollover completed, the Company believes it
obtained any such deferred sales during fiscal 2000. The Company will continue
to monitor whether it needs to further address any anticipated costs, problems
and uncertainties associated with Year 2000 consequences.
PRICE LEVELS AND THE IMPACT OF INFLATION
Prices of the Company's products have not increased significantly as a result
of inflation during the past several years, primarily due to competition. The
effect of inflation on the Company's costs of production has been minimized
through production efficiencies and lower costs of materials. The Company
anticipates that these factors will continue to minimize the effects of any
foreseeable inflation and other price pressures from the industries in which
it operates. As the Company's manufacturing activities mainly utilize
semi-skilled labor, which is relatively plentiful in the areas surrounding
the Company's production facilities, the Company does not anticipate
substantial inflation-related increases in the wages of the majority of its
employees.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the areas of changes in United States interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
These exposures are directly related to its normal operating and funding
activities. Historically, and as of June 30, 2000, the Company has not used
derivative instruments or engaged in hedging activities.
INTEREST RATE RISK
The interest payable on the Company's line-of-credit is variable based on the
prime rate, and, therefore, affected by changes in market interest rates. At
June 30, 2000, approximately $1.5 million was outstanding with a weighted
average interest rate of 10.56%. The line-of-credit matures in May 2001 and is
subject to automatic and continuous annual renewal for successive annual terms
of one year each unless either party notifies the other of its intention to
terminate the Agreement at least sixty days before the next maturity date. The
Company manages interest rate risk by investing excess funds in cash equivalents
bearing variable interest rates that are tied to various market indices.
Additionally, the Company monitors interest rates frequently and has sufficient
cash balances to pay off the line-of-credit should interest rates increase
significantly. As a result, the Company does not believe that reasonably
possible near-term changes in interest rates will result in a material effect on
future earnings, fair values or cash flows of the Company.
FOREIGN CURRENCY RISK
The Company has wholly-owned subsidiaries located in Northern Ireland and
England. Sales from these operations are typically denominated in British
Pounds, thereby creating exposures to changes in exchange rates. The changes in
the British/U.S. exchange rate may positively or negatively affect the Company's
sales, gross margins, net income and retained earnings. The Company does not
believe that reasonably possible near-term changes in exchange rates will result
in a material effect on future earnings, fair values or cash flows of the
Company, and therefore, has chosen not to enter into foreign currency hedging
instruments. There can be no assurance that such an approach will be successful,
especially in the event of a significant and sudden decline in the value of the
British Pound.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, " Derivative Instruments
and Hedging Activities," ("SFAS 133") establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. It also specifies the accounting for changes in
the fair value of a derivative instrument depending on the intended use of the
instrument and whether (and how) it is designated as a hedge. SFAS 133 was
effective for all fiscal years beginning after June 15, 1999. During 1999, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133," (SFAS 137") which
delayed the effective date of SFAS 133 until all fiscal years beginning after
June 15, 2000. Through June 30, 2000, the Company had not entered into any
transactions involving derivative financial
11
instruments and, therefore, cannot predict the financial statement impact of
adopting SFAS 133 with respect to transactions that have not yet been entered
into.
In December 1999, the SEC staff released SAB No. 101, "Revenue
Recognition,"("SAB 101") to provide guidance on the recognition, presentation
and disclosure of revenue in financial statements. In order to recognize
revenue, there must be persuasive evidence that an arrangement exists, delivery
must have occurred or services must have been rendered, the selling price must
be fixed or determinable, and collectibility must be reasonably assured. The
accounting and disclosures described in SAB 101 must be applied no later than
the fourth fiscal quarter of the Company's fiscal year beginning after December
15, 1999 (fiscal 2001). The Company believes that adoption of SAB No. 101 will
not materially impact its financial statements. However, implementation
guidelines for this bulletin, as well as potential new bulletins, could result
in unanticipated changes to the Company's current revenue recognition policies.
These changes could affect the timing of the Company's future revenue
recognition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hathaway Corporation:
We have audited the accompanying consolidated balance sheets of HATHAWAY
CORPORATION (a Colorado corporation) AND SUBSIDIARIES as of June 30, 2000 and
1999, and the related consolidated statements of operations, cash flows and
stockholders' investment for each of the three fiscal years in the period ended
June 30, 2000. These consolidated financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hathaway Corporation
and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
Denver, Colorado,
August 2, 2000.
13
HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2000 JUNE 30, 1999
- --------------------------------------------------------------------------- ----------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,928 $ 2,416
Restricted cash 270 646
Trade receivables, net of allowance for doubtful accounts of $530 and
$479 at June 30, 2000 and 1999, respectively 7,976 6,465
Inventories, net 4,550 3,316
Current deferred income taxes 601 632
Income tax refunds receivable, prepaid expenses and other 361 538
- --------------------------------------------------------------------------- ----------------- ----------------
Total current assets 16,686 14,013
Property and equipment, net 1,707 1,720
Investment in joint ventures, net (Note 3) 1,482 514
Cost in excess of net assets acquired, net 59 126
Other 3 25
- --------------------------------------------------------------------------- ----------------- ----------------
Total Assets $ 19,937 $ 16,398
=========================================================================== ================= ================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Line-of-credit classified as current (Note 4) $ 1,546 $ 1,308
Accounts payable 1,879 1,570
Accrued liabilities and other 3,854 2,955
Income taxes payable 538 560
Product service reserve 813 689
- --------------------------------------------------------------------------- ----------------- ----------------
Total Liabilities 8,630 7,082
Commitments and Contingencies
Stockholders' Investment:
Preferred stock, par value $1.00 per share, authorized 5,000 shares;
no shares outstanding -- --
Common stock, at aggregate stated value, authorized 50,000 shares;
5,582 and 5,405 shares issued at June 30, 2000 and 1999, respectively 100 100
Additional paid-in capital 10,594 9,954
Loans receivable for stock (Note 7) (235) (235)
Retained earnings
4,791 3,316
Cumulative translation adjustments
34 154
Treasury stock, at cost; 1,122 shares (3,977) (3,973)
- --------------------------------------------------------------------------- ----------------- ----------------
Total Stockholders' Investment 11,307 9,316
- --------------------------------------------------------------------------- ----------------- ----------------
Total Liabilities and Stockholders' Investment $ 19,937 $ 16,398
=========================================================================== ================= ================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
14
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Revenues $ 45,133 $ 41,691 $ 41,317
Operating costs and expenses:
Cost of products sold 28,175 26,475 26,379
Selling 6,433 6,852 7,697
General and administrative 5,194 4,958 4,358
Engineering and development 4,274 4,466 4,411
Amortization of intangibles and other 83 481 738
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Total operating costs and expenses 44,159 43,232 43,583
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Operating income (loss) 974 (1,541) (2,266)
Other income (expense), net:
Equity income from investments in joint
ventures (Note 3) 698 329 222
Interest and dividend income 69 111 217
Interest expense (154) (146) (148)
Other income (expense), net 17 (70) (186)
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Total other income, net 630 224 105
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Income (loss) before income taxes 1,604 (1,317) (2,161)
Benefit (provision) for income taxes (Note 5) (129) (208) 184
- -------------------------------------------------------------- ----------------- ---------------- -----------------
Net income (loss) $ 1,475 $ (1,525) $ (1,977)
============================================================== ================= ================ =================
Basic net income (loss) per share (Note 1) $ 0.34 $ (0.36) $ (0.46)
============================================================== ================= ================ =================
Diluted net income (loss) per share (Note 1) $ 0.31 $ (0.36) $ (0.46)
============================================================== ================= ================ =================
Basic weighted average shares outstanding (Note 1) 4,341 4,283 4,284
============================================================== ================= ================ =================
Diluted weighted average shares outstanding (Note 1) 4,785 4,283 4,284
============================================================== ================= ================ =================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
15
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
- ---------------------------------------------------------------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,475 $ (1,525) $ (1,977)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 890 1,220 1,490
Provision for bad debts 150 14 136
Equity income from investments in joint ventures (Note 3) (698) (329) (222)
Deferred income tax provision 31 147 75
Other (144) (195) 201
Changes in assets and liabilities, net of effect in 1999 of
purchase of Ashurst (Note 2):
(Increase) decrease in -
Restricted cash 377 (166) (227)
Trade receivables (1,661) 87 238
Inventories, net (1,234) 333 742
Income tax refunds receivable, prepaid expenses and other 182 183 1,177
Increase (decrease) in -
Accounts payable 309 (499) 184
Accrued liabilities and other 899 408 (94)
Income taxes payable (22) 27 (182)
Product service reserve 124 214 (91)
- ---------------------------------------------------------------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities 678 (81) 1,450
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (827) (792) (685)
Purchase of Ashurst, net of cash acquired (Note 2) -- (281) --
Purchase of Tate (Note 2) -- -- (229)
Activities related to joint venture investments, net (Note 3) (143) 86 --
- ---------------------------------------------------------------------- ------------- ------------- -------------
Net Cash used in investing activities (970) (987) (914)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line-of-credit (65) (150) (1,769)
Borrowings on line-of-credit 303 213 1,245
Proceeds from exercise of employee stock options 575 -- --
Purchase of treasury stock (4) -- (2)
- ---------------------------------------------------------------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities 809 63 (526)
Effect of foreign exchange rate changes on cash (5) (22) 2
- ---------------------------------------------------------------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 512 (1,027) 12
Cash and cash equivalents at beginning of year 2,416 3,443 3,431
- ---------------------------------------------------------------------- ------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,928 $ 2,416 $ 3,443
====================================================================== ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid (received) during the year for:
Interest $ 152 $ 123 $ 146
Income taxes 53 (153) (1,037)
Noncash investing and financing activities:
Assets of Ashurst purchased, net of liabilities assumed and cash
acquired (Note 2) $ -- $ 281 $ --
The accompanying notes to consolidated financial statements are an integral
part of these statements.
16
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(IN THOUSANDS)
LOANS
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE
--------------------- PAID-IN FOR STOCK RETAINED TRANSLATION
SHARES AMOUNT CAPITAL (NOTE 7) EARNINGS ADJUSTMENTS
---------- ---------- ------------ ------------ ------------- ---------------- --
Balances, June 30, 1997 5,405 $ 100 $ 9,954 $ (235) $ 6,818 $ 360
Purchase of treasury stock -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- 29
Net loss -- -- -- -- (1,977) --
Comprehensive loss -- -- -- -- -- --
---------- ---------- ------------ ------------ ------------- ----------------
Balances, June 30, 1998 5,405 100 9,954 (235) 4,841 389
Foreign currency translation
adjustment -- -- -- -- -- (235)
Net loss -- -- -- -- (1,525) --
Comprehensive loss -- -- -- -- -- --
---------- ---------- ------------ ------------ ------------- ----------------
Balances, June 30, 1999 5,405 100 9,954 (235) 3,316 154
Purchase of treasury stock -- -- -- -- -- --
Exercise of stock options 177 -- 575 -- -- --
Tax benefit from stock dispositions -- -- 65 -- -- --
Foreign currency translation
adjustment -- -- -- -- -- (120)
Net income -- -- -- -- 1,475 --
Comprehensive income -- -- -- -- -- --
---------- ---------- ------------ ------------ ------------- ----------------
Balances, June 30, 2000 5,582 $ 100 $ 10,594 $ (235) $ 4,791 $ 34
========== ========== ============ ============ ============= ================
TREASURY STOCK
COMPREHENSIVE -------------------------
INCOME (LOSS) SHARES AMOUNT
--------------- ----------- -------------
Balances, June 30, 1997 1,121 $ (3,971)
Purchase of treasury stock 1 (2)
Foreign currency translation
adjustment $ 29 -- --
Net loss (1,977) -- --
-------
Comprehensive loss (1,948) -- --
=======
----------- -------------
Balances, June 30, 1998 1,122 (3,973)
Foreign currency translation
adjustment $ (235) -- --
Net loss (1,525) -- --
-------
Comprehensive loss (1,760) -- --
=======
----------- -------------
Balances, June 30, 1999 1,122 (3,973)
Purchase of treasury stock -- (4)
Exercise of stock options -- --
Tax benefit from stock dispositions -- --
Foreign currency translation
adjustment (120) -- --
Net income 1,475 -- --
-----
Comprehensive income 1,355 -- --
=====
----------- -------------
Balances, June 30, 2000 1,122 $ (3,977)
=========== =============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
17
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Hathaway Corporation (the Company) is engaged in the business of designing,
manufacturing and selling advanced systems and instrumentation to the
worldwide power and process industries, as well as motion control products
to a broad spectrum of customers throughout the world. The Company operates
primarily in the United States and Europe and has three joint venture
investments in China (Note 3).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
Investments in joint ventures, in which the ownership is at least 20% but
less than 50%, are accounted for using the equity method (Note 3).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts which are readily convertible
into cash (original maturities of three months or less) and which are not
subject to significant risk of changes in interest rates. Cash flows in
foreign currencies are translated using an average rate.
RESTRICTED CASH
Restricted cash consists of certificates of deposit that serve as
collateral for letters of credit issued on behalf of the
Company.
INVENTORIES
Inventories, valued at the lower of cost (first-in, first-out basis) or
market, are as follows (in thousands):
JUNE 30, 2000 JUNE 30, 1999
---------------- -----------------
Parts and raw materials, net $ 2,827 $ 2,227
Finished goods and work-in-process, net 1,723 1,089
---------------- -----------------
$ 4,550 $ 3,316
================ =================
Reserves established for anticipated losses on excess or obsolete
inventories were approximately $1,900,000 and $1,675,000 at June 30, 2000
and 1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, is classified as follows (in thousands):
USEFUL LIVES JUNE 30, 2000 JUNE 30, 1999
---------------- ---------------- -----------------
Machinery, equipment, tools and dies 2-8 years $ 8,233 $ 7,574
Furniture, fixtures and other 3-10 years 1,350 1,623
---------------- -----------------
9,583 9,197
Less accumulated depreciation and amortization (7,876) (7,477)
---------------- -----------------
$ 1,707 $ 1,720
================ =================
Depreciation and amortization expense are provided using the straight-line
method over the estimated useful life of the assets. Maintenance and repair
costs are charged to operations as incurred. Major additions and
improvements are capitalized. The cost and related accumulated depreciation
of retired or sold property are removed from the accounts and any resulting
gain or loss is reflected in earnings.
Depreciation expense was $807,000, $788,000 and $757,000 in fiscal years
2000, 1999 and 1998, respectively.
18
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired represents the amount by which the
purchase price of acquired companies exceeds the fair market value of net
assets acquired, and is amortized using the straight-line method over the
period estimated to be benefited. Cost in excess of net assets acquired as
of June 30, 2000 and 1999 consists of $195,000 of original costs, $16,000
and $10,000 of effect of exchange rate changes, and $120,000 and $59,000 of
accumulated amortization, respectively.
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets that are held and used in operations, the asset
would be considered to be impaired if the undiscounted future cash flows
related to the asset did not exceed the net book value. The amount of the
impairment is assessed using the assets' fair market value, which is
determined using discounted cash flows.
As a result of its acquisition of Hathaway Systems Limited (HSL) in 1991,
the Company had previously recorded goodwill of $1,197,000. At June 30,
1999 and in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121), the Company determined that the
unamortized cost in excess of net assets acquired from its acquisition of
HSL was impaired; and, therefore, wrote off the remaining unamortized
balance of $249,000. The Company's determination was based on projections
of undiscounted cash flows of HSL, which were based on current marketplace
conditions, low orders and continuing losses. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such
projections and discounting the estimated cash flows, the Company
determined that the entire unamortized amount was impaired. Fiscal year
1999 amortization of $125,000 and impairment write-off of $249,000,
totaling $374,000, is included in amortization of intangibles and other in
the fiscal year 1999 consolidated statement of operations.
As a result of its acquisition of Hathaway Industrial Automation (HIA), the
Company recorded goodwill of $624,000 primarily due to loss accruals on an
in-process contract acquired by the Company. As a result of continuing and
expected near term losses from HIA at June 30, 1998 and in accordance with
SFAS 121, the Company determined that the unamortized cost in excess of net
assets acquired from its acquisition of TIS was impaired and, therefore,
wrote-off the remaining unamortized balance of $406,000. The Company's
determination was based on projections of undiscounted cash flows of HIA,
which were based on current marketplace and competitive conditions and
resulting low margins for the industrial applications of HIA's product.
Such undiscounted cash flow estimates were not sufficient to indicate
realization of the related unamortized cost in excess of net assets
acquired. Utilizing such projections and discounting the estimated cash
flows, the Company determined that the entire unamortized amount was
impaired. The fiscal year 1998 amortization of $202,000 and impairment
write-off of $406,000, totaling $608,000 is included in amortization of
intangibles and other in the fiscal year 1998 consolidated statement of
operations.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
JUNE 30, 2000 JUNE 30, 1999
---------------- -----------------
Compensation and fringe benefits $ 1,863 $ 1,377
Deferred revenue 800 270
Commissions 596 541
Other accrued expenses 595 767
---------------- -----------------
$ 3,854 $ 2,955
================ =================
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation", the assets
and liabilities of the Company's foreign subsidiaries are translated into
U.S. dollars using current exchange rates. Revenues and expenses are
translated at average rates prevailing during the period. The resulting
translation adjustments are recorded in the cumulative translation
adjustments component of stockholders' investment in the accompanying
consolidated balance sheets.
19
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
HIA, a wholly-owned subsidiary of the Company, undertakes contracts for the
installation of integrated process control systems which are based upon its
proprietary software. These contracts typically require substantial
customization of this proprietary software. Accordingly, in accordance with
SOP 97-2, the Company recognizes contract revenues by applying the
percentage of completion achieved to the total contract sales price. The
Company determines the percentage of completion for all contracts using the
"cost-to-cost" method of measuring contract progress. Under this method,
actual contract costs incurred to date are compared to total estimated
contract costs to determine the estimated percentage of revenues to be
recognized. To the extent these estimates prove to be inaccurate, the
revenues and gross profits, if any, reported for the period during which
work on the contract is ongoing may not accurately reflect the final
results of the contract, which can only be determined upon contract
completion. Provisions for estimated losses on uncompleted contracts, to
the full extent of the estimated loss, are made during the period in which
the Company first becomes aware that a loss on a contract is probable. The
Company's traditional businesses (other than HIA) generally recognize
revenue when products are shipped, evidence of an arrangement exists,
selling price is fixed, and collectibility is reasonably assured.
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing the net earnings or
loss by the weighted average number of shares of common stock outstanding.
Diluted earnings or loss per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted average number of common
shares outstanding and (2) if not anti-dilutive, the effect of outstanding
warrants and stock options determined utilizing the treasury stock method.
In fiscal years 1999 and 1998, stock options to purchase 819,004 and
648,204 shares of common stock, respectively, (without regard to the
treasury stock method) were excluded from the calculation of diluted (loss)
per share since the result would have been anti-dilutive. In fiscal year
2000, stock options to purchase 621,276 shares of common stock were
included in the calculation of diluted earnings per share.
Basic earnings per share have been computed as follows (in thousands, except per share data):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
--------------- --------------- ---------------
Numerator:
Net income (loss) $ 1,475 $ (1,525) $ (1,977)
Denominator:
Weighted average outstanding shares 4,341 4,283 4,284
--------------- --------------- ---------------
Basic net income (loss) per share $ 0.34 $ (0.36) $ (0.46)
=============== =============== ===============
Diluted earnings per share have been computed as follows (in thousands, except per share data):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
--------------- --------------- ---------------
Numerator:
Net income (loss) $ 1,475 $ (1,525) $ (1,977)
Denominator:
Weighted average outstanding shares 4,785 4,283 4,284
--------------- --------------- ---------------
Diluted net income (loss) per share $ 0.31 $ (0.36) $ (0.46)
=============== =============== ===============
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted SFAS 130 in
fiscal year 1999. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by and
distributions to shareholders.
20
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans for employees
and non-employee directors under the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, restricted cash, trade receivables, accounts payable
and accrued liabilities approximate fair value because of the immediate or
short-term maturities of these financial instruments. The carrying amount
of the line-of-credit approximates fair value because the underlying
instrument is a variable rate note that reprices frequently.
CONCENTRATION OF CREDIT RISK
During fiscal 2000, 1999 or 1998, no single customer accounted for more
than 10% of the Company's consolidated revenue from continuing operations.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make certain
estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities as well as disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances in order
to conform to the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Derivative
Instruments and Hedging Activities," ("SFAS 133") establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value.
It also specifies the accounting for changes in the fair value of a
derivative instrument depending on the intended use of the instrument and
whether (and how) it is designated as a hedge. SFAS 133 was effective for
all fiscal years beginning after June 15, 1999. During 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS 133," ("SFAS 137")
which delayed the effective date of SFAS 133 until all fiscal years
beginning after June 15, 2000. Through June 30, 2000, the Company had not
entered into any transactions involving derivative financial instruments
and, therefore, cannot predict the financial statement impact of adopting
SFAS 133 with respect to transactions that have not yet been entered into.
In December 1999, the SEC staff released SAB No. 101, "Revenue
Recognition," ("SAB 101") to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. In order to
recognize revenue, there must be persuasive evidence that an arrangement
exists, delivery must have occurred or services must have been rendered,
the selling price must be fixed or determinable, and collectibility must be
reasonably assured. The accounting and disclosures described in SAB 101
must be applied no later than the fourth fiscal quarter of the Company's
fiscal year beginning after December 15, 1999 (fiscal 2001). The Company
believes that adoption of SAB No. 101 will not materially impact its
financial statements. However, implementation guidelines for this bulletin,
as well as potential new bulletins, could result in unanticipated changes
to the Company's current revenue recognition policies. These changes could
affect the timing of the Company's future revenue recognition and results
of operations.
21
2. BUSINESS ACQUISITION
Effective July 1, 1998, a wholly owned subsidiary of the Company acquired
all the outstanding shares of Ashurst Logistic Electronics Limited of
Bournemouth, England (Ashurst) for $317,000 in cash. Ashurst manufactures
drive electronics and position controllers for a variety of motor
technologies as well as a family of static frequency converters for
military and aerospace applications and has extensive experience in power
electronics design and software development required for the application of
specialized drive electronics technology. The acquired company was renamed
Emoteq UK Limited.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. The final net purchase price allocation
was as follows (in thousands):
Cash $ 36
Trade receivables 190
Prepaid expenses 2
Property and equipment, net 25
Cost in excess of net assets acquired 195
Accounts payable ( 43)
Accrued liabilities and other ( 88)
----------------
Net purchase price $ 317
================
The results of operations of Ashurst have been included in the Company's
fiscal 1999 consolidated statement of operations starting on July 1, 1998.
The following unaudited pro forma summary (in thousands, except per share
data) combines the consolidated results of operations of the Company and
Ashurst as if the acquisition had occurred at the beginning of fiscal year
1998 after giving effect to certain pro forma adjustments related to such
items as income taxes, depreciation, and amortization of cost in excess of
net assets acquired. The pro forma results are shown for illustrative
purposes only, and do not purport to be indicative of the actual results
which would have occurred had the transaction been consummated as of the
earlier date, nor are they indicative of results of operations which may
occur in the future.
FOR THE YEAR ENDED
JUNE 30, 1998
(UNAUDITED)
----------------------
Revenue $ 41,859
Net loss (1,833)
Basic and diluted net loss per share (0.43)
3. INVESTMENTS IN JOINT VENTURES
The Company has three joint venture investments in China - Hathaway Si Fang
Protection and Control Company, Ltd. (Si Fang), Zibo Kehui Electric Company
Ltd. (Kehui) and Hathaway Power Monitoring Systems Company, Ltd. (HPMS).
The Company holds a 20% interest in Si Fang, a 25% interest in Kehui and a
40% interest in HPMS. Si Fang designs, manufactures and sells a new
generation of digital protective relays, control equipment and
instrumentation products for substations in power transmission and
distribution systems in China and is now the largest Chinese supplier of
digital relays in China. The Company may sell these products outside of
China. Kehui designs, manufactures and sells cable and overhead fault
location products, SCADA systems and other test instruments within the
China market and the Company may sell these products outside of China. HPMS
manufactures and sells, under a license from the Company, instrumentation
products designed by the Company to electric power companies in China.
22
3. INVESTMENTS IN JOINT VENTURES (CONTINUED)
The Company accounts for the Chinese joint ventures using the equity method
of accounting. At the time of the original investments in the Chinese joint
ventures and until the beginning of fiscal 1998, the Company determined
that due to the start-up nature of the entities, their untested products
and political uncertainty in China, the realization of the initial
investments and subsequent earnings (which were not significant) was
uncertain; and, therefore, the Company fully reserved against the original
investments and its share of any equity in income.
Beginning in fiscal year 1998 and continuing during fiscal years 1999 and
2000, Si Fang and Kehui's operations have matured, their products have
gained significant acceptance, and both companies have achieved sustained
profitability. Because of sustained positive operating results, offset by a
certain amount of political and business uncertainty in China, the Company
recognized a portion of its share of equity in income from these two joint
ventures, totaling $698,000, $329,000 and $222,000 in fiscal years 2000,
1999 and 1998, respectively. These amounts are included in equity income
from investments in joint ventures in the consolidated statements of
operations. The amounts recognized represent management's best estimate of
the future amounts that will be realized from the joint ventures as of June
30, 2000. The Company will continue to recognize its share of equity in
income (loss) from these two joint ventures to the extent it believes such
amounts are realizable.
During fiscal 2000, the Company sold a portion of its investment in its Si
Fang joint venture to another partner, reducing its ownership from 23% to
20%. The Company received $143,000 and recognized a $126,000 gain on the
sale. The gain is included in other income in the consolidated statement of
operations. The Company reinvested the proceeds from the sale plus an
additional $283,000 in cash to maintain this 20% ownership interest. During
fiscal 2000, the Company received $139,000 in cash dividends from this
joint venture. The Company has no future commitments relating to its
Chinese investments.
During fiscal 1999, the Company sold 2% of its ownership interest in Si
Fang for $57,000 in cash and recognized a $49,000 gain on the sale, which
is included in other income in the accompanying 1999 consolidated statement
of operations.
At June 30, 2000, the Company's investments and current ownership interests
in these joint ventures are as follows (in thousands):
Cumulative Share
of Income Cumulative Balance at
Ownership Investment, (Through Dividends Cumulative June 30,
Interest net of sales Dec. 31, 1999) Received Reserve 2000
------------- ------------------- ------------- -------------- ------------
Si Fang 20% $ 642 $ 1,509 $ (260) $ (484) $1,407
Kehui 25% 100 271 (28) (268) 75
HPMS 40% 140 53 -- (193) --
------------- ------------------- ------------- -------------- ------------
$ 882 $ 1,833 $ (288) $ (945) $1,482
============= =================== ============= ============== ============
The Company has no future commitments relating to these investments.
23
3. INVESTMENTS IN JOINT VENTURES (CONTINUED)
In accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," summarized financial information for Si Fang
as of December 31, 1999, 1998 and 1997 (Si Fang is on a calendar fiscal
year) is presented as follows (in thousands):
As of and As of and As of and
For the Year Ended For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Current assets $ 25,539 $ 16,864 $ 8,638
Non-current assets 4,785 1,745 1,498
Current liabilities 20,239 14,752 7,378
Revenues 32,959 16,502 8,918
Gross income 6,834 4,047 2,232
Net income before income taxes 3,940 1,706 1,525
Net income 3,352 1,367 1,525
Summarized financial information for Kehui and for HPMS is not presented
because it is not significant relative to the Company's consolidated
financial statements.
Prior to June 30, 1999, the Company also had an 11.4% interest in a joint
venture (JV) with KUB Holdings BHD, a Malaysian firm. The JV was created
for the purpose of manufacturing, marketing and selling the TIS-4000 system
in certain Asian countries. As of June 30, 1998, the JV had ceased all
operations due to unprofitability and the Asian economic downturn. During
fiscal year 1999, the JV was dissolved and settled its existing obligations
from its existing assets. The license to manufacture, market and sell the
TIS-4000 system reverted back to the Company and the Company has no further
obligations related to this JV.
4. DEBT
On May 7, 1998, the Company entered into a long-term financing agreement
(Agreement) with Silicon Valley Bank (Silicon). The Agreement matures on
May 7, 2001 and, accordingly, the $1,546,000 balance of the line-of-credit
has been classified as a current liability as of June 30, 2000. The
Agreement is subject to automatic and continuous annual renewal for
successive additional terms of one year each unless either party notifies
the other of its intention to terminate the Agreement at least sixty days
before the next maturity date. Borrowings on this line-of-credit are
restricted to the lesser of $3,000,000 or 85% of the Company's eligible
receivables (Maximum Credit Limit). As of June 30, 2000, 85% of the
Company's eligible receivables exceeded the maximum loan amount; therefore
the company could borrow an additional $1,454,000 up to the $3,000,000
Maximum Credit Limit.
The line bears interest at Silicon's prime borrowing rate (prime rate, 9.5%
at June 30, 2000) plus 2%. The interest rate is adjustable on a quarterly
basis to prime rate plus 1.5% if the Company achieves a net loss less than
$750,000 for each previous twelve-month rolling period. The Company must
continue to meet this quarterly financial goal, or the rate will be
re-adjusted to prime rate plus 2%. In addition to interest, the line bears
a monthly unused line fee at 0.125% of the Maximum Credit Limit less the
average daily balance of the outstanding loan during a month. The unused
line fee is also adjustable on a quarterly basis, if the Company achieves a
net loss less than $750,000 for each previous twelve-month rolling period,
the monthly unused line fee will be adjusted to 0.0625%. The Company must
continue to meet this quarterly financial goal, or the rate will be
re-adjusted to 0.125%. The Company qualified for the lower interest rate
and unused line fee beginning January 1, 2000. The debt is secured by all
assets of the Company. The Agreement requires that the Company maintain
compliance with certain covenants related to tangible net worth. At June
30, 2000, the Company was in compliance with such covenants.
24
5. INCOME TAXES
The benefit (provision) for income taxes is based on income (loss) before
income taxes as follows (in thousands):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
----------------- ---------------- -----------------
Domestic $ 1,918 $ (1,065) $ (2,179)
Foreign (314) (252) 18
----------------- ---------------- -----------------
Income (loss) before income taxes $ 1,604 $ (1,317) $ (2,161)
================= ================ =================
Components of the benefit (provision) for income taxes are as follows (in thousands):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
----------------- ---------------- -----------------
Current benefit (provision):
Domestic $ (117) $ (61) $ 308
Foreign 19 -- (49)
----------------- ---------------- -----------------
Total current benefit (provision) (98) (61) 259
Domestic deferred provision (31) (147) (75)
----------------- ---------------- -----------------
Benefit (provision) for income taxes $ (129) $ (208) $ 184
================= ================ =================
The benefit (provision) for income taxes differs from the amount determined
by applying the federal statutory rate as follows (in thousands):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
----------------- ---------------- -----------------
Tax benefit (provision) computed at statutory
rate $ (545) $ 448 $ 735
State tax, net of federal benefit (99) (36) (2)
Nondeductible expenses and goodwill amortization (14) (145) (267)
Recovery of prior year taxes paid -- -- 69
Change in valuation allowance 561 (497) (315)
Other (32) 22 (36)
----------------- ---------------- -----------------
Benefit (provision) for income taxes $ (129) $ (208) $ 184
================= ================ =================
The tax effects of significant temporary differences and credit and
operating loss carryforwards that give rise to the net deferred tax asset
under SFAS No. 109 are as follows (in thousands):
JUNE 30, 2000 JUNE 30, 1999
---------------- -----------------
Allowances and other accrued liabilities $ 1,008 $ 882
Investment in joint ventures (198) (11)
Tax credit carryforwards 376 374
Net operating loss carryforwards 75 608
Valuation allowance (660) (1,221)
---------------- -----------------
Net deferred tax asset $ 601 $ 632
================ =================
The Company is entitled to a deduction for tax purposes related to the
exercise of employee stock options during fiscal 2000, and, therefore has a
domestic operating loss carryforward of $1,392,000 for tax purposes that
will expire in 2013 and 2019 for which a benefit for income taxes will not
be recorded upon realization. The Company also has domestic tax credit
carryforwards of $334,000 expiring in 2004 through 2008, foreign loss
carryforwards totaling $251,000 which can be carried forward indefinitely
and foreign advance corporation tax of $47,000 available which may be
utilized to reduce future foreign taxes due.
25
5. INCOME TAXES (CONTINUED)
Realization of the Company's net deferred tax asset is dependent upon the
Company generating sufficient taxable income in future years to obtain
benefit from the reversal of net deductible temporary differences and from
tax credit and net operating loss carryforwards. The Company's management
believes that, on a more likely than not basis, the recorded net deferred
tax asset is realizable. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of
future taxable income are changed.
6. STOCK COMPENSATION
HATHAWAY CORPORATION STOCK OPTION PLAN
At June 30, 2000, 133,996 shares of common stock were available for grant
under the Company's stock option plans. Under the terms of the plans,
options may not be granted at less than 85% of fair market value. However,
all options granted to date have been granted at fair market value as of
the date of grant. Options generally become exercisable evenly over three
years starting one year from the date of grant and expire seven years from
the date of grant.
In conjunction with the acquisition of HIA during fiscal 1997, the Company
granted options for 125,000 shares of the Company's common stock to certain
key management personnel of HIA with vesting schedules reliant on meeting
certain performance criteria. At June 30, 2000, options to purchase 54,000
shares remain outstanding. The options vest during fiscal 2004.
Option activity in fiscal years 1998, 1999 and 2000 was as follows:
WEIGHTED WEIGHTED
AVERAGE NUMBER OF AVERAGE
NUMBER OF EXERCISE SHARES EXERCISE
SHARES PRICE ($) EXERCISABLE PRICE ($)
-------------- --------------- -------------- ----------------
Outstanding at June 30, 1997 708,704 3.45 187,104 3.19
Granted 45,900 2.13
Canceled or forfeited (106,400) 3.48
--------------
Outstanding at June 30, 1998 648,204 3.35 303,138 3.36
Granted 249,104 1.71
Canceled or forfeited (78,304) 3.18
--------------
Outstanding at June 30, 1999 819,004 2.87 371,866 3.36
Granted 164,000 1.81
Canceled or forfeited (144,400) 3.48
Exercised (177,101) 3.25
--------------
Outstanding at June 30, 2000 661,503 2.37 410,800 2.49
==============
Exercise prices for options outstanding and exercisable at June 30, 2000
are as follows:
RANGE OF EXERCISE PRICES TOTAL
------------------------ -----
$1.13 - $1.88 $2.13 - $2.81 $3.75 - $4.31 $1.13 - $4.31
---------------- --------------- -------------- ----------------
Options Outstanding:
Number of options 357,903 190,100 113,500 661,503
Weighted average exercise price $ 1.70 $ 2.74 $ 3.90 $ 2.37
Weighted average remaining
contractual life 5.6 years 3.7 years 4.4 years 4.8 years
Options Exercisable:
Number of options 193,500 157,800 59,500 410,800
Weighted average exercise price $ 1.81 $ 2.78 $ 3.93 $ 2.49
26
6. STOCK COMPENSATION (CONTINUED)
The Company accounts for its stock-based compensation plans for employees
under the provisions of APB 25 and related interpretations. In October
1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based
on fair values. Companies that elect to continue accounting for stock-based
compensation plans under the provisions of APB 25 must present certain pro
forma disclosures.
Pro forma information regarding net income (loss) and income (loss) per
share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock-based compensation plans using the fair value
method prescribed by that statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
---------------------- ----------------------- ----------------------
Risk-free interest rate 6.7% 6.3% 5.7%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life 6 years 6 years 6 years
Expected volatility 81.9% 60.8% 58.2%
Using the fair value method of SFAS 123, the net income (loss) and net
income (loss) per share would have been adjusted to the pro forma amounts
indicated below (in thousands, except per share data):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
----------------- ----------------- -----------------
Actual net income (loss) $ 1,475 $ (1,525) $ (1,977)
Pro forma net income (loss) $ 1,444 $ (1,702) $ (2,128)
Actual basic net income (loss) per share $ 0.34 $ (0.36) $ (0.46)
Pro forma basic net income (loss) per share $ 0.33 $ (0.40) $ (0.50)
Actual diluted net income (loss) per share $ 0.31 $ (0.36) $ (0.46)
Pro forma diluted net income (loss) per share $ 0.30 $ (0.40) $ (0.50)
The weighted average fair value of options granted during fiscal years
2000, 1999 and 1998 was $0.79, $1.07 and $1.28, respectively. The total
fair value of options granted was $130,000, $266,000 and $59,000 in fiscal
years 2000, 1999 and 1998, respectively. These amounts are being amortized
ratably over the vesting periods of the options for purposes of this
disclosure.
EMOTEQ CORPORATION STOCK OPTION PLAN
During fiscal year 2000 the Company's wholly owned subsidiary, Emoteq
Corporation (Emoteq), amended its stock option plan that was adopted during
fiscal 1998. Under the terms of the amended plan, options to purchase
223,636 shares of Emoteq have been granted to officers and key employees of
Emoteq. All options have been granted at fair market value as of the date
of grant. If all granted options become vested and are exercised, the
dilution of the Company's ownership of Emoteq would be 12%. The Company
accounts for the performance vested options under variable plan accounting.
Under the terms of the plan as amended, the Company may, upon an employee
stockholder's termination of employment with Emoteq, purchase the
terminated employee's shares of Emoteq that were acquired through the
exercise of stock options (Call Right). In addition, the option holders
have a liquidity Put Option, whereby, upon its exercise, the Company would
purchase shares of Emoteq acquired through the exercise of stock options.
Shares purchased by the Company under the Call Right or Put Option, would
be purchased at fair market value and would be paid for in cash, Hathaway
Corporation stock, stock of any parent of Emoteq if it is marketable, or a
combination of the above. Such Put Right and Call Option may only be
exercised after the employee has held the stock for at least six months.
27
6. STOCK COMPENSATION (CONTINUED)
Option activity for the Emoteq plan during fiscal years 2000, 1999 and 1998
was as follows:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
--------------------------- --------------------------
TIME PERFORMANCE TIME PERFORMANCE
VESTED VESTED VESTED VESTED
--------------------------- --------------------------
Outstanding at June 30, 1997 -- -- -- --
Granted 80,000 187,600 $1.37 $1.37
--------------------------- --------------------------
Outstanding at June 30, 1998 80,000 187,600 $1.37 $1.37
Granted 11,000 34,000 $2.50 $2.50
Cancelled or forfeited -- (33,683) -- $1.56
--------------------------- --------------------------
Outstanding at June 30, 1999 91,000 187,917 $1.51 $1.54
Granted 83,118 -- $3.43 --
Cancelled or forfeited (6,000) (132,399) $1.37 $1.55
--------------------------- --------------------------
Outstanding at June 30, 2000 168,118 55,518 $2.46 $1.51
=========================== ==========================
Exercise prices for options outstanding at June 30, 2000 under this plan
are as follows:
Time Vested Performance Vested
----------- ------------------
$1.37 $2.50 $3.43 $1.37 $2.50
----- ----- ----- ----- -----
Options Outstanding
Number of options 74,000 11,000 83,118 48,402 7,116
Weighted average remaining
contractual life 4 years 4 years 7 years 4 years 4 years
Options exercisable 55,500 7,333 -- 48,402 7,116
The potential dilution of the Company's ownership of Emoteq at June 30,
2000 is as follows:
COMPANY EMPLOYEES TOTAL
------------------ ------------------- ----------------
Issued and Outstanding 1,640,000 -- 1,640,000
Exercisable Options -- 118,351 118,351
------------------ ------------------- ----------------
Total 1,640,000 118,351 1,758,351
Percentage 93.3% 6.7% 100.0%
The Company has recognized $21,000, $0 and $66,000 in compensation expense
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively,
related to this plan.
7. LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 2000 and
1999 is comprised of a loan for $102,000 from the Leveraged Employee Stock
Ownership Plan and Trust (the Plan) and $133,000 from an Officer of the
Company.
The Plan allows eligible Company employees to participate in ownership of
the Company. The $102,000 receivable represents the unpaid balance of the
original $500,000 that the Company loaned to the Plan in fiscal year 1989
so that the Plan could acquire from the Company 114,285 newly issued shares
of the Company's common stock. The note bears interest at an annual rate of
9.23% and matures May 31, 2004. The terms of the Plan require the Company
to make an annual contribution equal to the greater of i) the Board
established percentage of pretax income before the contribution (5% in
fiscal years 2000, 1999, and 1998) or ii) the annual interest payable on
the note. Company contributions to the Plan were $84,000 in 2000 and $9,000
in 1999 and 1998.
The $133,000 receivable represents the unpaid balance of a loan made in
fiscal year 1994 to the Chief Executive Officer of the Company in
connection with his purchase of the Company's common stock, pursuant to the
Officer and Director Loan Plan approved by stockholders on October 26,
1989. The loan is full-recourse and bears interest at the applicable
federal rate determined by the Internal Revenue Service (5.8% as of June
30, 2000). The loan is due on demand but no later than October 31, 2001.
28
8. COMMITMENTS AND CONTINGENCIES
LEASES
At June 30, 2000 the Company maintained leases for certain facilities and
equipment. Minimum future rental commitments under all non-cancelable
operating leases are as follows (in thousands):
FISCAL YEAR AMOUNT
---------------------------- -----------------
2001 $ 1,323
2002 985
2003 540
2004 352
2005 301
Thereafter 72
-----------------
$ 3,573
=================
Net rental expense was $1,126,000, $1,000,000 and $869,000 in fiscal years
2000, 1999 and 1998, respectively.
SEVERANCE BENEFIT AGREEMENTS
The Company has entered into annually renewable severance benefit
agreements with certain key employees which, among other things, provide
inducement to the employees to continue to work for the Company during and
after any period of threatened takeover. The agreements provide the
employees with specified benefits upon the subsequent severance of
employment in the event of change in control of the Company and are
effective for 24 months thereafter. The maximum amount of salary that could
be required to be paid under these contracts, if such events occur, totaled
approximately $1,852,000 as of June 30, 2000. In addition to salary,
severance benefits include the cost of life, disability, accident and
health insurance for 24 months, a prorata calculation of bonus for the
current year and a gross-up payment for all federal, state and excise taxes
due on the severance payment.
EMPLOYMENT AGREEMENT
Effective August 13, 1998, the Company entered into a new five-year
employment agreement (Employment Agreement) with its Chief Executive
Officer which replaced the previous agreement that had been in effect
since July 1, 1993. This Employment Agreement is renewable after the
initial five-year term on a year-to-year basis unless the Company or the
officer gives termination notice at least sixty days prior to expiration of
the initial or subsequent terms. The Employment Agreement provides for base
salary plus 1) an annual incentive bonus based on corporate performance, as
defined each year by the Board of Directors, 2) a long-term incentive bonus
in the form of stock options, 3) specified benefits upon termination of
employment (for reasons other than cause or change in control) which are
effective for one year thereafter and 4) a bonus paid on dispositions of
subsidiaries or divisions of the Company.
An annual bonus of $42,000 was paid for fiscal 2000. No annual bonus was
paid for fiscal years 1999 or 1998. Stock options to purchase 100,000 and
69,000 shares of common stock of the Company were granted in fiscal years
ended June 30, 2000 and 1999, respectively, under the long-term incentive
portion of the current and previous agreements. As of June 30, 2000, the
maximum amount that could be required to be paid under the termination
clause of the Employment Agreement was approximately $399,000.
29
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
Effective September 1, 1998, the Company entered into a consulting
agreement (Consulting Agreement) with the Chairman of the Board of
Directors who is a major shareholder. Under theConsulting Agreement, he is
compensated for providing consulting services to the Company primarily on
matters involving the Company's Motion Control business, as well as other
matters as requested by the Chief Executive Officer. During fiscal years
2000 and 1999, the Company paid $66,000 and $137,750, respectively to the
Chairman of the Board under the Consulting Agreement.
STOCK REPURCHASE PROGRAM
Under an employee stock repurchase program approved by the Board of
Directors, the Company may repurchase its common stock from its employees
at the current market value. The Company's Agreement with Silicon limits
employee stock repurchases to $125,000 per fiscal year. Under Colorado law
enacted in July 1994, repurchased shares of capital stock are considered
authorized and unissued shares and have the same status as shares that have
never been issued.
LITIGATION
The Company is involved in certain actions that have arisen out of the
ordinary course of business. Management believes that resolution of the
actions will not have a significant adverse effect on the Company's
consolidated financial position or results of operations.
9. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") requires disclosure of operating segments, which
as defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company operates in two different segments: Power and Process Business
(Power and Process) and Motion Control Business (Motion Control).
Management has chosen to organize the Company around these segments based
on differences in markets, products and services.
POWER AND PROCESS BUSINESS
Hathaway's complete line of power instrumentation products helps ensure
that electric utilities provide high quality service to consumers of
electricity. The power products group produces a comprehensive and
cost-effective range of products designed exclusively for the power
industry worldwide. Hathaway's equipment assists the electric power system
operators in operating and maintaining proper system performance. The
products, which are used to monitor and control the power generation,
transmission and distribution processes, include fault recording products,
fault location products, condition monitoring (circuit breaker) products
and remote terminal units for Supervisory Control and Data Acquisition
(SCADA) systems.
The process instrumentation products group manufactures and markets
products for the process and power industries including monitoring systems,
calibration equipment and process measurement instrumentation. The
monitoring systems, called visual annunciators and sequential event
recorders, provide both visual and audible alarms and are used to control
processes in various plants including, chemical, petroleum, food and
beverage, pulp and paper, and textiles. Calibration equipment is used to
test and adjust instrumentation for proper and accurate operation in
measuring electricity, temperatures and pressure within the process
industry. Process measurement instrumentation includes signal conditioning
products and transducers used to measure such variables as temperature,
voltage, current and power in various industrial applications.
30
9. SEGMENT INFORMATION (CONTINUED)
Hathaway's state-of-the-art software system for SCADA has been used to
fully automate such industrial applications as water and wastewater
treatment plants, glass manufacturing plants, oil and gas terminals and
tank farm facilities. In addition to expanding into its traditional process
markets, the system is being marketed to the power utility industry. The
Company has successfully sold the system with certain other Hathaway
products and targets the combined product at substation automation and
integration applications used in power generation, transmission and
distribution facilities. MOTION CONTROL BUSINESS Motion Control offers
quality, cost-effective products that suit a wide range of applications in
the industrial, medical, military and aerospace sectors, as well as in
manufacturing of analytical instruments and computer peripherals. The end
products using Hathaway technology include special industrial and technical
products such as satellite tracking systems, MRI scanners, and high
definition printers.
The group designs, manufactures and markets direct current brush and
brushless motors, related components, and drive and control electronics as
well as precision direct-current fractional horsepower motors and certain
motor components. Industrial equipment and military products are the major
application for the motors.
The group also manufactures optical encoders that are used to measure
rotational and linear movements of parts as well as fiber optic-based
encoders with special characteristics, such as immunity to radio frequency
interference and high temperature tolerance.
The following provides information on the Company's segments (in thousands):
FOR THE FISCAL YEAR ENDED JUNE 30,
2000 1999 1998
------------------- ------------------- -------------------
POWER POWER POWER
AND MOTION AND MOTION AND MOTION
PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL
------------------- ------------------- -------------------
Revenue from external customers $ 26,542 $18,591 $ 28,711 $12,980 $27,476 $13,841
Equity income from investments in
joint ventures 698 -- 329 -- 222 --
Income (loss) before income taxes (1,643) 3,139 (1,932) 487 (4,659) 1,848
Identifiable assets 10,620 7,134 9,232 5,006 9,985 3,969
The following is a reconciliation of segment information to consolidated
information:
FOR THE FISCAL YEAR ENDED OR
AS OF JUNE 30,
2000 1999 1998
----------------------------------
Segments' income (loss) before income
taxes $ 1,496 $ (1,445) $(2,811)
Corporate activities 108 128 650
----------------------------------
Consolidated income (loss) before
income taxes $ 1,604 $ (1,317) $(2,161)
==================================
Segments' identifiable assets $ 17,754 $ 14,238 $13,954
Corporate assets and eliminations 2,183 2,160 3,866
----------------------------------
Consolidated total assets $ 19,937 $ 16,398 $17,820
==================================
31
9. SEGMENT INFORMATION (CONTINUED)
The Company's wholly owned foreign subsidiaries in the United Kingdom are
included in the accompanying consolidated financial statements. Financial
information for the foreign subsidiaries is summarized below (in
thousands):
FOR THE FISCAL YEARS ENDED JUNE 30,
2000 1999 1998
----------------- ---------------- -----------------
Revenues derived from foreign subsidiaries $ 5,632 $ 7,744 $ 7,197
Identifiable assets 3,078 3,179 3,723
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in fiscal
years 2000 and 1999 is as follows (in thousands, except per share data):
SECOND FOURTH
2000 FIRST QUARTER QUARTER THIRD QUARTER QUARTER
---------------------------------------- ---------------- -------------- ---------------- --------------
Revenues $ 8,905 $ 11,151 $ 11,767 $ 13,310
Operating income (loss) (762) 501 139 1,096
Net income (loss) (721) 617 225 1,354
Basic net income (loss) per share $ (0.17) $ 0.14 $ 0.05 $ 0.30
Diluted net income (loss) per share $ (0.17) $ 0.14 $ 0.05 $ 0.28
SECOND FOURTH
1999 FIRST QUARTER QUARTER THIRD QUARTER QUARTER
---------------------------------------- ---------------- -------------- ---------------- --------------
Revenues $ 9,118 $ 10,539 $ 10,550 $ 11,484
Operating income (loss) (1,165) (300) (385) 309
Net income (loss) (1,307) (346) (379) 507
Basic and diluted net income (loss)
per share $ (0.31) $ (0.08) $ (0.09) $ 0.12
32
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The Company has
not changed its accounting or auditing firm during the past 24 months, nor has
it had any material disagreements with its accountants or auditors regarding any
accounting or financial statement disclosure matters.
PART III
The information required by Part III is included in the Company's Proxy
Statement, and is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information
required by this item is set forth in the sections entitled "Election of
Directors" (page 2), "Executive Officer" (page 4) and " Section 16(a) Beneficial
Ownership Reporting Compliance" (page 10) in the Company's Proxy Statement and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is set forth in the section entitled
"Executive Compensation" (pages 5 through 9) in the Company's Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
information required by this item is set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" (pages 4 through 5) in
the Company's Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Effective September 1,
1998, the Company entered into a Consulting Agreement with Eugene E. Prince, who
resigned from the offices of President and Chief Executive Officer on August 13,
1998 and retired from employment with the Company effective August 31, 1998. Mr.
Prince is the Chairman of the Board of Directors and a major shareholder of the
Company. Under the Consulting Agreement, he is compensated for providing
consulting services to the Company primarily on matters involving the Company's
Motion Control business, as well as other matters as requested by the Chief
Executive Officer. During fiscal year 2000, the Company paid $66,000 to Mr.
Prince under the Consulting Agreement.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
a) Consolidated Balance Sheets as of June 30, 2000 and June 30,
1999.
b) Consolidated Statements of Operations for each of the fiscal
years in the three-year period ended June 30, 2000.
c) Consolidated Statements of Cash Flows for each of the fiscal
years in the three-year period ended June 30, 2000.
d) Consolidated Statements of Stockholders' Investment for each of
the fiscal years in the three-year period ended June 30, 2000.
e) Notes to Consolidated Financial Statements.
f) Report of Independent Public Accountants.
2. FINANCIAL STATEMENT SCHEDULES
II. Valuation and Qualifying Accounts.
3. EXHIBITS
Exhibit No. Subject Page
----------- ------- ----
3.1 Restated Articles of Incorporation. *
3.2 Amendment to Articles of Incorporation dated September 24, 1993. *
3.3 By-laws of the Company adopted August 11, 1994. *
4 Rights Agreement between Hathaway Corporation and Bank of *
America National Trust and Savings Association, dated
June 15, 1989. Incorporated by reference to the Company's
1989 Annual Report and Form 10-K for the fiscal year ended
June 30, 1989.
10.1 Severance Agreement dated June 15, 1989 between Hathaway *
Corporation and Richard D. Smith. Incorporated by
reference to Exhibit 10n(ii) to the Company's 1989 annual
Report and Form 10-K for the fiscal year ended June 30,
1989.
10.2 The 1989 Incentive and Non-Qualified Stock Option Plan *
dated January 4, 1989. Incorporated by reference to the
Company's Form S-8 filed October 25, 1990.
10.3 Joint Venture Agreement between Zibo Kehui Electric *
Company and Hathaway Instruments Limited, for the
establishment of Zibo Kehui Electric Company Ltd., dated
July 25, 1993. Incorporated by reference to Exhibit 10.15
to the Company's Form 10-K for the fiscal year ended June
30, 1994.
10.4 Promissory Note from Richard D. Smith to Hathaway *
Corporation dated October 26, 1993. Incorporated by
reference to Exhibit 10.23 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
34
Exhibit No. Subject Page
----------- ------- ----
10.5 Joint Venture Contract between Si Fang Protection and *
Control Company Limited and Hathaway Corporation for the
establishment of Beijing Hathaway Si Fang Protection and
Control Company, Ltd., dated March 2, 1994. Incorporated
by reference to Exhibit 10.26 to the Company's Form 10-K
for the fiscal year ended June 30, 1994.
10.6 Joint Venture Contract between Wuhan Electric Power *
Instrument Factory, Beijing Huadian Electric Power
Automation Corporation and Hathaway Corporation for the
establishment of Hathaway Power Monitoring Systems
Company, Ltd., dated June 12, 1995. Incorporated by
reference to Exhibit 10.29 to the Company's Form 10-K for
the fiscal year ended June 30, 1995.
10.7 Technology License Contract between Wuhan Electric Power *
Instrument Factory and Beijing Huadian Electric Power
Automation Corporation on behalf of Hathaway Power
Monitoring Systems Company, Ltd. and Hathaway Corporation
dated June 12, 1995. Incorporated by reference to Exhibit
10.30 to the Company's Form 10-K for the fiscal year ended
June 30, 1995.
10.8 Supplementary Agreement between Wuhan Electric Power *
Instrument Factory, Beijing Huadian Electric Power
Automation Corporation and Hathaway Corporation dated
August 30, 1995. Incorporated by reference to Exhibit
10.31 to the Company's Form 10-K for the fiscal year ended
June 30, 1995.
10.9 Management Incentive Bonus Plan for the fiscal year ending *
June 30, 1996. Incorporated by reference to Exhibit
10.28 to the Company's Form 10-K for the fiscal year ended
June 30, 1995.**
10.10 Purchase Agreement between Hathaway Corporation and Tate *
Engineering Services Corporation dated October 10, 1996,
for the Company's purchase of all the issued and
outstanding stock of Tate Integrated Systems, Inc.
Incorporated by reference to the Company's Form 8-K dated
October 25, 1996.
10.11 Joint Venture Agreement between KUB Holdings Bhd. And Tate *
Integrated Systems, L.P. dated March 9, 1995 and
Supplement dated June 15, 1995. Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the fiscal
year ended June 30, 1997.
10.12 License Agreement between Tate Integrated Systems, L.P. and *
KUB-TIS Controls Sdn. Bhd. dated March 9, 1995. Incorporated
by reference to Exhibit 10.24 to the Company's Form 10-K for
the fiscal year ended June 30, 1997.
10.13 Loan and Security Agreement dated May 7, 1998 between *
Hathaway Corporation and * certain subsidiaries of
Hathaway Corporation and Silicon Valley Bank. Incorporated
by reference to Exhibit 10.16 to the Company's Form 10-K
for the fiscal year ended June 30, 1998.
10.14 Schedule to Loan and Security Agreement dated May 7, 1998 *
between Hathaway * Corporation and certain subsidiaries of
Hathaway Corporation and Silicon Valley Bank. Incorporated
by reference to Exhibit 10.17 to the Company's Form 10-K
for the fiscal year ended June 30, 1998.
10.15 Amendment Number One dated August 1, 1998 to the 1989 *
Incentive and Non-Qualified * Stock Option Plan.
Incorporated by reference to Exhibit 10.18 to the
Company's Form 10-K for the fiscal year ended June 30,
1998.
35
Exhibit No. Subject Page
----------- ------- ----
10.16 The Amended 1991 Incentive and Nonstatutory Stock Option *
Plan dated August 1, 1998. * Incorporated by reference to
Exhibit 10.19 to the Company's Form 10-K for the fiscal
year ended June 30, 1998.
10.17 Employment Agreement between Hathaway Corporation and *
Richard D. Smith, effective August 13, 1998.
10.18 Consulting Agreement between Hathaway Corporation and *
Eugene E. Prince dated September 1, 1998.
21 List of Subsidiaries
22 Definitive Proxy Statement dated September 18, 2000 for *
the Registrant's 2000 Annual Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP.
27 Financial Data Schedule
* These documents have been filed with the Securities and
Exchange Commission and are incorporated herein by
reference.
** The Management Incentive Bonus Plans for the fiscal years
ending June 30, 1997, 1998, 1999, and 2000 are omitted
because they are substantially identical in all material
respects to the Management Incentive Bonus Plan for the
fiscal year ending June 30, 1996 previously filed with the
Commission, except for the fiscal years to which they
apply.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of
fiscal 2000.
36
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated August 2, 2000 included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8 (No. 2-73235) of the
Hathaway Corporation Amended 1980 Non-Incentive Stock Option Plan dated August
3, 1981, into the Registration Statement on Form S-8 (No. 2-90687) of the 1983
Incentive and Non-Qualified Stock Option Plan of Hathaway Corporation dated May
10, 1984, into the Registration Statement on Form S-8 (No. 33-44998) of the 1992
Employee Stock Purchase Plan of Hathaway Corporation dated January 8, 1992, into
the Registration Statement on Form S-8 (No. 33-37473) of the 1989 Incentive and
Non-Qualified Stock Option Plan of Hathaway Corporation dated October 25, 1990,
and into the Registration Statements on Form S-8 (Nos. 33-44997 and 333-21337)
of the 1991 Incentive and Non-Statutory Stock Option Plan of Hathaway
Corporation dated January 8, 1992 and February 7, 1997, respectively.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 21, 2000.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HATHAWAY CORPORATION
By /s/ Richard D. Smith
----------------------
Richard D. Smith
President, Chief Executive Officer and
Chief Financial Officer
Date: September 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Richard D. Smith President, Chief Executive September 21, 2000
- -------------------- Officer, Chief Financial Officer
Richard D. Smith and Director
/s/ Eugene E. Prince Chairman of the Board of Directors September 21, 2000
- --------------------
Eugene E. Prince
/s/ George J. Pilmanis Director September 21, 2000
- ----------------------
George J. Pilmanis
/s/ Delwin D. Hock Director September 21, 2000
- ------------------
Delwin D. Hock
/s/ Graydon D. Hubbard Director September 21, 2000
- ----------------------
Graydon D. Hubbard
38
HATHAWAY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND FROM RESERVES END OF PERIOD
PERIOD EXPENSES
- ------------------------------------ --- --------------- ---------------- --------------- --------------
YEAR ENDED JUNE 30, 2000:
Reserve for bad debts $ 479 $ 150 $ (99) $ 530
- ------------------------------------ --- --------------- ---------------- --------------- --------------
YEAR ENDED JUNE 30, 1999:
Reserve for bad debts $ 599 $ 14 $(134) $ 479
- ------------------------------------ --- --------------- ---------------- --------------- --------------
YEAR ENDED JUNE 30, 1998:
Reserve for bad debts $ 492 $ 136 $ (29) $ 599
- ------------------------------------ --- --------------- ---------------- --------------- --------------
39
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