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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, 1999
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 incorporation or organization) (I.R.S. Employer 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. [ ]
As of September 9, 1999, 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 $6,368,000.
___________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated September 23,
1999 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
Signatures................................................................ 37
Financial Statement Schedule.............................................. 38
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 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, a 23% interest in 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 manufactures and sells, under a license from
the Company, instrumentation products designed by the Company, to electric
power companies in China.
Process Instrumentation
The process instrumentation products group manufactures and markets products
for the process and power industries including monitoring systems, calibration
equipment and process measurement instrumentation. The monitoring systems,
called visual 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 has
been successful at teaming the HIA system with certain existing Hathaway
products and targeting the combined product at substation automation and
integration applications used in power transmission and distribution
facilities.
Restructuring
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).
Effective July 1, 1998, Emoteq Corporation acquired all of the outstanding
shares of Ashurst Logistic Electronics Limited of Bournemouth, England
(Ashurst) for $317,000. Ashurst manufactures drive electronics and position
controllers for a variety of motor technologies as well as a family of static
frequency converters for military and aerospace applications and has extensive
experience in power electronics design and software development required for
the application of specialized drive electronics technology. The acquired
company was renamed Emoteq UK Limited.
The MI division manufactures precision direct-current fractional horsepower
motors and certain motor components. Industrial equipment and military
products are the major application for the motors. This division also supplies
spare parts and replacement equipment for general-purpose instrumentation
products.
Emoteq designs, manufactures and markets direct current brushless motors,
related components, and drive and control electronics. Markets served include
semiconductor manufacturing, industrial automation, medical equipment, and
military and aerospace. A new motion technology center was established in
Evergreen, Colorado in fiscal year 1998 to develop more automated methods of
manufacturing and advance the state of Emoteq's core technology base.
Optical encoders are manufactured by COPI. They are used to measure rotational
and linear movements of parts in diverse applications such as 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.
2
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 1999, 1998 and 1997 no single customer accounted for more than
10% of the Company's consolidated revenue from continuing operations.
Sales Backlog
The Company's backlog at June 30, 1999 consisted of sales orders totaling
approximately $18,260,000. The Company expects to ship goods filling
$16,128,000 of those purchase orders within fiscal 2000. This compares to a
backlog of $13,892,000 at June 30, 1998, of which $13,712,000 was scheduled
for shipment in fiscal 1999.
Government Sales
Approximately $302,000 of the Company's backlog as of June 30, 1999 consisted
of contracts with the United States Government. The Company's contracts with
the government contain a provision generally found in government contracts
which permits the government to terminate the contract at its option. When the
termination is attributable to no fault of the Company, the government would,
in general, have to pay the Company certain allowable costs up to the time of
termination, but there is no compensation for loss of profits.
Engineering and Development Activities
The Company's expenditures on engineering and development were $4,466,000 in
fiscal 1999, $4,411,000 in fiscal 1998 and $3,646,000 in fiscal 1997. 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.
3
Employees
As of the end of fiscal 1999, the Company had approximately 353 full-time
employees.
Item 2. Properties.
The Company leases its administrative offices and manufacturing facilities as
follows:
Approximate
Description / Use Location square footage
- - -------------------------------------------------------------------------------------------------------------------
Corporate headquarters and sales and engineering Littleton, Colorado
offices 14,000
Engineering and development facility Evergreen, Colorado 3,000
Office and manufacturing facility Carrolton, Texas 29,000
Office and manufacturing facility Kent, Washington 21,000
Engineering, development and administrative office Hunt Valley, Maryland 14,000
Office and manufacturing facility Tulsa, Oklahoma 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
Office and manufacturing facility Bournemouth, England 2,100
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 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Effective March 18, 1999, trading in Hathaway Corporation's common stock was
moved from the Nasdaq National Market to the Nasdaq Small Cap Market System and
continued trading under the symbol HATH. The number of holders of record of the
Company's common stock as of the close of business on September 9, 1999 was 594.
The Company did not pay or declare any dividends during fiscal years 1999 and
1998 as the Company's long-term financing agreement prohibits the Company from
doing so without prior approval.
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 (through
March 18, 1999) and on the Nasdaq Small Cap Market System (after March 18,
1999), as reported by Nasdaq.
Price Range
High Low
--------------------------------
Fiscal 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
Fiscal 1999
First Quarter $ 2.06 $ 0.75
Second Quarter 2.31 0.75
Third Quarter 2.38 0.82
Fourth Quarter 2.00 1.38
Item 6. Selected Financial Data.
The following table summarizes data from the Company's annual financial
statements for the fiscal years 1995 through 1999 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 business acquisitions completed in fiscal years
1999 and 1997.
For the fiscal years ended June 30,
1999 1998 1997 1996 1995
------------------------------------------------------------------------------------
In thousands (except per share data)
Statements of Operations Data:
Net revenues $41,691 $41,317 $39,946 $35,411 $39,838
====================================================================================
Income (loss) before income taxes $(1,317) $(2,161) $(2,192) $(1,398) $ 1,321
Benefit (provision) for income taxes (208) 184 763 385 (479)
------------------------------------------------------------------------------------
Net income (loss) $(1,525) $(1,977) $(1,429) $(1,013) $ 842
====================================================================================
Diluted net income (loss) per share $ (0.36) $ (0.46) $ (0.34) $ (0.24) $ 0.19
====================================================================================
Cash dividends:
Per share $ -- $ -- $ -- $ 0.10 $ 0.12
Total amount paid $ -- $ -- $ -- $ 426 $ 536
Balance Sheet Data:
Total assets at June 30 $16,398 $17,820 $20,477 $21,139 $23,312
Total current and long-term debt
at June 30 $ 1,308 $ 1,245 $ 1,769 $ 1,777 $ 2,144
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: future financial performance may be
impacted by the unavailability of sufficient capital on satisfactory terms to
finance the Company's business plan, general business and economic conditions in
the domestic and international markets, uncertainty in the viability of
international markets, particularly the Asian market, and the impact of
political unrest on market forces, the introduction of new technologies and
competitors into the systems and instrumentation markets where the Company
competes, uncertainties in acceptance of new products in the existing power and
process market environment, increased competition and changes in competitor
responses to the Company's products and services, continued uncertainty about
the impact of deregulation of the power business on the Company's products,
further adverse changes in the regulatory environment, availability of qualified
personnel, and others. 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," "intends" or "should"
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 1999 compared to fiscal year 1998
The Company recorded a net loss of $1,525,000 in fiscal year 1999, compared to a
net loss of $1,977,000 in fiscal 1998. Revenues increased 1% from $41,317,000,
in fiscal 1998 to $41,691,000 in fiscal 1999. The increase in revenues was due
to a 4.5% increase in revenues from the Company's power and process
instrumentation products partially offset by a 6.2% decrease in revenues from
the Company's motion control products. The decrease in Motion Control revenues
was primarily due to decreased orders as a result of the Asian economic crises
and the slowdown in the semi-conductor industry partially offset by the addition
of revenues from Emoteq UK. Motion Control orders, however, increased over the
prior year, with the order rate progressively increasing over the last three
quarters of fiscal 1999. At June 30, 1999 backlog for Motion Control orders was
24% higher than at June 30, 1998. This is a reflection of Motion Control's
expansion into new markets and broader segments of its existing markets. The
increased order rate and backlog indicate that the segment should achieve growth
in sales and profitability in fiscal year 2000.
Sales to international customers decreased 8% from $13,955,000, or 34% of sales,
in fiscal 1998, to $12,902,000, or 31% of sales, in fiscal 1999. Sales order
backlog increased 31% from $13,892,000 at June 30, 1998 to $18,260,000 at June
30, 1999. Cost of products sold remained at 64% of revenues in fiscal 1998 and
1999.
Selling expenses decreased 11% from $7,857,000 in fiscal 1998 to $7,012,000 in
fiscal 1999 resulting from savings due to the overall cost reduction efforts of
the Company as well as from HIA's change in its primary focus to the deregulated
power industry in 1999 from industrial markets in previous periods. General and
administrative expenses increased 14% from $4,198,000 in fiscal 1998 to
$4,798,000 in fiscal 1999 primarily due to bonuses paid to the management of
profitable operations and the addition of Emoteq UK. Engineering and
development expenses increased 1% from $4,411,000 in 1998 to $4,466,000 in 1999.
Amortization of intangibles and other assets decreased from $738,000 in 1998 to
$481,000 in 1999. The decrease was primarily due to the $406,000 impairment
write-off in fiscal 1998 of the unamortized portion of goodwill which resulted
from the HIA acquisition, partially offset by the $249,000 impairment write-off
in fiscal 1999 of the unamortized portion of goodwill from the 1991 acquisition
of Hathaway Systems Limited (HSL), and fiscal 1999 amortization expense related
to the Ashurst acquisition. (See further discussion under "Business Acquisition"
below.)
As a result of its acquisition of HSL, the Company had previously recorded
goodwill of $1,197,000. At June 30, 1999 and in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121), the
Company determined that the unamortized cost in excess of net assets acquired
from its acquisition of HSL was impaired; and, therefore, wrote-off the
remaining unamortized balance of $249,000. The Company's determination was based
on projections
6
of undiscounted cash flows of HSL, which were based on current marketplace
conditions, low orders and continuing losses. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related unamortized
cost in excess of net assets acquired. Utilizing such projections and
discounting the estimated cash flows, the Company determined that the entire
unamortized amount was impaired. The current year amortization of $125,000 and
impairment write-off of $249,000, totaling $374,000, is included in amortization
of intangibles and other in the fiscal year 1999 consolidated statement of
operations.
The Company 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 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 manufactures and sells, under a
license from Hathaway, instrumentation products designed by Hathaway, to
electric power companies in China.
The Company has no future commitments relating to these investments, however Si
Fang has requested additional capital from each joint venture partner to be
invested in September 1999. The Company has agreed to sell 3% of its ownership
interest for $143,000 and reinvest the proceeds plus an additional $143,000 in
cash plus $139,000 of dividends. After the sale and capital contribution, the
Company's ownership interest will be 20%.
The Company accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and until fiscal 1998, the Company determined that due to the start-up
nature of the entities, their untested products and political uncertainty in
China, the realization of the initial investments and subsequent earnings (which
were not significant) was uncertain; and, therefore, the Company fully reserved
against the original investments and its share of any equity in income.
During fiscal years 1998 and 1999, Kehui and Si Fang's operations continued to
mature, their products have gained significant acceptance and both companies
have sustained profitability. Because of sustained positive operating results,
offset by a certain amount of political and business uncertainty in China, the
Company recognized a portion of its share of equity income from these two joint
ventures, totaling $329,000 and $222,000 in fiscal years 1999 and 1998,
respectively. These amounts are included in equity income from investments in
joint ventures in the consolidated statements of operations. The amounts
recognized represent management's best estimate of the future amounts that will
be received from the joint ventures as of June 30, 1999. The Company will
continue to recognize its share of equity in income (loss) from these two joint
ventures to the extent it believes such amounts are realizable.
During fiscal 1999, the Company sold 2% of its investment in Si Fang for $57,000
in cash and recognized a $49,000 gain on the sale, which is included in other
income in the accompanying statement of operations. The Company also invested an
additional $92,000 in the joint venture and received $121,000 cash dividends
during the fiscal year. At June 30, 1999, the Company has recorded a net
investment in Si Fang and Kehui of $467,000 and $47,000, respectively, which is
included in investment in joint ventures, net in the consolidated balance
sheets.
Prior to June 30, 1999, the Company also had an 11.4% interest in a joint
venture (JV) with KUB Holdings BHD, a Malaysian firm, acquired from TIS, which
had a carrying value of $0. The JV was created for the purpose of marketing and
selling the TIS-4000 system of HIA in certain Asian countries. As of June 30,
1998, the JV had ceased all operations due to unprofitability and the Asian
economic downturn. During fiscal year 1999, the JV was dissolved and settled its
existing obligations from its existing assets. The license to manufacture,
market and sell the TIS-4000 system reverted back to the Company and the Company
has no further obligations related to this JV.
In fiscal year 1999 the Company recognized a provision for income taxes of
$208,000 compared to a benefit of $184,000 in fiscal year 1998. The effective
tax rate was a provision of 16% in fiscal 1999 and a benefit of 9% in fiscal
1998. The difference is primarily due to a decrease in nondeductible expenses
and goodwill amortization plus an increase in the valuation allowance against
the deferred tax asset. The increase is also due to income taxes payable in
local tax jurisdictions where the Company has no net operating losses. The
valuation allowance was increased primarily due to the increased level of net
operating losses being carried forward and the Company's continued operating
losses. Realization of the Company's net deferred tax asset is dependent upon
the Company generating sufficient United States federal taxable income
(approximately $1,859,000) in future years to obtain
7
benefit from the reversal of net deductible temporary differences and from tax
credit and net operating loss carryforwards. The Company's management believes
that, on a more likely than not basis, the recorded net deferred tax asset is
realizable. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods if estimates of future United States federal
taxable income are changed.
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)
which 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,
respectfully.
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 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 1997.
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 impairment
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
when the Company refinanced its debt with Silicon Valley Bank (Silicon) (see
further discussion under "Liquidity and Capital Resources" below.)
As a result of its acquisition of HIA in fiscal 1997, 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,
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 products. Such undiscounted cash flow estimates
were not sufficient to indicate realization of the related unamortized cost in
excess of net assets acquired. Utilizing such projections and discounting the
estimated cash flows, the Company determined that the entire unamortized amount
was impaired. The fiscal year 1998 amortization of $202,000 and impairment
write-off of $406,000 is included in amortization of intangibles and other in
the fiscal year 1998 consolidated statement of operations.
In fiscal 1998 the Company recognized $222,000 of equity income from its
investment in two Chinese joint ventures, Kehui and Si Fang as compared to none
recognized in 1997.
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.
8
BUSINESS ACQUISITIONS
Ashurst Logistic Electronics Limited
Effective July 1, 1998, Emoteq Corporation, a wholly-owned subsidiary of the
Company, acquired all the outstanding shares of Ashurst Logistic Electronics
Limited of Bournemouth, England (Ashurst) for $317,000 in cash. Ashurst
manufactures drive electronics and position controllers for a variety of motor
technologies as well as a family of static frequency converters for military and
aerospace applications and has extensive experience in power electronics design
and software development required for the application of specialized drive
electronics technology. The acquired company was renamed Emoteq UK Limited. The
acquisition has been accounted for using the purchase method of accounting, and,
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the estimated fair values at the date of
acquisition.
Tate Integrated Systems, Inc.
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 degregulated power utility industry. The Company
is selling the HIA system together with certain other Hathaway products and
targeting 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 estimated fair values at the date of
acquisition.
For the years ended June 30, 1999 and 1998 and the nine month post-acquisition
period ended June 30, 1997, HIA had losses before income taxes of approximately
$1.2 million, $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.
Consistent with the Company's strategy to develop applications for the HIA
software for the deregulated power industry, the Company has continued to invest
substantial resources in HIA. As evidenced by HIA's profitable fourth quarter
in fiscal year 1999, the Company is beginning to successfully market HIA's
products to the deregulated power industry. HIA's fourth quarter profitability
was partially due to its completion of certification testing of one of its
automation systems with the California Independent System Operator Corporation
(California ISO). Certification allows the Company's system to be installed at
generator sites throughout California. The Company's system is currently the
only certified system available to California generators. Each system will sell
for $38,000 to $102,000 per site, depending on the size and technical
requirements of each site. There are approximately 900 power generators located
at approximately 600 generation plants that supply electricity to consumers in
the state of California. The automation system developed for California ISO
will enable California ISO to measure and control the amount of electricity
being put into the transmission system by generators to ensure reliable delivery
of power to meet the demands of the consumers in California. A major feature of
the system is its ability to use digital certificate and encryption technology
to ensure data privacy and control security.
Also during the second half of fiscal 1999, HIA was awarded a $6.2 million
contract to supply a control and automation system for the treatment plant which
supplies all potable water to the Las Vegas region.
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
9
solutions that will both reduce their operating costs and improve the
reliability of their power supply. However, there can be no assurance that such
modifications will be successful and/or economically viable. Management believes
that there is significant demand in the power industry for such solutions as a
result of the business environment created by the recent industry deregulation.
The successful implementation of the Company's current business plan continues
to be partially dependent on the Company's ability to successfully market HIA's
products to the deregulated power industry. The factors that will affect the
success of implementing this business plan include, but are not limited to, the
ability to win sufficient amount of project work on favorable terms to the
Company, the ability to complete projects in a timely and cost-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) decreased $1,027,000 during the year to a balance of
$2,416,000 at June 30, 1999. Fiscal 1999 operating activities used $81,000,
compared to $1,450,000 generated in fiscal 1998 and $197,000 used in 1997. The
amounts used to fund the operations of the HIA business in 1999, 1998 and 1997
was $1,379,000, $1,628,000 and $1,592,000, respectively, while the amounts
generated from the operating activities of the Company's other businesses was
$1,298,000, $3,078,000 and $1,395,000, respectively, for the same periods. The
increased cash generated from operations during 1998 was primarily due to income
tax refunds received.
Cash of $987,000, $914,000 and $1,313,000 was used by investing activities in
fiscal 1999, 1998 and 1997, respectively. The 1999 cash used for investing
activities includes $281,000, net of cash acquired, paid for the purchase of
Emoteq UK Limited and $86,000 net cash received from investments in joint
ventures. The 1998 and 1997 cash used for investing activities includes $229,000
and $863,000, respectively, paid for the interest acquired in TIS.
Financing activities generated $63,000 in fiscal year 1999, and used $526,000
and $32,000 in fiscal years 1998 and 1997, respectively. The increased cash used
in financing activities in 1998 was due to repayments, net of borrowings, on the
line of credit of $524,000.
At June 30, 1999, the Company had $1,308,000 of debt, compared with $1,245,000
at June 30, 1998, an increase of $63,000. The debt at June 30, 1999 represents
borrowings on the Company's current long-term financing agreement (Agreement)
with Silicon. The Agreement matures on May 7, 2000 and, accordingly, the
$1,308,000 balance has been classified as a current liability as of June 30,
1999. The Agreement is subject to automatic and continuous annual renewal for
successive additional terms of one year each unless either party notifies the
other of its intention to terminate the Agreement at least sixty days before the
next maturity date. Borrowings on the loan are restricted to the lesser of
$3,000,000 or 85% of the Company's eligible receivables (Maximum Credit Limit).
As of June 30, 1999, the Company could borrow an additional $1,265,000 up to the
Maximum Credit Limit of $2,573,000.
The loan bears interest at Silicon's prime borrowing rate (prime rate) plus 2%
(9.75% at June 30, 1999). 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, 1999, the Company was in compliance with such covenants.
As in the three-year period ended June 30, 1999, the Company's fiscal 2000
working capital, capital expenditure and debt service requirements are expected
to be funded from the existing cash balance of $2,416,000 and the
10
$1,265,000 available under the long-term financing agreement at June 30, 1999.
The Company believes that such amounts are sufficient to fund operations and
working capital needs for at least the next twelve months. As explained above,
the Company's Agreement with Silicon matures on May 7, 2000 but will continue
for successive additional terms of one each year unless either party gives
notice of termination at least sixty days before the maturity date. The Company
has not received notice of termination and does not anticipate receiving or
giving such notice, however, if such notice was received, the Company would
pursue other lenders to meet its long-term financing needs. Although the Company
believes it would be successful in its efforts to obtain alternate financing,
there are no assurances that it will be successful in doing so. An inability to
obtain such alternate financing may have a material adverse effect on the
Company's results of operations and financial condition.
The Company continues to explore all possible opportunities for increasing
shareholder value including a possible spinoff of the power and process business
as well as other alternatives.
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, software
systems used in its business and items purchased from its suppliers. The Company
has adopted a "Y2K Readiness Program" and is taking what it believes to be
appropriate steps necessary in preparation for Year 2000 issues.
The Company is completing an assessment of its products to determine which
products will be affected by Year 2000 issues. Test procedures have been modeled
from the public document titled "Year 2000 Test Procedures", published by
General Motors Corporation, and include a step by step method of date
verification using each interface to the product. Testing of most products is
completed or under way. Modifications and updates are being made as needed for
products that are not Y2K compliant. With the possible exception of some of the
older RTU protocol software, testing of all of the Company's current products
will be complete before December 31, 1999. Some of the Company's older products
that are no longer sold will not be tested for compliance. The Company will
indicate on its Web site which products will not be tested.
The Company has completed its assessment of its internal systems, processes and
facilities for Year 2000 compliance and found them to be 97% compliant. The
expected completion date to have all significant internal systems, processes and
facilities compliant is October 31, 1999. The Company's assessment of its
suppliers', service providers' and contractors' Year 2000 compliance is also
ongoing and is expected to be completed by October 31, 1999. Alternative sources
will be pursued for any non-compliant sources. Additionally, alternative sources
will be identified and qualified for all compliant sources so that a secondary
supplier will be available in the event that disruption in supply occurs from
the primary supplier.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, normal business activities or operations. There
is inherent uncertainty regarding the Year 2000 problem primarily due to the
uncertainty of the readiness of suppliers and customers. Therefore, the Company
is unable to predict with certainty whether the consequences of Year 2000
failures will have a material impact on the Company's business, results of
operations or financial condition. The Company's Year 2000 efforts are expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and the Company currently believes it will be able to modify or offer
alternative products as well as modify or replace its affected systems in time
to minimize any detrimental effects on customer relationships or operations.
Activities related to Year 2000 compliance are being performed with internal
resources. The Company is expensing as incurred all payroll and associated costs
related to the Year 2000 issue. It is not anticipated that Year 2000 activities
will delay other projects or materially impact the Company's business. 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
anticipates that these factors will continue to minimize the effects of any
foreseeable inflation and other price pressures from the industries in
11
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, 1999, the Company has not used
derivative instruments or engaged in hedging activities.
Interest Rate Risk
The interest payable on the Company's line-of-credit is variable based on the
prime rate, and, therefore, affected by changes in market interest rates. At
June 30, 1999, approximately $1.3 million was outstanding with a weighted
average interest rate of 9.75% (prime plus 2%). The line-of-credit matures in
May 2000 and is subject to automatic and continuous annual renewal for
successive annual terms of one year each unless either party notifies the other
of its intention to terminate the Agreement at least sixty days before the next
maturity date. The Company manages interest rate risk by investing excess funds
in cash equivalents bearing variable interest rates 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 wholly-owned subsidiaries located in Northern Ireland and
England. Sales from these operations are typically denominated in British
Pounds, thereby creating exposures to changes in exchange rates. The changes in
the British/U.S. exchange rate may positively or negatively affect the Company's
sales, gross margins and retained earnings. The Company does not believe that
reasonably possible near-term changes in exchange rates will result in a
material effect on future earnings, fair values or cash flows of the Company,
and therefore, has chosen not to enter into foreign currency hedging
instruments. There can be no assurance that such an approach will be successful,
especially in the event of a significant and sudden decline in the value of the
British Pound.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). In general, SOP 98-
1 requires that certain costs to develop software for internal use be
capitalized. This statement is effective for fiscal years beginning after
December 15, 1998. These requirements are to be applied prospectively from the
date of adoption. The Company believes SOP 98-1 will not materially impact its
financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 provides guidance on the
financial reporting of start-up and organization costs and requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
is effective for fiscal years beginning after December 15, 1998. These
requirements are to be applied as a cumulative change in accounting principle.
The Company believes SOP 98-5 will not materially impact its financial
statements.
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, 2000. 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.
Item 8. Financial Statements and Supplementary Data.
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hathaway Corporation:
We have audited the accompanying consolidated balance sheets of HATHAWAY
CORPORATION (a Colorado corporation) AND SUBSIDIARIES as of June 30, 1999 and
1998, 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, 1999. These consolidated financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The supplemental Schedule II
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 30, 1999.
13
HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1999 June 30, 1998
- - --------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 2,416 $ 3,443
Restricted cash 646 480
Trade receivables, net of allowance for doubtful accounts of
$479 and $599 at June 30, 1999 and 1998, respectively 6,465 6,400
Inventories, net 3,316 3,649
Current deferred income taxes 632 779
Income tax refunds receivable, prepaid expenses and other 538 684
- - --------------------------------------------------------------------------------------------------
Total current assets 14,013 15,435
Property and equipment, net 1,720 1,730
Investment in joint ventures, net (Note 3) 514 222
Cost in excess of net assets acquired, net 126 374
Other 25 59
- - --------------------------------------------------------------------------------------------------
Total Assets $16,398 $17,820
==================================================================================================
Liabilities and Stockholders' Investment
Current Liabilities:
Line-of-credit classified as current (Note 4) $ 1,308 $ --
Accounts payable 1,570 2,027
Accrued liabilities 2,955 2,500
Income taxes and other current liabilities 560 497
Product service reserve 689 475
- - --------------------------------------------------------------------------------------------------
Total current liabilities 7,082 5,499
Line-of-credit (Note 4) -- 1,245
- - --------------------------------------------------------------------------------------------------
Total Liabilities 7,082 6,744
Commitments and Contingencies
Stockholders' Investment:
Preferred stock, par value $1.00 per share, authorized 5,000
shares; no shares outstanding -- --
Common stock, at aggregate stated value, authorized 50,000
shares; 5,405 shares issued 100 100
Additional paid-in capital 9,954 9,954
Loans receivable for stock (Note 7) (235) (235)
Retained earnings 3,316 4,841
Cumulative translation adjustments 154 389
Treasury stock, at cost; 1,122 shares (3,973) (3,973)
- - --------------------------------------------------------------------------------------------------
Total Stockholders' Investment 9,316 11,076
- - --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Investment $16,398 $17,820
==================================================================================================
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,
1999 1998 1997
- - --------------------------------------------------------------------------------------------------
Revenues $41,691 $41,317 $39,946
Operating costs and expenses:
Cost of products sold 26,475 26,379 25,575
Selling 7,012 7,857 7,601
General and administrative 4,798 4,198 4,771
Engineering and development 4,466 4,411 3,646
Amortization of intangibles and other 481 738 402
- - --------------------------------------------------------------------------------------------------
Total operating costs and expenses 43,232 43,583 41,995
- - --------------------------------------------------------------------------------------------------
Operating loss (1,541) (2,266) (2,049)
Other income (expense), net:
Equity income from investments in joint
ventures (Note 3) 329 222 --
Interest and dividend income 111 217 245
Interest expense (146) (148) (173)
Other income (expense), net (70) (186) (215)
- - --------------------------------------------------------------------------------------------------
Total other income (expense), net 224 105 (143)
- - --------------------------------------------------------------------------------------------------
Loss before income taxes (1,317) (2,161) (2,192)
Benefit (provision) for income taxes (Note 5) (208) 184 763
- - --------------------------------------------------------------------------------------------------
Net loss $(1,525) $(1,977) $(1,429)
==================================================================================================
Basic and diluted net loss per share (Note 1) $ (0.36) $ (0.46) $ (0.34)
==================================================================================================
Basic and diluted weighted average shares
outstanding (Note 1) 4,283 4,284 4,259
==================================================================================================
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,
1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net loss $(1,525) $(1,977) $(1,429)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,220 1,490 1,199
Provision for bad debts 14 136 105
Equity income from investments in joint ventures (Note 3) (329) (222) --
Deferred income tax provision 147 75 39
Other (195) 201 241
Changes in assets and liabilities, net of effect in 1999 of
purchase of Ashurst and in 1997 of purchase of Tate (Note 2):
(Increase) decrease in -
Restricted cash (166) (227) 59
Trade receivables 87 238 (344)
Inventories, net 333 742 1,174
Income tax refunds receivable, prepaid expenses and other 183 1,177 (827)
Increase (decrease) in -
Accounts payable (499) 184 (46)
Accrued liabilities 408 (94) (649)
Income taxes and other current liabilites 27 (182) 274
Product service reserve 214 (91) 7
- - --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (81) 1,450 (197)
Cash Flows From Investing Activities:
Purchase of property and equipment (792) (685) (651)
Purchase of Ashurst, net of cash acquired (Note 2) (281) -- --
Purchase of Tate (Note 2) -- (229) (863)
Activities related to joint venture investments (Note 3) 86 -- --
Proceeds from maturity of marketable securities -- -- 201
- - --------------------------------------------------------------------------------------------------------------
Net Cash used in investing activities (987) (914) (1,313)
Cash Flows From Financing Activities:
Repayments on line-of-credit (150) (1,769) (8)
Borrowings on line-of-credit 213 1,245 --
Proceeds from exercise of employee stock options -- -- 81
Purchase of treasury stock -- (2) (105)
- - --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 63 (526) (32)
Effect of foreign exchange rate changes on cash (22) 2 48
- - --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,027) 12 (1,494)
Cash and cash equivalents at beginning of year 3,443 3,431 4,925
- - --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,416 $ 3,443 $ 3,431
==============================================================================================================
Supplemental disclosure of cash flow information:
Net cash paid (received) during the year for:
Interest $ 123 $ 146 $ 167
Income taxes (153) (1,037) 4
Noncash investing and financing activities:
Assets of Ashurst purchased, net of liabilities assumed and cash
acquired (Note 2) $ 281 $ -- $ --
Assets of Tate purchased, net of liabilities assumed (Note 2) -- -- 1,092
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)
Additional Loans Cumulative Compre-
Common Stock Paid-in Receivable Retained Translation hensive Treasury Stock
---------------- ------------------
Shares Amount Capital (Note 7) Earnings Adjustment Loss Shares Amount
-----------------------------------------------------------------------------------------------
Balances, June 30, 1996 5,307 $100 $9,712 $(235) $ 8,247 $ 163 1,058 $(3,705)
Purchase of treasury stock -- -- -- -- -- -- 25 (105)
Exercise of stock options 32 -- 81 -- -- -- -- --
Acquisition of common stock as
a result of stock option
exercises (Note 6) 66 -- 161 -- -- -- 38 (161)
Foreign currency translation
adjustment -- -- -- -- -- 197 $ 197 -- --
Net loss -- -- -- -- (1,429) -- (1,429) -- --
-------
Comprehensive loss -- -- -- -- -- -- $(1,232) -- --
=======
------------------------------------------------------------- ------------------
Balances, June 30, 1997 5,405 100 9,954 (235) 6,818 360 1,121 (3,971)
Purchase of treasury stock -- -- -- -- -- -- 1 (2)
Foreign currency translation
adjustment -- -- -- -- -- 29 $ 29 -- --
Net loss -- -- -- -- (1,977) -- (1,977) -- --
-------
Comprehensive loss -- -- -- -- -- -- $(1,948) -- --
=======
------------------------------------------------------------- ------------------
Balances, June 30, 1998 5,405 100 9,954 (235) 4,841 389 1,122 (3,973)
Foreign currency translation
adjustment -- -- -- -- -- (235) $ (235) -- --
Net loss -- -- -- -- (1,525) -- (1,525) -- --
-------
Comprehensive loss -- -- -- -- -- -- $(1,760) -- --
=======
------------------------------------------------------------- -----------------
Balances, June 30, 1999 5,405 $100 $9,954 $(235) $ 3,316 $ 154 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, 1999 June 30, 1998
--------------------------------------
Parts and raw materials, net $ 2,227 $ 2,210
Finished goods and work-in-process, net 1,089 1,439
--------------------------------------
$ 3,316 $ 3,649
======================================
Reserves established for anticipated losses on excess or obsolete
inventories were approximately $1,675,000 and $1,742,000 at June 30, 1999
and 1998, respectively.
Property and Equipment
Property and equipment, at cost, is classified as follows (in thousands):
Useful lives June 30, 1999 June 30, 1998
--------------------------------------------------------
Machinery, equipment, tools and dies 2-8 years $ 7,574 $ 6,597
Furniture, fixtures and other 3-10 years 1,623 2,662
-----------------------------------
9,197 9,259
Less accumulated depreciation and amortization (7,477) (7,529)
-----------------------------------
$ 1,720 $ 1,730
===================================
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.
Depreciation expense was $788,000, $757,000 and $729,000 in fiscal years
1999, 1998 and 1997, respectively.
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 the
period estimated to be benefitted. Cost in excess of net assets acquired as
of June 30, 1999 and 1998 consists of $195,000 and $1,197,000 of original
costs, $10,000 and zero of effect of exchange rate changes, and $59,000 and
$823,000 of accumulated amortization, respectively.
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets that are held and used in operations, the asset
would be considered to be impaired if the undiscounted future cash flows
related to the asset did not exceed the net book value. The amount of the
impairment is assessed using the assets' fair market value, which is
determined using discounted cash flows.
As a result of its acquisition of Hathaway Systems Limited (HSL) in 1991,
the Company had previously recorded goodwill of $1,197,000. At June 30, 1999
and in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS No. 121), the Company determined that the
unamortized cost in excess of net assets acquired from its acquisition of
HSL was impaired; and, therefore, wrote-off the remaining unamortized
balance of $249,000. The Company's determination was based on projections of
undiscounted cash flows of HSL, which were based on current marketplace
conditions, low orders and continuing losses. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such
projections and discounting the estimated cash flows, the Company determined
that the entire unamortized amount was impaired. The current year
amortization of $125,000 and impairment write-off of $249,000, totaling
$374,000, is included in amortization of intangibles and other in the fiscal
year 1999 consolidated statement of operations.
As 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, 1999 June 30, 1998
--------------------------------------
Compensation and fringe benefits $1,377 $ 973
Commissions 541 474
Other accrued expenses 1,037 1,053
--------------------------------------
$2,955 $2,500
======================================
Foreign Currency Translation
In accordance with SFAS No. 52, "Foreign Currency Translation", the assets
and liabilities of the Company's foreign subsidiaries are translated into
U.S. dollars using current exchange rates. Revenues and expenses are
translated at average rates prevailing during the period. The resulting
translation adjustments are recorded in the cumulative translation
adjustments component of stockholders' investment in the accompanying
consolidated balance sheets.
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
19
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Basic and Diluted Earnings per Share
Basic earnings (loss) per share is computed by dividing the net earnings or
loss by the weighted average number of shares of common stock outstanding.
Diluted earnings or loss per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted average number of common
shares outstanding and (2) if not anti-dilutive, the effect of outstanding
warrants and stock options determined utilizing the treasury stock method.
In fiscal years 1999, 1998 and 1997, stock options totaling 819,004, 648,204
and 708,704, respectively, (without regard to the treasury stock method)
were excluded from the calculation of diluted earnings (loss) per share
since the result would have been anti-dilutive.
Basic and Diluted EPS have been computed as follows (in thousands, except
per share data):
For the fiscal years ended June 30,
1999 1998 1997
-----------------------------------------------------
Numerator:
Net loss $(1,525) $(1,977) $(1,429)
Denominator:
Weighted average outstanding shares 4,283 4,284 4,259
-----------------------------------------------------
Basic and Diluted net loss per share $ (0.36) $ (0.46) $ (0.34)
=====================================================
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," (SFAS 130). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted SFAS 130 in
fiscal year 1999. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by and distributions
to shareholders.
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) and related
interpretations.
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, restricted cash, trade receivables, accounts payable
and accrued liabilities approximate fair value because of the immediate or
short-term maturities of these financial instruments. The carrying amount of
the line-of-credit approximates fair value because the underlying instrument
is a variable rate note that reprices frequently.
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.
20
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). In
general, SOP 98-1 requires that certain costs to develop software for
internal use be capitalized. This statement is effective for fiscal years
beginning after December 15, 1998. These requirements are to be applied
prospectively from the date of adoption. The Company believes SOP 98-1 will
not materially impact its financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs and requires
costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December
15, 1998. These requirements are to be applied as a cumulative change in
accounting principle. The Company believes SOP 98-5 will not materially
impact its financial statements.
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, 2000. 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 ACQUISITIONS
Ashurst Logistic Electronics Limited
Effective July 1, 1998, a wholly-owned subsidiary of the Company acquired
all the outstanding shares of Ashurst Logistic Electronics Limited of
Bournemouth, England (Ashurst) for $317,000 in cash. Ashurst manufactures
drive electronics and position controllers for a variety of motor
technologies as well as a family of static frequency converters for military
and aerospace applications and has extensive experience in power electronics
design and software development required for the application of specialized
drive electronics technology. The acquired company was renamed Emoteq UK
Limited.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. The final net purchase price allocation
was as follows (in thousands):
Cash $ 36
Trade receivables 190
Prepaid expenses 2
Property and equipment, net 25
Cost in excess of net assets acquired 195
Accounts payable ( 43)
Accrued liabilities and other ( 88)
------------------
Net purchase price $ 317
==================
The results of operations of Ashurst have been included in the Company's
fiscal 1999 consolidated statement of operations starting on July 1, 1998.
Tate Integrated Systems, Inc.
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
21
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS ACQUISITIONS (CONTINUED)
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 is selling the HIA system together with other
Hathaway products and targeting 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 estimated fair values at the date
of acquisition. The final 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
===============
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 121, the Company determined
that the unamortized cost in excess of net assets acquired from its
acquisition of TIS was impaired and, therefore, wrote-off the remaining
unamortized balance of $406,000. The Company's determination was based on
projections of undiscounted cash flows of HIA, which were based on current
marketplace and competitive conditions and resulting low margins for the
industrial applications of HIA's product. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such
projections and discounting the estimated cash flows, the Company determined
that the entire unamortized amount was impaired. The fiscal year 1998
amortization of $202,000 and impairment write-off of $406,000, totaling
$608,000 is included in amortization of intangibles and other in the fiscal
year 1998 consolidated statement of operations.
The results of operations of TIS have been included in the Company's fiscal
1999, 1998 and 1997 consolidated statement of operations starting on October
1, 1996. For the years ended June 30, 1999, 1998 and the nine month post-
acquisition period ended June 30, 1997, HIA had losses before income taxes
of approximately $1.2 million, $2.7 million and $1.3 million, respectively.
The following unaudited pro forma summary (in thousands, except per share
data) combines the consolidated results of operations of the Company,
Ashurst and TIS as if the acquisitions had occurred at the beginning of
fiscal year 1998 for Ashurst and fiscal year 1997 for TIS after giving
effect to certain pro forma adjustments related to such items as income
taxes, depreciation, and amortization of cost in excess of net assets
acquired. The pro forma results are shown for illustrative purposes only,
and do not purport to be indicative of the actual results which would have
occurred had the transaction been consummated as of the earlier date, nor
are they indicative of results of operations which may occur in the future.
22
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS ACQUISITIONS (CONTINUED)
For the year ended For the year ended
June 30, 1998 June 30, 1997
(Unaudited) (Unaudited)
------------------------ --------------------
Revenue $ 41,859 $ 40,946
Net loss (1,833) (1,403)
Basic net loss per share (0.43) (0.33)
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 systems, 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. Under a license from Hathaway,
HPMS manufactures and sells instrumentation products designed by Hathaway,
to electric power companies in China.
The Company accounts for the Chinese joint ventures using the equity method
of accounting. At the time of the original investments in the Chinese joint
ventures and until fiscal 1998, the Company determined that due to the
start-up nature of the entities, their untested products and political
uncertainty in China, the realization of the initial investments and
subsequent earnings (which were not significant) was uncertain; and,
therefore, the Company fully reserved against the original investments and
its share of any equity in income.
During fiscal years 1998 and 1999, Kehui and Si Fang's operations have
continued to mature, their products have gained significant acceptance, and
both companies have sustained profitability. Because of sustained positive
operating results, offset by a certain amount of political and business
uncertainty in China, the Company recognized a portion of its share of
equity in income from these two joint ventures, totaling $329,000 and
$222,000 in fiscal years 1999 and 1998, respectively. These amounts are
included in equity income from investments in joint ventures in the
consolidated statements of operations. The amounts recognized represent
management's best estimate of the future amounts that will be received from
the joint ventures as of June 30, 1999. The Company will continue to
recognize its share of equity in income (loss) from these two joint ventures
to the extent it believes such amounts are realizable.
During fiscal 1999, the Company sold 2% of its investment in Si Fang for
$57,000 in cash and recognized a $49,000 gain on the sale, which is included
in other income in the accompanying 1999 consolidated statement of
operations. The Company also invested an additional $92,000 in the joint
venture and received $121,000 cash dividends during the fiscal year.
At June 30, 1999, the Company's investments and current ownership interests
in these joint ventures are as follows (in thousands):
Cumulative Cumulative Balance at
Ownership Investment, Share of Dividends Cumulative June 30,
Interest net of sale Equity Income Received Reserve 1999
-------- ----------------------------------------------------------------------------------
Si Fang 23% $248 $ 839 $ (121) $(499) $467
Kehui 25% 100 216 (28) (241) 47
HPMS 40% 140 -- $ -- (140) --
----------------------------------------------------------------------------------
$488 $1,055 $ (149) $(880) $514
==================================================================================
The Company has no future commitments relating to these investments, however
Si Fang has requested additional capital from each joint venture partner to
be invested in September 1999. The Company has agreed to sell 3% of its
ownership interest for $143,000 and reinvest the proceeds plus an additional
$143,000 in cash plus $139,000 of dividends. After the sale and capital
contribution, the Company's ownership interest will be 20%.
23
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN JOINT VENTURES (CONTINUED)
In accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," summarized financial information for Si Fang
as of December 31, 1998 and 1997 (Si Fang is on a calendar fiscal year) is
presented as follows (in thousands):
As of and As of and
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------------- -------------------------
Current assets $16,864 $8,638
Non-current assets 1,745 1,498
Current liabilities 14,752 7,378
Non-current liabilities -- --
Revenues 16,502 8,918
Gross profit 4,047 2,232
Net income before income taxes 1,706 1,525
Net income 1,367 1,525
Summarized financial information for Si Fang for the year ended December
31, 1996 and for Kehui and for HPMS for the years ended December 31, 1998,
1997, and 1996 is not presented because it is not significant relative to
the Company's consolidated financial statements.
Prior to June 30, 1999, the Company also had an 11.4% interest in a joint
venture (JV) with KUB Holdings BHD, a Malaysian firm. The JV was created
for the purpose of manufacturing, marketing and selling the TIS-4000 system
in certain Asian countries. As of June 30, 1998, the JV had ceased all
operations due to unprofitability and the Asian economic downturn. During
fiscal year 1999, the JV was dissolved and settled its existing obligations
from its existing assets. The license to manufacture, market and sell the
TIS-4000 system reverted back to the Company and the Company has no further
obligations related to this JV.
4. DEBT
On 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, accordingly, the $1,308,000 balance of the line-of-credit
has been classified as a current liability as of June 30, 1999. The
Agreement is subject to automatic and continuous annual renewal for
successive additional terms of one year each unless either party notifies
the other of its intention to terminate the Agreement at least sixty days
before the next maturity date. Borrowings on this line-of-credit are
restricted to the lesser of $3,000,000 or 85% of the Company's eligible
receivables (Maximum Credit Limit). As of June 30, 1999, the Company could
borrow an additional $1,265,000, up to the $2,573,000 Maximum Credit Limit.
The line bears interest at Silicon's prime borrowing rate (prime rate) plus
2% (9.75% at June 30, 1999). 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, 1999, the Company was
in compliance with such covenants.
24
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The benefit (provision) for income taxes is based on income (loss) before
income taxes as follows (in thousands):
For the fiscal years ended June 30,
1999 1998 1997
-----------------------------------------------------------
Domestic $(1,065) $(2,179) $(2,471)
Foreign (252) 18 279
-----------------------------------------------------------
Loss before income taxes $(1,317) $(2,161) $(2,192)
===========================================================
Components of the benefit (provision) for income taxes are as follows (in
thousands):
For the fiscal years ended June 30,
1999 1998 1997
-----------------------------------------------------------
Current benefit (provision):
Domestic $ (61) $ 308 $ 682
Foreign -- (49) 120
-----------------------------------------------------------
Total current benefit (provision) (61) 259 802
Domestic deferred provision (147) (75) (39)
-----------------------------------------------------------
Benefit (provision) for income taxes $(208) $ 184 $ 763
===========================================================
The benefit (provision) for income taxes differs from the amount determined
by applying the federal statutory rate as follows (in thousands):
For the fiscal years ended June 30,
1999 1998 1997
-----------------------------------------------------------
Tax benefit computed at statutory rate $ 448 $ 735 $ 745
State tax, net of federal benefit (36) (2) (2)
Nondeductible expenses and goodwill amortization (145) (267) (32)
Non-benefited losses of foreign subsidiaries -- -- (3)
Recovery of prior year taxes paid -- 69 98
Change in valuation allowance (497) (315) (89)
Other 22 (36) 46
-----------------------------------------------------------
Benefit (provision) for income taxes $(208) $ 184 $ 763
===========================================================
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, 1999 June 30, 1998
---------------------------------------
Allowances and other accrued liabilities $ 871 $ 927
Tax credit carryforwards 374 352
Net operating loss carryforwards 608 224
Valuation allowance (1,221) (724)
---------------------------------------
Net deferred tax asset $ 632 $ 779
=======================================
As of June 30, 1999, the Company has a domestic loss carryforward of
$1,632,000 which will expire in 2013 and 2019 and domestic tax credit
carryforwards of $334,000 expiring in 2004 through 2008. The Company also
has foreign loss carryforwards totalling $174,000 which can be carried
forward indefinitely and has paid foreign advance corporation tax of
$40,000 which may be utilized to reduce future foreign taxes due.
During fiscal 1999, the valuation allowance was increased primarily due to
the increased level of net operating losses being carried forward and the
Company's continued operating losses. Realization of the Company's net
deferred tax asset is dependent upon the Company generating sufficient
United States federal taxable income (approximately $1,859,000) in future
years to obtain benefit from the reversal of net deductible temporary
differences and from tax credit and net operating loss carryforwards. The
Company's management believes that, on a more likely than not basis, the
recorded net deferred tax asset is realizable. The amount of deferred tax
assets considered realizable is
25
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
subject to adjustment in future periods if estimates of future United
States federal taxable income change.
6. STOCK COMPENSATION
Hathaway Corporation Stock Option Plan
At June 30, 1999, 193,617 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 if certain performance criteria are met. Based on HIA's fiscal years'
1997, 1998 and 1999 operating results, 24,400 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 $161,000, in non-cash, tax-deferred
transactions.
Option activity in fiscal years 1997, 1998 and 1999 was as follows:
Weighted Weighted
Average Number of Average
Number of Exercise Shares Exercise
Shares Price ($) Exercisable Price ($)
----------------------------------------------------------------
Outstanding at June 30, 1996 332,856 3.02 250,856 2.88
Granted 503,350 3.56
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 3.35 303,138 3.36
Granted 249,104 1.71
Canceled or forfeited (78,304) 3.18
------------
Outstanding at June 30, 1999 819,004 2.87 371,866 3.36
============
Exercise prices for options outstanding and exercisable at June 30, 1999
are as follows:
Range of Exercise Prices Total
$1.13 - $1.88 $2.13 - $3.19 $3.50 - $4.31 $1.13 - $4.31
-------------------------------------------------------------------
Options Outstanding:
Number of options 249,104 234,400 335,500 819,004
Weighted average exercise price $ 1.71 $ 2.67 $ 3.88 $ 2.87
Weighted average remaining
contractual life 6.5 years 3.7 years 3.5 years 4.3 years
Options Exercisable:
Number of options - 159,300 212,566 371,866
Weighted average exercise price - $ 2.71 $ 3.84 $ 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 and related interpretations. In October
1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) which established an alternative method of
expense recognition for stock-based compensation awards to employees based
on fair values. Companies that elect to continue accounting for stock-based
compensation plans under the provisions of APB 25 must present certain pro
forma disclosures.
Pro forma information regarding net 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,
1999 1998 1997
----------------------------------------
Risk-free interest rate 6.3% 5.7% 6.3%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life 6 years 6 years 6 years
Expected volatility 60.8% 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,
1999 1998 1997
----------------------------------------
Actual net loss $(1,525) $(1,977) $(1,429)
Pro forma net loss $(1,702) $(2,128) $(1,686)
Actual basic and diluted net loss per share $ (0.36) $ (0.46) $ (0.34)
Pro forma basic and diluted net loss per share $ (0.40) $ (0.50) $ (0.40)
The weighted average fair value of options granted during fiscal years
1999, 1998 and 1997 was $1.07, $1.28 and $1.98, respectively. The total
fair value of options granted was $266,000, $59,000 and $978,000 in fiscal
years 1999, 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 estimated 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 for the Emoteq plan during fiscal years 1999 and 1998 was
as follows:
Weighted Average
Number of Shares Exercise Price
----------------------------- -----------------------------
Time Performance Time Performance
Vested Vested Vested Vested
----------------------------- -----------------------------
Outstanding at June 30, 1997 -- -- -- --
Granted 80,000 187,600 $1.37 $1.37
----------------------------- -----------------------------
Outstanding at June 30, 1998 80,000 187,600 1.37 1.37
Granted 11,000 34,000 2.50 2.50
Cancelled or forfeited -- (33,683) -- 1.56
----------------------------- -----------------------------
Outstanding at June 30, 1999 91,000 187,917 $1.51 $1.54
============================= =============================
Exercise prices for options outstanding at June 30, 1999 under this plan
are as follows:
Time Vested Performance Vested
----------- ------------------
$1.37 $2.50 $1.37 $2.50
----- ----- ----- -----
Options Outstanding
Number of options 80,000 11,000 159,460 28,457
Weighted average remaining
contractual life 5 years 5 years 5 years 5 years
Options exercisable 40,000 3,666 15,008 --
The potential dilution of the Company's ownership of Emoteq at June 30,
1999 is as follows:
Company Employees Total
-------------------------------------------------------
Issued and Outstanding 1,640,000 -- 1,640,000
Exercisable Options -- 58,674 58,674
-------------------------------------------------------
Total 1,640,000 58,674 1,698,674
Percentage 96.5% 3.5% 100.0%
The Company has recognized $0 and $66,162 in compensation expense for the
fiscal year ended June 30, 1999 and 1998, respectively, related to this
plan.
7. LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 1999 and
1998 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 1999, 1998 and 1997) or ii) the annual interest payable on the
note. Company contributions to the Plan were $9,000 in 1999, 1998 and 1997,
representing interest in all three years.
The $133,000 receivable represents the unpaid balance of a loan made in
fiscal year 1994 to the Chief Executive Officer of the Company in
connection with his purchase of the Company's common stock, pursuant to the
Officer and Director Loan Plan approved by stockholders on October 26,
1989. The loan is full-recourse and bears interest at the applicable
federal rate determined by the Internal Revenue Service (5.25% as of June
30, 1999). The loan is due on demand but no later than October 31, 2001.
28
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Leases
At June 30, 1999, 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
-------------------------------------------------
2000 $ 1,076
2001 705
2002 432
2003 226
2004 221
Thereafter 221
----------
$ 2,881
==========
Net rental expense was $1,000,000, $869,000 and $783,000 in fiscal years
1999, 1998 and 1997, respectively.
Shareholder Rights Plan
During fiscal year 1989, the Company adopted a shareholder rights plan,
which expired June 25, 1999. Under the plan, one preferred stock purchase
right was distributed for each share of common stock outstanding. Each
right entitled 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.
Severance Benefit Agreements
The Company has entered into annually-renewable severance benefit
agreements with certain key employees which, among other things, provide
inducement to the employees to continue to work for the Company during and
after any period of threatened takeover. The agreements provide the
employees with specified benefits upon the subsequent severance of
employment in the event of change in control of the Company and are
effective for 24 months thereafter. The maximum amount of salary that could
be required to be paid under these contracts, if such events occur, totaled
approximately $1,783,000 as of June 30, 1999. In addition to salary,
severance benefits include the cost of life, disability, accident and
health insurance for 24 months, a prorata calculation of bonus for the
current year and a gross-up payment for all federal, state and excise taxes
due on the severance payment.
Employment Agreement
Effective July 1, 1998, the Company entered into a new five-year employment
agreement with its Chief Executive Officer which replaced the previous
agreement that had been in effect since July 1, 1993. This agreement is
renewable after the initial five-year term on a year-to-year basis unless
the Company or the officer gives termination notice at least sixty days
prior to expiration of the initial or subsequent terms. The agreement
provides for base salary plus 1) an annual incentive bonus based on
corporate performance, as defined each year by the Board of Directors, 2) a
long-term incentive bonus in the form of stock options, 3) specified
benefits upon termination of employment (for reasons other than cause or
change in control) which are effective for one year thereafter and 4) a
bonus paid on dispositions of subsidiaries or divisions of the Company.
No annual bonus was paid in fiscal years 1999, 1998 or 1997. Stock options
to purchase 69,000 and 100,000 shares of common stock of the Company were
granted subsequent to fiscal years ended June 30, 1999 and 1998,
repectively, under the long-term incentive portion of the current and
previous agreements. In July 1999 the Board of Directors voted to
immediately vest options to purchase 127,000 shares of stock which had been
issued in previous years. As of June 30, 1999, the maximum amount that
could be required to be paid under the termination clause of the agreement
was approximately $399,000.
29
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting Agreement
Effective September 1, 1998, the Company entered into a Consulting
Agreement with the Chairman of the Board of Directors who is a major
shareholder. Under the Agreement, he is compensated for providing
consulting services to the Company primarily on matters involving the
Company's Motion Control business, as well as other matters as requested by
the Chief Executive Officer. During fiscal year 1999, the Company paid
$137,750 to the Chairman of the Board under the 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 markets, products and services.
Power and Process Business
Hathaway's complete line of power instrumentation products helps ensure
that electric utilities provide high quality service to consumers of
electricity. The power products group produces a comprehensive and cost-
effective range of products designed exclusively for the power industry
worldwide. Hathaway's equipment assists the electric power system operators
in operating and maintaining proper system performance. The products, which
are used to monitor and control the power generation, transmission and
distribution processes, include fault recording products, fault location
products, condition monitoring (circuit breaker) products and remote
terminal units for Supervisory Control and Data Acquisition (SCADA)
systems.
The process instrumentation products group manufactures and markets
products for the process and power industries including monitoring systems,
calibration equipment and process measurement instrumentation. The
monitoring systems, called visual 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 SCADA has been used to
fully automate such industrial applications as water and wastewater
treatment plants, glass manufacturing plants, oil and gas terminals and
tank farm facilities. In addition to expanding into its traditional process
markets, the system is being marketed to the power utility industry. The
Company has successfully sold the system with certain other Hathaway
products and target the combined product at substation automation and
integration applications used in power generation, transmission and
distribution facilities.
Motion Control Business
Motion Control offers quality, cost-effective products that suit a wide
range of applications in the industrial, medical, military and aerospace
sectors, as well as in manufacturing of analytical instruments and computer
peripherals. The end products using Hathaway technology include special
30
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENT INFORMATION (CONTINUED)
industrial and technical products such as satellite tracking systems, MRI
scanners, and high definition printers.
The group designs, manufactures and markets direct current brush and
brushless motors, related components, and drive and control electronics as
well as precision direct-current fractional horsepower motors and certain
motor components. Industrial equipment and military products are the major
application for the motors.
The group also manufactures optical encoders that are used to measure
rotational and linear movements of parts as well as fiber optic-based
encoders with special characteristics, such as immunity to radio frequency
interference and high temperature tolerance.
The following provides information on the Company's segments (in
thousands):
For the fiscal year ended June 30,
1999 1998 1997
---------------------- --------------------- ----------------------
Power and Motion Power and Motion Power and Motion
Process Control Process Control Process Control
---------------------- --------------------- ----------------------
Revenue from external customers $28,711 $12,980 $27,476 $13,841 $27,069 $12,877
Equity income from investments in
joint ventures 329 -- 222 -- -- --
Income (loss) before income taxes (1,932) 487 (4,659) 1,848 (3,402) 1,218
Identifiable assets 9,232 5,006 9,985 3,969 12,320 3,965
The following is a reconciliation of segment information to consolidated
information:
For the fiscal year ended or
as of June 30,
1999 1998 1997
--------------------------------
Segments' loss before income taxes $(1,445) $(2,811) $(2,184)
Corporate activities 128 650 (8)
--------------------------------
Consolidated loss before income taxes $(1,317) $(2,161) $(2,192)
================================
Segments' identifiable assets $14,238 $13,954 $16,285
Corporate assets and eliminations 2,160 3,866 4,192
--------------------------------
Consolidated total assets $16,398 $17,820 $20,477
================================
The Company's wholly-owned foreign subsidiaries in the United Kingdom and
Canada 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,
1999 1998 1997
-------------------------------------------
Revenues derived from foreign subsidiaries $ 7,744 $ 7,197 $ 7,031
Identifiable assets 3,179 3,723 4,335
31
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in fiscal
years 1999 and 1998 is as follows (in thousands, except per share data):
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------
Revenues $ 9,118 $10,539 $10,550 $11,484
Operating income (loss) (1,165) (300) (385) 309
Net income (loss) (1,307) (346) (379) 507
Basic and diluted net (loss) per share $ (0.31) $ (0.08) $ (0.09) $ 0.12
First Second Third Fourth
1998 Quarter Quarter Quarter 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)
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.
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. In December
1998, the IRS issued a favorable ruling on the proposed transaction. The
primary purpose for the spin-off would be to obtain additional bank
financing. The final decision as to whether to proceed with the spin-off
will be made by the Company's Board of Directors after consideration of all
relevant factors. Because management has not committed to such spin-off,
the Power and Process Business has not been treated as a discontinued
operation.
32
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 9) 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 7) in the Company's Proxy Statement
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" (pages 4
through 5) in the Company's Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Effective September 1, 1998, the Company entered into a consulting agreement
(Agreement) with Eugene E. Prince, who resigned from the offices of President
and Chief Executive Officer on August 13, 1998 and retired from employment with
the Company effective August 31, 1998. Mr. Prince is the Chairman of the Board
of Directors and a major shareholder of the Company. Under the Agreement, he is
compensated for providing consulting services to the Company primarily on
matters involving the Company's Motion Control business, as well as other
matters as requested by the Chief Executive Officer. During fiscal year 1999,
the Company paid $137,750 to Mr. Prince under the Agreement.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) The following documents are filed as part of this Report:
1. Financial Statements
a) Consolidated Balance Sheets as of June 30, 1999 and June 30, 1998.
b) Consolidated Statements of Operations for each of the fiscal years in
the three-year period ended June 30, 1999.
c) Consolidated Statements of Cash Flows for each of the fiscal years in
the three-year period ended June 30, 1999.
d) Consolidated Statements of Stockholders' Investment for each of the
fiscal years in the three-year period ended June 30, 1999.
e) Notes to Consolidated Financial Statements.
f) Report of Independent Public Accountants.
2. Financial Statement Schedules
II. Valuation and Qualifying Accounts.
3. Exhibits
Exhibit No. Subject
---------- -------
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
---------- -------
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 *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.
10.9 *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.
10.10 *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.
10.11 *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.**
10.12 *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.
10.13 *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.
10.14 *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.
10.15 *Loan and Security Agreement dated May 7, 1998 between Hathaway Corporation and
certain subsidiaries of Hathaway Corporation and Silicon Valley Bank. Incorporated
by reference to Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended
June 30, 1998.
10.16 *Schedule to Loan and Security Agreement dated May 7, 1998 between Hathaway
Corporation and certain subsidiaries of Hathaway Corporation and Silicon Valley
Bank. Incorporated by reference to Exhibit 10.17 to the Company's Form 10-K for the
fiscal year ended June 30, 1998.
10.17 *Amendment Number One dated August 1, 1998 to the 1989 Incentive and Non-Qualified
Stock Option Plan. Incorporated by reference to Exhibit 10.18 to the Company's Form
10-K for the fiscal year ended June 30, 1998.
35
Exhibit No. Subject
---------- -------
10.18 *The Amended 1991 Incentive and Nonstatutory Stock Option Plan dated August 1, 1998.
Incorporated by reference to Exhibit 10.19 to the Company's Form 10-K for the fiscal
year ended June 30, 1998.
10.19 Employment Agreement between Hathaway Corporation and Richard D. Smith, effective
August 13, 1998.
10.20 Consulting Agreement between Hathaway Corporation and Eugene E. Prince dated
September 1, 1998.
21 List of Subsidiaries
22 *Definitive Proxy Statement, dated September 23, 1999 for the Registrant's 1999
Annual Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP.
27 Financial Data Schedule
* These documents have been filed with the Securities and
Exchange Commission and are incorporated herein by
reference .
** The Management Incentive Bonus Plans for the fiscal years
ending June 30, 1997, 1998 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 1999.
36
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 20, 1999
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 20, 1999
- - -------------------- Officer, Chief Financial Officer
Richard D. Smith and Director
/s/ Eugene E. Prince Chairman of the Board of Directors September 20, 1999
- - --------------------
Eugene E. Prince
/s/ George J. Pilmanis Director September 20, 1999
- - ----------------------
George J. Pilmanis
/s/ Delwin D. Hock Director September 20, 1999
- - ------------------
Delwin D. Hock
/s/ Chester H. Clarridge Director September 20, 1999
- - ------------------------
Chester H. Clarridge
/s/ Graydon D. Hubbard Director September 20, 1999
- - ----------------------
Graydon D. Hubbard
37
HATHAWAY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Deductions Balance at
Beginning of Costs and from End of
Period Expenses Reserves Other /(1)/ Period
- - -------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1999:
Reserve for bad debts $ 599 $ 14 $ (134) -- $ 479
- - -------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998:
Reserve for bad debts $ 492 $ 136 $ (29) -- $ 599
- - -------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997:
Reserve for bad debts $ 321 $ 105 $ (34) $ 100 $ 492
- - -------------------------------------------------------------------------------------------------------------
/(1)/ Represents the effect of the Tate acquisition.
38