Item 1. Business.
Hathaway Corporation (the Company) was organized under the laws of Colorado in 1962. The Company is engaged in the business of designing, manufacturing and selling advanced electronic instrumentation and systems to the worldwide power and process industries, as well as motion control products to a broad spectrum of customers throughout the world. The Company also develops, designs, and installs integrated process automation systems for industrial applications. The Company operates primarily in the United States and Europe and has three joint venture investments in China and a joint venture investment in Malaysia.
Power and Process Instrumentation and Systems Automation
Power Instrumentation
Hathaway's complete line of power instrumentation products helps ensure that electric utilities provide high quality service to consumers of electricity. With manufacturing facilities in Seattle and Belfast, Northern Ireland, and sales and engineering functions in Seattle, Belfast and Denver, the power products group produces a comprehensive and cost-effective range of products designed exclusively for the power industry worldwide. Hathaway's equipment assists the electric power system operators in operating and maintaining proper system performance. The products, which are used to monitor and control the power generation, transmission and distribution processes, include fault recording products, fault location products, condition monitoring (circuit breaker) products and remote terminal units (RTUs) for Supervisory Control and Data Acquisition (SCADA) systems.
The Company also has three joint venture investments in China - Zibo Kehui Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company (Si Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). The Company holds a 25% interest in Kehui and Si Fang and a 40% interest in HPMS. Kehui designs, manufactures and sells cable and overhead fault location, SCADA systems and other test instruments within the China market. Si Fang designs, manufactures and sells a new generation of digital protective relays, control equipment and instrumentation products for substations in power transmission and distribution systems in China. The Company will sell these products outside of China. HPMS will design, manufacture and sell, under a license from the Company, instrumentation products designed by the Company, to electric power companies in China.
Process Instrumentation
The process instrumentation products group manufactures and markets monitoring systems which provide either visual annunciation and/or printed messages whenever a monitored "point" changes from an existing state. These systems are called visual annunciators and sequential event recorders (SER's). Visual annunciators and SER's are sold to electric utility companies and the process industry in general. Visual annunciators provide both visual and audible alert signals whenever a process variable goes into an alarm state. SER's provide a printed message whenever a monitored "point" changes state. The group also manufactures and sells combined annunciator/SER systems with distributed architecture (which significantly reduces installation costs) for power plant applications and is engaged in the design, manufacture and sale of power transducers which are sold to the process and power utility industries, as well as calibrators and signal conditioning products which are sold to the process industry.
Business Acquisition
Effective September 30, 1996, the Company acquired a 100% partnership interest in Tate Integrated Systems, L.P. and 100% of the stock of its sole general partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS"). The ownership interests were acquired for an adjusted negotiated price of $1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996 and $145,000 on June 30, 1997. In addition, $229,000 of additional consideration will be payable when certain accounts receivable of TIS are collected. Hathaway purchased the stock and partnership interest from Tate Engineering Services Corporation and its affiliate, Tate Engineering Services, Inc., both divisions of Tate Industries, a privately held company (collectively referred to as "TES".)
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a newly-formed wholly-owned subsidiary of the Company, since October 1, 1996. HIA is located in Baltimore, Maryland and is a full service supplier of process automation systems for industrial applications. HIA has developed a state-of-the-art
software system for Supervisory Control and Data Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA system has been used to fully automate such industrial applications as water and wastewater treatment plants, glass manufacturing plants, oil and gas terminals and tank farm facilities. In addition to expanding into its traditional process markets, HIA's system is being marketed to the power utility industry. The Company expects to team the HIA system with certain existing Hathaway products and target the combined product at substation automation and integration applications used in power transmission and distribution facilities.
Restructuring
In the fourth quarter of fiscal 1996 the Company decided to reorganize its Canadian and U.K. operations. Effective June 30, 1996 the net assets and substantially all operations of Hathaway Instruments Limited (HIL), the Company's subsidiary located in Hoddesdon, England, were transferred to Hathaway Systems Limited (HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with the asset transfer, substantially all operations of HIL were combined with the operations of HSL. In addition, the Company decided to close its Toronto, Canada facility and to combine substantially all of its operations with the operations of Hathaway Process Instrumentation, the Dallas, Texas division. The initiatives were aimed at reducing costs and enhancing productivity and efficiency. The restructuring provision was primarily comprised of estimated costs for employee severance benefits and fixed asset writeoffs. The payouts related to the restructuring charge were made in 1996 and 1997.
In the first quarter of 1997, management decided to restructure the power products manufacturing operations to produce operating efficiencies and to better utilize local management talent and expertise. Accordingly, the manufacturing operation located in Denver was consolidated in 1997 into two manufacturing facilities located in Seattle, Washington and Belfast, Northern Ireland.
Motion Control Instrumentation
The motion control group offers quality, cost-effective products that suit a wide range of applications in the industrial, medical, military and aerospace sectors, as well as in manufacturing of analytical instruments and computer peripherals. The end products using Hathaway technology include special industrial and technical products such as satellite tracking systems, MRI scanners, and high definition printers.
The motion control group is organized into two divisions and one subsidiary, respectively: Engineered Motion Technology division ("EMT"-Tulsa, previously known as the Motion Control division), Motors and Instruments Division ("MI"-Tulsa) and Computer Optical Products, Inc., ("COPI"-Chatsworth, CA).
The EMT division designs, manufactures and markets direct current (DC) brushless motors, related components, and drive and control electronics. Markets served include semiconductor manufacturing, industrial automation, medical equipment, and military and aerospace.
The MI division manufactures precision direct-current fractional horsepower motors and certain motor components. Industrial equipment and military products are the major application for the motors. This division also supplies spare parts and replacement equipment for general-purpose instrumentation products.
Optical encoders are manufactured by COPI in Chatsworth, California. They are used to measure rotational and linear movements of parts in diverse applications such as machine tools, robots, printers and medical equipment. The primary markets for the optical encoders are in the industrial, medical and computer peripheral manufacturing sectors. COPI also designs, manufactures and markets fiber optic-based encoders with special characteristics, such as immunity to radio frequency interference and high temperature tolerance, suited for industrial, aerospace and military environments. Applications include airborne navigational systems, anti-lock braking transducers, missile flight surface controls and high temperature process control equipment.
Product Distribution and Principal Markets
In addition to its own marketing and sales force, the Company has developed a worldwide network of independent sales representatives and agents to market its various product lines.
The Company faces competition in all of its markets, although the number of competitors varies depending upon the product. The Company believes there are only a small number of competitors in the power and process
markets, but there are numerous competitors in the motion control market. No clear market share data is available for the Company's other product areas. Competition involves primarily product performance and price, although service and warranty are also important.
Financial Information about Industry Segments
The Company considers all of its operations to be materially in one industry segment - electronic instrumentation.
Availability of Raw Materials
All parts and materials used by the company are in adequate supply. No significant parts or materials are acquired from a single source.
Patents, Trademarks, Licenses, Franchises, and Concessions.
The Company holds several patents and trademarks regarding components used by the various subsidiaries; however, none of these patents and trademarks are considered to be of major significance.
Seasonality of the Business
The Company's business is not of a seasonal nature.
Working Capital Items
The Company currently maintains inventory levels adequate for its short-term needs based upon present levels of production. The Company considers the component parts of its different product lines to be readily available and current suppliers to be reliable and capable of satisfying anticipated needs.
Sales to Large Customers
During fiscal 1997, no single customer accounted for more than 10% of the Company's consolidated revenue from continuing operations.
Sales Backlog
The backlog of the Company's continuing operations at June 30, 1997 consisted of sales orders totaling approximately $14,742,000. The Company expects to ship goods filling $14,229,000 of those purchase orders within fiscal 1998. This compares to a backlog from continuing operations of $9,998,000 at June 30, 1996, of which $9,982,000 was scheduled for shipment is fiscal 1997.
Government Sales
Approximately $605,000 of the Company's backlog as of June 30, 1997 consisted of contracts with the United States Government. The Company's contracts with the government contain a provision generally found in government contracts which permits the government to terminate the contract at its option. When the termination is attributable to no fault of the Company, the government would, in general, have to pay the Company certain allowable costs up to the time of termination, but there is no compensation for loss of profits.
Engineering and Development Activities
The Company's expenditures on engineering and development for continuing operations were $3,646,000 in fiscal 1997, $3,722,000 in fiscal 1996 and $3,616,000 in fiscal 1995. Of these expenditures, no material amounts were charged directly to customers.
Environmental Issues
No pollution or other types of emission result from the Company's operations and it is not anticipated that the Company's proposed operations will be affected by Federal, State or local provisions concerning environmental controls.
Export Sales from Domestic Operations and Foreign Operations
The information required by this item is set forth in Note 9 on page 26 herein.
Employees
As of the end of fiscal 1997, the Company had approximately 380 full-time employees.
Item 2.
Item 2. Properties.
The Company leases its administrative offices and manufacturing facilities as follows:
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.
Item 3. Legal Proceedings.
The Company has been named as a defendant in certain actions that have arisen out of the ordinary course of business. Management believes the actions are without merit and will not have a significant adverse effect on the Company's consolidated financial position.
Item 4.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted to a vote of the security holders of the Company in the fourth quarter of 1997.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Hathaway Corporation's common stock is traded on the Nasdaq National Market System under the symbol HATH. The number of holders of record of the Company's common stock as of the close of business on August 28, 1997 was 660.
The following table sets forth, for the periods indicated, the high and low prices of the Company's common stock on the Nasdaq National Market System, as reported by Nasdaq.
The Bid and Asked quotations as published by Nasdaq reflect interdealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Item 6.
Item 6. Selected Financial Data.
The following table summarizes data from the Company's annual financial statements for the years 1993 through 1997 and notes thereto; the Company's complete annual financial statements and notes thereto for the current fiscal year appear in Item 8 beginning on page 10 herein. See Item 1 in the Business section of this report and Note 2 to Consolidated Financial Statements on page 18 for discussion of a business acquisition completed in fiscal 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
All statements contained herein that are not statements of historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Among the factors that could cause actual results to differ materially are the following: the unavailability of sufficient capital on satisfactory terms to finance the Company's business plan, increased competition, the introduction of new technologies and competitors into the systems and instrumentation markets where the Company competes, adverse changes in the regulatory environment, and general business and economic conditions. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "expects," "plans," "anticipates," or "intends" to be uncertain and forward-looking. All cautionary statements made herein should be read as being applicable to all related forward-looking statements wherever they appear. In this connection, investors should consider the risks described herein.
OPERATING RESULTS
Fiscal year 1997 compared to fiscal year 1996
The Company recorded a net loss of $1,429,000 in fiscal year 1997, compared to a net loss of $1,013,000 in 1996. The fiscal 1997 net loss includes a $923,000 net loss from Hathaway Industrial Automation (HIA), acquired by the Company effective September 30, 1996 (see discussion under "Business Acquisition" below), and a $506,000 net loss from operations of the Company's other businesses.
Revenues increased by $4,535,000, or 13%, from 1996 to 1997, comprised of a 16% increase in sales of the Company's power and process instrumentation and systems products and a 7% increase in sales of motion control products (the fourth consecutive annual increase).
The increase in sales of power and process products consists of a 3% increase in sales of the Company's traditional product lines - the first such increase since 1993. Management believes that this trend is the first indication that the downturn in power and process revenues that began after the power industry deregulation law was passed in October 1992 may be reversing. The remainder of the increase in power and process revenues was due to product sales of HIA, totalling $2,993,000.
Sales to international customers increased 12% from $12,668,000, or 36% of sales in fiscal 1996 to $14,200,000, or 36% of sales in fiscal 1997. Foreign sales as a percentage of total sales remained constant because the growth in the Company's traditional foreign business was offset by HIA's business, which is primarily with domestic customers. Sales backlog increased from $9,998,000 at June 30, 1996 to $14,742,000 at June 30, 1997, comprised of $11,996,000 of traditional product backlog and $2,746,000 of HIA product backlog.
Cost of products sold increased to 64% of revenues in 1997 from 62% in 1996. The increase occurred primarily because of price reductions implemented in response to competitive pressures, changes in the mix of products sold, and manufacturing inefficiencies resulting from the consolidation of manufacturing operations implemented in 1997. In addition, HIA's cost of products sold represents a higher percentage of revenues than that of the Company's traditional product lines. Excluding the effect of HIA, the cost of products sold in 1997 represents 63% of related revenues.
Selling, general and administrative and engineering and development expenses increased 9% from $14,671,000 in 1996 to $16,018,000 in 1997 because of such expenses incurred by HIA. Excluding the effect of HIA, these expenses would have totaled $14,182,000 in 1997, representing a 3% decrease from the prior period. This decrease reflects the overall cost reduction efforts initiated by the Company in recent years.
Amortization of intangibles and other assets increased from $215,000 in 1996 to $402,000 in 1997, primarily due to the $197,000 write-off of unamortized debt acquisition costs related to the Marine Midland loan facility (see further discussion under "Liquidity and Capital Resources" below.)
Other income in 1996 includes $165,000 of income recorded upon the Company's consummation of an agreement with Global Software, Inc. (Global). Under the terms of this agreement, the Company received $165,000 in exchange for, among other things, consenting to Global's proposed disposition of certain assets acquired after the Company's January 31, 1994 sale of Global and acknowledging that this disposition would not violate the terms of the original sale agreement.
The Company recorded a $338,000 restructuring charge in the fourth quarter of fiscal 1996 in connection with the reorganization of its Canadian and U.K. operations. Effective June 30, 1996 the net assets and substantially all operations of Hathaway Instruments Limited (HIL), the Company's subsidiary located in Hoddesdon, England, were transferred to Hathaway Systems Limited (HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with the asset transfer, substantially all operations of HIL were combined with the operations of HSL. In addition, the Company decided to close its Toronto, Canada facility and to combine substantially all of its operations with the operations of Hathaway Process Instrumentation, the Dallas, Texas division. The initiatives were aimed at reducing costs and enhancing productivity and efficiency. The restructuring provision was primarily comprised of estimated costs for employee severance benefits and fixed asset writeoffs. The payouts related to the restructuring charge were made in 1996 and 1997.
In the first quarter of 1997, management decided to restructure the power products manufacturing operations to produce operating efficiencies and to better utilize local management talent and expertise. Accordingly, the manufacturing operation located in Denver was consolidated in 1997 into two manufacturing facilities located in Seattle, Washington and Belfast, Northern Ireland. The cost of consolidating these manufacturing facilities was not material and was paid in fiscal year 1997.
As expected, the consolidation of certain manufacturing operations in 1997 initially produced some inefficiencies in the manufacturing process due to additional training and start-up time required at the remaining facilities. Management believes, however, that the initial issues encountered have been substantially resolved and expects to generate significant cost savings from the consolidation efforts.
Fiscal year 1996 compared to fiscal year 1995
The Company recorded a net loss of $1,013,000 in 1996 compared to net income of $842,000 in 1995.
Revenues decreased by $4,427,000, or 11%, from 1995 to 1996, comprised of a 26% decrease in sales of the Company's power and process instrumentation products, offset by a 48% increase in sales of the Company's motion control products.
Sales to international customers decreased 14% from $14,646,000, or 37% of sales in fiscal 1995 to $12,668,000, or 36% of sales in fiscal 1996. Sales backlog increased 14% from to $8,878,000 at June 30, 1995 to $9,998,000 at June 30, 1996.
Cost of products sold increased to 62% of revenues in 1996, compared to 57% in 1995. The increase was due to price reductions implemented in response to competitive pressures and changes in the mix of products sold.
Selling, general and administrative and engineering and development expenses decreased 5% from $15,489,000 in 1995 to $14,671,000 in 1996 primarily due to overall cost reduction efforts initiated by the Company.
BUSINESS ACQUISITION
Effective September 30, 1996, the Company acquired a 100% partnership interest in Tate Integrated Systems, L.P. and 100% of the stock of the sole general partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS"). The ownership interests were acquired for an adjusted negotiated price of $1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996 and $145,000 on June 30, 1997. In addition, $229,000 will be payable when certain accounts receivable of TIS are collected.
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a newly-formed wholly-owned subsidiary of the Company, since October 1, 1996. HIA is located in Baltimore, Maryland and is a full service supplier of process automation systems for industrial applications. HIA has developed a state-of-the-art software system for Supervisory Control and Data Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA system has been used to fully automate such industrial applications as water and wastewater treatment plants, glass manufacturing plants, oil and gas terminals and tank farm facilities. In addition to expanding into its traditional process markets, HIA's system is being marketed to the power utility industry. The Company expects to team the HIA system with certain existing Hathaway products and target the combined product at substation automation and integration applications used in the distribution and transmission of power.
The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition. This allocation is subject to adjustment pending the resolution of certain items.
The Company is investing substantial resources in HIA, consistent with the Company's strategy to expand further into the process industry and to develop applications of the HIA software for the power industry. Management believes that the software products developed by HIA, as modified for the power industry and combined with other Company products, will provide power companies with automated and integrated systems solutions that will both reduce their operating costs and improve the reliability of their power supply. Management believes that there is significant demand in the power industry for such solutions as a result of the business environment created by the recent industry deregulation.
The successful implementation of the Company's current business plan is partially dependent on the Company's investment in HIA producing growth and increased profitability in HIA's traditional process automation business, as well as the ability to successfully market HIA's products to the power industry. The factors that will affect the success of implementing this business plan include, but are not limited to, the ability to win a sufficient amount of project work on favorable terms to the Company, the ability to complete projects in a timely and cost-effective manner, and the existence of sufficient demand for the HIA products in both the power and process markets. An inability to achieve this plan in the planned timeframe may have a material adverse effect on the Company's operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents (excluding restricted cash) decreased $1,494,000 during the year to a balance of $3,431,000 at June 30, 1997. Operating activities used $197,000 of cash in fiscal 1997 compared to $93,000 used in 1996 and $1,266,000 generated in 1995. Of the $197,000 used in 1997 by operating activities, $1,592,000 was used to fund the operations of the HIA business and $1,395,000 was generated from the operating activities of the Company's other businesses. The overall reduced cash from operations in 1997 and 1996 is primarily the result of net losses of $1,429,000 and $1,013,000 recorded in 1997 and 1996, respectively, compared to net income of $842,000 recorded in 1995.
Cash of $1,313,000 was used by investing activities in fiscal 1997 compared to $376,000 generated in fiscal 1996 and $1,049,000 used in fiscal 1995. The 1996 cash generated by investing activities was primarily due to proceeds of $1,000,000 from maturities of marketable securities. The 1997 cash used for investing activities includes $863,000 paid for the interest acquired in TIS.
Financing activities used $32,000, $828,000 and $1,887,000 in fiscal years 1997, 1996 and 1995, respectively. The decrease in cash used for financing activities from 1995 to 1996 is due primarily to less cash used for the purchase of treasury stock. The Board of Directors' fiscal 1996 decision to discontinue the public stock repurchase program was the primary reason for the lower volume of stock repurchase activity in 1996. The decrease in cash used for financing activities from 1996 to 1997 occurred primarily because no dividends were paid to stockholders in 1997, as compared to $426,000 of dividends paid to stockholders in 1996. The Board of Directors did not declare a dividend in 1997 because of the net loss recognized by the Company for fiscal 1996 and dividend restrictions contained in the loan agreement with Marine Midland Business Loans, Inc. (see below).
At June 30, 1997, the Company had $1,769,000 of debt, compared with $1,777,000 at June 30, 1996, a reduction of $8,000. The debt represents borrowings on the Company's long-term financing agreement (Agreement) with Marine Midland Business Loans, Inc. (Midland). The Agreement is a Reducing Revolving Line of Credit with a borrowing limit that is reduced monthly over the seven-year term of the loan. Borrowings on the line are restricted to the lesser of i) an amount based on certain asset levels, or ii) the borrowing limit. As of June 30, 1997, the Company could borrow an additional $1,036,000 up to the current borrowing limit of $2,805,000. Pursuant to the borrowing limit reduction schedule contained in the Agreement, the limit will be amortized to $2,070,000, $1,133,000 and $155,000 in the years ended June 30, 1998, 1999 and 2000, respectively, with the remaining unpaid balance of the loan becoming due August 1, 2000.
The line bears interest at Midland's prime borrowing rate plus 1% (9.5% at June 30, 1997). As long as the Agreement is in place, interest expense is calculated using the higher of i) the actual debt balance or ii) 50% of the borrowing limit. Starting in August 1997 the Company may repay the entire debt balance with Midland with no prepayment penalty.
The debt is secured by all assets of the Company. The Agreement requires that the Company maintain compliance with certain covenants related to tangible net worth, cash flow coverage and current ratios. The Company has not met the quarterly-calculated cash flow coverage covenant since the first quarter of fiscal 1996. Midland issued a waiver of compliance with the cash flow coverage covenant through June 30, 1997. In connection with obtaining the aforementioned waiver, the Company agreed to certain conditions, including limiting the assets against which the Company may borrow to certain accounts receivable and maintaining higher tangible net worth and achieving certain annual operating results in fiscal 1997. In addition, the Company agreed not to pay cash dividends, purchase treasury stock (except for limited amounts from employees), or make investments in other than investment grade securities without the prior written consent of Midland, as long as the Company is in violation of the cash flow coverage covenant.
Beginning in March 1997 the Company has not maintained the aforementioned minimum tangible net worth. In addition, the Company did not achieve the aforementioned minimum fiscal 1997 operating results.
The Company's not meeting these requirements constitutes an event of default under the Agreement. Pursuant to the Agreement, upon the happening of an event of default, Midland may declare any principal outstanding to be immediately due and payable, together with all interest thereon and applicable costs and expenses. Accordingly, the balance of the long-term debt has been classified as current as of June 30, 1997.
To date, Midland has not declared the Company's indebtedness to be immediately due and payable. In addition, the Company is renegotiating with Midland for a waiver of the aforementioned debt covenant violations. There can be no assurance, however, that Midland will grant such a waiver.
Because of the uncertainty regarding the timing of the debt becoming due and payable, the Company wrote off the $197,000 unamortized balance of the Midland loan acquisition costs at June 30, 1997.
The Company has three joint venture investments in China - Zibo Kehui Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company, Ltd. (Si Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). Kehui designs, manufactures and sells cable and overhead fault location, SCADA systems and other test instruments within the China market and the Company will sell these products outside of China. Si Fang designs, manufactures and sells a new generation of digital protective relays, control equipment and instrumentation products for substations in power transmission and distribution systems and the Company will sell these products outside of China. HPMS will design, manufacture and sell, under a license from Hathaway, instrumentation products designed by Hathaway, to electric power companies in China. There are no future commitments relating to these investments. The Company considers the realization of these investments to be uncertain due to political instability and the untested market in China. Accordingly, the Company has fully reserved for these investments. The Company recognizes income from the joint ventures as cash dividends are received.
The Company also has an 11.4% interest in a joint venture (JV) with KUB Holdings BHD, a Malaysian firm. The interest, acquired by TIS for $400,000 in March 1995, was acquired by the Company in connection with the purchase of TIS effective September 30, 1996. The fair market value of this asset was not significant at the acquisition date. The JV was created for the purpose of manufacturing, marketing and selling the TIS-4000 system in certain Asian countries. If the JV requires funding, the Company may be required to contribute in accordance with the agreed-upon proportions as defined in the JV agreement.
The JV agreement also requires the Company to continue as a going concern and to provide support services to the JV at market rates. If the Company does not meet this requirement, it could be required to refund a contractually-defined portion ($1,938,000 at June 30, 1997) of the $2,500,000 proceeds TIS received in 1995 from the sale to the JV of licensing and marketing rights to the TIS-4000 technology. Because of the remote possibility of the Company being required to make such a refund, this obligation was determined to be zero at the acquisition date. Further, as of July 30, 1997, the Company does not expect that such refunds will be required. In addition, the Company is not aware of any violations of the requirements defined in the JV agreement nor does it anticipate any future violations.
As in the three-year period ended June 30, 1997, the Company's fiscal 1998 working capital, capital expenditure and debt service requirements, including repayment of the entire balance of the Midland loan, if necessary, are expected to be funded from the existing cash balance of $3,431,000 at June 30, 1997. In addition, the Company may seek additional debt, equity or other financing, particularly if it must fully repay the Midland loan balance, in order to supplement its long-term financial resources. There can be no assurance, however, that additional debt, equity or other financing will be available on terms acceptable to the Company, or at all.
PRICE LEVELS AND THE IMPACT OF INFLATION
Prices of the Company's products have not increased significantly as a result of inflation during the past several years, primarily due to competition. The effect of inflation on the Company's costs of production has been minimized through production efficiencies and lower costs of materials. The Company anticipated that these factors would continue to minimize the effects of any foreseeable inflation and other price pressures from the industries in which it operates. As the Company's manufacturing activities mainly utilize semi-skilled labor, which is relatively plentiful in the areas surrounding the Company's production facilities, the Company does not anticipate substantial inflation-related increases in the wages of the majority of its employees.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hathaway Corporation:
We have audited the accompanying consolidated balance sheets of HATHAWAY CORPORATION (a Colorado corporation) AND SUBSIDIARIES as of June 30, 1997 and 1996, and the related consolidated statements of operations, cash flows and stockholders' investment for each of the three fiscal years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hathaway Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado, July 30, 1997.
HATHAWAY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
HATHAWAY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
The accompanying notes to consolidated financial statements are an integral part of these statements.
HATHAWAY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying notes to consolidated financial statements are an integral part of these statements.
HATHAWAY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (In thousands, except per share data)
The accompanying notes to consolidated financial statements are an integral part of these statements.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Hathaway Corporation (the Company) is engaged in the business of designing, manufacturing and selling electronic instrumentation products to the worldwide power and process industries, as well as motion control products to a broad spectrum of customers throughout the world. The Company also develops, designs, and installs integrated process automation systems for industrial applications. The Company operates primarily in the United States and Europe and has three joint venture investments in China and a joint venture investment in Malaysia (Note 3).
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Investments in joint ventures, in which the ownership is at least 20% but less than 50%, are accounted for using the equity method (Note 3).
Cash and Cash Equivalents For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include amounts which are readily convertible into cash (original maturities of three months or less) and which are not subject to significant risk of changes in interest rates. Cash flows in foreign currencies are translated using an average rate.
Restricted Cash Restricted cash consists of certificates of deposit that serve as collateral for letters of credit issued on behalf of the Company.
Inventories
Inventories, valued at the lower of cost (first-in, first-out basis) or market, are as follows (in thousands):
Reserves established for anticipated losses on excess or obsolete inventories were approximately $1,943,000 and $1,689,000 at June 30, 1997 and 1996, respectively.
Property and Equipment Property and equipment, at cost, is classified as follows (in thousands):
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.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cost in Excess of Net Assets Acquired Cost in excess of net assets acquired represents the amount by which the purchase price of acquired companies exceeds the fair market value of net assets acquired, and is amortized using the straight-line method over five to ten years. Cost in excess of net assets acquired as of June 30, 1997 and 1996 consists of $1,613,000 and $1,505,000 of original costs and $1,022,000 and $882,000 of accumulated amortization, respectively. The Company reviews its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets that are held and used in operations, the asset would be considered to be impaired if the undiscounted future cash flows related to the asset did not exceed the net book value. As discussed in Note 2, the Company's acquisition of Tate Integrated Systems resulted in $108,000 of costs in excess of net assets acquired, which is being amortized over five years. Such amount is subject to adjustment pending the outcome of certain acquisition-related matters.
Accrued Liabilities Accrued liabilities consist of the following (in thousands):
Foreign Currency Translation In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation", the assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using current exchange rates. Revenues and expenses are translated at average rates prevailing during the period. The resulting translation adjustments are recorded in the Cumulative Translation Adjustments component of Stockholders' Investment in the accompanying Consolidated Balance Sheets.
Changes in Cumulative Translation Adjustments included in the Stockholders' Investment section of the accompanying Consolidated Balance Sheets are as follows (in thousands):
Revenue and Cost Recognition on Contracts Hathaway Industrial Automation (HIA) undertakes contracts for the installation of integrated process control systems that use its proprietary software. The Company recognizes contract revenues and costs by applying the percentage of completion achieved to the total contract sales price and estimated costs. The Company determines the percentage of completion for all contracts using the "cost-to-cost" method of measuring contract progress. Under this method, actual contract costs incurred to date are compared to total estimated contract costs to determine the estimated percentage of revenues to be recognized. Provisions for estimated losses on uncompleted contracts, to the full extent of the estimated loss, are made during the period in which the Company first becomes aware that a loss on a contract is probable. The Company's traditional businesses (other than HIA) generally recognize revenue when products are shipped.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings per Share Earnings per share is calculated using the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period, including the effects of options and warrants granted when such adjustment has a dilutive effect on earnings per share. Shares used in the computations for the periods reported are as follows (in thousands):
Stock-Based Compensation The Company accounts for its stock-based compensation plans for employees under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).
Fair Values of Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amount of long-term debt approximates fair value because the underlying instrument is a variable rate note that reprices frequently. The carrying value of marketable securities approximates fair value obtained from quoted market prices.
Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain reclassifications have been made to prior years' balances in order to conform to the current year's presentation.
New Accounting Standard In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which establishes new reporting requirements for earnings per share (EPS). The Statement replaces Primary and Fully Diluted EPS reporting required under APB Opinion No. 15 with Basic and Diluted EPS, respectively. Basic EPS is computed by dividing reported earnings available to common stockholders by weighted average shares outstanding, with no consideration for other potentially dilutive securities (in contrast to Opinion 15 requirements). Diluted EPS is computed by dividing reported earnings by weighted average outstanding and dilutive shares, where the dilution is determined using the average share price for the period. In contrast, Opinion 15 requires that the calculation use a more dilutive share price, which represents the greater of the average or end-of-period share price. The Statement also requires a disclosure reconciling the numerator and denominator of the EPS calculations. The Company will adopt the new reporting requirements in the quarter ending December 31, 1997 and management does not believe the effect of adoption will be material.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
2. BUSINESS ACQUISITION Effective September 30, 1996, the Company acquired a 100% partnership interest in Tate Integrated Systems, L.P. and 100% of the stock of its sole general partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS"). The ownership interests were acquired for an adjusted negotiated price of $1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996 and $145,000 on June 30, 1997. In addition, $229,000 of additional consideration will become payable when certain accounts receivable of TIS are collected.
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a newly-formed wholly-owned subsidiary of the Company, since October 1, 1996. HIA is located in Baltimore, Maryland and is a full service developer and supplier of integrated process automation systems for industrial applications. HIA has developed a state-of-the-art software system, the TIS-4000, for Supervisory Control and Data Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA system has been used to fully automate such industrial applications as water and wastewater treatment plants, glass manufacturing plants, oil and gas terminals and tank farm facilities. In addition to expanding into its traditional process markets, HIA's system is being marketed to the power utility industry. The Company expects to team the HIA system with certain existing Hathaway products and target the combined product at substation automation and integration applications in power plants.
The acquisition has been accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition. This allocation is subject to adjustment pending the resolution of certain items. The preliminary net purchase price allocation is as follows: (in thousands):
The results of operations of TIS have been included in the Company's 1997 Consolidated Statement of Operations starting on October 1, 1996.
The following unaudited pro forma summary (in thousands, except per share data) combines the consolidated results of operations of the Company and TIS as if the acquisition had occurred at the beginning of fiscal years 1997 and 1996 after giving effect to certain pro forma adjustments related to such items as income taxes, depreciation, and amortization of cost in excess of net assets acquired. The pro forma results are shown for illustrative purposes only, and do not purport to be indicative of the actual results which would have occurred had the transaction been consummated as of those earlier dates, nor are they indicative of results of operations which may occur in the future.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
3. INVESTMENTS IN JOINT VENTURES The Company has three joint venture investments in China - Zibo Kehui Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company, Ltd. (Si Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). Kehui designs, manufactures and sells cable and overhead fault location, SCADA systems and other test instruments in China. Si Fang designs, manufactures and sells a new generation of digital protective relays, control equipment and instrumentation products for substations in power transmission and distribution systems. HPMS will design, manufacture and sell, under a license from Hathaway, instrumentation products designed by Hathaway, to electric power companies in China. The Company's investment and ownership interest in these Chinese joint ventures are as follows (in thousands):
The Company has no future commitments relating to these investments. The Company considers the realization of these investments to be uncertain due to political instability and the untested market in China. Accordingly, the Company has fully reserved for these investments. The Company recognizes income from the joint ventures as cash dividends are received.
The Company also has an 11.4% interest in a joint venture (JV) with KUB Holdings BHD, a Malaysian firm. The interest, acquired by TIS for $400,000 in March 1995, was acquired by the Company in connection with the purchase of TIS effective September 30, 1996 (Note 2). The fair value of this asset was not significant at the acquisition date. The JV was created for the purpose of manufacturing, marketing and selling the TIS-4000 system in certain Asian countries. If the JV requires funding, the Company may be required to contribute in accordance with the agreed-upon proportions as defined in the JV agreement.
The JV agreement also requires the Company to continue as a going concern and to provide support services to the JV at market rates. If the Company does not meet this requirement, it could be required to refund a contractually-defined portion ($1,938,000 at June 30, 1997) of the $2,500,000 proceeds TIS received in 1995 from the sale to the JV of licensing and marketing rights to the TIS-4000 technology. Because of the remote possibility of the Company being required to make such a refund, this obligation was determined to be zero at the acquisition date. Further, as of July 30, 1997, the Company does not expect that such refunds will be required. In addition, the Company is not aware of any violations of the requirements defined in the JV agreement nor does it anticipate any future violations.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
4. DEBT On August 2, 1993, the Company entered into a long-term financing agreement (Agreement) with Marine Midland Business Loans, Inc. (Midland). The Agreement is a Reducing Revolving Line of Credit with a borrowing limit that is reduced monthly over the seven year term of the loan. Borrowings on the line are restricted to the lesser of an amount based on certain asset levels, or the borrowing limit. As of June 30, 1997, the Company could borrow an additional $1,036,000 up to the current borrowing limit of $2,805,000. Pursuant to the borrowing limit amortization schedule, the limit will be amortized to $2,070,000, $1,133,000 and $155,000 in the years ended June 30, 1998, 1999 and 2000, respectively, with the remaining unpaid balance of the loan becoming due August 1, 2000.
The line bears interest at Midland's prime borrowing rate plus 1% (9.5% at June 30, 1997). As long as the Agreement is in place, interest expense is calculated using the higher of the actual debt balance or 50% of the borrowing limit. Starting in August 1997 the Company may repay the entire debt balance with Midland with no prepayment penalty.
The debt is secured by all assets of the Company. The Agreement requires that the Company maintain compliance with certain covenants related to tangible net worth, cash flow coverage and current ratios.
The Company has not met the quarterly-calculated cash flow coverage covenant since the first quarter of fiscal 1996. Midland has issued waivers of non-compliance with the cash flow coverage covenant through June 30, 1997. In connection with obtaining the aforementioned waivers, the Company agreed to certain conditions, including limiting the assets against which the Company may borrow to certain accounts receivable, maintaining higher tangible net worth and achieving certain annual operating results in fiscal 1997. In addition, the Company may not, without the prior written consent of Midland, pay cash dividends, purchase treasury stock (except for limited amounts from employees), or make investments in other than investment grade securities, as long as the Company is in violation of the cash flow coverage covenant.
Beginning in March 1997, the Company has not maintained the aforementioned minimum tangible net worth. In addition, the Company did not achieve the aforementioned minimum fiscal 1997 operating results.
The Company's non-compliance with these requirements constitutes an event of default under the Agreement. Pursuant to the Agreement, upon the happening of an event of default, Midland may declare any principal outstanding to be immediately due and payable, together with all interest thereon and applicable costs and expenses. Accordingly, the $1,769,000 balance of the long-term debt has been classified as current as of June 30, 1997.
As of July 30, 1997, Midland had not declared the Company's indebtedness to be immediately due and payable. The Company's management is currently discussing the terms of this debt with Midland and believes that should Midland declare the debt immediately due and payable, the Company would be able to satisfy the debt obligation using its cash on hand and maintain liquidity sufficient to meet the near-term needs of the Company.
Because of the uncertainty regarding the timing of the debt becoming due and payable, the Company wrote off $197,000 of unamortized Midland loan acquisition costs at June 30, 1997.
Contractual maturities of long-term debt, which Midland may accelerate or declare immediately due and payable at any time unless the aforementioned event of default is cured, are as follows (in thousands):
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):
Components of the benefit (provision) for income taxes are as follows (in thousands):
The benefit (provision) for income taxes differs from the amount determined by applying the federal statutory rate as follows (in thousands):
The tax effects of significant temporary differences and credit carryforwards that give rise to the net deferred tax asset under SFAS 109 are as follows (in thousands):
As of June 30, 1997, the Company has paid foreign advance corporation tax of $20,000 which may be utilized to reduce future foreign taxes due and has domestic tax credit carryforwards of $189,000 expiring in 2007 and 2008.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK COMPENSATION
At June 30, 1997, 294,621 shares of common stock were available for grant under the Company's stock option plans. Under the terms of the plans, options may not be granted at less than 85% of fair market value. However, all options granted to date have been granted at fair market value as of the date of grant. Options generally become exercisable evenly over three years starting one year from the date of grant and expire seven years from the date of grant.
During 1997 the Company granted options for 125,000 shares of the Company's common stock to certain key management personnel of HIA. Of the total, 75,000 vest over seven years, subject to acceleration if certain performance criteria are achieved by HIA and expire ten years after date of grant. The remaining 50,000 vest over four years only if certain performance criteria are met. Based on HIA's 1997 operating results, 10,000 shares will never vest and were forfeited.
In 1997 certain eligible employees of the Company exercised stock options by surrendering to the Company their Company stock with an aggregate fair market value of $161,000, in non-cash, tax-free transactions.
Option activity in fiscal years 1995, 1996 and 1997 was as follows:
Exercise prices for options outstanding at June 30, 1997 are as follows:
The Company accounts for its stock-based compensation plans for employees under the provisions of APB 25. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which established an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. Companies that elect to continue accounting for stock-based compensation plans under the provisions of APB 25 must present certain pro forma disclosures.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK COMPENSATION (CONTINUED) Pro forma information regarding net loss and loss per share is required by SFAS 123 and has been determined as if the Company had accounted for its stock-based compensation plans using the fair value method prescribed by that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes pricing model with the following weighted average assumptions:
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):
The weighted average fair value of options granted during 1997 and 1996 was $1.98 and $1.39, respectively. The total fair value of options granted was $978,000 and $31,000 in 1997 and 1996, respectively. These amounts have been amortized ratably over the vesting periods of the options for purposes of this disclosure.
7. LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 1997 and 1996 is comprised of a loan for $102,000 from the Leveraged Employee Stock Ownership Plan and Trust (the Plan) and $133,000 from an Officer of the Company.
The Plan allows eligible Company employees to participate in ownership of the Company. The $102,000 receivable represents the unpaid balance of the original $500,000 that the Company loaned to the Plan in fiscal 1989 so that the Plan could acquire from the Company 114,285 newly issued shares of the Company's common stock. The note bears interest at an annual rate of 9.23% and matures May 31, 2004. The terms of the Plan require the Company to make an annual contribution equal to the greater of i) the Board established percentage of pretax income before the contribution (5% in 1997, 1996 and 1995) or ii) the annual interest payable on the note. Company contributions to the Plan were $9,000 in 1997 and 1996 and $70,000 in 1995, representing interest in 1997 and 1996, and principal and interest of $55,000 and $15,000 in 1995, respectively.
The $133,000 receivable represents the unpaid balance of a loan made in fiscal 1994 to an officer of the Company in connection with his purchase of the Company's common stock, pursuant to the Officer and Director Loan Plan approved by stockholders on October 26, 1989. The loan is full-recourse and bears interest at the applicable federal rate determined by the Internal Revenue Service (6.0% at June 30, 1997). The loan is due on demand but no later than October 26, 1998.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES Leases At June 30, 1997, the Company maintained leases for certain facilities and equipment. Minimum future rental commitments under all non-cancelable operating leases are as follows (in thousands):
Net rental expense was $783,000, $822,000 and $1,035,000 in 1997, 1996 and 1995, respectively.
Shareholder Rights Plan During fiscal year 1989, the Company adopted a shareholder rights plan under which preferred stock purchase rights were distributed, one right for each share of common stock outstanding. Each right entitles holders of the Company's common stock to buy one one-hundredth of a newly issued share of Series A Junior Participating Preferred Stock at an exercise price of $17.50, following certain change of control events including a tender offer for, or acquisition by, any entity of 20% or more of the Company's common stock.
At any time up to ten business days following the public announcement of certain change of control events, the Company can redeem the rights at $.001 per right. If certain subsequent triggering events occur, the rights will give shareholders the ability to acquire, upon payment of the then-current exercise price, the Company's common stock or the common stock of an acquirer having a value equal to twice the right's exercise price. The rights will expire June 25, 1999.
Severance Benefit Agreements The Company has entered into annually-renewable severance benefit agreements with certain key employees which, among other things, provide inducement to the employees to continue to work for the Company during and after any period of threatened takeover. The agreements provide the employees with specified benefits upon the subsequent severance of employment in the event of change in control of the Company and are effective for 24 months thereafter. The maximum amount that could be required to be paid under these contracts, if such events occur, aggregated approximately $1,846,000 as of June 30, 1997.
Employment Agreements Effective July 1, 1993, the Company entered into five-year employment agreements with two of its executive officers. The agreements provide for base salary plus 1) an annual incentive bonus to be paid in cash based on the achievement of specified returns on equity and growth in share price plus dividends paid for each fiscal year, 2) a long-term incentive bonus, 3) specified benefits upon termination of employment (for reasons other than cause or change in control) which are effective for one year thereafter and 4) a bonus paid for gains on dispositions, if any, of certain subsidiaries and divisions of the Company.
No annual bonus was paid in 1997, 1996 or 1995.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED) For the three year performance period ended June 30, 1996, the long-term incentive bonus was payable at the end of the period in up to 210,000 shares of Company common stock based on the achievement of specified returns on equity and share price growth plus dividends paid during the period. At the employee's election, such payout could have been taken in cash up to 40% of the fair market value of the total shares to be issued. The Company recognized $71,000, ($16,000), and ($55,000) of compensation expense (reversal of expense) in 1994, 1995 and 1996, respectively, related to the long-term incentive plan. The amounts were reflected as adjustments to additional paid-in capital. Because the specified performance targets for the three year performance period were not met, no long-term incentive bonus was paid for the three year performance period ended June 30, 1996.
To replace the expired long-term incentive bonus, on August 15, 1996 the Board of Directors approved the issuance of 148,500 stock options to the two executive officers at an exercise price equal to the fair market value of $2.8125 at the grant date. The options become exercisable evenly over three years starting one year from the date of grant and expire seven years from the date of grant.
As of June 30, 1997, the maximum amount that could be required to be paid under the termination clause of these agreements was approximately $766,000.
Stock Repurchase Program Under an employee stock repurchase program approved by the Board of Directors, the Company may repurchase its common stock from its employees at the current market value. Of the $1,000,000 approved for employee stock repurchases by the Board of Directors, the Company had $55,000 available for future repurchases at June 30, 1997. The Company's Agreement with Midland limits employee stock repurchases to $120,000 per calendar year ($170,000 for calendar year 1996) as long as the Company is in violation of the cash flow coverage covenant contained in the Agreement (Note 4). As of June 30, 1997, $99,000 was available under the calendar year 1997 limit. Effective June 30, 1995 the Board of Directors discontinued the previously authorized public stock repurchase program. Under Colorado law enacted in July 1994, repurchased shares of capital stock are considered authorized and unissued shares and have the same status as shares that have never been issued.
HATHAWAY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC SEGMENT DATA
The Company's wholly-owned foreign subsidiaries have been based in Europe and Canada and are included in the accompanying consolidated financial statements. The Company closed its Canadian operating facility in 1997. Financial information for the foreign subsidiaries is summarized below (in thousands):
The Company's export sales from domestic operations were approximately $7,169,000 in 1997, $6,753,000 in 1996 and $7,265,000 in 1995, each representing 22%, 24%, and 23%, respectively, of total sales from domestic operations. The profitability of domestic sales is approximately the same as that of export sales, and the Company foresees no unusual risks associated with its export sales.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in 1997 and 1996 is as follows (in thousands, except per share data):
11. RESTRUCTURING OF OPERATIONS
In the first quarter of 1997, management decided to restructure the power products manufacturing operations to produce operating efficiencies and to better utilize local management talent and expertise. Accordingly, the manufacturing operation located in Denver, Colorado was consolidated in 1997 into two manufacturing facilities located in Seattle, Washington and Belfast, Northern Ireland. The cost of consolidating these manufacturing facilities was not material and was paid in fiscal year 1997.
The Company recorded a $338,000 restructuring charge in the fourth quarter of fiscal 1996 in connection with the reorganization of its Canadian and U.K. operations. Effective June 30, 1996 the net assets and substantially all operations of Hathaway Instruments Limited (HIL), the Company's subsidiary located in Hoddesdon, England, were transferred to Hathaway Systems, Limited (HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with the asset transfer, substantially all operations of HIL were combined with the operations of HSL. In addition, the Company decided to close its Toronto, Canada facility and to combine substantially all of its operations with the operations of Hathaway Process Instrumentation, the Dallas, Texas division. The initiatives were aimed at reducing costs and enhancing productivity and efficiency. The restructuring provision was primarily comprised of estimated costs for employee severance benefits and fixed asset writeoffs. The payouts related to the restructuring charge were made in 1996 and 1997.
Item 9.
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.
Item 10. Directors and Executive Officers of the Registrant. Information required by this item is set forth in the sections entitled "Election of Directors" (page 2), "Executive Officers" (page 3) and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" (page 10) in the Company's Proxy Statement and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation. The information required by this item is set forth in the section entitled "Executive Compensation" (pages 5 through 8) in the Company's Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" (pages 4 and 5) in the Company's Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. Since July 1, 1996, the Company has not entered into any material related party transactions.
PART IV Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. a) The following documents are filed as part of this Report: 1. Financial Statements g) Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996. h) Consolidated Statements of Operations for each of the years in the three-year period ended June 30, 1997. i) Consolidated Statements of Cash Flows for each of the years in the three-year period ended June 30, 1997. j) Consolidated Statements of Stockholders' Investment for each of the years in the three-year period ended June 30, 1997. k) Notes to Consolidated Financial Statements. l) Report of Independent Public Accountants.
2. Financial Statement Schedules None.
3. Exhibits
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of fiscal 1997.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our report dated July 30, 1997 included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 (No. 2-73235) of the Hathaway Corporation Amended 1980 Non-Incentive Stock Option Plan dated August 3, 1981, into the Registration Statement on Form S-8 (No. 2-90687) of the 1983 Incentive and Non-Qualified Stock Option Plan of Hathaway Corporation dated May 10, 1984, into the Registration Statement on Form S-8 (No. 3344998) of the 1992 Employee Stock Purchase Plan of Hathaway Corporation dated January 8, 1992, into the Registration Statement on Form S-8 (No. 33-37473) of the 1989 Incentive and Non-Qualified Stock Option Plan of Hathaway Corporation dated October 25, 1990, and into the Registration Statement on Form S-8 (No. 3344997) of the 1991 Incentive and Non-Statutory Stock Option Plan of Hathaway Corporation dated January 8, 1992.
ARTHUR ANDERSEN LLP
Denver, Colorado, September 18, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HATHAWAY CORPORATION
By /s/ Eugene E. Prince ------------------------------------- Eugene E. Prince President, Chief Executive Officer and Chairman of the Board of Directors
Date: September 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
OFFICERS AND DIRECTORS / INVESTOR INFORMATION
BOARD OF DIRECTORS Eugene E. Prince Chairman of the Board, President and Chief Executive Officer
Richard D. Smith Executive Vice President, Treasurer and Chief Financial Officer
Delwin D. Hock Former Chairman of the Board of Directors, President and CEO of Public Service Company of Colorado
Chester H. Clarridge Consultant
Graydon D. Hubbard Retired Partner, Arthur Andersen LLP
George J. Pilmanis President of Balriga International Corporation Business Development in the Far East and Eastern Europe
INVESTOR INFORMATION Annual Meeting The Annual Meeting of Shareholders of Hathaway Corporation will be held at 3:00 p.m., on Thursday, October 23, 1997 at Lone Tree Country Club, 9808 Sunningdale Boulevard, Littleton, Colorado.
Information Requests Copies of the Company's reports to the Securities and Exchange Commission, excluding exhibits, on Form 10-K and Form 10-Q may be obtained from the Company without charge. Direct your written request to: Hathaway Corporation, 8228 Park Meadows Drive, Littleton, Colorado 80124.
Transfer Agent American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005
Independent Public Accountants ARTHUR ANDERSEN LLP Denver, Colorado
CORPORATE OFFICERS Eugene E. Prince Chairman of the Board, President and Chief Executive Officer
Richard D. Smith Executive Vice President, Treasurer and Chief Financial Officer
Herbert Franson Assistant Treasurer, Corporate Controller and Assistant Secretary
Susan M. Chiarmonte Secretary
SUBSIDIARIES AND DIVISIONS Domestic Subsidiaries and Divisions Computer Optical Products, Inc. Chatsworth, California
Hathaway Industrial Automation, Inc. Baltimore, Maryland
Hathaway Motion Control Division Tulsa, Oklahoma
Hathaway Motors and Instruments Division Tulsa, Oklahoma
Hathaway Power Instrumentation Littleton, Colorado
Hathaway Process Instrumentation Dallas, Texas
Hathaway Automation Technology Division Seattle, Washington
International Subsidiary Hathaway Systems Limited Belfast, Northern Ireland