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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-4041
HATHAWAY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0518115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 27, 1998, 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 $3,722,000.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated September 17,
1998 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................................................................ 6
Item 8. Financial Statements and Supplementary Data............................... 12
Report of Independent Public Accountants.................................. 13
Item 9. Disagreements on Accounting and Financial Disclosure...................... 33
PART III.
Item 10. Directors and Executive Officers of the Registrant........................ 33
Item 11. Executive Compensation.................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 33
Item 13. Certain Relationships and Related Transactions............................ 33
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 34
Consent of Independent Public Accountants................................. 37
Signatures................................................................ 38
Officers and Directors / Investor Information............................. 41
PART I
ITEM 1. BUSINESS.
Hathaway Corporation (the Company) was organized under the laws of Colorado in
1962. The Company is engaged in the business of designing, manufacturing and
selling advanced systems and instrumentation to the worldwide power and
process industries, as well as motion control products to a broad spectrum of
customers throughout the world. The Company operates primarily in the United
States and the United Kingdom and has three joint venture investments in
China.
POWER AND PROCESS BUSINESS
Power Instrumentation
Hathaway's 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 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 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 products
for the process and power industries including monitoring systems, calibration
equipment and process measurement instrumentation. The monitoring systems,
called visual anunciators and sequential event recorders, provide both visual
and audible alarms and are used to control processes in various plants
including, chemical, petroleum, food and beverage, pulp and paper, and
textiles. Calibration equipment is used to test and adjust instrumentation
for proper and accurate operation in measuring electricity, temperatures and
pressure within the process industry. Process measurement instrumentation
includes signal conditioning products and transducers used to measure such
variables as temperature, voltage, current and power in various industrial
applications.
Systems Automation
Effective September 30, 1996, the Company acquired 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,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable of TIS
were collected during fiscal year 1998. 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.
1
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 near Baltimore, Maryland and is a full service supplier of
process automation systems for industrial applications. HIA has developed a
state-of-the-art software system for Supervisory Control and Data Acquisition
(SCADA) and Distributed Control Systems (DCS). The HIA system has been used
to fully automate such industrial applications as water and wastewater
treatment plants, glass manufacturing plants, oil and gas terminals and tank
farm facilities. In addition to expanding into its traditional process
markets, HIA's system is being marketed to the power utility industry. 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 closed its Toronto, Canada facility and combined substantially all of
its operations with the operations of Hathaway Process Instrumentation
Corporation, the Carrolton, Texas subsidiary. The initiatives were aimed at
reducing costs and enhancing productivity and efficiency. The restructuring
provision of $338,000 recorded in 1996 was primarily comprised of estimated
costs for employee severance benefits and fixed asset writeoffs. The payouts
related to the restructuring charge were made in fiscal years 1996 and 1997,
and the related restructuring accrual fully utilized.
In the first quarter of fiscal year 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 fiscal year 1997
into two manufacturing facilities located in Seattle, Washington and Belfast,
Northern Ireland.
MOTION CONTROL BUSINESS
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 one division and two subsidiaries,
respectively, of Hathaway Motion Control Corporation, a wholly-owned
subsidiary of the Company: Motors and Instruments Division (MI Tulsa), Emoteq
Corporation (Emoteq Tulsa) and Computer Optical Products, Inc., (COPI -
Chatsworth, CA).
Subsequent to fiscal year 1998, Emoteq Corporation acquired all of the
outstanding shares of Ashurst Logistic Electronics Limited of Bournemouth,
England (Ashurst) for $289,000. Ashurst manufactures drive electronics and
position controllers for a variety of motor technologies as well as a family
of static frequency converters for military and aerospace applications and has
extensive experience in power electronics design and software development
required for the application of specialized drive electronics technology. For
calendar year ended December 31, 1997, Ashurst reported revenues of $353,000.
The acquired company was renamed Emoteq UK Limited.
The MI division manufactures precision direct-current fractional horsepower
motors and certain motor components. Industrial equipment and military
products are the major application for the motors. This division also supplies
spare parts and replacement equipment for general-purpose instrumentation
products.
Emoteq designs, manufactures and markets direct current (DC) brushless motors,
related components, and drive and control electronics. Markets served include
semiconductor manufacturing, industrial automation, medical equipment, and
military and aerospace. A new motion technology center was established in
Evergreen, Colorado in fiscal year 1998 to develop more automated methods of
manufacturing and advance the state of Emoteq's core technology base.
2
Optical encoders are manufactured by COPI. 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
The Company maintains a direct sales force. In addition to its own marketing
and sales force, the Company has developed a worldwide network of independent
sales representatives and agents to market its various product lines.
The Company faces competition in all of its markets, although the number of
competitors varies depending upon the product. The Company believes there are
only a small number of competitors in the power and process markets, but there
are numerous competitors in the motion control market. No clear market share
data is available for the Company's other product areas. Competition involves
primarily product performance and price, although service and warranty are
also important.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The information required by this item is set forth in Note 9 of the Notes to
Consolidated Financial Statements on page 30 herein.
AVAILABILITY OF RAW MATERIALS
All parts and materials used by the company are in adequate supply. No
significant parts or materials are acquired from a single source.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS
The Company holds several patents and trademarks regarding components used by
the various subsidiaries; however, none of these patents and trademarks are
considered to be of major significance.
SEASONALITY OF THE BUSINESS
The Company's business is not of a seasonal nature, however, revenues derived
from the power market may be influenced by customers' fiscal year ends and
holiday seasons.
WORKING CAPITAL ITEMS
The Company currently maintains inventory levels adequate for its short-term
needs based upon present levels of production. The Company considers the
component parts of its different product lines to be readily available and
current suppliers to be reliable and capable of satisfying anticipated needs.
SALES TO LARGE CUSTOMERS
During fiscal 1998, 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, 1998 consisted
of sales orders totaling approximately $13,892,000. The Company expects to
ship goods filling $13,712,000 of those purchase orders within fiscal 1999.
This compares to a backlog from continuing operations of $14,742,000 at June
30, 1997, of which $14,229,000 was scheduled for shipment is fiscal 1998.
GOVERNMENT SALES
Approximately $238,000 of the Company's backlog as of June 30, 1998 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.
3
ENGINEERING AND DEVELOPMENT ACTIVITIES
The Company's expenditures on engineering and development for continuing
operations were $4,411,000 in fiscal 1998, $3,646,000 in fiscal 1997 and
$3,722,000 in fiscal 1996. Of these expenditures, no material amounts were
charged directly to customers.
ENVIRONMENTAL ISSUES
No significant pollution or other types of emission result from the Company's
operations and it is not anticipated that the Company's proposed operations
will be affected by Federal, State or local provisions concerning
environmental controls. However, there can be no assurance that any future
regulations will not affect the Company's operations.
FOREIGN OPERATIONS
The information required by this item is set forth in Note 9 of the Notes to
Consolidated Financial Statements on page 32 herein.
EMPLOYEES
As of the end of fiscal 1998, the Company had approximately 349 full-time
employees.
ITEM 2. PROPERTIES.
The Company leases its administrative offices and manufacturing facilities as
follows:
APPROXIMATE SQUARE
DESCRIPTION / USE LOCATION FOOTAGE
- -------------------------------------------------------------------------------------------------------------
Corporate headquarters and administrative office Littleton, Colorado 14,000
Engineering and development facility Evergreen, Colorado 3,000
Office and manufacturing facility Carrolton, Texas 29,000
Office and manufacturing facility Kent, Washington 16,000
Engineering, development and administrative office Hunt Valley, Maryland 14,000
Office and manufacturing facility Tulsa, Oklahoma 13,000
Office and manufacturing facility Chatsworth, California 13,000
Office and manufacturing facility Tulsa, Oklahoma 10,000
Office facility Hoddesdon, England 3,000
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 is involved in certain actions that have arisen out of the ordinary
course of business. Management believes that resolution of the actions will not
have a significant adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of the Company in the
fourth quarter of fiscal year 1998.
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 27, 1998 was 619. The
Company declared no dividends during fiscal years 1998 and 1997.
4
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
HIGH LOW
------------------------------
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
FISCAL 1998
First Quarter $4.50 $2.63
Second Quarter 4.00 2.38
Third Quarter 2.94 2.13
Fourth Quarter 2.63 1.56
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes data from the Company's annual financial
statements for the fiscal years 1994 through 1998 and notes thereto; the
Company's complete annual financial statements and notes thereto for the current
fiscal year appear in Item 8 beginning on page 12 herein. See Item 1 in the
Business section of this report and Note 2 to Consolidated Financial Statements
on page 21 for discussion of a business acquisition completed in fiscal 1997.
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
In thousands (except per share data)
STATEMENTS OF OPERATIONS DATA:
Net revenues from continuing operations $41,317 $39,946 $35,411 $39,838 $43,028
===============================================================================
Income (loss) from continuing operations $(2,161) $(2,192) $(1,398) $ 1,321 $ 1,275
before income taxes
Benefit (provision) for income taxes 184 763 385 (479) (320)
-------------------------------------------------------------------------------
Net income (loss) from continuing $(1,977) $(1,429) $(1,013) $ 842 $ 955
operations
Net income from operations of divested -- -- -- -- 885
segment and divested operation
Gain on sale of segment -- -- -- -- 4,023
Net income (loss) $(1,977) $(1,429) $(1,013) $ 842 $ 5,863
===============================================================================
Diluted earnings (loss) per share:
Continuing operations $ (0.46) $ (0.34) $ (0.24) $ 0.19 $ 0.20
Operations of divested segment and -- -- -- -- 0.18
divested operation
Sale of segment -- -- -- -- 0.83
Net income (loss) $ (0.46) $ (0.34) (0.24) $ 0.19 $ 1.21
===============================================================================
Cash dividends:
Per share $ -- $ -- $ 0.10 $ 0.12 $ 0.205
Total amount paid $ -- $ -- $ 426 $ 536 $ 992
BALANCE SHEET DATA:
Total assets at June 30 $17,820 $20,477 $21,139 $23,312 $24,432
Total current and long-term debt $ 1,245 $ 1,769 $ 1,777 $ 2,144 $ 2,298
at June 30
5
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 1998 COMPARED TO FISCAL YEAR 1997
The Company recorded a net loss of $1,977,000 in fiscal year 1998, compared to a
net loss of $1,429,000 in 1997. The fiscal 1998 and 1997 results include
$2,527,000 and $923,000 of net losses from Hathaway Industrial Automation (HIA),
respectively. HIA was acquired by the Company effective September 30, 1996 (see
discussion under "Business Acquisition" below) and is included in the Company's
Power and Process Business. Excluding HIA, the Company recognized net income
of $550,000 and a net loss of $506,000 for the years ended June 30, 1998 and
1997, respectively.
Revenues increased by $1,371,000, or 3%, from 1997 to 1998, comprised of a 2%
increase in sales of the Company's power and process instrumentation and systems
automation products and an 8% increase in sales of motion control products (the
fifth consecutive annual increase). The increase in sales of power and process
products consists of a $861,000 decrease in sales of the Company's traditional
product lines, offset by a $1,268,000 increase in HIA product sales.
Sales to international customers decreased 2% from $14,200,000, or 36% of sales,
in fiscal 1997, to $13,955,000, or 34% of sales, in fiscal 1998. Sales backlog
decreased from $14,742,000 at June 30, 1997 to $13,892,000 at June 30, 1998,
comprised of $11,874,000 of traditional product backlog and $2,018,000 of HIA
product backlog, compared to $11,996,000 of traditional product backlog and
$2,746,000 of HIA product backlog at June 30, 1997.
Cost of products sold remained at 64% of revenues in 1998 and 1997. Excluding
the effect of HIA, the cost of products sold in 1998 and 1997 represents 61% and
63% of related revenues, respectively. This decrease in cost of traditional
product sold was primarily due to manufacturing efficiencies and an improved
product sales mix in the motion control business.
Selling, general and administrative and engineering and development expenses
increased 3% from $16,018,000 in 1997 to $16,466,000 in 1998 due to a whole year
of HIA operations in 1998 versus a partial year in 1997. Excluding the effect
of HIA, these expenses would have totaled $14,129,000 in 1998, as compared to
$14,182,000 in the prior period.
Amortization of intangibles and other assets increased from $402,000 in 1997 to
$738,000 in 1998. The increase was primarily due to the $406,000 write-off in
fiscal 1998 of the unamortized portion of goodwill which resulted from the HIA
acquisition, offset by the $197,000 write-off in fiscal 1997 of unamortized
debt acquisition costs related to the Marine Midland loan facility. (See further
discussion under "Business Acquisition" and "Liquidity and Capital Resources"
below.)
In fiscal 1998 the Company recognized $222,000 of equity income from its
investment in two of its Chinese joint ventures, Zibo Kehui Electric Company
Ltd. and Hathaway Si Fang Protection and Control Company, Ltd., as compared to
none recognized in 1997. (See further discussion under "Liquidity and Capital
Resources" below.)
6
In fiscal year 1998 the Company recognized a benefit for income taxes of
$184,000 compared to $763,000 in fiscal year 1997. The decrease is primarily
due to an increase in nondeductible expenses and goodwill amortization plus an
increase in the valuation allowance. Realization of the Company's net deferred
tax asset is dependent upon the Company generating sufficient United States
federal taxable income (approximately $2,291,000) in future years to obtain
benefit from the reversal of net deductible temporary differences and from tax
credit and net operating loss carryforwards. The Company's management believes
that, on a more likely than not basis, the recorded net deferred tax asset is
realizable. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods if estimates of future United States federal
taxable income are reduced.
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) which was acquired by the
Company effective September 30, 1996 (see discussion under "Business
Acquisition" below), and a $506,000 net loss from operation 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 increase in
sales of power and process products consists of a 3% increase in sales of the
Company's traditional product lines. The remainder of the increase in power and
process revenues was due to product sales of HIA, totaling $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 primarily 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.
7
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 Carrolton, 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 write-offs. 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 Littleton was consolidated in 1997 into two
manufacturing facilities located in Kent, Washington and Belfast, Northern
Ireland. The cost of consolidating these manufacturing facilities was not
material and was paid in fiscal year 1997.
In fiscal year 1997 the Company recognized a benefit for income taxes of
$763,000 compared to $385,000 in fiscal year 1996. The increase is primarily
due to an increase in the Company's loss before income taxes. Realization of
the Company's net deferred tax asset is dependent upon the Company generating
sufficient United States federal taxable income in future years to obtain
benefit from the reversal of net deductible temporary differences and from tax
credit and net operating loss carryforwards. The Company's management believes
that, on a more likely than not basis, the recorded net deferred tax asset is
realizable. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods if estimates of future United States federal
taxable income are reduced.
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,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable of TIS
were collected during fiscal 1998.
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 Hunt Valley, 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
generation, 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.
For the year ended June 30, 1998 and the nine month post-acquisition period
ended June 30, 1997, HIA had losses before income taxes of approximately $2.7
million and $1.3 million, respectively. HIA's traditional business is highly
dependent on sales to the industrial market which typically encompasses a long
sales cycle, significant customization to specific customer requirements, long
performance periods and large contract values which are subject to a high degree
of scrutiny and negotiation with customers. Since the Company's acquisition of
HIA in September 1996, the Company has seen significant deterioration in the
margins of contracts awarded in this market; and, in several instances, HIA has
declined to submit a bid or has not been awarded a project bid due to competitor
prices or customer specifications that would have resulted in insignificant or
negative contract margin.
8
As a result of its acquisition of HIA, the Company recorded goodwill of
$624,000, primarily due to loss accruals on an in-process contract acquired by
the Company. At June 30, 1998 and in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company determined that the unamortized cost in excess of net assets
acquired from its acquisition of TIS was impaired; and, therefore, wrote-off the
remaining unamortized balance of $406,000. The Company's determination was based
on projections of undiscounted cash flows of HIA, which were based on current
marketplace and competitive conditions and resulting low margins for the
industrial applications of HIA's product. Such undiscounted cash flow estimates
were not sufficient to indicate realization of the related unamortized cost in
excess of net assets acquired. Utilizing such projections and discounting the
estimated cash flows, the Company determined that the entire unamortized amount
was impaired. The current year amortization of $202,000 and impairment write-off
of $406,000, totaling $608,000, is included in amortization of intangibles and
other in the fiscal year 1998 consolidated statement of operations.
The Company is investing substantial resources in HIA, consistent with the
Company's strategy to develop applications of the HIA software for the
deregulated 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. However, there can be no assurance that such
modifications will be successful and/or economically viable. Management
believes that there is significant demand in the power industry for such
solutions as a result of the business environment created by the recent industry
deregulation.
The successful implementation of the Company's current business plan is
partially dependent on the Company's ability to successfully market HIA's
products to the deregulated power industry. The factors that will affect the
success of implementing this business plan include, but are not limited to, the
ability to win 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
(excluding restricted cash) increased $12,000 during the year to a balance of
$3,443,000 at June 30, 1998. Fiscal 1998 operating activities generated
$1,450,000, compared to $197,000 used in fiscal 1997 and $93,000 used in 1996.
Of the $1,450,000 generated in 1998, $1,628,000 was used to fund the operations
of the HIA business and $3,078,000 was generated from operating activities of
the Company's other businesses. 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 consolidated increased cash generated from operations in 1998
was primarily due to increased revenues, the overall cost reduction efforts of
the Company and net income tax refunds of $1,037,000 received during fiscal
1998.
Cash of $914,000 and $1,313,000 was used by investing activities in fiscal 1998
and 1997, respectively, compared to $376,000 generated in fiscal 1996. 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.
The 1998 cash used for investing activities includes $229,000 paid for the
interest acquired in TIS and $685,000 paid for capital expenditures.
Financing activities used $526,000, $32,000 and $828,000 in fiscal years 1998,
1997 and 1996, respectively. The increase in cash used for financing activities
from 1997 to 1998 was primarily due to repayments on the line-of-credit. 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.
9
At June 30, 1998, the Company had $1,245,000 of debt, compared with $1,769,000
at June 30, 1997, a reduction of $524,000. The debt at June 30, 1997 represents
borrowings on the Company's previous long-term financing agreement (Midland
Agreement) with Marine Midland Business Loans, Inc. The Midland Agreement was a
Reducing Revolving Line-of-Credit with a borrowing limit that was reduced
monthly over the seven-year term of the loan. On June 3, 1998, the Company
repaid the $1,232,000 balance on this loan and terminated the Midland Agreement.
The debt at June 30, 1998 represents borrowings on the Company's current long-
term financing agreement (Agreement) with Silicon Valley Bank (Silicon). The
Agreement matures on May 7, 2000 and is subject to automatic annual renewal.
Beginning in May 1999, the Company may terminate the Agreement with no
termination fee. Borrowings on the loan are restricted to the lesser of
$3,000,000 or 85% of the Company's eligible receivables (Maximum Credit Limit).
As of June 30, 1998, the Company could borrow an additional $1,385,000 up to the
Maximum Credit Limit of $2,630,000.
The loan bears interest at Silicon's prime borrowing rate (prime rate) plus 2%
(10.5% at June 30, 1998). The interest rate is adjustable on a quarterly basis
to prime rate plus 1.5% if the Company achieves a net loss less than $750,000
for each previous twelve month rolling period. The Company must continue to
meet this quarterly financial goal, or the rate will be re-adjusted to prime
rate plus 2%. In addition to interest, the loan bears a monthly unused line fee
at 0.125% of the Maximum Credit Limit less the average daily balance of the
outstanding loan during a month. The unused line fee is also adjustable on a
quarterly basis, if the Company achieves a net loss less than $750,000 for each
previous twelve-month rolling period, the monthly unused line fee will be
adjusted to 0.0625%. The Company must continue to meet this quarterly financial
goal, or the rate will be re-adjusted to 0.125%.
The debt is secured by all assets of the Company. The Agreement requires that
the Company maintain compliance with certain covenants related to tangible net
worth. At June 30, 1998, the Company was in compliance with such covenants.
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 accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and subsequently, the Company determined that due to the start-up
nature of the entities, their untested products and political uncertainty in
China, the realization of the initial investment and subsequent earnings (which
were not significant) was uncertain; and, therefore, the Company fully reserved
against the original investments and its share of any equity in income
thereafter, and recognized income from the Chinese joint ventures only as cash
dividends were received. During fiscal year 1998, the operations of Si Fang and
Kehui have continued to mature, their products have gained significant
acceptance and they have indicated sustained profitability while the operations
of HPMS are still in the development stage and continue to incur losses.
In fiscal year 1998, because of the sustained positive operating results of Si
Fang and Kehui combined with the fact that both of these joint ventures are
still subject to a certain amount of political and business uncertainty in
China, the Company recognized a portion of its share of equity in income from
these two joint ventures totaling $222,000, which is included in other assets
and equity income from investments in joint ventures in the fiscal year 1998
consolidated balance sheet and statement of operations, respectively. This
amount represents management's best estimate of the amounts expected to be
received from the joint ventures as of June 30, 1998. The Company will continue
to recognize the portion of its share of equity in income (loss) from these two
joint ventures to the extent it believes such amounts are realizable.
10
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. As of June 30, 1998, the Company had ceased all operations of the JV
due to unprofitablity. The Company is currently in the process of winding down
the partnership.
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 ($1,688,000 at June 30, 1998) 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 September 17, 1998, because sales have ceased, 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, 1998, the Company's fiscal 1999
working capital, capital expenditure and debt service requirements are expected
to be funded from the existing cash balance of $3,443,000 and the $1,385,000
available under the long-term financing agreement at June 30, 1998. The Company
believes that such amounts are sufficient to fund operations and working capital
needs for at least the next twelve months.
YEAR 2000 COMPLIANCE
Some computers and computer-based systems use only the last two digits to
identify a year in the date field and cannot distinguish the year 2000 from the
year 1900. The Company recognizes that the Year 2000 poses a challenge to the
proper functioning of computer systems included in its products, items purchased
from its suppliers and software systems used in its business. The Company is
taking what it believes to be appropriate steps necessary in preparation for
Year 2000 issues. The Company has assessed its products and application
software systems and has concluded that no major changes or updates are
required. Minor modifications and updates are being made as needed. An
assessment of its suppliers and service providers is ongoing and is expected to
be completed by June 30, 1999. The Company does not anticipate that the overall
costs of adaptation of its products and systems will be material, however the
Company will continue to review on an ongoing basis whether it needs to further
address any anticipated costs, problems and uncertainties associated with Year
2000 consequences.
PRICE LEVELS AND THE IMPACT OF INFLATION
Prices of the Company's products have not increased significantly as a result of
inflation during the past several years, primarily due to competition. The
effect of inflation on the Company's costs of production has been minimized
through production efficiencies and lower costs of materials. The Company
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the areas of changes in United States interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
These exposures are directly related to its normal operating and funding
activities. Historically and as of June 30, 1998, the Company has not used
derivative instruments or engaged in hedging activities.
11
INTEREST RATE RISK
The interest payable on the Company's line-of-credit is variable based on the
prime rate, and, therefore, affected by changes in market interest rates. At
June 30, 1998, approximately $1.3 million was outstanding with a weighted
average interest rate of 10.5% (prime plus 2%). The line-of-credit matures in
May 2000 and is subject to automatic annual renewal. Beginning in May 1999, the
Company may pay the balance in full at any time without penalty. The Company
manages interest rate risk by investing excess funds in cash equivalents bearing
variable interest rates which are tied to various market indices. Additionally,
the Company monitors interest rates frequently and has sufficient cash balances
to pay off the line-of-credit and any early termination penalties, should
interest rates increase significantly. As a result, the Company does not
believe that reasonably possible near-term changes in interest rates will result
in a material effect on future earnings, fair values or cash flows of the
Company.
FOREIGN CURRENCY RISK
The Company has a wholly-owned subsidiary located in Northern Ireland. Sales
from this operation are typically denominated in British Pounds, thereby
creating exposures to changes in exchange rates. The changes in the
British/U.S. exchange rate may positively or negatively affect the Company's
sales, gross margins and retained earnings. The Company does not believe that
reasonably possible near-term changes in exchange rates will result in a
material effect on future earnings, fair values or cash flows of the Company,
and therefore, has chosen not to enter into foreign currency hedging
instruments. There can be no assurance that such an approach will be successful,
especially in the event of a significant and sudden decline in the value of the
British Pound.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
a) Report of Independent Public Accountants................................ 13
b) Consolidated Balance Sheets as of June 30, 1998 and June 30, 1997....... 14
c) Consolidated Statements of Operations for each of the fiscal years
in the three-year period ended June 30, 1998............................ 15
d) Consolidated Statements of Cash Flows for each of the fiscal years
in the three-year period ended June 30, 1998............................ 16
e) Consolidated Statements of Stockholders' Investment for each of the
fiscal years in the three-year period ended June 30, 1998............... 17
f) Notes to Consolidated Financial Statements.............................. 18
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hathaway Corporation:
We have audited the accompanying consolidated balance sheets of HATHAWAY
CORPORATION (a Colorado corporation) AND SUBSIDIARIES as of June 30, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
July 31, 1998 (except with respect to the matter
discussed in Note 13, as to which the date is
August 13, 1998).
13
HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 1998 JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,443 $ 3,431
Restricted cash 480 253
Trade receivables, net of allowance for doubtful accounts of 6,400 6,910
$599 and $492 at June 30, 1998 and 1997, respectively
Inventories, net 3,649 4,907
Current deferred income taxes 779 854
Income tax refunds receivable, prepaid expenses and other 684 1,690
- ----------------------------------------------------------------------------------------------------
Total current assets 15,435 18,045
Property and equipment, net 1,730 1,841
Cost in excess of net assets acquired, net 374 591
Other (Note 3) 281 --
- ----------------------------------------------------------------------------------------------------
Total Assets $17,820 $20,477
====================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Line-of-credit classified as current (Note 4) $ -- $ 1,769
Accounts payable 2,027 1,843
Accrued liabilities 2,500 2,594
Income taxes and other current liabilities 497 679
Product service reserve 475 566
- ----------------------------------------------------------------------------------------------------
Total current liabilities 5,499 7,451
Line-of-credit (Note 4) 1,245 --
- ----------------------------------------------------------------------------------------------------
Total Liabilities 6,744 7,451
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 50,000 100 100
shares; 5,405 issued at June 30, 1998 and 1997, respectively
Additional paid-in capital 9,954 9,954
Loans receivable for stock (Note 7) (235) (235)
Retained earnings 4,841 6,818
Cumulative translation adjustments (Note 1) 389 360
Treasury stock, at cost; 1,122 and 1,121 shares at June 30, (3,973) (3,971)
1998 and 1997, respectively (Note 8)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Investment 11,076 13,026
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Investment $17,820 $20,477
====================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
14
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the fiscal years ended June 30,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Revenues $41,317 $39,946 $35,411
Operating costs and expenses:
Cost of products sold 26,379 25,575 21,926
Selling 7,857 7,601 6,269
General and administrative 4,198 4,771 4,680
Engineering and development 4,411 3,646 3,722
Amortization of intangibles and other 738 402 215
Restructuring charge (Note 11) -- -- 338
- --------------------------------------------------------------------------------------------------
Total operating costs and expenses 43,583 41,995 37,150
- --------------------------------------------------------------------------------------------------
Operating loss (2,266) (2,049) (1,739)
Other income (expense), net:
Equity income from investments in joint
ventures (Note 3) 222 -- --
Interest and dividend income 217 245 325
Interest expense (148) (173) (194)
Other income (expense), net (186) (215) 210
- --------------------------------------------------------------------------------------------------
Total other income (expense), net 105 (143) 341
- --------------------------------------------------------------------------------------------------
Loss before income taxes (2,161) (2,192) (1,398)
Benefit for income taxes (Note 5) 184 763 385
- --------------------------------------------------------------------------------------------------
Net loss $(1,977) $(1,429) $(1,013)
==================================================================================================
Basic and diluted net loss per share (Note 1) $ (0.46) $ (0.34) $ (0.24)
==================================================================================================
Basic and diluted weighted average shares
outstanding (Note 1) 4,284 4,259 4,260
==================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the fiscal years ended June 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,977) $(1,429) $(1,013)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,490 1,199 960
Equity income from investments in joint ventures (Note 3) (222) -- --
Deferred income tax provision (benefit) 75 39 (155)
Other 201 241 (149)
Changes in assets and liabilities, net of effect in 1997 of
purchase of Tate Integrated Systems (Note 2):
(Increase) decrease in -
Restricted cash (227) 59 86
Trade receivables, net 374 (239) 1,177
Inventories, net 742 1,174 (503)
Income tax refunds receivable, prepaid expenses and other 1,177 (827) (282)
Increase (decrease) in -
Accounts payable 184 (46) 1
Accrued liabilities (94) (649) 187
Income taxes payable (182) 274 (360)
Product service reserve (91) 7 (42)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,450 (197) (93)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (685) (651) (719)
Purchase of Tate Integrated Systems (Note 2) (229) (863) --
Investments in joint ventures (Note 3) -- -- (70)
Proceeds from maturity of marketable securities -- 201 1,000
Other -- -- 165
Net cash provided by (used in) investing activities (914) (1,313) 376
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line-of-credit (1,769) (8) (360)
Borrowings on line-of-credit 1,245 -- --
Dividends paid to stockholders -- -- (426)
Proceeds from exercise of employee stock options -- 81 --
Purchase of treasury stock (2) (105) (42)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (526) (32) (828)
2 48 (35)
Effect of foreign exchange rate changes on cash
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12 (1,494) (580)
Cash and cash equivalents at beginning of year 3,431 4,925 5,505
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,443 $ 3,431 $ 4,925
================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid (received) during the year for:
Interest $ 146 $ 167 $ 177
Income taxes (1,037) 4 173
Noncash investing and financing activities:
Assets of Tate Integrated Systems purchased, net of liabilities $ -- $ 1,092 $ --
assumed (Note 2)
Acquisition of common stock as a result of stock option -- 161 --
exercises (Note 6)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
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
- ---------------------------------------------------------------------------------------------------------------
5,307 $100 $9,767 $(235) $ 9,686 1,042 $(3,663)
Balances, June 30, 1995
Long-term incentive plan -- -- (55) -- -- -- --
bonus (Note 8)
Purchase of treasury stock -- -- -- -- -- 16 (42)
Dividend paid to stockholders -- -- -- -- (426) -- --
($.10 per share)
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 32 -- 81 -- -- -- --
options
Acquisition of common stock 66 -- 161 -- -- 38 (161)
as a result of stock option
exercises (Note 6)
Net loss -- -- -- -- (1,429) -- --
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1997 5,405 $100 $9,954 $(235) $ 6,818 1,121 $(3,971)
Purchase of treasury stock -- -- -- -- -- 1 (2)
Net loss -- -- -- -- (1,977) -- --
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1998 5,405 $100 $9,954 $(235) $ 4,841 1,122 $(3,973)
===============================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Hathaway Corporation (the Company) is engaged in the business of designing,
manufacturing and selling advanced systems and instrumentation to the
worldwide power and process industries, as well as motion control products to
a broad spectrum of customers throughout the world. The Company operates
primarily in the United States and Europe and has three joint venture
investments in China (Note 3).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.Investments in joint ventures,
in which the ownership is at least 20% but less than 50%, are accounted for
using the equity method (Note 3).
CASH AND CASH EQUIVALENTS
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, 1998 JUNE 30, 1997
---------------------------------
Parts and raw materials, net $2,210 $2,141
Finished goods and work-in-process, net 1,439 2,766
$3,649 $4,907
================================
Reserves established for anticipated losses on excess or obsolete inventories
were approximately $1,742,000 and $1,943,000 at June 30, 1998 and 1997,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, is classified as follows (in thousands):
USEFUL LIVES JUNE 30, 1998 JUNE 30, 1997
-------------------------------------------
Machinery, equipment, tools and dies 2-8 years $ 6,597 $ 6,738
Furniture, fixtures and other 3-10 years 2,662 2,056
-----------------------
9,259 8,794
Less accumulated depreciation
and amortization (7,529) (6,953)
-----------------------
$ 1,730 $ 1,841
=======================
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.
18
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired represents the amount by which the
purchase price of acquired companies exceeds the fair market value of net
assets acquired, and is amortized using the straight-line method over ten
years. Cost in excess of net assets acquired as of June 30, 1998 and 1997
consists of $1,197,000 and $1,305,000 of original costs and $823,000 and
$714,000 of accumulated amortization, respectively.
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets that are held and used in operations, the asset would
be considered to be impaired if the undiscounted future cash flows related to
the asset did not exceed the net book value. The amount of the impairment is
assessed using the assets' fair market value, which is determined using
discounted cash flows. As discussed in Note 2, at June 30, 1998, the Company
determined that the cost in excess of net assets acquired related to its
acquisition of Tate Integrated Systems was impaired; and therefore, the
unamortized balance was written off.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------
Compensation and fringe benefits $ 973 $ 716
Commissions 474 592
Other accrued expenses 1,053 1,286
--------------------------------------
$2,500 $2,594
======================================
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, 1998 JUNE 30, 1997
--------------------------------------
Cumulative Translation Adjustments, beginning of year $360 $163
Translation adjustments 29 197
--------------------------------------
Cumulative Translation Adjustments, end of year $389 $360
======================================
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 by applying the percentage of completion
achieved to the total contract sales price. The Company determines the
percentage of completion for all contracts using the "cost-to-cost" method of
measuring contract progress. Under this method, actual contract costs
incurred to date are compared to total estimated contract costs to determine
the estimated percentage of revenues to be recognized. To the extent these
estimates prove to be inaccurate, the revenues and gross profits, if any,
reported for the period during which work on the contract is ongoing may not
accurately reflect the final results of the contract, which can only be
determined upon contract completion. Provisions for estimated losses on
uncompleted contracts, to the full extent of the estimated loss, are made
during the period in which the Company first becomes aware that a loss on a
contract is probable. The Company's traditional businesses (other than HIA)
generally recognize revenue when products are shipped.
19
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
During fiscal year 1998, the Company adopted SFAS No. 128, "Earnings Per
Share", which establishes standards for computing and presenting basic and
diluted earnings per share (EPS). Under this statement, basic earnings (loss)
per share is computed by dividing the net earnings or loss by the weighted
average number of shares of common stock outstanding. Diluted earnings or loss
per share is determined by dividing the net earnings or loss by the sum of (1)
the weighted average number of common shares outstanding and (2) if not anti-
dilutive, the effect of outstanding warrants and stock options determined
utilizing the treasury stock method. In fiscal years 1998, 1997 and 1996,
stock options totaling 648,204, 708,704 and 332,856, respectively, were
excluded from the calculation of diluted earnings (loss) per share since the
result would have been anti-dilutive. The adoption of this statement had no
impact on prior year's reported per share amounts.
Basic and Diluted EPS have been computed as follows (in thousands, except per
share data):
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996
----------------------------------------
Numerator:
Net loss $(1,977) $(1,429) $(1,013)
Denominator
Weighted average outstanding shares 4,284 4,259 4,260
----------------------------------------
Basic and Diluted net loss per share $(0.46) $ (0.34) $ (0.24)
=========================================
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans for employees
under the provisions of Accounting Principles Board (APB) 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 the
line-of-credit approximates fair value because the underlying instrument is a
variable rate note that reprices frequently.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities as well as disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances in order to
conform to the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," (SFAS 130). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 in fiscal year 1999,
beginning July 1, 1998. Historically, the only additional item considered
part of comprehensive income has been the cumulative translation adjustment.
20
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131). SFAS 131 requires that public
companies report information about their operating segments based on the
financial information used by the chief operating decision maker in their
annual financial statements and requires those companies to report selected
information in their interim statements. The Company adopted SFAS 131 at June
30, 1998 (see Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measures
those instruments at fair value. SFAS 133 is effective for fiscal quarters and
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS 133 will not have a significant impact on the Company's
financial condition and results of operations, as the Company has not
historically utilized such instruments.
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,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable were
collected during fiscal 1998.
TIS has operated under the ownership of HIA, a newly formed wholly-owned
subsidiary of the Company, since October 1, 1996. HIA is located near
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 used in the generation, transmission
and distribution of power.
The acquisition was accounted for using the purchase method of accounting; and
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of acquisition. The
net purchase price allocation was as follows (in thousands):
Trade receivables, net $ 485
Inventories, net 649
Property and equipment, net 123
Cost in excess of net assets acquired 624
Accounts payable (580)
Accrued liabilities and other (209)
Net purchase price $1,092
======
For the year ended June 30, 1998 and the nine month post-acquisition period
ended June 30, 1997, HIA had losses before income taxes of approximately $2.7
million and $1.3 million, respectively. HIA's traditional business is highly
dependent on sales to the industrial market which typically encompass a long
sales cycle, significant customization to specific customer requirements, long
performance periods and large contract values which are subject to a high
degree of scrutiny and negotiation with customers. Since the Company's
acquisition of HIA in September 1996, the Company has seen significant
deterioration in the margins of contracts awarded in this market; and, in
several instances, HIA has declined to submit a bid or has not been awarded a
project bid due to competitor prices or customer specifications that would
have resulted in insignificant or negative contract margin.
21
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.BUSINESS ACQUISITION (CONTINUED)
As a result of its acquisition of HIA, the Company recorded goodwill of
$624,000, primarily due to loss accruals on an in-process contract acquired by
the Company. As a result of continuing and expected near term losses from HIA
at June 30, 1998 and in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company determined that the unamortized cost in excess of net assets
acquired from its acquisition of TIS was impaired; and, therefore, wrote-off
the remaining unamortized balance of $406,000. The Company's determination was
based on projections of undiscounted cash flows of HIA, which were based on
current marketplace and competitive conditions and resulting low margins for
the industrial applications of HIA's product. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such projections
and discounting the estimated cash flows, the Company determined that the
entire unamortized amount was impaired. The current year amortization of
$202,000 and impairment write-off of $406,000, totaling $608,000, is included
in amortization of intangibles and other in the fiscal year 1998 consolidated
statement of operations.
The results of operations of TIS have been included in the Company's fiscal
1998 and 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, respectively, 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)
Basic net loss per share (0.33) (0.25)
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. At June 30, 1998, the Company's original
investment and ownership interest in these Chinese joint ventures are as
follows (in thousands):
INVESTMENT OWNERSHIP INTEREST
----------------------------------
Kehui $100 25%
Si Fang 175 25%
HPMS 140 40%
-----------
$415
===========
As discussed below, the Company has fully reserved against these original
investments. The Company has no future commitments relating to these
investments.
22
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS IN JOINT VENTURES (CONTINUED)
The Company accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and subsequently, the Company determined that due to the start-up
nature of the entities, their untested products and political uncertainty in
China, the realization of the initial investment and subsequent earnings
(which were not significant) was uncertain; and, therefore, the Company fully
reserved against the original investments and its share of any equity in
income thereafter, and recognized income from the Chinese joint ventures only
as cash dividends were received. During fiscal year 1998, the operations of
Si Fang and Kehui have continued to mature, their products have gained
significant acceptance and they have indicated sustained profitability while
the operations of HPMS are still in the development stage and continue to
incur losses.
In fiscal year 1998, because of the sustained positive operating results of Si
Fang and Kehui combined with the fact that both of these joint are still
subject to a certain amount of political and business uncertainty in China,
the Company recognized a portion of its share of equity in income from these
two joint ventures totaling $222,000, which is included in other assets and
equity income from investments in joint ventures in the fiscal year 1998
consolidated balance sheet and statement of operations, respectively. This
amount represents management's best estimate of the amounts expected to be
received from the joint ventures as of June 30, 1998. The Company will
continue to recognize the portion of its share of equity in income (loss) from
these two joint ventures to the extent it believes such amounts are
realizable.
In accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," summarized financial information for Si Fang as
of December 31, 1997 (Si Fang is on a calendar fiscal year) is presented as
follows (in thousands):
As of and
For the Year Ended
December 31, 1997
--------------------
Current assets $8,638
Non-current assets 1,498
Current liabilities 7,378
Non-current liabilities --
Revenues 8,918
Gross profit 2,232
Net income before income taxes 1,525
Net income 1,525
Summarized financial information for Si Fang for the years ended December 31,
1996 and 1995 and for Kehui for the years ended December 31, 1997, 1996 and
1995 is not presented because it is not significant relative to the Company's
consolidated financial statements.
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 Company has no significant involvement in, or influence over,
the JV. As of June 30, 1998, the JV had ceased all operations due to
unprofitability and the Asian economic downturn. The JV is currently in the
process of being dissolved and has adequate assets to settle its existing
obligations. The Company does not believe it will have any further
obligations regarding this JV after the wind-down.
23
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS IN JOINT VENTURES (CONTINUED)
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 ($1,688,000 at June 30, 1998) 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, 1998, because
operations have ceased, 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.
4.DEBT
On August 2, 1993, the Company entered into a long-term financing agreement
with Marine Midland Business Loans, Inc. (Midland Agreement). The Midland
Agreement was a Reducing Revolving Line-of-Credit with a borrowing limit that
was reduced monthly over the seven-year term of the loan. On June 3, 1998, the
Company fully repaid the remaining balance on this loan and terminated the
Midland Agreement.
On May 7, 1998, the Company entered into a long-term financing agreement
(Agreement) with Silicon Valley Bank (Silicon). The Agreement matures on May
7, 2000 and is subject to automatic annual renewal. Beginning in May 1999,
the Company may terminate the Agreement with no termination fee. Borrowings
on this line-of-credit are restricted to the lesser of $3,000,000 or 85% of
the Company's eligible receivables (Maximum Credit Limit). As of June 30,
1998, the Company could borrow an additional $1,385,000, up to the $2,630,000
Maximum Credit Limit.
The line bears interest at Silicon's prime borrowing rate (prime rate) plus 2%
(10.5% at June 30, 1998). The interest rate is adjustable on a quarterly
basis to prime rate plus 1.5% if the Company achieves a net loss less than
$750,000 for each previous twelve month rolling period. The Company must
continue to meet this quarterly financial goal, or the rate will be re-
adjusted to prime rate plus 2%. In addition to interest, the line bears a
monthly unused line fee at 0.125% of the Maximum Credit Limit less the average
daily balance of the outstanding loan during a month. The unused line fee is
also adjustable on a quarterly basis, if the Company achieves a net loss less
than $750,000 for each previous twelve-month rolling period, the monthly
unused line fee will be adjusted to 0.0625%. The Company must continue to
meet this quarterly financial goal, or the rate will be re-adjusted to 0.125%.
The debt is secured by all assets of the Company. The Agreement requires that
the Company maintain compliance with certain covenants related to tangible net
worth. At June 30, 1998, the Company was in compliance with such covenants.
Contractual maturities of long-term debt are as follows (in thousands):
1999 $ --
2000 1,245
Total $ 1,245
========
5.INCOME TAXES
The benefit for income taxes is based on income (loss) before income taxes as
follows (in thousands):
For the fiscal years ended June 30,
1998 1997 1996
-------------------------------------
Domestic $(2,179) $(2,471) $(1,160)
Foreign 18 279 (238)
-------------------------------------
Loss before income taxes $(2,161) $(2,192) $(1,398)
=====================================
24
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5.INCOME TAXES (CONTINUED)
Components of the benefit for income taxes are as follows (in thousands):
For the fiscal years ended June 30,
1998 1997 1996
-----------------------------------
Current benefit (provision):
Domestic $ 308 $ 682 $ 222
Foreign (49) 120 8
Total current benefit 259 802 230
Domestic deferred benefit (provision) (75) (39) 155
Benefit for income taxes $ 184 $ 763 $ 385
===================================
The benefit for income taxes differs from the amount determined by applying
the federal statutory rate as follows (in thousands):
For the fiscal years ended June 30,
1998 1997 1996
----------------------------------
Tax benefit computed at statutory rate $ 735 $ 745 $ 475
State tax, net of federal benefit (2) (2) (2)
Nondeductible expenses and goodwill amortization (267) (32) (90)
Income tax credits -- -- (72)
Non-benefited losses of foreign subsidiaries -- (3) (33)
Recovery of prior year taxes paid 69 98 84
Change in valuation allowance (315) (89) 37
Other (36) 46 (14)
Benefit for income taxes $ 184 $ 763 $ 385
=================================
The tax effects of significant temporary differences and credit and operating
loss carryforwards that give rise to the net deferred tax asset under SFAS No.
109 are as follows (in thousands):
June 30, 1998 JUNE 30, 1997
-----------------------------------
Allowances and other accrued liabilities $ 927 $1,047
Tax credit carryforwards 352 216
Net operating loss carryforwards 224 --
Valuation allowance (724) (409)
Net deferred tax asset $ 779 $ 854
===================================
As of June 30, 1998, the Company has paid foreign advance corporation tax of
$18,000 which may be utilized to reduce future foreign taxes due, domestic tax
credit carryforwards of $334,000 expiring in 2004 through 2008 and has a
domestic loss carryforward of $658,000 which will expire in 2013.
Realization of the Company's net deferred tax asset is dependent upon the
Company generating sufficient United States federal taxable income
(approximately $2,291,000) in future years to obtain benefit from the reversal
of net deductible temporary differences and from tax credit and net operating
loss carryforwards. The Company's management believes that, on a more likely
than not basis, the recorded net deferred tax asset is realizable. The amount
of deferred tax assets considered realizable is subject to adjustment in
future periods if estimates of future United States federal taxable income are
reduced.
25
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION
Hathaway Corporation Stock Option Plan
At June 30, 1998, 396,521 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 fiscal year 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 the date
of grant. In fiscal year 1998, options to purchase 21,000 shares were
forfeited due to terminations. The remaining 50,000 shares vest over four
years only if certain performance criteria are met. Based on HIA's fiscal
years' 1998 and 1997 operating results, 17,200 options will never vest and
were forfeited, and options to purchase 11,200 shares were forfeited due to
terminations.
In fiscal year 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 1996, 1997 and 1998 was as follows:
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE SHARES AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------------------------------------------------------------
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
Granted 45,900 2.13
Canceled or forfeited (106,400) 3.48
-----------------------------------
Outstanding at June 30, 1998 648,204 3.36 303,138 $3.36
=====================================================================
Exercise prices for options outstanding at June 30, 1998 are as follows:
RANGE OF EXERCISE PRICES
TOTAL
$2.13 - $3.19 $3.50 - $4.31 $2.13 - $4.31
-------------------------------------------------------------------
Options Outstanding:
Number of options 295,004 353,200 648,204
Weighted average exercise price $ 2.73 $ 3.88 $ 3.36
Weighted average remaining contractual 4.27 years 4.6 years 4.45 years
life
Options Exercisable:
Number of options 141,604 161,534 303,138
Weighted average exercise price $ 2.86 $ 3.79 $ 3.36
26
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION (CONTINUED)
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 SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) which established an alternative method of expense
recognition for stock-based compensation awards to employees based on fair
values. Companies that elect to continue accounting for stock-based
compensation plans under the provisions of APB 25 must present certain pro
forma disclosures.
Pro forma information regarding net 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 FISCAL YEARS ENDED JUNE 30,
1998 1997
-----------------------------------------
Risk-free interest rate 5.7% 6.3%
Expected dividend yield 0.0% 0.0%
Expected life 6 years 6 years
Expected volatility 58.2% 58.5%
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 FISCAL YEARS ENDED JUNE 30,
1998 1997
---------------------------------------
Pro forma net loss $(2,128) $(1,686)
Pro forma basic and diluted net loss per share $ (0.50) $ (0.40)
The weighted average fair value of options granted during fiscal years 1998
and 1997 was $1.28 and $1.98, respectively. The total fair value of options
granted was $59,000 and $978,000 in fiscal years 1998 and 1997, respectively.
These amounts are being amortized ratably over the vesting periods of the
options for purposes of this disclosure.
EMOTEQ CORPORATION STOCK OPTION PLAN
During fiscal 1998 the Company's wholly-owned subsidiary, Emoteq Corporation
(Emoteq), adopted a stock option plan. Under the terms of the plan, up to
360,000 (18%) of the 2,000,000 authorized shares of Emoteq are available for
stock option grants to officers and key employees of Emoteq. 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.
One hundred thousand of the options available under the plan are Time Vested
and 260,000 of the options available under the plan are Performance Vested.
The Time Vested options will become exercisable evenly over the fiscal years
from the date of grant through June 30, 2001. The Performance Vested options
may become exercisable during the fiscal years from the date of grant through
June 30, 2001 if certain performance criteria are met. All options will
expire as of the first Board of Directors meeting following the year ended
June 30, 2004. The Company may, in its discretion, purchase shares of Emoteq
acquired through the exercise of stock options.
27
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION (CONTINUED)
Option activity during fiscal year 1998 was as follows:
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING
NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL LIFE
---------------------------- ---------------------------- -----------------------------
TIME PERFORMANCE Time PERFORMANCE Time PERFORMANCE
VESTED VESTED Vested VESTED Vested VESTED
---------------------------- ---------------------------- -----------------------------
Outstanding at June 30,
1997 -- -- $ -- $ --
Granted 80,000 187,600 1.37 1.37
Exercised -- -- -- --
Canceled or forfeited -- -- -- --
---------------------------- ---------------------------- -----------------------------
Outstanding at June 30,
1998 80,000 187,600 $ 1.37 $ 1.37 6 years 6 years
========================================================== =============================
Exercise prices for options outstanding at June 30, 1998 under this plan are
as follows:
TIME VESTED PERFORMANCE
VESTED
--------------------------------
Number of Options Exercisable at 6/30/98 20,000 15,008
Weighted Average Exercise Price $ 1.37 $ 1.37
The potential dilution of the Company's ownership of Emoteq at June 30, 1998
is as follows:
COMPANY EMPLOYEES TOTAL
--------------------------------------------
Issued and Outstanding 1,640,000 -- 1,640,000
Exercisable Options -- 35,008 35,008
--------------------------------------------
Total 1,640,000 35,008 1,675,008
Percentage 97.9% 2.1% 100.0%
The Company has recognized $66,162 in compensation expense for the fiscal year
ended June 30, 1998 related to this plan.
7.LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 1998 and 1997
is comprised of a loan for $102,000 from the Leveraged Employee Stock
Ownership Plan and Trust (the Plan) and $133,000 from an Officer of the
Company.
The Plan allows eligible Company employees to participate in ownership of the
Company. The $102,000 receivable represents the unpaid balance of the
original $500,000 that the Company loaned to the Plan in fiscal year 1989 so
that the Plan could acquire from the Company 114,285 newly issued shares of
the Company's common stock. The note bears interest at an annual rate of
9.23% and matures May 31, 2004. The terms of the Plan require the Company to
make an annual contribution equal to the greater of i) the Board established
percentage of pretax income before the contribution (5% in fiscal years 1998,
1997 and 1996) or ii) the annual interest payable on the note. Company
contributions to the Plan were $9,000 in 1998, 1997 and 1996, representing
interest in all three years.
The $133,000 receivable represents the unpaid balance of a loan made in fiscal
year 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, 1998). The loan is due on demand but no
later than October 26, 1998. The Board of Directors of the Company has
proposed to authorize an extension of the due date of the loan to October 31,
2001, with all other terms of the loan to remain unchanged.
28
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.COMMITMENTS AND CONTINGENCIES
LEASES
At June 30, 1998, 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
---------------------------------------
1999 $1,006
2000 732
2001 566
2002 372
2003 223
Thereafter 223
--------
$3,122
========
Net rental expense was $869,000, $783,000 and $822,000 in fiscal years 1998,
1997 and 1996, 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 $1,876,000 as of June 30, 1998. (See Note 13
for discussion of termination of one of the severance benefit
agreements.)
EMPLOYMENT AGREEMENTS
Effective July 1, 1993, the Company entered into five-year employment
agreements with two of its executive officers. These agreements are renewable
after the initial five-year term on a year-to-year basis unless the Company or
the officers give termination notice at least sixty days prior to expiration
of the initial or subsequent terms. 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. (See Note 13 for discussion of amendment of one of the agreements
and termination of the other agreement.)
No annual bonus was paid in fiscal years 1998, 1997 or 1996.
29
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.COMMITMENTS AND CONTINGENCIES (CONTINUED)
To replace the expired long-term incentive bonus, on August 15, 1996, the
Board of Directors approved the issuance of stock options to the two executive
officers to purchase 148,500 shares 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, 1998, the maximum amount that could be required to be paid
under the termination clause of these agreements was approximately $779,000.
(See Note 13 for discussion of new employment agreement.)
STOCK REPURCHASE PROGRAM
Under an employee stock repurchase program approved by the Board of Directors,
the Company may repurchase its common stock from its employees at the current
market value. The Company's Agreement with Silicon limits employee stock
repurchases to $125,000 per fiscal year. Under Colorado law enacted in July
1994, repurchased shares of capital stock are considered authorized and
unissued shares and have the same status as shares that have never been
issued.
9.SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 requires disclosure
of operating segments, which as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance.
The Company operates in two different segments: Power and Process Business
(Power and Process) and Motion Control Business (Motion Control). Management
has chosen to organize the Company around these segments based on differences
in products and services.
POWER AND PROCESS BUSINESS
Hathaway's complete line of power instrumentation products helps ensure that
electric utilities provide high quality service to consumers of electricity.
The power products group produces a comprehensive and cost-effective range of
products designed exclusively for the power industry worldwide. Hathaway's
equipment assists the electric power system operators in operating and
maintaining proper system performance. The products, which are used to monitor
and control the power generation, transmission and distribution processes,
include fault recording products, fault location products, condition
monitoring (circuit breaker) products and remote terminal units (RTUs) for
Supervisory Control and Data Acquisition (SCADA) systems.
The process instrumentation products group manufactures and markets products
for the process and power industries including monitoring systems, calibration
equipment and process measurement instrumentation. The monitoring systems,
called visual anunciators and sequential event recorders, provide both visual
and audible alarms and are used to control processes in various plants
including, chemical, petroleum, food and beverage, pulp and paper, and
textiles. Calibration equipment is used to test and adjust instrumentation
for proper and accurate operation in measuring electricity, temperatures and
pressure within the process industry. Process measurement instrumentation
includes signal conditioning products and transducers used to measure such
variables as temperature, voltage, current and power in various industrial
applications.
Hathaway's state-of-the-art software system for Supervisory Control and Data
Acquisition (SCADA) and Distributed Control Systems (DCS) has been used to
fully automate such industrial applications as water and wastewater treatment
plants, glass manufacturing plants, oil and gas terminals and tank farm
facilities. In addition to expanding into its traditional process markets,
the system is being marketed to the power utility industry. The Company
expects to team the system with certain other Hathaway products and target the
combined product at substation automation and integration applications used in
power generation, transmission and distribution facilities.
30
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.SEGMENT INFORMATION (CONTINUED)
MOTION CONTROL BUSINESS
Motion Control offers quality, cost-effective products that suit a wide range
of applications in the industrial, medical, military and aerospace sectors, as
well as in manufacturing of analytical instruments and computer peripherals.
The end products using Hathaway technology include special industrial and
technical products such as satellite tracking systems, MRI scanners, and high
definition printers.
The group designs, manufactures and markets direct current (DC) brush and
brushless motors, related components, and drive and control electronics as
well as precision direct-current fractional horsepower motors and certain
motor components. Industrial equipment and military products are the major
application for the motors.
The group also manufactures optical encoders that are used to measure
rotational and linear movements of parts as well as fiber optic-based encoders
with special characteristics, such as immunity to radio frequency interference
and high temperature tolerance.
The following provides information on the Company's segments (in thousands):
FOR THE FISCAL YEAR ENDED JUNE 30,
1998 1997 1996
----------------------- ----------------------- -----------------------
POWER AND MOTION POWER AND MOTION POWER AND MOTION
PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL
----------------------- ----------------------- -----------------------
Revenue from external customers $27,476 $13,841 $27,069 $12,877 $23,337 $12,074
Equity income from investments in 222 -- -- -- -- --
joint ventures
Income (loss) before income taxes (4,659) 1,848 (3,402) 1,218 (2,961) 1,933
Identifiable assets 9,985 3,969 12,320 3,965 11,362 4,890
The following is a reconciliation of segment information to consolidated
information:
FOR THE FISCAL YEAR ENDED OR
AS OF JUNE 30,
1998 1997 1996
---------------------------------------
Segments' loss before income taxes $(2,811) $(2,184) $(1,028)
Corporate activities 650 (8) (370)
---------------------------------------
Consolidated loss before income taxes $(2,161) $(2,192) $(1,398)
=======================================
Segments' identifiable assets $13,954 $16,285 $16,252
Corporate assets and eliminations 3,866 4,192 4,873
---------------------------------------
Consolidated total assets $17,820 $20,477 $21,125
=======================================
31
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.SEGMENT INFORMATION (CONTINUED)
The Company's wholly-owned foreign subsidiaries have been based in Northern
Ireland and Canada and are included in the accompanying consolidated financial
statements. The Company closed its Canadian operating facility during fiscal
year 1997. Financial information for the foreign subsidiaries is summarized
below (in thousands):
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996
-----------------------------------
Revenues derived from foreign subsidiaries $7,197 $7,031 $7,261
Identifiable assets 3,723 4,335 4,636
10.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in fiscal
years 1998 and 1997 is as follows (in thousands, except per share data):
1998 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ------------------------------------------------------------------------------------------------------------------
Revenues $9,539 $11,137 $ 9,804 $10,837
Operating loss (874) (79) (630) (683)
Net loss (589) (157) (690) (541)
Basic and diluted net loss per share $(0.14) $ (0.04) $ (0.16) $ (0.13)
1997 First Quarter Second Quarter Third Quarter FOURTH 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
Basic and diluted net income (loss) per $(0.09) $ (0.05) $ (0.22) $ 0.03
share
11.RESTRUCTURING OF OPERATIONS
In the first quarter of fiscal 1997, management restructured the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Littleton, Colorado was consolidated in
1997 into two manufacturing facilities located in Kent, 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 operations, the Carrolton,
Texas subsidiary. 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
fiscal years 1996 and 1997 and the related restructuring accrual was fully
utilized.
32
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.INCOME TAX RULING REQUEST
In June 1998, the Company filed a request for an income tax ruling by the
Internal Revenue Service (IRS) with respect to the tax-free treatment of the
possible spin-off of its Power and Process Business. The proposed spin-off
would separate the Company's Power and Process Business from its Motion
Control Business. Prior to the spin-off, the Power and Process Business will
be organized under one of Hathaway's subsidiaries, Hathaway Systems
Corporation (HSC). If such transaction were to occur, all of the outstanding
shares of HSC would be distributed to the Hathaway shareholders, and
thereafter, the Power and Process Business would operate as a separate
publicly-owned company under the name of Hathaway Corporation and the Motion
Control Business would operate as a separate publicly-owned company under the
name of Hathaway Motion Control Corporation. The final decision as to whether
to proceed with the spin-off will be made by the Company's Board of Directors
only after the IRS has ruled on the Company's request and approval is
obtained from the Company's lenders and after consideration of other factors
at that time. Because management has not committed to such spin-off, the
Power and Process Business has not been treated as a discontinued operation.
13.SUBSEQUENT EVENTS
Effective August 13, 1998, Richard D. Smith was appointed President and CEO
of the Company. He succeeded Mr. Prince who retired from his employment with
the Company effective August 31, 1998. Mr. Prince will remain as Chairman of
the Board of Directors.
Effective August 31, 1998, Mr. Prince's severance benefit and employment
agreements were terminated upon his retirement and acceptance of his
resignation. Mr. Smith's severance benefit and employment agreements are
being amended and extended. The amended agreement will provide for 1) an
annual incentive bonus based on corporate performance, as defined each year
by the Board of Directors; 2) a long-term incentive bonus in the form of
stock options; 3) specified benefits upon termination of employment (for
reasons other than cause or change in control) which are effective for one
year thereafter; and 4) a bonus paid on dispositions of divisions or
subsidiaries of the Company.
The Company is in the process of entering into a Consulting Agreement with
Mr. Prince effective upon his retirement from employment on August 31, 1998.
Under the Agreement, Mr. Prince will be compensated for providing consulting
services to the Company primarily on matters involving the Company's Motion
Control Business, as well as other matters as requested by the President.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed its accounting or auditing firm during the past 24
months, nor has it had any material disagreements with its accountants or
auditors regarding any accounting or financial statement disclosure matters.
PART III
The information required by Part III is included in the Company's Proxy
Statement, and is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is set forth in the sections entitled
"Election of Directors" (page 2), "Executive Officer" (page 3) and " Section
16(a) Beneficial Ownership Reporting Compliance" (page 10) in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is set forth in the section entitled
"Executive Compensation" (pages 5 through 9) in the Company's Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" (pages 4 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.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
g) Consolidated Balance Sheets as of June 30, 1998 and June 30, 1997.
h) Consolidated Statements of Operations for each of the fiscal years in
the three-year period ended June 30, 1998.
i) Consolidated Statements of Cash Flows for each of the fiscal years in
the three-year period ended June 30, 1998.
j) Consolidated Statements of Stockholders' Investment for each of the
fiscal years in the three-year period ended June 30, 1998.
k) Notes to Consolidated Financial Statements.
l) Report of Independent Public Accountants.
2. FINANCIAL STATEMENT SCHEDULES
None.
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 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.
10.2 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 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.
10.4 The 1989 Incentive and Non-Qualified Stock Option Plan dated January 4, 1989. *
Incorporated by reference to the Company's Form S-8 filed October 25, 1990.
10.5 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.
10.6 Promissory Note from Richard D. Smith to Hathaway Corporation, dated October 26, *
1993. Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the
fiscal year ended June 30, 1994.
34
Exhibit No. Subject Page
----------- ------- ----
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.**
10.13 Purchase Agreement between Hathaway Corporation and Tate Engineering Services *
Corporation dated October 10, 1996, for the Company's purchase of all the issued and
outstanding stock of Tate Integrated Systems, Inc. Incorporated by reference to the
Company's Form 8-K dated October 25, 1996.
10.14 Joint Venture Agreement between KUB Holdings Bhd. And Tate Integrated Systems, L.P. *
dated March 9, 1995 and Supplement dated June 15, 1995. Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the fiscal year ended June 30, 1997.
10.15 License Agreement between Tate Integrated Systems, L.P. and KUB-TIS Controls Sdn. *
Bhd. dated March 9, 1995. Incorporated by reference to Exhibit 10.24 to the
Company's Form 10-K for the fiscal year ended June 30, 1997.
10.16 Loan and Security Agreement dated May 7, 1998 between Hathaway Corporation and 42
certain subsidiaries of Hathaway Corporation and Silicon Valley Bank.
10.17 Schedule to Loan and Security Agreement dated May 7, 1998 between Hathaway 57
Corporation and certain subsidiaries of Hathaway Corporation and Silicon Valley Bank.
10.18 Amendment Number One dated August 1, 1998 to the 1989 Incentive and Non-Qualified 63
Stock Option Plan.
35
Exhibit No. Subject Page
----------- ------- ----
10.19 The Amended 1991 Incentive and Nonstatutory Stock Option Plan dated August 1, 1998. 65
21 List of Subsidiaries 41
22 Definitive Proxy Statement, dated September 17, 1998 for the Registrant's 1998 *
Annual Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP. 37
27 Financial Data Schedule 34
* These documents have been filed with the Securities and Exchange
Commission and are incorporated herein by reference.
** The Management Incentive Bonus Plans for the fiscal years ending June
30, 1997, 1998 and 1999 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
1998.
36
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 31, 1998 (except with respect to the matter discussed in Note
13 to the Consolidated Financial Statements, as to which the date is August 13,
1998) 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 Statements on Form S-8 (Nos. 3344997 and 333-21337) of the
1991 Incentive and Non-Statutory Stock Option Plan of Hathaway Corporation dated
January 8, 1992 and February 7, 1997, respectively.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 14, 1998.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HATHAWAY CORPORATION
By /s/ Richard D. Smith
-----------------------
Richard D. Smith
President, Chief Executive Officer and
Chief Financial Officer
Date: September 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
SIGNATURES Title DATE
/s/ Richard D. Smith President, Chief Executive September 17, 1998
- -------------------- Officer, Chief Financial Officer
Richard D. Smith and Director
/s/ Eugene E. Prince Chairman of the Board of Directors September 17, 1998
- --------------------
Eugene E. Prince
/s/ George J. Pilmanis Director September 17, 1998
- ----------------------
George J. Pilmanis
/s/ Delwin D. Hock Director September 17, 1998
- ------------------
Delwin D. Hock
/s/ Chester H. Clarridge Director September 17, 1998
- ------------------------
Chester H. Clarridge
/s/ Graydon D. Hubbard Director September 17, 1998
- ----------------------
Graydon D. Hubbard
38