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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, 1997
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 88-0518115
(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. [X]
As of August 28, 1997, 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 $12,655,000.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated September 18,
1997 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...........................................10
Report of Independent Public Accountants..............................................10
Item 9. Disagreements on Accounting and Financial Disclosure..................................27
Part III.
Item 10. Directors and Executive Officers of the Registrant....................................27
Item 11. Executive Compensation................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management........................27
Item 13. Certain Relationships and Related Transactions........................................27
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................27
Consent of Independent Public Accountants.............................................31
Signatures............................................................................32
Officers and Directors / Investor Information.........................................33
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 electronic instrumentation and systems to the
worldwide power and process industries, as well as motion control products
to a broad spectrum of customers throughout the world. The Company also
develops, designs, and installs integrated process automation systems for
industrial applications. The Company operates primarily in the United
States and Europe and has three joint venture investments in China and a
joint venture investment in Malaysia.
Power and Process Instrumentation and Systems Automation
Power Instrumentation
Hathaway's complete line of 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 (RTUs) for Supervisory Control and Data
Acquisition (SCADA) systems.
The Company also has three joint venture investments in China - Zibo Kehui
Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control
Company (Si Fang), and Hathaway Power Monitoring Systems Company, Ltd.
(HPMS). The Company holds a 25% interest in Kehui and Si Fang and a 40%
interest in HPMS. Kehui designs, manufactures and sells cable and overhead
fault location, SCADA systems and other test instruments within the China
market. 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. The
Company will sell these products outside of China. HPMS will design,
manufacture and sell, 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
monitoring systems which provide either visual annunciation and/or printed
messages whenever a monitored "point" changes from an existing state. These
systems are called visual annunciators and sequential event recorders
(SER's). Visual annunciators and SER's are sold to electric utility
companies and the process industry in general. Visual annunciators provide
both visual and audible alert signals whenever a process variable goes into
an alarm state. SER's provide a printed message whenever a monitored
"point" changes state. The group also manufactures and sells combined
annunciator/SER systems with distributed architecture (which significantly
reduces installation costs) for power plant applications and is engaged in
the design, manufacture and sale of power transducers which are sold to the
process and power utility industries, as well as calibrators and signal
conditioning products which are sold to the process industry.
Business Acquisition
Effective September 30, 1996, the Company acquired a 100% partnership
interest in Tate Integrated Systems, L.P. and 100% of the stock of its sole
general partner, Tate Integrated Systems, Inc. (collectively referred to as
"TIS"). The ownership interests were acquired for an adjusted negotiated
price of $1,092,000, of which $718,000 was paid in cash at closing on
October 10, 1996 and $145,000 on June 30, 1997. In addition, $229,000 of
additional consideration will be payable when certain accounts receivable
of TIS are collected. Hathaway purchased the stock and partnership interest
from Tate Engineering Services Corporation and its affiliate, Tate
Engineering Services, Inc., both divisions of Tate Industries, a privately
held company (collectively referred to as "TES".)
TIS has operated under the ownership of Hathaway Industrial Automation
(HIA), a newly-formed wholly-owned subsidiary of the Company, since October
1, 1996. HIA is located in Baltimore, Maryland and is a full service
supplier of process automation systems for industrial applications. HIA has
developed a state-of-the-art
1
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. The Company
expects to team the HIA system with certain existing Hathaway products and
target the combined product at substation automation and integration
applications used in power transmission and distribution facilities.
Restructuring
In the fourth quarter of fiscal 1996 the Company decided to reorganize its
Canadian and U.K. operations. Effective June 30, 1996 the net assets and
substantially all operations of Hathaway Instruments Limited (HIL), the
Company's subsidiary located in Hoddesdon, England, were transferred to
Hathaway Systems Limited (HSL), the Company's Belfast, Northern Ireland
subsidiary. In connection with the asset transfer, substantially all
operations of HIL were combined with the operations of HSL. In addition,
the Company decided to close its Toronto, Canada facility and to combine
substantially all of its operations with the operations of Hathaway Process
Instrumentation, the Dallas, Texas division. The initiatives were aimed at
reducing costs and enhancing productivity and efficiency. The restructuring
provision was primarily comprised of estimated costs for employee severance
benefits and fixed asset writeoffs. The payouts related to the
restructuring charge were made in 1996 and 1997.
In the first quarter of 1997, management decided to restructure the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Denver was consolidated in 1997 into two
manufacturing facilities located in Seattle, Washington and Belfast,
Northern Ireland.
Motion Control Instrumentation
The motion control group 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 motion control group is organized into two divisions and one
subsidiary, respectively: Engineered Motion Technology division
("EMT"-Tulsa, previously known as the Motion Control division), Motors and
Instruments Division ("MI"-Tulsa) and Computer Optical Products, Inc.,
("COPI"-Chatsworth, CA).
The EMT division designs, manufactures and markets direct current (DC)
brushless motors, related components, and drive and control electronics.
Markets served include semiconductor manufacturing, industrial automation,
medical equipment, and military and aerospace.
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.
Optical encoders are manufactured by COPI in Chatsworth, California. They
are used to measure rotational and linear movements of parts in diverse
applications such as machine tools, robots, printers and medical equipment.
The primary markets for the optical encoders are in the industrial, medical
and computer peripheral manufacturing 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
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
2
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 Industry Segments
The Company considers all of its operations to be materially in one
industry segment - electronic instrumentation.
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.
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.
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 1997, no single customer accounted for more than 10% of the
Company's consolidated revenue from continuing operations.
Sales Backlog
The backlog of the Company's continuing operations at June 30, 1997
consisted of sales orders totaling approximately $14,742,000. The Company
expects to ship goods filling $14,229,000 of those purchase orders within
fiscal 1998. This compares to a backlog from continuing operations of
$9,998,000 at June 30, 1996, of which $9,982,000 was scheduled for shipment
is fiscal 1997.
Government Sales
Approximately $605,000 of the Company's backlog as of June 30, 1997
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 for continuing
operations were $3,646,000 in fiscal 1997, $3,722,000 in fiscal 1996 and
$3,616,000 in fiscal 1995. Of these expenditures, no material amounts were
charged directly to customers.
Environmental Issues
No 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.
Export Sales from Domestic Operations and Foreign Operations
The information required by this item is set forth in Note 9 on page 26
herein.
Employees
As of the end of fiscal 1997, the Company had approximately 380 full-time
employees.
3
Item 2. Properties.
The Company leases its administrative offices and manufacturing facilities as
follows:
Approximate
Description / Use Location square footage
- ---------------------------------------------------------------------------------------------------------------------
Corporate headquarters and administrative office Denver, Colorado 14,000
Office and manufacturing facility Dallas, Texas 29,000
Office and manufacturing facility Seattle, Washington 16,000
Engineering, development and administrative office Baltimore, Maryland 14,000
Office and manufacturing facility Tulsa, Oklahoma 12,000
Office and manufacturing facility Chatsworth, California 11,000
Office and manufacturing facility Tulsa, Oklahoma 8,000
Office and manufacturing facility Belfast, Northern Ireland 17,000
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 has been named as a defendant in certain actions that have arisen
out of the ordinary course of business. Management believes the actions are
without merit and will not have a significant adverse effect on the Company's
consolidated financial position.
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 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Hathaway Corporation's common stock is traded on the Nasdaq National Market
System under the symbol HATH. The number of holders of record of the Company's
common stock as of the close of business on August 28, 1997 was 660.
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 System, as
reported by Nasdaq.
Price Range
Dividends per share High Low
--------------------------------------------------------
FISCAL 1996
First Quarter $ 0.10 $ 3.13 $ 2.50
Second Quarter --- 2.88 1.88
Third Quarter --- 2.56 1.81
Fourth Quarter --- 4.00 1.69
FISCAL 1997
First Quarter --- $ 4.38 $ 2.50
Second Quarter --- 4.13 3.25
Third Quarter --- 4.88 3.00
Fourth Quarter --- 3.81 2.38
The Bid and Asked quotations as published by Nasdaq reflect interdealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
4
Item 6. Selected Financial Data.
The following table summarizes data from the Company's annual financial
statements for the years 1993 through 1997 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 10 herein. See Item 1 in the Business
section of this report and Note 2 to Consolidated Financial Statements on page
18 for discussion of a business acquisition completed in fiscal 1997.
For the years ended June 30,
1997 1996 1995 1994 1993
----------------------------------------------------------------------
In thousands (except per share data)
Statements of Operations Data:
Net revenues from continuing operations $ 39,946 $ 35,411 $ 39,838 $ 43,028 $ 45,741
======================================================================
Net income (loss) from continuing
operations $ (1,429) $ (1,013) $ 842 $ 955 $ 23
Net income (loss) from operations of
divested segment and divested operation -- -- -- 885 958
Gain on sale of segment -- -- -- 4,023 --
----------------------------------------------------------------------
Net income (loss) $ (1,429) $ (1,013) $ 842 $ 5,863 $ 981
======================================================================
Fully diluted earnings (loss) per share:
Continuing operations $ (0.33) $ (0.24) $ 0.19 $ 0.19 $ --
Operations of divested segment and
divested operation -- -- -- 0.18 0.21
Sale of segment -- -- -- 0.81 --
----------------------------------------------------------------------
Net income (loss) $ (0.33) (0.24) $ 0.19 $ 1.18 $ 0.21
======================================================================
Cash dividends:
Per share $ -- $ 0.10 $ 0.12 $ 0.205 $ --
Total amount paid $ -- $ 426 $ 536 $ 992 $ --
Balance Sheet Data:
Total assets at June 30 $ 19,967 $ 21,139 $ 23,312 $ 24,432 $ 28,326
Total long-term debt at June 30 $ 1,769 $ 1,777 $ 2,144 $ 2,298 $ 5,819
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. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. Among the factors that could cause actual results to
differ materially are the following: the unavailability of sufficient capital on
satisfactory terms to finance the Company's business plan, increased
competition, the introduction of new technologies and competitors into the
systems and instrumentation markets where the Company competes, adverse changes
in the regulatory environment, and general business and economic conditions. In
addition to statements that explicitly describe such risks and uncertainties,
readers are urged to consider statements labeled with the terms "believes,"
"expects," "plans," "anticipates," or "intends" to be uncertain and
forward-looking. All cautionary statements made herein should be read as being
applicable to all related forward-looking statements wherever they appear. In
this connection, investors should consider the risks described herein.
OPERATING RESULTS
Fiscal year 1997 compared to fiscal year 1996
The Company recorded a net loss of $1,429,000 in fiscal year 1997, compared to a
net loss of $1,013,000 in 1996. The fiscal 1997 net loss includes a $923,000 net
loss from Hathaway Industrial Automation (HIA), acquired by the Company
effective September 30, 1996 (see discussion under "Business Acquisition"
below), and a $506,000 net loss from operations of the Company's other
businesses.
Revenues increased by $4,535,000, or 13%, from 1996 to 1997, comprised of a 16%
increase in sales of the Company's power and process instrumentation and systems
products and a 7% increase in sales of motion control products (the fourth
consecutive annual increase).
5
The increase in sales of power and process products consists of a 3% increase in
sales of the Company's traditional product lines - the first such increase since
1993. Management believes that this trend is the first indication that the
downturn in power and process revenues that began after the power industry
deregulation law was passed in October 1992 may be reversing. The remainder of
the increase in power and process revenues was due to product sales of HIA,
totalling $2,993,000.
Sales to international customers increased 12% from $12,668,000, or 36% of sales
in fiscal 1996 to $14,200,000, or 36% of sales in fiscal 1997. Foreign sales as
a percentage of total sales remained constant because the growth in the
Company's traditional foreign business was offset by HIA's business, which is
primarily with domestic customers. Sales backlog increased from $9,998,000 at
June 30, 1996 to $14,742,000 at June 30, 1997, comprised of $11,996,000 of
traditional product backlog and $2,746,000 of HIA product backlog.
Cost of products sold increased to 64% of revenues in 1997 from 62% in 1996. The
increase occurred primarily because of price reductions implemented in response
to competitive pressures, changes in the mix of products sold, and manufacturing
inefficiencies resulting from the consolidation of manufacturing operations
implemented in 1997. In addition, HIA's cost of products sold represents a
higher percentage of revenues than that of the Company's traditional product
lines. Excluding the effect of HIA, the cost of products sold in 1997 represents
63% of related revenues.
Selling, general and administrative and engineering and development expenses
increased 9% from $14,671,000 in 1996 to $16,018,000 in 1997 because of such
expenses incurred by HIA. Excluding the effect of HIA, these expenses would have
totaled $14,182,000 in 1997, representing a 3% decrease from the prior period.
This decrease reflects the overall cost reduction efforts initiated by the
Company in recent years.
Amortization of intangibles and other assets increased from $215,000 in 1996 to
$402,000 in 1997, primarily due to the $197,000 write-off of unamortized debt
acquisition costs related to the Marine Midland loan facility (see further
discussion under "Liquidity and Capital Resources" below.)
Other income in 1996 includes $165,000 of income recorded upon the Company's
consummation of an agreement with Global Software, Inc. (Global). Under the
terms of this agreement, the Company received $165,000 in exchange for, among
other things, consenting to Global's proposed disposition of certain assets
acquired after the Company's January 31, 1994 sale of Global and acknowledging
that this disposition would not violate the terms of the original sale
agreement.
The Company recorded a $338,000 restructuring charge in the fourth quarter of
fiscal 1996 in connection with the reorganization of its Canadian and U.K.
operations. Effective June 30, 1996 the net assets and substantially all
operations of Hathaway Instruments Limited (HIL), the Company's subsidiary
located in Hoddesdon, England, were transferred to Hathaway Systems Limited
(HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with
the asset transfer, substantially all operations of HIL were combined with the
operations of HSL. In addition, the Company decided to close its Toronto, Canada
facility and to combine substantially all of its operations with the operations
of Hathaway Process Instrumentation, the Dallas, Texas division. The initiatives
were aimed at reducing costs and enhancing productivity and efficiency. The
restructuring provision was primarily comprised of estimated costs for employee
severance benefits and fixed asset writeoffs. The payouts related to the
restructuring charge were made in 1996 and 1997.
In the first quarter of 1997, management decided to restructure the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Denver was consolidated in 1997 into two
manufacturing facilities located in Seattle, Washington and Belfast, Northern
Ireland. The cost of consolidating these manufacturing facilities was not
material and was paid in fiscal year 1997.
As expected, the consolidation of certain manufacturing operations in 1997
initially produced some inefficiencies in the manufacturing process due to
additional training and start-up time required at the remaining facilities.
Management believes, however, that the initial issues encountered have been
substantially resolved and expects to generate significant cost savings from the
consolidation efforts.
6
Fiscal year 1996 compared to fiscal year 1995
The Company recorded a net loss of $1,013,000 in 1996 compared to net income of
$842,000 in 1995.
Revenues decreased by $4,427,000, or 11%, from 1995 to 1996, comprised of a 26%
decrease in sales of the Company's power and process instrumentation products,
offset by a 48% increase in sales of the Company's motion control products.
Sales to international customers decreased 14% from $14,646,000, or 37% of sales
in fiscal 1995 to $12,668,000, or 36% of sales in fiscal 1996. Sales backlog
increased 14% from to $8,878,000 at June 30, 1995 to $9,998,000 at June 30,
1996.
Cost of products sold increased to 62% of revenues in 1996, compared to 57% in
1995. The increase was due to price reductions implemented in response to
competitive pressures and changes in the mix of products sold.
Selling, general and administrative and engineering and development expenses
decreased 5% from $15,489,000 in 1995 to $14,671,000 in 1996 primarily due to
overall cost reduction efforts initiated by the Company.
BUSINESS ACQUISITION
Effective September 30, 1996, the Company acquired a 100% partnership interest
in Tate Integrated Systems, L.P. and 100% of the stock of the sole general
partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS"). The
ownership interests were acquired for an adjusted negotiated price of
$1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996
and $145,000 on June 30, 1997. In addition, $229,000 will be payable when
certain accounts receivable of TIS are collected.
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a
newly-formed wholly-owned subsidiary of the Company, since October 1, 1996. HIA
is located in 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. The Company expects to
team the HIA system with certain existing Hathaway products and target the
combined product at substation automation and integration applications used in
the distribution and transmission of power.
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 fair values at the date of
acquisition. This allocation is subject to adjustment pending the resolution of
certain items.
The Company is investing substantial resources in HIA, consistent with the
Company's strategy to expand further into the process industry and to develop
applications of the HIA software for the power industry. 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. 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 is
partially dependent on the Company's investment in HIA producing growth and
increased profitability in HIA's traditional process automation business, as
well as the ability to successfully market HIA's products to the power industry.
The factors that will affect the success of implementing this business plan
include, but are not limited to, the ability to win a sufficient amount of
project work on favorable terms to the Company, the ability to complete projects
in a timely and cost-effective manner, and the existence of sufficient demand
for the HIA products in both the power and process markets. 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.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
(excluding restricted cash) decreased $1,494,000 during the year to a balance of
$3,431,000 at June 30, 1997. Operating activities used $197,000 of cash in
fiscal 1997 compared to $93,000 used in 1996 and $1,266,000 generated in 1995.
Of the $197,000 used in 1997 by operating activities, $1,592,000 was used to
fund the operations of the HIA business and $1,395,000 was generated from the
operating activities of the Company's other businesses. The overall reduced cash
from operations in 1997 and 1996 is primarily the result of net losses of
$1,429,000 and $1,013,000 recorded in 1997 and 1996, respectively, compared to
net income of $842,000 recorded in 1995.
Cash of $1,313,000 was used by investing activities in fiscal 1997 compared to
$376,000 generated in fiscal 1996 and $1,049,000 used in fiscal 1995. The 1996
cash generated by investing activities was primarily due to proceeds of
$1,000,000 from maturities of marketable securities. The 1997 cash used for
investing activities includes $863,000 paid for the interest acquired in TIS.
Financing activities used $32,000, $828,000 and $1,887,000 in fiscal years 1997,
1996 and 1995, respectively. The decrease in cash used for financing activities
from 1995 to 1996 is due primarily to less cash used for the purchase of
treasury stock. The Board of Directors' fiscal 1996 decision to discontinue the
public stock repurchase program was the primary reason for the lower volume of
stock repurchase activity in 1996. The decrease in cash used for financing
activities from 1996 to 1997 occurred primarily because no dividends were paid
to stockholders in 1997, as compared to $426,000 of dividends paid to
stockholders in 1996. The Board of Directors did not declare a dividend in 1997
because of the net loss recognized by the Company for fiscal 1996 and dividend
restrictions contained in the loan agreement with Marine Midland Business Loans,
Inc. (see below).
At June 30, 1997, the Company had $1,769,000 of debt, compared with $1,777,000
at June 30, 1996, a reduction of $8,000. The debt represents borrowings on the
Company's long-term financing agreement (Agreement) with Marine Midland Business
Loans, Inc. (Midland). The Agreement is a Reducing Revolving Line of Credit with
a borrowing limit that is reduced monthly over the seven-year term of the loan.
Borrowings on the line are restricted to the lesser of i) an amount based on
certain asset levels, or ii) the borrowing limit. As of June 30, 1997, the
Company could borrow an additional $1,036,000 up to the current borrowing limit
of $2,805,000. Pursuant to the borrowing limit reduction schedule contained in
the Agreement, the limit will be amortized to $2,070,000, $1,133,000 and
$155,000 in the years ended June 30, 1998, 1999 and 2000, respectively, with the
remaining unpaid balance of the loan becoming due August 1, 2000.
The line bears interest at Midland's prime borrowing rate plus 1% (9.5% at June
30, 1997). As long as the Agreement is in place, interest expense is calculated
using the higher of i) the actual debt balance or ii) 50% of the borrowing
limit. Starting in August 1997 the Company may repay the entire debt balance
with Midland with no prepayment penalty.
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, cash flow coverage and current ratios. The Company has not met the
quarterly-calculated cash flow coverage covenant since the first quarter of
fiscal 1996. Midland issued a waiver of compliance with the cash flow coverage
covenant through June 30, 1997. In connection with obtaining the aforementioned
waiver, the Company agreed to certain conditions, including limiting the assets
against which the Company may borrow to certain accounts receivable and
maintaining higher tangible net worth and achieving certain annual operating
results in fiscal 1997. In addition, the Company agreed not to pay cash
dividends, purchase treasury stock (except for limited amounts from employees),
or make investments in other than investment grade securities without the prior
written consent of Midland, as long as the Company is in violation of the cash
flow coverage covenant.
Beginning in March 1997 the Company has not maintained the aforementioned
minimum tangible net worth. In addition, the Company did not achieve the
aforementioned minimum fiscal 1997 operating results.
The Company's not meeting these requirements constitutes an event of default
under the Agreement. Pursuant to the Agreement, upon the happening of an event
of default, Midland may declare any principal outstanding to be immediately due
and payable, together with all interest thereon and applicable costs and
expenses. Accordingly, the balance of the long-term debt has been classified as
current as of June 30, 1997.
8
To date, Midland has not declared the Company's indebtedness to be immediately
due and payable. In addition, the Company is renegotiating with Midland for a
waiver of the aforementioned debt covenant violations. There can be no
assurance, however, that Midland will grant such a waiver.
Because of the uncertainty regarding the timing of the debt becoming due and
payable, the Company wrote off the $197,000 unamortized balance of the Midland
loan acquisition costs at June 30, 1997.
The Company has three joint venture investments in China - Zibo Kehui Electric
Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company, Ltd. (Si
Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). Kehui
designs, manufactures and sells cable and overhead fault location, SCADA systems
and other test instruments within the China market and the Company will sell
these products outside of China. 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 and the
Company will sell these products outside of China. HPMS will design, manufacture
and sell, under a license from Hathaway, instrumentation products designed by
Hathaway, to electric power companies in China. There are no future commitments
relating to these investments. The Company considers the realization of these
investments to be uncertain due to political instability and the untested market
in China. Accordingly, the Company has fully reserved for these investments. The
Company recognizes income from the joint ventures as cash dividends are
received.
The Company also has an 11.4% interest in a joint venture (JV) with KUB Holdings
BHD, a Malaysian firm. The interest, acquired by TIS for $400,000 in March 1995,
was acquired by the Company in connection with the purchase of TIS effective
September 30, 1996. The fair market value of this asset was not significant at
the acquisition date. The JV was created for the purpose of manufacturing,
marketing and selling the TIS-4000 system in certain Asian countries. If the JV
requires funding, the Company may be required to contribute in accordance with
the agreed-upon proportions as defined in the JV agreement.
The JV agreement also requires the Company to continue as a going concern and to
provide support services to the JV at market rates. If the Company does not meet
this requirement, it could be required to refund a contractually-defined portion
($1,938,000 at June 30, 1997) of the $2,500,000 proceeds TIS received in 1995
from the sale to the JV of licensing and marketing rights to the TIS-4000
technology. Because of the remote possibility of the Company being required to
make such a refund, this obligation was determined to be zero at the acquisition
date. Further, as of July 30, 1997, the Company does not expect that such
refunds will be required. In addition, the Company is not aware of any
violations of the requirements defined in the JV agreement nor does it
anticipate any future violations.
As in the three-year period ended June 30, 1997, the Company's fiscal 1998
working capital, capital expenditure and debt service requirements, including
repayment of the entire balance of the Midland loan, if necessary, are expected
to be funded from the existing cash balance of $3,431,000 at June 30, 1997. In
addition, the Company may seek additional debt, equity or other financing,
particularly if it must fully repay the Midland loan balance, in order to
supplement its long-term financial resources. There can be no assurance,
however, that additional debt, equity or other financing will be available on
terms acceptable to the Company, or at all.
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
anticipated that these factors would 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.
9
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
a) Report of Independent Public Accountants.................................................................................10
b) Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996........................................................11
c) Consolidated Statements of Operations for each of the years in the three-year period ended
June 30, 1997............................................................................................................12
d) Consolidated Statements of Cash Flows for each of the years in the three-year
period ended June 30, 1997...............................................................................................13
e) Consolidated Statements of Stockholders' Investment for each of the years in the three-year period ended
June 30, 1997............................................................................................................14
f) Notes to Consolidated Financial Statements...............................................................................15
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, 1997 and
1996, 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, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 30, 1997.
10
HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 3,431 $ 4,925
Restricted cash 253 312
Marketable securities, current -- 201
Trade receivables, net of allowance for doubtful accounts of $492 and
$321 at June 30, 1997 and 1996, respectively 6,910 6,293
Inventories, net 4,907 4,972
Current deferred income taxes 854 893
Income tax refunds receivable, prepaid expenses and other 1,180 857
- -------------------------------------------------------------------------------------------------------------
Total current assets 17,535 18,453
Property and equipment, net 1,841 1,727
Cost in excess of net assets acquired, net 591 623
Other -- 336
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 19,967 $ 21,139
=============================================================================================================
Liabilities and Stockholders' Investment
Current Liabilities:
Long-term debt classified as current (Note 4) $ 1,769 $ --
Accounts payable 1,843 1,309
Accrued liabilities 2,594 2,907
Income taxes payable 169 405
Product service reserve 566 459
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 6,941 5,080
Long-term debt (Note 4) -- 1,777
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 6,941 6,857
Commitments and Contingencies (Notes 3, 4 and 8)
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;
5,405 and 5,307 issued at June 30, 1997 and 1996, respectively 100 100
Additional paid-in capital 9,954 9,712
Loans receivable for stock (Note 7) (235) (235)
Retained earnings 6,818 8,247
Cumulative translation adjustments (Note 1) 360 163
Treasury stock, at cost; 1,121 and 1,058 shares at June 30, 1997 and
1996, respectively (Note 8) (3,971) (3,705)
- -------------------------------------------------------------------------------------------------------------
Total Stockholders' Investment 13,026 14,282
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Investment $ 19,967 $ 21,139
=============================================================================================================
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
11
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the fiscal years ended June 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Revenues $ 39,946 $ 35,411 $ 39,838
Operating costs and expenses:
Cost of products sold 25,575 21,926 22,834
Selling 7,601 6,269 7,037
General and administrative 4,771 4,680 4,836
Engineering and development 3,646 3,722 3,616
Amortization of intangibles and other 402 215 246
Restructuring charge (Note 11) -- 338 --
- ---------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 41,995 37,150 38,569
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) (2,049) (1,739) 1,269
Other income (expenses), net:
Interest and dividend income 245 325 332
Interest expense (173) (194) (204)
Other income (expenses), net (215) 210 (76)
- ---------------------------------------------------------------------------------------------------------------
Total other income (expenses), net (143) 341 52
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,192) (1,398) 1,321
Benefit (provision) for income taxes (Note 5) 763 385 (479)
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,429) $ (1,013) $ 842
===============================================================================================================
Primary and fully diluted net income (loss) per share
(Note 1) $ (0.33) $ (0.24) $ 0.19
===============================================================================================================
The accompanying notes to consolidated financial statements
are an integral part of these statements.
12
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the fiscal years ended June 30,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ (1,429) $ (1,013) $ 842
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization 1,199 960 970
Deferred income tax provision (benefit) 39 (155) (6)
Other 241 (149) (52)
Changes in assets and liabilities, net of effect in 1997
of purchase of Tate Integrated Systems (Note 2):
(Increase) decrease in -
Restricted cash 59 86 13
Receivables (239) 1,177 (580)
Inventories 1,174 (503) 247
Prepaid expenses and other (317) (282) (26)
Increase (decrease) in -
Accounts payable (46) 1 (138)
Accrued liabilities (649) 187 (429)
Product service reserve 7 (42) 65
Income taxes payable (236) (360) 360
- ---------------------------------------------------------------------------------------------------------------
Net cash from operating activities (197) (93) 1,266
Cash Flows From Investing Activities:
Purchase of property and equipment (651) (719) (934)
Purchase of Tate Integrated Systems (Note 2) (863) -- --
Investments in joint ventures (Note 3) -- (70) (115)
Proceeds from maturity of marketable securities 201 1,000 --
Other -- 165 --
- ---------------------------------------------------------------------------------------------------------------
Net cash from investing activities (1,313) 376 (1,049)
Cash Flows from Financing Activities:
Repayments on line of credit and long-term debt (8) (360) (460)
Borrowings on line of credit and long-term debt -- -- 276
Dividends paid to stockholders -- (426) (536)
Proceeds from exercise of employee stock options 81 -- 43
Purchase of treasury stock (105) (42) (1,210)
- ---------------------------------------------------------------------------------------------------------------
Net cash from financing activities (32) (828) (1,887)
Effect of foreign exchange rate changes on cash 48 (35) 39
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,494) (580) (1,631)
Cash and cash equivalents at beginning of year 4,925 5,505 7,136
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,431 $ 4,925 $ 5,505
===============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 167 $ 177 $ 194
Income taxes 4 173 108
Noncash investing and financing activities:
Assets of Tate Integrated Systems purchased, net of liabilities
assumed (Note 2) $ 1,092 $ -- $ --
Acquisition of common stock as a result of stock option
exercises (Note 6) 161 -- --
Repayment of loan receivable from Leveraged Employee Stock
Ownership Plan and Trust ("LESOP") (Note 7) -- -- 55
The accompanying notes to consolidated financial statements
are an integral part of these statements.
13
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(In thousands, except per share data)
Treasury Stock
Common Stock Additional Loans (Note 8)
--------------------- Paid-in Receivable Retained ----------------------
Shares Amount Capital (Note 7) Earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------
Balances, June 30, 1994 5,290 $ 100 $ 9,717 $ (290) $ 9,380 675 $ (2,453)
Exercise of employee stock
options 17 -- 43 -- -- -- --
Long-term incentive plan
bonus (Note 8) -- -- (16) -- -- -- --
Repayment of loan
receivable from LESOP -- -- -- 55 -- -- --
Tax benefit from
disqualifying stock
dispositions -- -- 23 -- -- -- --
Purchase of treasury stock -- -- -- -- -- 367 (1,210)
Dividend paid to
stockholders ($.12 per
share) -- -- -- -- (536) -- --
Net income -- -- -- -- 842 -- --
- -----------------------------------------------------------------------------------------------------------------
Balances, June 30, 1995 5,307 $ 100 $ 9,767 $ (235) $ 9,686 1,042 $ (3,663)
Long-term incentive plan bonus
(Note 8) -- -- (55) -- -- -- --
Purchase of treasury stock -- -- -- -- -- 16 (42)
Dividend paid to
stockholders ($.10 per
share) -- -- -- -- (426) -- --
Net loss -- -- -- -- (1,013) -- --
- -----------------------------------------------------------------------------------------------------------------
Balances, June 30, 1996 5,307 $ 100 $ 9,712 $ (235) $ 8,247 1,058 $ (3,705)
Purchase of treasury stock -- -- -- -- -- 25 (105)
Exercise of employee stock
options 32 -- 81 -- -- -- --
Acquisition of common
stock as a result of
stock option exercises
(Note 6) 66 -- 161 -- -- 38 (161)
Net loss -- -- -- -- (1,429) -- --
- -----------------------------------------------------------------------------------------------------------------
Balances, June 30, 1997 5,405 $ 100 $ 9,954 $ (235) $ 6,818 1,121 $ (3,971)
=================================================================================================================
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
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 electronic instrumentation products to the
worldwide power and process industries, as well as motion control products
to a broad spectrum of customers throughout the world. The Company also
develops, designs, and installs integrated process automation systems for
industrial applications. The Company operates primarily in the United
States and Europe and has three joint venture investments in China and a
joint venture investment in Malaysia (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
For purposes of the Consolidated Statements of Cash Flows, 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, 1997 June 30, 1996
----------------------------------
Parts and raw materials, net $ 2,141 $ 2,689
Finished goods and work-in process, net 2,766 2,283
----------------------------------
$ 4,907 $ 4,972
==================================
Reserves established for anticipated losses on excess or obsolete
inventories were approximately $1,943,000 and $1,689,000 at June 30, 1997
and 1996, respectively.
Property and Equipment
Property and equipment, at cost, is classified as follows (in thousands):
Useful lives June 30, 1997 June 30, 1996
---------------------------------------------------
Machinery, equipment, tools and dies 2-8 years $ 6,738 $ 5,763
Furniture, fixtures and other 3-10 years 2,056 2,074
----------------------------------
8,794 7,837
Less accumulated depreciation and amortization (6,953) (6,110)
----------------------------------
$ 1,841 $ 1,727
==================================
Depreciation and amortization 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.
15
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. 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 five
to ten years. Cost in excess of net assets acquired as of June 30, 1997 and
1996 consists of $1,613,000 and $1,505,000 of original costs and $1,022,000
and $882,000 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. As discussed in Note 2, the Company's
acquisition of Tate Integrated Systems resulted in $108,000 of costs in
excess of net assets acquired, which is being amortized over five years.
Such amount is subject to adjustment pending the outcome of certain
acquisition-related matters.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
June 30, 1997 June 30, 1996
----------------------------------
Compensation and fringe benefits $ 716 $ 1,012
Commissions 592 539
Professional fees 117 239
Other accrued expenses 1,169 1,117
----------------------------------
$ 2,594 $ 2,907
==================================
Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards (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.
Changes in Cumulative Translation Adjustments included in the Stockholders'
Investment section of the accompanying Consolidated Balance Sheets are as
follows (in thousands):
June 30, 1997 June 30, 1996
----------------------------------
Cumulative Translation Adjustments, beginning of year $ 163 $ 218
Translation adjustments 197 (55)
----------------------------------
Cumulative Translation Adjustments, end of year $ 360 $ 163
==================================
Revenue and Cost Recognition on Contracts
Hathaway Industrial Automation (HIA) undertakes contracts for the
installation of integrated process control systems that use its proprietary
software. The Company recognizes contract revenues and costs by applying
the percentage of completion achieved to the total contract sales price and
estimated costs. 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. 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.
16
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
Earnings per share is calculated using the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding
during the period, including the effects of options and warrants granted
when such adjustment has a dilutive effect on earnings per share. Shares
used in the computations for the periods reported are as follows (in
thousands):
Primary Fully Diluted
---------------------------------
1997 4,317 4,317
1996 4,271 4,309
1995 4,422 4,422
Stock-Based Compensation
The Company accounts for its stock-based compensation plans for employees
under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
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 long-term debt approximates fair value because the underlying instrument
is a variable rate note that reprices frequently. The carrying value of
marketable securities approximates fair value obtained from quoted market
prices.
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 revenue 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.
New Accounting Standard
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new reporting requirements for
earnings per share (EPS). The Statement replaces Primary and Fully Diluted
EPS reporting required under APB Opinion No. 15 with Basic and Diluted EPS,
respectively. Basic EPS is computed by dividing reported earnings available
to common stockholders by weighted average shares outstanding, with no
consideration for other potentially dilutive securities (in contrast to
Opinion 15 requirements). Diluted EPS is computed by dividing reported
earnings by weighted average outstanding and dilutive shares, where the
dilution is determined using the average share price for the period. In
contrast, Opinion 15 requires that the calculation use a more dilutive
share price, which represents the greater of the average or end-of-period
share price. The Statement also requires a disclosure reconciling the
numerator and denominator of the EPS calculations. The Company will adopt
the new reporting requirements in the quarter ending December 31, 1997 and
management does not believe the effect of adoption will be material.
17
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
2. BUSINESS ACQUISITION
Effective September 30, 1996, the Company acquired a 100% partnership
interest in Tate Integrated Systems, L.P. and 100% of the stock of its sole
general partner, Tate Integrated Systems, Inc. (collectively referred to as
"TIS"). The ownership interests were acquired for an adjusted negotiated
price of $1,092,000, of which $718,000 was paid in cash at closing on
October 10, 1996 and $145,000 on June 30, 1997. In addition, $229,000 of
additional consideration will become payable when certain accounts
receivable of TIS are collected.
TIS has operated under the ownership of Hathaway Industrial Automation
(HIA), a newly-formed wholly-owned subsidiary of the Company, since October
1, 1996. HIA is located in Baltimore, Maryland and is a full service
developer and supplier of integrated process automation systems for
industrial applications. HIA has developed a state-of-the-art software
system, the TIS-4000, 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. The
Company expects to team the HIA system with certain existing Hathaway
products and target the combined product at substation automation and
integration applications in power plants.
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 fair values at
the date of acquisition. This allocation is subject to adjustment pending
the resolution of certain items. The preliminary net purchase price
allocation is as follows: (in thousands):
Trade receivables, net $ 485
Inventories, net 1,165
Property and equipment, net 123
Cost in excess of net assets acquired 108
Accounts payable (580)
Accrued liabilities and other (209)
--------------
Net purchase price $ 1,092
==============
The results of operations of TIS have been included in the Company's 1997
Consolidated Statement of Operations starting on October 1, 1996.
The following unaudited pro forma summary (in thousands, except per share
data) combines the consolidated results of operations of the Company and
TIS as if the acquisition had occurred at the beginning of fiscal years
1997 and 1996 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 those earlier dates, nor are they indicative of results
of operations which may occur in the future.
For the years ended June 30,
1997 1996
----------------------------------
(Unaudited)
Revenue $ 40,946 $ 40,016
Net loss (1,403) (1,072)
Primary net loss per share (0.32) (0.25)
18
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
3. INVESTMENTS IN JOINT VENTURES
The Company has three joint venture investments in China - Zibo Kehui
Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control
Company, Ltd. (Si Fang), and Hathaway Power Monitoring Systems Company,
Ltd. (HPMS). Kehui designs, manufactures and sells cable and overhead fault
location, SCADA systems and other test instruments in China. 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. HPMS will design, manufacture
and sell, under a license from Hathaway, instrumentation products designed
by Hathaway, to electric power companies in China. The Company's investment
and ownership interest in these Chinese joint ventures are as follows (in
thousands):
Ownership
Investment interest
--------------------------------
Kehui $ 100 25%
Si Fang 175 25%
HPMS 140 40%
--------------
$ 415
==============
The Company has no future commitments relating to these investments. The
Company considers the realization of these investments to be uncertain due
to political instability and the untested market in China. Accordingly, the
Company has fully reserved for these investments. The Company recognizes
income from the joint ventures as cash dividends are received.
The Company also has an 11.4% interest in a joint venture (JV) with KUB
Holdings BHD, a Malaysian firm. The interest, acquired by TIS for $400,000
in March 1995, was acquired by the Company in connection with the purchase
of TIS effective September 30, 1996 (Note 2). The fair value of this asset
was not significant at the acquisition date. The JV was created for the
purpose of manufacturing, marketing and selling the TIS-4000 system in
certain Asian countries. If the JV requires funding, the Company may be
required to contribute in accordance with the agreed-upon proportions as
defined in the JV agreement.
The JV agreement also requires the Company to continue as a going concern
and to provide support services to the JV at market rates. If the Company
does not meet this requirement, it could be required to refund a
contractually-defined portion ($1,938,000 at June 30, 1997) of the
$2,500,000 proceeds TIS received in 1995 from the sale to the JV of
licensing and marketing rights to the TIS-4000 technology. Because of the
remote possibility of the Company being required to make such a refund,
this obligation was determined to be zero at the acquisition date. Further,
as of July 30, 1997, the Company does not expect that such refunds will be
required. In addition, the Company is not aware of any violations of the
requirements defined in the JV agreement nor does it anticipate any future
violations.
19
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
4. DEBT
On August 2, 1993, the Company entered into a long-term financing agreement
(Agreement) with Marine Midland Business Loans, Inc. (Midland). The
Agreement is a Reducing Revolving Line of Credit with a borrowing limit
that is reduced monthly over the seven year term of the loan. Borrowings on
the line are restricted to the lesser of an amount based on certain asset
levels, or the borrowing limit. As of June 30, 1997, the Company could
borrow an additional $1,036,000 up to the current borrowing limit of
$2,805,000. Pursuant to the borrowing limit amortization schedule, the
limit will be amortized to $2,070,000, $1,133,000 and $155,000 in the years
ended June 30, 1998, 1999 and 2000, respectively, with the remaining unpaid
balance of the loan becoming due August 1, 2000.
The line bears interest at Midland's prime borrowing rate plus 1% (9.5% at
June 30, 1997). As long as the Agreement is in place, interest expense is
calculated using the higher of the actual debt balance or 50% of the
borrowing limit. Starting in August 1997 the Company may repay the entire
debt balance with Midland with no prepayment penalty.
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, cash flow coverage and current ratios.
The Company has not met the quarterly-calculated cash flow coverage
covenant since the first quarter of fiscal 1996. Midland has issued waivers
of non-compliance with the cash flow coverage covenant through June 30,
1997. In connection with obtaining the aforementioned waivers, the Company
agreed to certain conditions, including limiting the assets against which
the Company may borrow to certain accounts receivable, maintaining higher
tangible net worth and achieving certain annual operating results in fiscal
1997. In addition, the Company may not, without the prior written consent
of Midland, pay cash dividends, purchase treasury stock (except for limited
amounts from employees), or make investments in other than investment grade
securities, as long as the Company is in violation of the cash flow
coverage covenant.
Beginning in March 1997, the Company has not maintained the aforementioned
minimum tangible net worth. In addition, the Company did not achieve the
aforementioned minimum fiscal 1997 operating results.
The Company's non-compliance with these requirements constitutes an event
of default under the Agreement. Pursuant to the Agreement, upon the
happening of an event of default, Midland may declare any principal
outstanding to be immediately due and payable, together with all interest
thereon and applicable costs and expenses. Accordingly, the $1,769,000
balance of the long-term debt has been classified as current as of June 30,
1997.
As of July 30, 1997, Midland had not declared the Company's indebtedness to
be immediately due and payable. The Company's management is currently
discussing the terms of this debt with Midland and believes that should
Midland declare the debt immediately due and payable, the Company would be
able to satisfy the debt obligation using its cash on hand and maintain
liquidity sufficient to meet the near-term needs of the Company.
Because of the uncertainty regarding the timing of the debt becoming due
and payable, the Company wrote off $197,000 of unamortized Midland loan
acquisition costs at June 30, 1997.
Contractual maturities of long-term debt, which Midland may accelerate or
declare immediately due and payable at any time unless the aforementioned
event of default is cured, are as follows (in thousands):
1998 $ --
1999 628
2000 978
2001 163
---------------
Total 1,769
===============
20
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The benefit (provision) for income taxes is based on income (loss) before
income taxes as follows (in thousands):
For the years ended June 30,
1997 1996 1995
-------------------------------------------------
Domestic $ (2,471) $ (1,160) $ 948
Foreign 279 (238) 373
-------------------------------------------------
Income (loss) before income taxes $ (2,192) $ (1,398) $ 1,321
=================================================
Components of the benefit (provision) for income taxes are as follows (in
thousands):
For the years ended June 30,
1997 1996 1995
-------------------------------------------------
Current benefit (provision):
Domestic $ 682 $ 222 $ (414)
Foreign 120 8 (74)
-------------------------------------------------
Total current benefit (provision) 802 230 (488)
Domestic deferred benefit (provision) (39) 155 9
-------------------------------------------------
Benefit (provision) for income taxes $ 763 $ 385 $ (479)
=================================================
The benefit (provision) for income taxes differs from the amount determined
by applying the federal statutory rate as follows (in thousands):
For the years ended June 30,
1997 1996 1995
-------------------------------------------------
Tax benefit (provision) computed at statutory
rate $ 745 $ 475 $ (449)
State tax, net of federal benefit (2) (2) (25)
Nondeductible expenses (32) (90) (69)
Income tax credits -- (72) 73
Non-benefitted losses of foreign subsidiaries (3) (33) (5)
Recovery of prior year taxes paid 98 84 --
Change in valuation allowance (89) 37 (11)
Other 46 (14) 7
-------------------------------------------------
Benefit (provision) for income taxes $ 763 $ 385 $ (479)
=================================================
The tax effects of significant temporary differences and credit
carryforwards that give rise to the net deferred tax asset under SFAS 109
are as follows (in thousands):
June 30, 1997 June 30, 1996
------------------------------
Allowances and other accrued liabilities $ 1,361 $ 1,401
Tax credit carryforwards 209 88
Net operating loss carryforwards -- 31
Valuation allowance (716) (627)
------------------------------
Net deferred tax asset $ 854 $ 893
==============================
As of June 30, 1997, the Company has paid foreign advance corporation tax
of $20,000 which may be utilized to reduce future foreign taxes due and has
domestic tax credit carryforwards of $189,000 expiring in 2007 and 2008.
21
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK COMPENSATION
At June 30, 1997, 294,621 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.
During 1997 the Company granted options for 125,000 shares of the Company's
common stock to certain key management personnel of HIA. Of the total,
75,000 vest over seven years, subject to acceleration if certain
performance criteria are achieved by HIA and expire ten years after date of
grant. The remaining 50,000 vest over four years only if certain
performance criteria are met. Based on HIA's 1997 operating results, 10,000
shares will never vest and were forfeited.
In 1997 certain eligible employees of the Company exercised stock options
by surrendering to the Company their Company stock with an aggregate fair
market value of $161,000, in non-cash, tax-free transactions.
Option activity in fiscal years 1995, 1996 and 1997 was as follows:
Weighted Number of Weighted
Number of Average Shares Average
Shares Exercise Price Exercisable Exercise Price
--------------------------------------------------------------
Outstanding at June 30, 1994 320,356 $ 2.76
Granted 88,500 3.74
Exercised (17,500) 2.47
Canceled or forfeited (28,500) 3.09
------------------------------
Outstanding at June 30, 1995 362,856 $ 2.88 228,856 $ 2.76
Granted 22,500 2.68
Canceled or forfeited (52,500) 2.75
------------------------------
Outstanding at June 30, 1996 332,856 $ 2.87 250,856 $ 2.88
Granted 503,350 3.58
Exercised (98,252) 2.46
Canceled or forfeited (29,250) 3.84
------------------------------
Outstanding at June 30, 1997 708,704 $ 3.45 187,104 $ 3.19
==============================================================
Exercise prices for options outstanding at June 30, 1997 are as follows:
Range of Exercise Prices
Total
$2.38 - $3.19 $3.50 - $4.31 $2.38 - $4.31
---------------------------------------------------------------
Options Outstanding:
Number of options 285,104 423,600 708,704
Weighted average exercise price $ 2.82 $ 3.88 $ 3.45
Weighted average remaining
contractual life 4.63 years 5.66 years 5.24 years
Options Exercisable:
Number of options 106,104 81,000 187,104
Weighted average exercise price $ 2.85 $ 3.64 $ 3.19
The Company accounts for its stock-based compensation plans for employees
under the provisions of APB 25. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Standards 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.
22
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK COMPENSATION (CONTINUED)
Pro forma information regarding net loss and 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 a Black-Scholes pricing model with the following weighted
average assumptions:
For the years ended June 30,
1997 1996
----------------------------------
Risk-free interest rate 6.3% 6.5%
Expected dividend yield 0.0% 0.0%
Expected life 6 years 6 years
Expected volatility 58.5% 57.7%
Using the fair value method of SFAS 123, the net loss and net loss per
share would have been adjusted to the pro forma amounts indicated below (in
thousands, except per share data):
For the years ended June 30,
1997 1996
----------------------------------
Pro forma net loss $ (1,686) $ (1,016)
Pro forma primary and fully diluted net loss per share $ (0.39) $ (0.24)
The weighted average fair value of options granted during 1997 and 1996 was
$1.98 and $1.39, respectively. The total fair value of options granted was
$978,000 and $31,000 in 1997 and 1996, respectively. These amounts have
been amortized ratably over the vesting periods of the options for purposes
of this disclosure.
7. LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 1997 and
1996 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 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
1997, 1996 and 1995) or ii) the annual interest payable on the note.
Company contributions to the Plan were $9,000 in 1997 and 1996 and $70,000
in 1995, representing interest in 1997 and 1996, and principal and interest
of $55,000 and $15,000 in 1995, respectively.
The $133,000 receivable represents the unpaid balance of a loan made in
fiscal 1994 to an 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 (6.0% at June 30, 1997). The loan is due on demand but no
later than October 26, 1998.
23
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Leases
At June 30, 1997, 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
--------------------------------------------
1998 $ 760
1999 685
2000 460
2001 456
2002 336
Thereafter 1,320
----------------
$ 4,017
================
Net rental expense was $783,000, $822,000 and $1,035,000 in 1997, 1996 and
1995, respectively.
Shareholder Rights Plan
During fiscal year 1989, the Company adopted a shareholder rights plan
under which preferred stock purchase rights were distributed, one right for
each share of common stock outstanding. Each right entitles holders of the
Company's common stock to buy one one-hundredth of a newly issued share of
Series A Junior Participating Preferred Stock at an exercise price of
$17.50, following certain change of control events including a tender offer
for, or acquisition by, any entity of 20% or more of the Company's common
stock.
At any time up to ten business days following the public announcement of
certain change of control events, the Company can redeem the rights at
$.001 per right. If certain subsequent triggering events occur, the rights
will give shareholders the ability to acquire, upon payment of the
then-current exercise price, the Company's common stock or the common stock
of an acquirer having a value equal to twice the right's exercise price.
The rights will expire June 25, 1999.
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 that could be
required to be paid under these contracts, if such events occur, aggregated
approximately $1,846,000 as of June 30, 1997.
Employment Agreements
Effective July 1, 1993, the Company entered into five-year employment
agreements with two of its executive officers. The agreements provide for
base salary plus 1) an annual incentive bonus to be paid in cash based on
the achievement of specified returns on equity and growth in share price
plus dividends paid for each fiscal year, 2) a long-term incentive bonus,
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 for gains on dispositions, if any, of
certain subsidiaries and divisions of the Company.
No annual bonus was paid in 1997, 1996 or 1995.
24
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
For the three year performance period ended June 30, 1996, the long-term
incentive bonus was payable at the end of the period in up to 210,000
shares of Company common stock based on the achievement of specified
returns on equity and share price growth plus dividends paid during the
period. At the employee's election, such payout could have been taken in
cash up to 40% of the fair market value of the total shares to be issued.
The Company recognized $71,000, ($16,000), and ($55,000) of compensation
expense (reversal of expense) in 1994, 1995 and 1996, respectively, related
to the long-term incentive plan. The amounts were reflected as adjustments
to additional paid-in capital. Because the specified performance targets
for the three year performance period were not met, no long-term incentive
bonus was paid for the three year performance period ended June 30, 1996.
To replace the expired long-term incentive bonus, on August 15, 1996 the
Board of Directors approved the issuance of 148,500 stock options to the
two executive officers at an exercise price equal to the fair market value
of $2.8125 at the grant date. The options become exercisable evenly over
three years starting one year from the date of grant and expire seven years
from the date of grant.
As of June 30, 1997, the maximum amount that could be required to be paid
under the termination clause of these agreements was approximately
$766,000.
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. Of the $1,000,000 approved for employee stock
repurchases by the Board of Directors, the Company had $55,000 available
for future repurchases at June 30, 1997. The Company's Agreement with
Midland limits employee stock repurchases to $120,000 per calendar year
($170,000 for calendar year 1996) as long as the Company is in violation of
the cash flow coverage covenant contained in the Agreement (Note 4). As of
June 30, 1997, $99,000 was available under the calendar year 1997 limit.
Effective June 30, 1995 the Board of Directors discontinued the previously
authorized public stock repurchase program. 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.
25
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC SEGMENT DATA
The Company's wholly-owned foreign subsidiaries have been based in Europe
and Canada and are included in the accompanying consolidated financial
statements. The Company closed its Canadian operating facility in 1997.
Financial information for the foreign subsidiaries is summarized below (in
thousands):
For the Years Ended June 30,
1997 1996 1995
----------------------------------------------------
Revenues $ 7,031 $ 7,261 $ 8,879
Income (loss) before income taxes 275 (238) 373
Identifiable assets 4,335 4,636 5,744
The Company's export sales from domestic operations were approximately
$7,169,000 in 1997, $6,753,000 in 1996 and $7,265,000 in 1995, each
representing 22%, 24%, and 23%, respectively, of total sales from domestic
operations. The profitability of domestic sales is approximately the same
as that of export sales, and the Company foresees no unusual risks
associated with its export sales.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in 1997 and
1996 is as follows (in thousands, except per share data):
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------
Revenues $ 8,818 $ 10,368 $ 9,443 $ 11,317
Operating income (loss) (540) (425) (1,186) 102
Net income (loss) (375) (226) (936) 108
Primary and fully diluted net
income (loss) per share $ (0.09) $ (0.05) $ (0.21) $ 0.02
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------------
Revenues $ 7,511 $ 9,678 $ 8,274 $ 9,948
Operating income (loss) (1,105) 121 (694) (61)
Net income (loss) (751) 7 (507) 238
Primary and fully diluted net
income (loss) per share $ (0.18) $ (0.00) $ (0.12) $ 0.06
11. RESTRUCTURING OF OPERATIONS
In the first quarter of 1997, management decided to restructure the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Denver, Colorado was consolidated in
1997 into two manufacturing facilities located in Seattle, Washington and
Belfast, Northern Ireland. The cost of consolidating these manufacturing
facilities was not material and was paid in fiscal year 1997.
The Company recorded a $338,000 restructuring charge in the fourth quarter
of fiscal 1996 in connection with the reorganization of its Canadian and
U.K. operations. Effective June 30, 1996 the net assets and substantially
all operations of Hathaway Instruments Limited (HIL), the Company's
subsidiary located in Hoddesdon, England, were transferred to Hathaway
Systems, Limited (HSL), the Company's Belfast, Northern Ireland subsidiary.
In connection with the asset transfer, substantially all operations of HIL
were combined with the operations of HSL. In addition, the Company decided
to close its Toronto, Canada facility and to combine substantially all of
its operations with the operations of Hathaway Process Instrumentation, the
Dallas, Texas division. The initiatives were aimed at reducing costs and
enhancing productivity and efficiency. The restructuring provision was
primarily comprised of estimated costs for employee severance benefits and
fixed asset writeoffs. The payouts related to the restructuring charge were
made in 1996 and 1997.
26
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 Officers" (page 3) and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" (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 8) 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 and 5)
in the Company's Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Since July 1, 1996, the Company has not entered into any material related party
transactions.
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
g) Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996.
h) Consolidated Statements of Operations for each of the years in the
three-year period ended June 30, 1997.
i) Consolidated Statements of Cash Flows for each of the years in the
three-year period ended June 30, 1997.
j) Consolidated Statements of Stockholders' Investment for each of the
years in the three-year period ended June 30, 1997.
k) Notes to Consolidated Financial Statements.
l) Report of Independent Public Accountants.
2. Financial Statement Schedules
None.
27
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 Eugene E. Prince. Incorporated by
reference to Exhibit 10n(i) to the Company's 1989 Annual
Report and Form 10-K for the fiscal year ended June 30,
1989.
10.2 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.
10.3 Lease Agreement between Circuits and Systems Design *
Limited and Department of Economic Development (Northern
Ireland) dated April 7, 1992. Incorporated by reference to
Exhibit 10(iii)D to the Company's 1992 Annual Report and
Form 10-K for the fiscal year ended June 30, 1992.
10.4 The Hathaway Corporation Amended 1980 Non-Incentive Stock Option *
Plan. Incorporated by reference to the Company's Form S-8 filed
August 3, 1981.
10.5 The 1983 Incentive and Non-Qualified Stock Option Plan *
dated September 22, 1983. Incorporated by reference to the
Company's Form S-8 filed May 10, 1984.
10.6 Amendment to the 1983 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.
10.7 The 1989 Incentive and Non-Qualified Stock Option Plan dated *
August 10, 1989. Incorporated by reference to the Company's
Form S-8 filed October 25, 1990.
10.8 The 1991 Incentive and Non-Statutory Stock Option Plan dated *
September 19, 1991. Incorporated by reference to the Company's
Form S-8 filed January 8, 1992.
10.9 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.
10.10 Employment Agreement between Hathaway Corporation and *
Eugene E. Prince, dated July 1, 1993. Incorporated by
reference to Exhibit 10.17 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
10.11 Employment Agreement between Hathaway Corporation and *
Richard D. Smith, dated July 1, 1993. Incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
28
Exhibit No. Subject Page
----------- ------- ----
10.12 Loan and Security Agreement dated August 2, 1993 between Hathaway Corporation, *
certain subsidiaries of Hathaway Corporation and Marine Midland Business Loans,
Inc. Incorporated by reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended June 30, 1993.
10.13 Loan Facility Agreement dated August 2, 1993 between CSD Hathaway Limited and Forward *
Trust Limited. Incorporated by reference to Exhibit 10.19 to the Company's Form 10-K
for the fiscal year ended June 30, 1993.
10.14 Reimbursement Agreement dated August 2, 1993 between CSD Hathaway Limited and Marine *
Midland Business Loans, Inc. Incorporated by reference to Exhibit 10.20 to the
Company's Form 10-K for the fiscal year ended June 30, 1993.
10.15 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.
10.16 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.
10.17 Assignment and Assumption of Lease Agreement, Letter Agreement, Collateral *
Assignment and Amendment to Lease Agreement between Trammel Crow Company
No. 91, Petula Associates, Ltd., Symantec Corporation and Hathaway Systems
Corporation-Beta Products Division, dated June 1, 1994. Incorporated by
reference to Exhibit 10.27 to the Company's Form 10-K for the fiscal year
ended June 30, 1994.
10.18 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.
10.19 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.
10.20 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.
10.21 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.**
10.22 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.
29
Exhibit No. Subject Page
----------- ------- ----
10.23 Joint Venture Agreement between KUB Holdings Bhd. And Tate Integrated Systems,
L.P. dated March 9, 1995 and Supplement dated June 15, 1995.
10.24 License Agreement between Tate Integrated Systems, L.P. and KUB-TIS Controls Sdn.
Bhd. dated March 9, 1995.
10.25 Commercial Lease Agreement between Commerce Square Associates LLC and Hathaway
Corporation dated October 24, 1996.
10.26 Industrial Lease Agreement between Lakefront Limited Partnership and Hathaway
Industrial Automation dated April 30, 1997.
21 List of Subsidiaries 33
22 Definitive Proxy Statement, dated September 18, 1997 for the Registrant's 1997 Annual *
Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP. 31
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 and 1998 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
1997.
30
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 30, 1997 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. 3344998) 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 Statement on Form S-8 (No. 3344997) of the 1991
Incentive and Non-Statutory Stock Option Plan of Hathaway Corporation dated
January 8, 1992.
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 18, 1997.
31
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/ Eugene E. Prince
-------------------------------------
Eugene E. Prince
President, Chief Executive
Officer and Chairman of the
Board of Directors
Date: September 18, 1997
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/ Eugene E. Prince President, Chief Executive September 18, 1997
- -------------------- Officer, and Chairman of the
Eugene E. Prince Board of Directors
/s/ Richard D. Smith Executive Vice President, September 18, 1997
- -------------------- Treasurer, Chief Financial
Richard D. Smith Officer (Principal Accounting
Officer) and Director
/s/ George J. Pilmanis Director September 18, 1997
- ----------------------
George J. Pilmanis
/s/ Del D. Hock Director September 18, 1997
- ---------------
Del D. Hock
/s/ Chester H. Clarridge Director September 18, 1997
- ------------------------
Chester H. Clarridge
/s/ Graydon D. Hubbard Director September 18, 1997
- ----------------------
Graydon D. Hubbard
32
OFFICERS AND DIRECTORS / INVESTOR INFORMATION
BOARD OF DIRECTORS
Eugene E. Prince
Chairman of the Board,
President and Chief Executive Officer
Richard D. Smith
Executive Vice President, Treasurer
and Chief Financial Officer
Delwin D. Hock
Former Chairman of the Board of Directors,
President and CEO of Public Service Company
of Colorado
Chester H. Clarridge
Consultant
Graydon D. Hubbard
Retired Partner, Arthur Andersen LLP
George J. Pilmanis
President of Balriga International Corporation
Business Development in the Far East and Eastern Europe
INVESTOR INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of Hathaway Corporation will be held at 3:00
p.m., on Thursday, October 23, 1997 at Lone Tree Country Club, 9808 Sunningdale
Boulevard, Littleton, Colorado.
Information Requests
Copies of the Company's reports to the Securities and Exchange Commission,
excluding exhibits, on Form 10-K and Form 10-Q may be obtained from the Company
without charge. Direct your written request to: Hathaway Corporation, 8228 Park
Meadows Drive, Littleton, Colorado 80124.
Transfer Agent
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Independent Public Accountants
ARTHUR ANDERSEN LLP
Denver, Colorado
CORPORATE OFFICERS
Eugene E. Prince
Chairman of the Board,
President and Chief Executive Officer
Richard D. Smith
Executive Vice President, Treasurer
and Chief Financial Officer
Herbert Franson
Assistant Treasurer, Corporate Controller
and Assistant Secretary
Susan M. Chiarmonte
Secretary
SUBSIDIARIES AND DIVISIONS
Domestic Subsidiaries and Divisions
Computer Optical Products, Inc.
Chatsworth, California
Hathaway Industrial Automation, Inc.
Baltimore, Maryland
Hathaway Motion Control Division
Tulsa, Oklahoma
Hathaway Motors and Instruments Division
Tulsa, Oklahoma
Hathaway Power Instrumentation
Littleton, Colorado
Hathaway Process Instrumentation
Dallas, Texas
Hathaway Automation Technology Division
Seattle, Washington
International Subsidiary
Hathaway Systems Limited
Belfast, Northern Ireland
33