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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
0-4041
HATHAWAY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0518115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
Common Stock (No Par Value)
(Title of Class)
The check mark below indicates 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 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.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock, as of August 29, 1996 was: $10,936,000.
The number of shares outstanding of the registrant's only class of common stock,
as of August 29, 1996, was: 4,235,817.
Documents incorporated by reference:
Portions of the Registrant's definitive Proxy Statement dated September 19, 1996
are incorporated by reference in Part III of this Report. The Registrant's
Fiscal Year 1996 Annual Report is incorporated by reference in Parts I and II of
this Report.
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Hathaway Corporation
Form 10-K
For the Year Ended June 30, 1996
Table of Contents
Form 10-K Page
Item No. Description Number
- -------- ----------- ------
Part I.
Item 1. Business............................................................................................ 1
Item 2. Properties.......................................................................................... 4
Item 3. Legal Proceedings................................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders................................................. 5
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................... 5
Item 6. Selected Financial Data............................................................................. 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................... 6
Item 8. Financial Statements and Supplementary Data......................................................... 6
Report of Independent Public Accountants............................................................ 7
Item 9. Disagreements on Accounting and Financial Disclosure................................................ 8
Part III.
Item 10. Directors and Executive Officers of the Registrant.................................................. 8
Item 11. Executive Compensation.............................................................................. 8
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 8
Item 13. Certain Relationships and Related Transactions...................................................... 8
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 8
Signatures.......................................................................................... 14
Financial Statement Schedule........................................................................ 15
i
PART I
Item 1. Business.
INTRODUCTION
Hathaway Corporation (the Company) was organized under the laws of Colorado in
1962. At the end of fiscal year 1996 (ended June 30, 1996), the Company had two
wholly-owned subsidiaries, Hathaway Systems Corporation (HSC) and subsidiaries
and Computer Optical Products, Inc. As used herein, the "Company" refers to
both the Company and its wholly-owned subsidiaries. The Company's executive
offices are located at 8228 Park Meadows Drive, Littleton, Colorado 80124.
PRINCIPAL BUSINESSES
The Company is engaged in the business of designing, manufacturing and selling
advanced 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.
Power and Process Instrumentation. Power monitoring and control systems are
comprised of systems and instrumentation used to monitor and control the
operations of power generating, transmission and distribution facilities of
electric utility and process control companies, to provide the means to remotely
monitor and control power utility substations, and to test circuit breakers and
calibrate instruments used by electric utility and process control companies.
HSC operates three product divisions - Hathaway Systems (located in Denver,
Colorado), Hathaway Automation Technology (located in Seattle, Washington), and
Hathaway Process Instrumentation (located in Dallas, Texas). HSC also operates
three subsidiaries - Hathaway, Inc. (located in Toronto, Canada), Hathaway
Systems Limited (HSL) and Hathaway Instruments Limited (HIL). Both HSL and HIL
are located in the United Kingdom. The subsidiaries and divisions of HSC are
engaged in the development, manufacturing and marketing of power monitoring and
control systems and process instrumentation.
The power instrumentation products group manufactures fault and disturbance
monitoring and circuit breaker testing systems which provide a graphic waveform
record of the performance of electric power systems during periods of recovery
from faults and disturbances. These fault recording systems are sold primarily
to electric utility companies who use the data obtained to assure the proper
operation and reliability of the power system. The group also manufactures
Remote Terminal Units (RTUs) for Supervisory Control and Data Acquisition
(SCADA) systems and Energy Management Systems (EMS). RTUs are located in power
substations or on utility poles and electronically report power system
measurements and status to a central computer system. The primary mission of
these systems is to present the state of the power system to power dispatch
personnel, and to allow them to remotely effect changes in its configuration or
operation to maintain efficient and continuous delivery of power.
Effective June 30, 1996 the net assets and substantially all operations of HIL
were transferred to HSL. Since September, 1992 HIL, located in Hoddesdon,
England, had been responsible for the design, manufacture and sale of fault
location instruments to power utility companies located throughout the world.
In connection with the asset transfer, substantially all operations of HIL will
be combined with the operations of HSL. The consolidation of the operations of
HSL and HIL is aimed at reducing costs and enhancing productivity and
efficiency.
To further increase productivity and efficiency and gain additional cost
savings, the Company decided in the first quarter of 1997 to consolidate its
U.S. power products manufacturing operations located in Denver and Seattle into
one manufacturing facility located in Seattle. The consolidation of the U.S.
power manufacturing operations will take place in the second quarter of fiscal
1997.
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.
1
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.
In order to gain cost savings and efficiencies, as of June 30, 1996 the Company
had decided to combine the operations of Hathaway, Inc and Hathaway Process
Instrumentation. Accordingly, all operations of Hathaway, Inc. will be moved to
Dallas, Texas in fiscal 1997.
The Company 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. The Company's
joint venture interests in Kehui and Si Fang were acquired in fiscal 1994. The
Company's joint venture interest in HPMS was acquired in the first quarter of
fiscal 1996 upon approval of the joint venture by the Chinese government. 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. HPMS
will design, manufacture and sell, under a license from the Company,
instrumentation products designed by the Company, to electric power companies in
China.
Motion Control Instrumentation. The Company's motion control products include
direct current (brush and brushless) motors, optical encoders, servo amplifiers
and fiber optic encoders which suit a wide range of applications in the
industrial, medical, military and aerospace sectors. The products are also used
by manufacturers of analytical instruments and computer peripherals.
The Company's motion control business is organized into two divisions and one
subsidiary: Hathaway Motion Control Division, Hathaway Motors and Instruments
Division and Computer Optical Products, Inc., respectively.
The Hathaway Motion Control Division provides brushless direct current motors,
servo amplifiers and related system components to industrial, medical,
automotive and military/aerospace markets in a diverse range of applications.
The Hathaway Motors and Instruments Division in Tulsa, Oklahoma, manufactures
precision direct-current fractional horsepower motors with .8" to 4.0"
diameters 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 Computer Optical Products, Inc., in
Chatsworth, California. An optical encoder determines the speed of various
mechanical parts within computer printers and plotters and analytical
instruments. In plotters, the encoder is used to control the position of the x
and y axis pins. The primary markets for the optical encoders are industrial,
medical and computer peripheral manufacturers.
In order to optimize the profitability of the motor/encoder assemblies, the
Company also manufactures encoder-compatible precision direct-current fractional
horsepower motors from in its Computer Optical Products, Inc. facility. The 1"
to 4" diameter motors are sold separately or are combined with optical encoders
for sale as an assembly. The primary markets are computer peripheral
manufacturers, instrumentation and industrial equipment manufacturers and
military applications.
The Fiberoptics Division of Computer Optical Products designs, manufactures and
markets fiber optic-based encoders with characteristics suited for industrial,
aerospace and military environments. Fiber optical encoders are immune to radio
frequency interference and electromagnetic pulses and will tolerate temperatures
to 300(degree)C. Applications include airborne navigational systems, anti-lock
braking transducers, missile flight surface controls and high temperature
process control equipment.
2
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.
SEASONALITY OF THE BUSINESS
The Company's business is not of a seasonal nature.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company considers all of its operations to be in one industry segment -
electronic instrumentation.
PRODUCT DISTRIBUTION AND OTHER INFORMATION
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.
Historically, the principal market for the Company's products has been the power
and process industries. Since fiscal year 1991, however, with the acquisition
of subsidiaries, development of new products and the expansion of existing
products to other industrial applications, the Company has penetrated a variety
of markets. 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. The Company
believes it is the world's leading manufacturer of electric power fault
recording equipment, with approximately 30% of the world market in the last
fiscal year. 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.
Two significant changes in the power industry have recently had an impact on the
domestic and European power instrumentation markets. In October of 1992, the
Energy Policy Act of 1992 became law in the United States and is causing
increased competition among the domestic electric utility companies. The Act
requires power companies to transmit competitors' power across their own power
networks and allows them to compete with each other for sales to major customers
across the United States. In March of 1990, the government owned utility company
in the United Kingdom was privatized in order to increase competition throughout
the United Kingdom power industry (a major foreign market of the Company). The
Energy Policy Act in the United States and privatization in the United Kingdom
has led to downsizing and cost reductions by most utility companies and,
accordingly, a reduction in demand for power instrumentation products. It is
uncertain how long this trend will continue, but the Company believes that
utilities will have to increase purchases of instrumentation that protect and
monitor their systems in order to maintain the high quality of power provided to
the consumer. The Company is developing new technology that will allow power
companies to automate their systems, which will both reduce the cost of
operation and improve the reliability of the power supply.
Government Sales from Continuing Operations. Approximately $63,000 of the
Company's backlog from continuing operations as of June 30, 1996 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.
Sales to Large Customers. During fiscal 1996, no single customer accounted for
more than 10% of the Company's consolidated revenue from continuing operations.
Export Sales from Continuing Domestic Operations and Foreign Operations. The
information required by this item is set forth in pages 13 and 17 of the
Company's 1996 Annual Report and is incorporated herein by reference.
3
Sales Backlog. The backlog of the Company's continuing operations at June 30,
1996 consisted of sales orders totaling approximately $10,094,000. The Company
expects to ship goods filling $9,982,000 of those purchase orders within fiscal
1997. This compares to a backlog from continuing operations of $8,878,000 at
June 30, 1995, of which $8,314,000 was scheduled for shipment is fiscal 1996.
The Company's expenditures on engineering and development for continuing
operations were $3,722,000 in fiscal 1996, $3,616,000 in fiscal 1995 and
$4,111,000 in fiscal 1994. Of these expenditures, no material amounts were
charged directly to customers.
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.
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.
As of the end of fiscal 1996, the Company had approximately 382 full-time
employees.
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.
Executive Officers. The Executive Officers of the Company are:
Mr. Eugene E. Prince, 64, has been President of the Company since October 1975,
was appointed Chief Executive Officer in September 1976, and was appointed
Chairman of the Board of Directors in January 1981.
Mr. Richard D. Smith, 49, has been the Company's Treasurer and Chief Financial
Officer since June 1983. From June 1983 until March 1986, Mr. Smith was the
Company's Secretary, and from March 1986 to January 1990 he was the Company's
Assistant Secretary. Since January 1990, Mr. Smith has resumed the
responsibilities of Secretary. Mr. Smith also served as the Company's Vice
President of Finance from June 1983 until August 1993. In August 1993, Mr. Smith
was made an Executive Vice President of the Company. In August 1996, Mr. Smith
became a Director of the Company.
Each of the above officers is elected for a term of one year.
Item 2. Properties.
The Company's corporate administration offices, the corporate office of HSC and
the principal office and main plant facility of the Hathaway Systems Division of
HSC is located at 8228 Park Meadows Drive, Littleton, Colorado, and contains
31,152 square feet. The lease expires in October 1996 and has an option to
renew for an additional five-year term.
The Hathaway Automation Technology Division of HSC leases 16,155 square feet of
office and manufacturing facility at 7661 South 180th Street, Kent, Washington.
The four-year lease term commenced July 1, 1995 and expires June 30, 1999.
The Process Instrumentation Division leases 28,585 square feet of office and
manufacturing space at 1840 Hutton Drive, Carrollton, Texas. This lease expires
on February 28, 1999.
Hathaway, Inc. leases 16,189 square feet of office and manufacturing/warehouse
space located at 370 Tapscott Road, Scarborough, Ontario, Canada. The lease
expires on January 31, 1997.
Hathaway Systems Limited has leased 17,300 square feet of administration, sales,
engineering and manufacturing space at Wildflower Way/Apollo Road in Belfast for
a 20-year term which expires in 2012.
4
During fiscal 1993, HIL took over Hathaway Systems Limited's office lease on
Brewery Road in Hoddesdon, Hertfordshire, England. This lease for 2,800 square
feet expires in 2007. Although substantially all operations of HIL were moved
to Belfast as of June 30, 1996, this facility will be maintained as a branch
sales office.
The Motors and Instruments Division has a lease for approximately 7,650 square
feet of office and manufacturing space located at 10816 East Newton Street,
Tulsa, Oklahoma. The current lease term expires December 31, 1996. Management
believes this lease can be renewed on terms and conditions similar to the
current lease.
The Motion Control Division leases 12,555 square feet of office and
manufacturing space located at 10002-B East 43rd Street South, Tulsa, Oklahoma.
The two-year lease term commenced August 1, 1995 and expires July 31, 1997, with
an option to renew on similar terms for three more years.
Computer Optical Products, Inc. leases one facility in Chatsworth, California.
In May 1994, the subsidiary entered into a three-year lease commencing June 1,
1994 with two one-year renewal options. The 10,560 square feet at 9305/09 Eton
Avenue houses Computer Optical Products, including the Fiberoptics Division.
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, except as noted.
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, based upon the advice of the
Company's legal counsel, believes the actions are without merit and will not
have a significant adverse effect on the Company's consolidated financial
position.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted to a vote of the security holders of the Company during
the fourth quarter of fiscal 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Hathaway Corporation's common stock is traded on the National Association of
Securities Dealers Automated Quotation System (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 29, 1996 was 732.
The following table sets forth, for the periods indicated, the high and low
prices of the Company's common stock on the NASDAQ National Market System, as
reported by NASDAQ.
Price Range
Dividends -----------
Per Share High Low
--------- ---- ---
FISCAL 1995
First Quarter $0.12 $4.13 $3.13
Second Quarter --- 3.88 2.75
Third Quarter --- 3.13 2.25
Fourth Quarter --- 3.13 2.38
FISCAL 1996
First Quarter $0.10 $3.13 $2.50
Second Quarter --- 2.88 1.88
Third Quarter --- 2.56 1.81
Fourth Quarter --- 4.00 1.69
5
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. Selected Financial Data.
The following table summarizes data from the Company's annual financial
statements for the years 1992 through 1996 and notes thereto; the Company's
complete annual financial statements and notes thereto for the current fiscal
year appear in the 1996 Annual Report. See Item 1 in the Business section of
this report and Notes 2 and 3 to Consolidated Financial Statements in the 1996
Annual Report for discussion of acquisitions and dispositions of business
operations.
For the fiscal years ended 1996 1995 1994 1993 1992
-------- -------- -------- --------- ---------
(In thousands, except per share data)
Net income (loss) from continuing
operations................................... $(1,013) $ 842 $ 955 $ 23 $ 2,064
Net income (loss) from operations of
divested segment and divested operation...... --- --- 885 958 (323)
Gain on sale of segment....................... --- --- 4,023 --- ---
Net income (loss)............................. (1,013) 842 5,863 981 1,741
Net revenues from continuing operations....... 35,411 39,838 43,028 45,741 42,806
Fully diluted earnings (loss) per share:
Continuing operations........................ (0.24) 0.19 0.19 --- 0.45
Operations of divested segment and
divested operation......................... --- --- 0.18 0.21 (0.07)
Sale of segment.............................. --- --- 0.81 --- ---
Net income (loss)............................ (0.24) 0.19 1.18 0.21 0.38
Cash dividends:
Per share.................................... 0.10 0.12 0.205 --- ---
Total amount paid............................ 426 536 992 --- ---
Total assets at June 30....................... 21,139 23,312 24,432 28,326 27,763
Total long-term debt at June 30............... 1,777 2,144 2,298 5,819 6,953
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this item is set forth in pages 4 through 6 of the
Company's 1996 Annual Report and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included in pages 7 through 20 of the
Company's 1996 Annual Report and is incorporated herein by reference.
6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hathaway Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Hathaway Corporation's 1996 Annual
Report incorporated by reference in this Form 10-K, and have issued our report
thereon dated July 31, 1996. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The supplemental Schedule II is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit 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 31, 1996.
7
Item 9. Disagreements on Accounting and Financial Disclosure.
The Company has not changed its accounting or auditing firm during the past 24
months, nor has it had any material disagreements with its accountants or
auditors regarding any accounting or financial statement disclosure matters.
PART III
The information required by Part III is included in the Company's Proxy
Statement, and is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant.
Information required by this item is set forth in the sections entitled
"Election of Directors" (page 2), "Executive Officers" (page 3) and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" (page 10) in the
Company's Proxy Statement and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item is set forth in the section entitled
"Executive Compensation" (pages 5 through 8) in the Company's Proxy Statement
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" (pages 4 and 5)
in the Company's Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Since July 1, 1995, the Company has not entered into any material related party
transactions.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
I. FINANCIAL STATEMENTS. The information required by this item and detailed
below is included in the 1996 Annual Report (pages 7 through 20) and is
incorporated herein by reference.
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1995.
Consolidated Statements of Operations for each of the years in the three-year
period ended June 30, 1996.
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended June 30, 1996.
Consolidated Statements of Stockholders' Investment for each of the years in the
three-year period ended June 30, 1996.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
8
II. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this report:
Schedule Subject
---------------- -------------------------------------
II Valuation and Qualifying Accounts
Financial statement schedules, other than those listed above, are omitted
because they are either not applicable or not required, or because the
information sought is included in the Consolidated Financial Statements or the
Notes thereto within the 1996 Annual Report.
III. EXHIBITS
Exhibit Index, regarding exhibits filed in accordance with Item 601, is at Page
10, hereof.
IV. REPORTS ON FORM 8-K.
The registrant did not file any reports on Form 8-K during the fourth quarter of
fiscal year 1996.
9
EXHIBIT INDEX
Exhibit No. Subject Page
- ----------- -------
3.1 Restated Articles of Incorporation. *
3.2 Amendment to Articles of Incorporation, dated September *
24, 1993.
3.3 By-laws of the Company adopted August 11, 1994. *
4 Rights Agreement between Hathaway Corporation and Bank of *
America National Trust and Savings Association, dated
June 15, 1989. Incorporated by reference to the Company's
1989 Annual Report and Form 10-K for the fiscal year
ended June 30, 1989.
10.1 Amendment No. 1 to Warrant to Purchase Common Stock of *
Hathaway Corporation granted to Household Commercial
Financial Services, Inc., dated as of June 15, 1987.
Incorporated by reference to Exhibit 10c(iii) to the
Company's 1989 Annual Report and Form 10-K for the fiscal
year ended June 30, 1989.
10.2 Amendment No. 1 to Warrant to Purchase Common Stock of *
Hathaway Corporation granted to Ford Motor Credit
Company, dated as of June 15, 1987. Incorporated by
reference to Exhibit 10c(iv) to the Company's 1989 Annual
Report and Form 10-K for the fiscal year ended June 30,
1989.
10.3 Severance Agreement dated June 15, 1989 between Hathaway *
Corporation and Eugene E. Prince. Incorporated by
reference to Exhibit 10n(i) to the Company's 1989 Annual
Report and Form 10-K for the fiscal year ended June 30,
1989.
10.4 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.
10.5 Lease Agreement between Circuits and Systems Design *
Limited and Department of Economic Development (Northern
Ireland) dated April 7, 1992. Incorporated by reference
to Exhibit 10(iii)D to the Company's 1992 Annual Report
and Form 10-K for the fiscal year ended June 30, 1992.
10.6 The Hathaway Corporation Amended 1980 Non-Incentive Stock *
Option Plan. Incorporated by reference to the Company's
Form S-8 filed August 3, 1981.
10.7 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.
10.8 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.
10.9 The 1989 Incentive and Non-Qualified Stock Option Plan *
dated August 10, 1989. Incorporated by reference to the
Company's Form S-8 filed October 25, 1990.
10.10 The 1991 Incentive and Non-Statutory Stock Option Plan *
dated September 19, 1991. Incorporated by reference to
the Company's Form S-8 filed January 8, 1992.
10.11 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
Exhibit No. Subject
- ----------- -------
10.12 Employment Agreement between Hathaway Corporation and *
Eugene E. Prince, dated July 1, 1993. Incorporated by
reference to Exhibit 10.17 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
10.13 Employment Agreement between Hathaway Corporation and *
Richard D. Smith, dated July 1, 1993. Incorporated by
reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
10.14 Loan and Security Agreement dated August 2, 1993 between *
Hathaway Corporation, certain subsidiaries of Hathaway
Corporation and Marine Midland Business Loans, Inc.
Incorporated by reference to Exhibit 10.18 to the
Company's Form 10-K for the fiscal year ended June 30,
1993.
10.15 Loan Facility Agreement dated August 2, 1993 between CSD *
Hathaway Limited and Forward Trust Limited. Incorporated
by reference to Exhibit 10.19 to the Company's Form 10-K
for the fiscal year ended June 30, 1993.
10.16 Reimbursement Agreement dated August 2, 1993 between CSD *
Hathaway Limited and Marine Midland Business Loans, Inc.
Incorporated by reference to Exhibit 10.20 to the
Company's Form 10-K for the fiscal year ended June 30,
1993.
10.17 Promissory Note from Richard D. Smith to Hathaway *
Corporation, dated October 26, 1993. Incorporated by
reference to Exhibit 10.23 to the Company's Form 10-K for
the fiscal year ended June 30, 1994.
10.18 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.
10.19 Assignment and Assumption of Lease Agreement, Letter *
Agreement, Collateral Assignment and Amendment to Lease
Agreement between Trammel Crow Company No. 91, Petula
Associates, Ltd., Symantec Corporation and Hathaway
Systems Corporation-Beta Products Division, dated June 1,
1994. Incorporated by reference to Exhibit 10.27 to the
Company's Form 10-K for the fiscal year ended June 30,
1994.
10.20 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.
10.21 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.
10.22 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.
11
Exhibit No. Subject Page
- ----------- ------- ----
10.23 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.
10.24 Management Incentive Bonus Plan for the fiscal year
ending June 30, 1997.
13 1996 Annual Report.
21 List of Subsidiaries. 12
22 Definitive Proxy Statement, dated September 19, 1996 for *
the Registrant's 1996 Annual Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP. 13
27 Financial Data Schedule
- -----------
* These documents have been filed with the Securities and Exchange
Commission, and are incorporated herein by reference.
- --------------------------------------------------------------------------------
SUBSIDIARIES OF HATHAWAY CORPORATION
1) Hathaway Systems Corporation, a Colorado corporation.
2) Computer Optical Products, Inc., a Colorado corporation.
3) Hathaway, Inc., a Canadian corporation.
4) Hathaway Systems Limited, a Northern Ireland corporation.
5) Hathaway Instruments Limited, a United Kingdom corporation.
12
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 31, 1996 incorporated by reference 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 19, 1996.
13
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 19, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Eugene E. Prince President, Chief Executive September 19, 1996
- ------------------------------ Officer, and Chairman of the
Eugene E. Prince Board of Directors
/s/ Richard D. Smith Executive Vice President, September 19, 1996
- ------------------------------ Treasurer, Secretary,
Richard D. Smith Chief Financial Officer
(Chief Accounting Officer)
and Director
/s/ George J. Pilmanis Director September 19, 1996
- ------------------------------
George J. Pilmanis
/s/ Marvin J. Fein Director September 19, 1996
- ------------------------------
Marvin J. Fein
/s/ Chester H. Clarridge Director September 19, 1996
- ------------------------------
Chester H. Clarridge
/s/ Graydon D. Hubbard Director September 19, 1996
- ------------------------------
Graydon D. Hubbard
14
HATHAWAY CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Deductions Balance at
Beginning of Costs and from End of
Period Expenses Reserves` Period
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996:
Reserve for bad debts ................... $ 305,000 $ 87,000 $71,000 $ 321,000
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1995:
Reserve for bad debts ................... 394,000 46,000 135,000 305,000
- ------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1994;
Reserve for bad debts ................... 463,000 158,000 227,000 394,000
- ------------------------------------------------------------------------------------------------------------
15
Exhibit 10.24
HATHAWAY CORPORATION
Management Incentive Bonus Plan
for the Fiscal Year Ending
June 30, 1997
- --------------------------------------------------------------------------------
OBJECTIVE:
- ----------
The objective of this Incentive Compensation Plan (the "Plan") is to provide an
incentive to certain Executives of Hathaway Corporation (the "Company") to
increase profits to the Company by offering these individuals an opportunity to
participate in a fund which is to be established by the Company from a portion
of its operating profits and/or is cash flow. A fund will be established for
each group, division and/or subsidiary based on its forecasted profitability for
1997 and its past fiscal year's financial results, with certain executives of
each division participating in their respective funds.
ELIGIBILITY:
- ------------
Executives eligible for participation are officers or executive level employees
as the President may select and the Board of Directors of the Company (the
"Board") shall approve. Eligibility shall not confer any vested rights,
however, it being understood that being an eligible executive shall mean only
that such executive may potentially receive an award pursuant to the Board's
final determination referred to below. It is the intention of the Board that
such individuals be designated and approved as early in the fiscal year as
possible.
TERM:
- -----
This Plan shall be effective for the fiscal year ending June 30, 1997, unless
modified by the Board,
ADMINISTRATION OF THE PLAN:
- ---------------------------
The Plan will be administered by the President, under the direction of the
Board, which will retain the option to modify the Plan from time-to-time,
retroactively, as well as prospectively, and whose decision shall be final and
binding on all parties.
ESTABLISHMENT OF THE FUNDS
- --------------------------
For the purpose of making incentive payments, separate funds (the "Funds") will
be established for each group, division and/or subsidiary, in accordance with
the attached schedules. The Funds will be established out of a portion of each
group, division, and/or subsidiary's Adjusted Plan Income, as hereinafter
defined.
Adjusted Plan Income is income for each group, division, and/or subsidiary
for the fiscal year ending June 30, 1997, before; (1) provision for federal
and state income taxes, (2) minority interest in net income of
subsidiaries, (3) extraordinary credits or losses, (4) provisions for the
Employee's Stock Ownership Plan and Trust and Cash Bonus Plan, (5)
provision for amounts set aside for the Funds and (6) such other amounts as
the Board determines to provide management incentives to
accomplish the goals and objectives of the Company. The Adjusted Plan
Income for each group, division, and/or subsidiary shall include all
intercompany charges and credits, including interest charged for
intercompany loans and/or the corporate asses charge, as defined by the
President.
ADDING OR DELETING PARTICIPANTS DURING THE PLAN YEAR:
- -----------------------------------------------------
An individual designated to participate in the Plan who leaves the employ of the
Company prior to the date of distribution shall not be entitled to participate
in the Fund. However, the portion of the Fund that would otherwise have been
allocated to such employee shall revert back to the Company and shall not be
reallocated to the remaining participants. The intent is that the remaining
employees will not benefit from or be detrimentally affected by the termination
of other employees, and the amount of the Fund that would otherwise be
distributed to the remaining employees shall remain the same.
An individual hired during the Plan Year that replaces an executive designated
to participate in the Plan, or who is a new addition (not replacing a designated
participant), and who is employed for a minimum of 90 days prior to June 30,
1997, will be entitled to participate in the respective Fund for the pro-rata
portion of the year that such new employee is employed by the Company.
If an individual is a replacement of a participating employee who terminates,
then the portion of the Fund, or a part thereof, that would have otherwise been
allocated to the terminated employee and which reverted back to the Company
shall be reallocated to the replacement employee. The amount that will be
distributed to the replacement employee on the date of distribution will be the
lesser of; (A) the amount which reverted back to the Company that would have
been allocated to the terminated employee had such employee stayed the full plan
year or, (B) the amount computed by multiplying the amount of the Fund times the
ratio of the replacement employee's actual salary earned during the 12 months
ending June 30, 1997 multiplied times the individual's salary multiple, to the
total annual salaries of all participants on August 16, 1996 (excluding the
replacement employee's salary), including the employee whose employment
terminated, multiplied by each employee's salary multiple.
If the individual is a new addition, then a portion of the Fund that would have
otherwise been allocated to all other participants will be allocated to the new
employee. The amount that will be distributed to each eligible participant on
the date of distribution will be computed by multiplying the amount of the Fund
times the ratio of the participant's salary multiplied times his/her salary
multiple to the total of the salaries of all participants, including the new
employee, multiplied times each employee's salary multiple. The salaries of the
participants used to determine the numerator and denominator of such ratio shall
be determined by multiplying the monthly salary being paid on August 16, 1996
times the number of months the individual was employed during the fiscal year
ending June 30, 1997, multiplied times their salary multiple.
DISTRIBUTION OF THE FUND
- ------------------------
Following the close of the fiscal year ending June 30, 1997, the President will
present to the Board his determination of the amount to be set aside for the
Fund and his recommendations regarding awards to be made to eligible executives.
The amount will have been audited and confirmed to be in agreement with the Plan
by the Company's independent auditors. For distributions of the group,
division, and/or subsidiary, Funds that are based on the salaries of the
participants, the salaries that are to be used in calculating such
distribution shall be the current rate of salary being paid on August 16, 1996,
multiplied times their salary multiples.
At the first meeting of the Board of Directors, following completion of the
audit for the fiscal year ending June 30, 1997, by the Company's independent
auditors, the Board of Directors will consider the recommendations of the
President and make a final determination as to the awards to be made to eligible
executives. The Board's determination may vary from the President's
recommendations and may make total awards of more or less than the amount to be
set aside as set forth above. The Board may also choose to make no awards. The
payment will be made to the participants immediately following the Board
Meeting.
[LETTERHEAD OF HATHAWAY APPEARS HERE]
1996
ANNUAL
REPORT
================================================================================
CORPORATE PROFILE
Headquartered in Denver, Colorado, Hathaway designs, manufactures and
sells 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. With subsidiaries in
the United States, United Kingdom and Canada and joint venture
investments in China, Hathaway is the world's leading manufacturer of
electronic power fault recording equipment and a leader in process
calibration technology and motion control products.
---------------------------------------------------------------------
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS................................................1
MESSAGE TO STOCKHOLDERS.............................................2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION.........................4
CONSOLIDATEDBALANCE SHEETS..........................................7
CONSOLIDATED STATEMENTS OF OPERATIONS...............................8
CONSOLIDATED STATEMENTS OF CASH FLOWS...............................9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT................10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS...........................20
OFFICERS AND DIRECTORS.............................................21
INVESTOR INFORMATION...............................................21
----------------------------------------------------------------------
This Annual Report is presented in a cost-effective manner which
exemplifies Hathaway's commitment to reduce spending without
compromising the information which shareholders need to assess the
state of the Company. We have also departed from our practice of
mailing quarterly reports to shareholders, but the Company's Form 10-
Q, filed quarterly with the Securities and Exchange Commission, is
available upon request or by accessing the filing through the SEC's
EDGAR system on the Internet's World Wide Web.
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
For the years ended June 30,
In thousands, except per share data 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES FROM CONTINUING OPERATIONS $35,411 $39,838 $43,028
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (1,013) 842 955
NET INCOME FROM OPERATIONS OF DIVESTED SEGMENT -- -- 885
GAIN ON SALE OF SEGMENT -- -- 4,023
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,013) $ 842 $ 5,863
- --------------------------------------------------------------------------------
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ (0.24) $ 0.19 $ 0.19
Operations of divested segment -- -- 0.18
Gain on sale of segment -- -- 0.81
- --------------------------------------------------------------------------------
Net income (loss) $ (0.24) $ 0.19 $ 1.18
- --------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE:
Annual dividend $ 0.10 $ 0.12 $ 0.105
Special dividend -- -- 0.100
- --------------------------------------------------------------------------------
Total dividends $ 0.10 $ 0.12 $ 0.205
- --------------------------------------------------------------------------------
TOTAL DIVIDENDS PAID $ 426 $ 536 $ 992
================================================================================
As of June 30,
In thousands, except per share data 1996 1995 1994
- --------------------------------------------------------------------------------
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES $ 5,438 $ 7,132 $ 8,818
TOTAL ASSETS $21,139 $23,312 $24,432
TOTAL DEBT $ 1,777 $ 2,144 $ 2,298
STOCKHOLDERS' INVESTMENT $14,282 $15,873 $16,610
NET BOOK VALUE PER COMMON SHARE OUTSTANDING $3.36 $3.72 $3.60
TOTAL SHARES ISSUED AND OUTSTANDING 4,249 4,266 4,615
================================================================================
1
MESSAGE TO STOCKHOLDERS
Dear Fellow Stockholders:
What a year!? We ended a very challenging fiscal 1996 with a $1,013,000 loss.
Despite this, our stock price increased by 43% over a year ago. These seemingly
conflicting facts are an indication of the constantly changing business
environment that the Company currently faces.
STOCK PERFORMANCE
The Company's stock generated a lot of investor interest in May through July of
1996, as evidenced by significant increases in the stock trading volume on
NASDAQ and in the stock price. On June 30, 1996, the closing bid price on the
Company's stock was $3.75, compared to $2.63 on June 30, 1995. The increase in
the stock price was primarily due to a new investor purchasing Hathaway stock
during this time. The investor indicated that he purchased the stock because it
met his investment criteria of a company operating in a temporarily depressed
industry, with a strong balance sheet and a low stock price.
POWER INDUSTRY IN TURMOIL
Deregulation, competition, mergers, reorganization, reengineering, downsizings
and power failures describe the trends in the power industry today. In its
efforts to prepare for impending competition, the industry has implemented
numerous cost reduction initiatives. One of those initiatives has been a
significant reduction in the purchase of electronic instrumentation,
particularly for transmission systems. "While indecision about the outcome of
competition reigns, utilities' investment in transmission gear has nearly dried
up," a recent Business Week article stated. The effect on Hathaway has been
severe - sales of the Company's power instrumentation products decreased 31% in
1996 from the prior year, much more of a decrease than we had anticipated.
In 1996 the industry was also plagued by numerous and far-reaching power
outages. This fact has led many experts to question whether the power outages
and the industry's cost-cutting efforts are in any way related. What is not
being questioned, however, is the fact that utilities need major investments in
technology to provide accurate, up-to-date information, improve the reliability
of the power supply and prevent major power failures in the future.
We are positioning Hathaway to provide utilities with solutions to the problems
brought on by deregulation. We have focused on developing technology that will
allow power companies to automate their systems, which will both reduce the cost
of operation and improve the reliability of the power supply. In order to
sustain the ongoing full-scale engineering and development efforts, we have not
reduced spending in this area.
Because we serve a global marketplace, Hathaway's product development effort now
represents a collaboration of the best talent from all divisions within the
power instrumentation products group. We have also continued to downsize and
reorganize our power group to cut costs as well as to better align the interests
of all the divisions within the power group, consolidate operations, and improve
efficiency.
RESTRUCTURING
We have put in place several initiatives aimed at reducing costs and enhancing
productivity and efficiency. In the fourth quarter of fiscal 1996, the Company
recorded a $338,000 pretax charge to reorganize its Canadian and U.K.
operations. Effective June 30, 1996 the net assets 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. The Company has also decided to close its Toronto, Canada
facility and to combine substantially all of its operations with the operations
of our Hathaway Process Instrumentation division in Dallas.
We determined that it is necessary to restructure the U.S. manufacturing
operations of our power products. In the second quarter of fiscal 1997, we will
consolidate our Denver and Seattle manufacturing operations into one
manufacturing facility located in Seattle.
CHINESE JOINT VENTURES
We have now invested in three joint ventures in China, which are all producing
products for the Chinese power market. Because almost 50% of the world's power
expansion is in China, the opportunities that exist there for our joint ventures
are significant. We are still confident that our Chinese joint ventures provide
excellent long-term potential.
2
MESSAGE TO STOCKHOLDERS
MOTION CONTROL ... A SHOOTING STAR
Sales of our motion control products increased 48% in 1996 over the prior year.
This was the third consecutive growth year. The motion control products group
now represents 34% of the Company's sales. Its products include specialty
brushless motors with related drive electronics and optical encoders. The group
has a broad base of customers including semi-conductor manufacturers as well as
industrial, medical and computer test equipment suppliers. To help ensure our
ability to keep up with demand in this product group, we are significantly
expanding production capacity and continuing new product development. We expect
growth in Motion Control to continue into the future.
FISCAL 1996 FINANCIAL RESULTS
Hathaway recognized a net loss of $1,013,000, or $.24 per share, for the year
ended June 30, 1996, compared to net income of $842,000, or $.19 per share, for
the year ended June 30, 1995. Revenues for the year decreased 11% from
$39,838,000 in fiscal 1995 to $35,411,000 in fiscal 1996. Our balance sheet is
strong with $5,438,000 in cash and investments and a current ratio of 3.63.
DIVIDENDS / STOCK REPURCHASES
The Board of Directors did not declare a dividend this year due to the fiscal
1996 loss. Also, the Company's loan agreement currently does not allow the
Company to pay dividends because the Company has failed to meet a loan covenant
related to cash flow since September 30, 1995. Although the bank has waived its
rights pursuant to the non-compliance, the Company may not, among other things,
pay dividends until compliance is achieved. Since 1993 the Company has paid out
approximately 50% of its net income in dividends to shareholders. We intend to
continue paying dividends at this level in the future, as long as net income and
compliance with all loan covenants is achieved.
The Company's public stock repurchase program (to purchase stock through the
NASDAQ National Market System) was terminated effective June 30, 1995 to
conserve cash for investment in the Company and potential acquisitions of
complementary companies and products.
LOOKING FORWARD
Our many years of experience in servicing domestic and international markets,
along with the close working relationships we have developed with our customers,
will allow Hathaway to meet the challenges of the evolving power markets and to
further develop the motion control markets.
We do not know how much longer the deregulation of the power industry will have
an adverse effect on Hathaway. However, we believe that as a result of our
reorganization and product development efforts, Hathaway will be in a good
position to meet new demands as they evolve. While having an adverse effect on
us now, we believe the deregulation of the power industry provides significant
opportunities for us in the future.
In the Motion Control area, Hathaway's customer relationships and expanding
production capacity have positioned the Company to continue to benefit from
rapidly rising demand and to take advantage of the opportunities currently
present in this market.
We also continue to search for products and companies that could be acquired
that complement the industries in which we are currently operating.
Our appreciation goes to our customers, suppliers and employees, who are
important in achieving our goals, and to our stockholders for their ongoing
support.
/s/ Gene Prince
Eugene E. Prince
Chairman of the Board, President
and Chief Executive Officer
/s/ Richard D. Smith
Richard D. Smith
Executive Vice President,Treasurer,
Secretary and Chief Financial Officer
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
OPERATING RESULTS
The Company generated a net loss from continuing operations of $1,013,000 in
fiscal year 1996, compared with net income from continuing operations of
$842,000 and $955,000 for 1995 and 1994, respectively. Net loss for the current
year was $1,013,000 compared with net income of $842,000 and $5,863,000 for
fiscal years 1995 and 1994, respectively. Fiscal year 1994 net income includes a
$4,023,000 net after tax gain on the January 31, 1994 sale of the Company's
Application Software Segment, Global Software, Inc. (Global) and net income from
discontinued operations of $885,000 generated by Global. See further discussion
under Divested Segment.
Revenues from continuing operations decreased 11% in 1996 to $35,411,000 from
$39,838,000 in 1995. This decrease represents a 31% decrease in sales of the
Company's power instrumentation products and a 2% decrease in sales of process
instrumentation products, offset by a 48% increase in sales of the Company's
motion control products. Revenues from continuing operations decreased 7% in
1995 from $43,028,000 in 1994. This decrease represented a 12% decrease in sales
of the Company's power instrumentation products and a 4% decrease in process
instrumentation products, offset by a 10% increase in sales of the Company's
motion control products.
The decreases in power instrumentation product sales are mainly attributable to
the changing power utility market conditions in the world. In October of 1992,
the Energy Policy Act of 1992 became law in the U.S. The Act's purpose is to
increase competition among the domestic electric utility companies. Worldwide,
many foreign countries are privatizing their power utility companies, creating
an increasingly competitive environment.
Motion control products recorded its third consecutive year of sales growth and
now represents 34% of overall company sales. Motion control serves a broad base
of customers including semiconductor manufacturers as well as industrial,
medical and computer test equipment suppliers. 83% of its market is within the
U.S.
Sales to international customers decreased to $12,820,000, or 36% of sales from
continuing operations, in fiscal 1996 compared to $14,646,000, or 37% of sales
from continuing operations, in fiscal 1995 and $13,863,000, or 32% of sales from
continuing operations, in fiscal 1994. Export sales from continuing domestic
operations were $6,753,000, $7,265,000, and $6,838,000 in 1996, 1995 and 1994,
respectively. Sales to domestic customers from continuing operations totalled
$22,591,000, $25,192,000 and $29,165,000 in fiscal 1996, 1995 and 1994,
respectively. Sales backlog for continuing operations was $10,094,000 at June
30, 1996, compared with $8,878,000 and $8,868,000 at June 30, 1995 and 1994,
respectively.
Cost of products sold represented 62% of revenues in 1996 compared to 57% in
1995 and 55% in 1994. The increases have occurred primarily because of price
reductions implemented in response to competitive pressures, as well as changes
in the mix of products sold.
Selling, general and administrative and engineering and development expenses
decreased from $17,526,000 in 1994 to $15,489,000 and 14,671,000 in 1995 and
1996, respectively, representing annual decreases of 12% and 5% in 1995 and
1996, respectively. The decreases have been primarily due to overall cost
reduction efforts and reduced commissions.
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 Hoddeston, 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 will be combined with
the operations of HSL. In addition, the Company has decided to close its
Toronto, Canada facility and to combine substantially all of its operations with
the operations of Hathaway Process Instrumentation, the Carrollton, Texas
division. The initiatives are aimed at reducing costs and enhancing productivity
and efficiency. The restructuring provision is primarily comprised of estimated
costs for employee severance benefits and fixed asset writeoffs. While these
actions have been initiated, due to the timing of the payouts, a majority of the
charge remains to be paid. The Company currently anticipates that the remaining
balance will be expended by the end of fiscal 1997.
Other income was $210,000 in 1996, whereas other expenses were $76,000 in 1995
and $438,000 in 1994. The large increase in 1996 is due primarily to $165,000 of
income recorded in the first quarter of 1996. In July, 1995 the Company
consummated an agreement with Global (see Divested Segment below) and management
of Global. Under the terms of the agreement, the Company received $165,000 in
exchange for
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
consenting to Global's proposed disposition of certain assets acquired after the
Company's sale of Global on January 31, 1994. In addition, the Company agreed to
acknowledge that the disposition would not violate the terms of the original
sale agreement. The change between 1995 and 1994 was due primarily to certain
expenses for non-recurring items incurred in 1994.
DIVESTED SEGMENT
Effective January 31, 1994, the Company sold Global Software, Inc. to the senior
management of Global. The sale resulted in a net after tax gain of $4,023,000.
The Company received a cash payment of $6,803,000, of which a portion was used
to repay $3,000,000 of the Company's long-term debt and to pay a special $.10
per share dividend to shareholders totaling $495,000. The remaining proceeds
were used to pay the expenses and income taxes which resulted from the sale and
for other general operating activities. The Company obtained a fairness opinion
supporting the sale price and stockholder approval of the sale.
Global's net income for the seven months ended January 31, 1994 has been
reflected as Net Income from Operations of Divested Segment in the accompanying
Consolidated Statements of Operations. For the seven months ended January 31,
1994, Global generated revenues of $14,053,000 and net income after income taxes
of $885,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
decreased $666,000 during the year to a balance of $5,237,000 at June 30, 1996.
Operating activities used $179,000 in fiscal 1996 compared to generating
$1,253,000 and $2,187,000 in fiscal years 1995 and 1994, respectively. The
decreased cash from operations in 1996 is primarily the result of an operating
loss of $1,013,000, offset by a decrease in receivables caused by the decrease
in sales volume. The decrease in cash from operations in 1995 was primarily due
to $1,070,000 generated by Global in 1994 prior to its sale.
Cash of $376,000 was generated by investing activities in fiscal 1996 compared
to $1,049,000 used in fiscal 1995 and $1,159,000 generated in fiscal 1994. The
increase from 1995 to 1996 was primarily due to proceeds of $1,000,000 from
maturities of marketable securities. The decrease from 1994 to 1995 was
primarily due to $1,743,000 used by Global in 1994 prior to its sale. In
addition, 1994 cash from investing activities included proceeds from the sale of
Global.
Financing activities used $828,000, $1,887,000 and $6,774,000 in fiscal years
1996, 1995 and 1994, respectively. The decrease in cash used for financing
activities from 1995 to 1996 is due primarily to an additional $1,168,000 used
in fiscal 1995 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 from 1995 to 1994 was due primarily to certain non-recurring events in
1994, primarily the $11,877,000 repayment of long-term debt, offset by new
borrowings of $7,227,000 under the Company's financing agreement (Agreement)
with Marine Midland Business Loans, Inc. (Midland).
At June 30, 1996, the Company had $1,777,000 of debt, compared with $2,144,000
at June 30, 1995, a reduction of $367,000. As of June 30, 1996 the Company could
borrow an additional $1,722,000 (up to the current borrowing limit of
$3,499,000, subject to availability of the borrowing base, which is based on
certain asset levels) under its Agreement with Midland. The line bears interest
at Midland's prime borrowing rate plus 1% (9.25% at June 30, 1996).
The Agreement with Midland requires that the Company maintain compliance with
certain covenants related to tangible net worth, cash flow coverage and currrent
ratios. The Company failed to meet the quarterly-calculated cash flow coverage
covenant in each quarter of fiscal 1996. In February, 1996 the Company received
from Midland a waiver of compliance with the cash flow coverage covenant
requirement from September 30, 1995 through December 31, 1996. In August, 1996
Midland extended the waiver of compliance through June 30, 1997. In connection
with obtaining the aforementioned waiver, the Company has agreed to certain
conditions, including limiting the assets against which the Company may borrow
to certain accounts receivable and requiring the Company to maintain higher
tangible net worth and achieve certain annual operating results. Also, as long
as the Company is in violation of the cash flow coverage covenant, 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 of July 31, 1996, the
Company had complied with all conditions contained in the waiver, as well as
with all the other covenants contained in the Agreement.
There can be no assurance that the Company will not require additional waivers
in the future or, if required, that Midland will grant them. Furthermore, in
the event that management deter-
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
mines that, based on its projections, it is probable that the Company will not
be able to comply with any covenant contained in the Agreement within twelve
months after the balance sheet date for which compliance with the covenant has
been waived, the entire balance of the long-term debt would have to be
reclassified as short-term debt. Starting in August, 1997 the Company may repay
the entire debt balance with Midland with no prepayment penalty.
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. HPMS
will design, manufacture and sell, under a license from Hathaway,
instrumentation products designed by Hathaway, to electric power companies in
China. Due to the uncertainty of realization of these joint venture investments,
they have been fully reserved for by the Company. There are no future
commitments relating to these investments.
No major commitments for capital expenditures existed at year end. The Company's
current capital needs can be supplied from operations and from cash and cash
equivalents of $5,237,000, marketable securities of $201,000 scheduled to mature
in August, 1996 and the $1,722,000 available under the line of credit with
Midland.
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 its 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 will continue to minimize the effects of any
foreseeable inflation and other price pressures from the industries in which it
operates. As the Company's manufacturing activities mainly utilize semi-skilled
labor, which is relatively plentiful in the areas surrounding the Company's
production facilities, the Company does not anticipate substantial inflation-
related increases in the wages of the majority of its employees.
6
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
In thousands, except share data June 30, 1996 June 30, 1995
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,237 $ 5,903
Marketable securities, current 201 1,029
Trade receivables, net of allowance for
doubtful accounts of $321 and $305 at
June 30, 1996 and 1995, respectively 6,293 7,486
Inventories, net 4,972 4,469
Current deferred income taxes 893 738
Prepaid expenses and other 857 575
- --------------------------------------------------------------------------------
Total current assets 18,453 20,200
Marketable securities, non-current -- 200
Property and equipment, net 1,727 1,798
Cost in excess of net assets acquired, net 623 777
Other 336 337
- --------------------------------------------------------------------------------
Total assets $21,139 $23,312
================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,309 $ 1,308
Accrued liabilities 2,907 2,721
Income taxes payable 405 765
Product service reserve 459 501
- --------------------------------------------------------------------------------
Total current liabilities 5,080 5,295
Long-term debt (Note 4) 1,777 2,144
- --------------------------------------------------------------------------------
Total liabilities 6,857 7,439
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' INVESTMENT:
Preferred stock, par value $1.00 per share,
authorized 5,000,000 shares; no shares outstanding -- --
Common stock, at aggregate stated value,
authorized 50,000,000 shares; 5,307,143 issued at
June 30, 1996 and 1995 100 100
Additional paid-in capital 9,712 9,767
Loan receivable for stock (Note 12) (133) (133)
Loan receivable from Leveraged Employee Stock
Ownership Plan and Trust (Note 5) (102) (102)
Retained earnings 8,247 9,686
Cumulative translation adjustments (Note 1) 163 218
Treasury stock, at cost; 1,058,046 and
1,041,560 shares at June 30, 1996 and 1995,
respectively (Note 10) (3,705) (3,663)
- --------------------------------------------------------------------------------
Total stockholders' investment 14,282 15,873
- --------------------------------------------------------------------------------
Total liabilities and stockholders' investment $21,139 $23,312
================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands, For the years ended June 30,
except per share data 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES $35,411 $39,838 $43,028
OPERATING COSTS AND EXPENSES:
Cost of products sold 21,926 22,834 23,584
Selling 6,269 7,037 7,762
General and administrative 4,680 4,836 5,653
Engineering and development 3,722 3,616 4,111
Amortization of intangibles 215 246 243
Restructuring charge (Note 11) 338 -- --
- -------------------------------------------------------------------------------
Total operating costs and expenses 37,150 38,569 41,353
- -------------------------------------------------------------------------------
Operating income (loss) from
continuing operations (1,739) 1,269 1,675
OTHER INCOME (EXPENSES), NET:
Interest and dividend income 325 332 315
Interest expense (194) (204) (277)
Other income (expenses), net 210 (76) (438)
- --------------------------------------------------------------------------------
Total other income (expenses), net 341 52 (400)
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (1,398) 1,321 1,275
Benefit (provision) for income
taxes (Note 8) 385 (479) (320)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,013) 842 955
NET INCOME FROM OPERATIONS OF
DIVESTED SEGMENT, NET OF INCOME
TAXES OF $453 (Notes 3 and 8) -- -- 885
GAIN ON SALE OF SEGMENT, NET OF INCOME
TAXES OF $900 (Notes 3 and 8) -- -- 4,023
- -------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,013) $ 842 $ 5,863
===============================================================================
PER SHARE AMOUNTS(Note 1)
- -------------------------------------------------------------------------------
For the years ended June 30, 1996 1995 1994
- -------------------------------------------------------------------------------
PRIMARY:
Net income (loss) per share from
continuing operations $ (0.24) $ 0.19 $ 0.20
Net income per share from
operations of divested segment -- -- 0.18
Gain per share from sale of
segment -- -- 0.82
- -------------------------------------------------------------------------------
NET INCOME(LOSS) PER SHARE $ (0.24) $ 0.19 $ 1.20
===============================================================================
FULLY DILUTED:
Net income (loss) per share from
continuing operations $ (0.24) $ 0.19 $ 0.19
Net income per share from
operations of divested segment -- -- 0.18
Gain per share on sale of segment -- -- 0.81
- -------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE $ (0.24) $ 0.19 $ 1.18
===============================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
8
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the years ended June 30,
In thousands 1996 1995 1994
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,013) $ 842 $ 5,863
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Gain on sale of segment, net of income
taxes -- -- (4,023)
Depreciation and amortization 960 970 1,564
Allowances on joint venture investments -- 140 208
Provision for doubtful accounts 16 (96) (73)
Other (165) (96) 33
Changes in assets and liabilities:
(Increase) decrease in -
Receivables 1,177 (580) (240)
Inventories (503) 247 (489)
Prepaid expenses and other (282) (26) 223
Current deferred income taxes (155) (6) 390
Increase (decrease) in -
Accounts payable 1 (138) (388)
Accrued liabilities 187 (429) (719)
Product service reserve (42) 65 38
Income taxes payable (360) 360 (603)
Deferred software service income -- -- 403
- --------------------------------------------------------------------------------
Net cash from operating activities (179) 1,253 2,187
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (719) (934) (969)
Investments in joint ventures (Note 2) (70) (115) (177)
Purchase of marketable securities -- -- (1,288)
Proceeds from maturity of marketable
securities 1,000 -- --
Proceeds from sale of segment, net of
expenses of $1,681 -- -- 5,122
Cash retained by segment sold -- -- (1,050)
Other 165 -- (479)
- --------------------------------------------------------------------------------
Net cash from investing activities 376 (1,049) 1,159
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line of credit and
long-term debt (360) (460) (11,877)
Borrowings on line of credit and
long-term debt -- 276 7,227
Cash paid for loan costs -- -- (448)
Dividends paid to stockholders (426) (536) (992)
Proceeds from exercise of stock options,
net of loans -- 43 617
Purchase of treasury stock (42) (1,210) (1,301)
- --------------------------------------------------------------------------------
Net cash from financing activities (828) (1,887) (6,774)
- --------------------------------------------------------------------------------
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (35) 39 84
- --------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (666) (1,644) (3,344)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,903 7,547 10,891
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,237 $ 5,903 $ 7,547
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 177 $ 194 $ 290
Income taxes 173 108 986
- -------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Tax benefit from disqualifying stock
dispositions $ -- $ 23 $ 72
Repayment of LESOP* loan receivable -- 55 --
- -------------------------------------------------------------------------------
*Leveraged Employee Stock Ownership Plan
and Trust
The accompanying notes to consolidated financial statements are an integral part
of these statements.
9
================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------------------------------------------------------
Additional Loans
In thousands, Common Stock Paid-In Receivable Retained Treasury Stock
except share data Shares Amount Capital (Notes 5 & 12) Earnings Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1993 4,944,087 $100 $8,824 $(157) $ 4,509 272,088 $(1,152)
Exercise of stock options and issuance
of notes (Note 12) 345,556 -- 750 (673) -- -- --
Repayment of notes for exercise of
stock options (Note 12) -- -- -- 540 -- -- --
Long-term incentive plan bonus (Note 10) -- -- 71 -- -- -- --
Tax benefit from disqualifying
stock dispositions -- -- 72 -- -- -- --
Purchase of treasury stock (Note 10) -- -- -- -- -- 402,497 (1,301)
Dividend paid to stockholders ($.105 per share) -- -- -- -- (497) -- --
Special dividend paid to stockholders
from gain on sale of segment
($.10 per share) -- -- -- -- (495) -- --
Net income -- -- -- -- 5,863 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1994 5,289,643 $100 $9,717 $(290) $ 9,380 674,585 $(2,453)
Exercise of stock options 17,500 -- 43 -- -- -- --
Long-term incentive plan bonus (Note 10) -- -- (16) -- -- -- --
Repayment of LESOP* loan receivable
(Note 5) -- -- -- 55 -- -- --
Tax benefit from disqualifying stock
dispositions -- -- 23 -- -- -- --
Purchase of treasury stock (Note 10) -- -- -- -- -- 366,975 (1,210)
Dividend paid to stockholders
($.12 per share) -- -- -- -- (536) -- --
Net income -- -- -- -- 842 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1995 5,307,143 $100 $9,767 $(235) $ 9,686 1,041,560 $(3,663)
Long-term incentive plan bonus (Note 10) -- -- (55) -- -- -- --
Purchase of treasury stock (Note 10) -- -- -- -- -- 16,486 (42)
Dividend paid to stockholders
($.10 per share) -- -- -- -- (426) -- --
Net loss -- -- -- -- (1,013) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1996 5,307,143 $100 $9,712 $(235) $ 8,247 1,058,046 $(3,705)
- -----------------------------------------------------------------------------------------------------------------------------------
* Leveraged Employee Stock Ownership Plan and Trust
The accompanying notes to consolidated financial statements are an integral part
of these statements.
10
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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 operates primarily in
the United States, Europe and Canada and has three joint venture investments in
China (Note 2). As more fully discussed in Note 11, the Company is in the
process of restructuring its operations in the United Kingdom and Canada to
achieve cost savings and improve productivity and efficiency.
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 2).
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of certificates of deposit and high grade
commercial paper with original maturities of three months or less, and are
stated at amortized cost. Certificates of deposit totaling $312,000 and $398,000
at June 30, 1996 and 1995, respectively, serve as collateral for letters of
credit issued on behalf of the Company.
MARKETABLE SECURITIES
Marketable securities consist of debt securities which have been categorized as
held-to-maturity, and as a result are stated at amortized cost. Marketable
securities consist of the following (in thousands):
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------
Corporate bond,
matured March, 1996 $ -- $1,029
U.S. Treasury note,
matures August, 1996 201 200
- ---------------------------------------------------------------------------------
$ 201 $1,229
=================================================================================
INVENTORIES
Inventories, valued at the lower of cost
(first-in, first-out basis) or market, are as
follows (in thousands):
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------
Parts and raw materials, net $2,689 $2,898
Finished goods and work-
in process, net (including
material costs, labor and
manufacturing overhead) 2,283 1,571
- ---------------------------------------------------------------------------------
$4,972 $4,469
=================================================================================
Reserves established for anticipated losses on excess or obsolete inventories
were approximately $1,689,000 and $1,059,000 at June 30, 1996 and 1995,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, is classified as follows (in thousands):
Useful June 30, June 30,
Lives 1996 1995
- -------------------------------------------------------------------------
Machinery, equipment,
tools and dies 2-8 years $ 5,763 $ 5,707
Furniture, fixtures
and other 3-10 years 2,074 2,129
- -------------------------------------------------------------------------
7,837 7,836
Less accumulated
depreciation and amortization (6,110) (6,038)
- -------------------------------------------------------------------------
$ 1,727 $ 1,798
=========================================================================
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.
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, 1996 and 1995
consists of $1,505,000 of original costs, and $882,000 and $728,000,
respectively, of accumulated amortization. The Company continually reviews the
cost in excess of net assets acquired for possible impairment by comparing the
unamortized balance of the cost in excess of net assets acquired to the related
subsidiaries' estimated undiscounted net income over the remaining life of the
asset.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------
Compensation and
fringe benefits $1,012 $ 858
Commissions 539 567
Professional fees 239 311
Other accrued expenses 1,117 985
- -------------------------------------------------------------------------
$2,907 $2,721
=========================================================================
11
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
STATEMENTS OF CASH FLOWS
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.
EARNINGS PER SHARE
Earnings per share is calculated using the weighted average number of shares of
common stock and dilutive common stock equivalents outstanding during the
period, including the effects of options and warrants granted when such
adjustment has a dilutive effect on earnings per share. Shares used in the
computations for the periods reported are as follows (in thousands):
Primary Fully Diluted
- -----------------------------------
1996 4,271 4,309
1995 4,422 4,422
1994 4,875 4,949
- -----------------------------------
FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation", the assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars using current exchange
rates. Revenues and expenses are translated at average rates prevailing during
the period. The resulting translation adjustments are recorded in the Cumulative
Translation Adjustments component of Stockholders' Investment in the
accompanying Consolidated Balance Sheets.
Changes in Cumulative Translation Adjustments included in the Stockholders'
Investment section of the accompanying Consolidated Balance Sheets are as
follows (in thousands):
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------
Cumulative Translation
Adjustments, beginning of period $218 $156
Translation adjustments (55) 62
- -------------------------------------------------------------------
Cumulative Translation
Adjustments, end of period $163 $218
===================================================================
Foreign currency transaction gains and losses and translation gains and losses
on intercompany balances are recognized in Other income (expenses) in the
accompanying Consolidated Statements of Operations as follows (in thousands):
For the Years Ended June 30, 1996 1995 1994
- ----------------------------------------------------------
Unrealized foreign exchange gains $ -- $ 43 $ 38
Realized foreign exchange losses (25) (56) (79)
- ----------------------------------------------------------
Foreign exchange losses $ (25) $ (13) $ (41)
==========================================================
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 year balances in order to
conform with the current year's presentation.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No.121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of," which requires losses to be recorded on long-lived
assets used in operations when indications of impairment are present and the
undiscounted cash flows estimated to be generated in the future by those assets
are less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement No. 121 in the first quarter of fiscal 1997 and,
based on current circumstances, does not believe the effect of adoption will be
material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes financial accounting and reporting standards
for stock-based compensation, including stock-based employee compensation plans.
The Statement defines a fair value-based method of accounting for an employee
stock option or similar equity instrument. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value-
based method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in the Statement
had been applied. The Company will be required to adopt SFAS No. 123 for its
year ended June 30, 1997. As allowed by SFAS 123, the Company will continue to
apply the accounting provisions of Opinion No. 25 and will make the required pro
forma disclosures.
12
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. INVESTMENTS IN JOINT VENTURES
In fiscal year 1994 the Company made investments in two joint ventures. In
December 1993, the Company acquired 25% of Zibo Kehui Electric Company Ltd.
(Kehui), located in Zibo, China, for approximately $100,000. Kehui designs,
manufactures and sells cable and overhead line fault location and other test
instruments within the China market and the Company sells these products outside
of China.
During the third quarter of fiscal 1994, the Company acquired 25% of Hathaway Si
Fang Protection and Control Company, Ltd. (Si Fang), located in Beijing, China,
for a capital contribution of approximately $175,000. 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 June 1995, the Company committed to acquire a 40% interest in Hathaway Power
Monitoring Systems Company, Ltd. (HPMS), located in Wuhan, China for $140,000.
The Company completed the acquisition in the first quarter of fiscal 1996 upon
approval of the joint venture by the Chinese government. HPMS will design,
manufacture and sell, under a license from Hathaway, instrumentation products
designed by Hathaway, to electric power companies in China.
Due to the uncertainty of realization of these joint venture investments, they
have been fully reserved for by the Company.
- -------------------------------------------------------------------------------
3. SALE OF APPLICATION SOFTWARE SEGMENT
Effective January 31, 1994, the Company sold its Application Software Segment,
Global Software, Inc. (Global), to the senior management of Global. The sale
resulted in a net after tax gain of $4,023,000. The Company received a cash
payment of $6,803,000, of which a portion was used to repay $3,000,000 of the
Company's long-term debt and to pay a special $.10 per share dividend to
stockholders totaling $495,000. The remaining proceeds were used to pay the
expenses and income taxes which resulted from the sale and for other general
operating activities. The Company obtained stockholder approval of the sale and
a fairness opinion supporting the sale price.
Global's software products and services included perpetual licenses for the
right to use its software, maintenance and customer support services, training
and installation services, and professional consulting and customization
services.
Global's net income for the seven months ended January 31, 1994 has been
reflected as Net Income from Operations of Divested Segment in the accompanying
Consolidated Statements of Operations.
In July, 1995 the Company consummated an agreement with Global and management of
Global. Under the terms of the agreement, the Company received $165,000 in
exchange for consenting to Global's proposed disposition of certain assets
acquired after the Company's sale of Global on January 31, 1994. In addition,
the Company agreed to acknowledge that the disposition would not violate the
terms of the original sale agreement. The gain realized on the transaction in
fiscal year 1996 is included in Other Income in the Consolidated Statements of
Operations.
13
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. DEBT
On August 2, 1993, the Company entered into a new long-term financing agreement
(Agreement) with Marine Midland Business Loans, Inc. (Midland). Under the
Agreement, the Company borrowed approximately $7,000,000 and repaid its prior
long-term financing agreement. The Agreement is a Reducing Revolving Line of
Credit with an initial borrowing limit of $7,000,000, which is reduced monthly
over the seven year term of the loan. As a result of the sale of Global (Note
3), the borrowing limit was reduced by $2,000,000. Borrowings on the line are
restricted to the lesser of an amount based on certain asset levels or the
borrowing limit, which is subject to monthly reductions. As of June 30, 1996,
the Company could borrow an additional $1,722,000 up to the current borrowing
limit of $3,499,000. The line bears interest at Midland's prime borrowing rate
plus 1% (9.25% at June 30, 1996). 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 failed to meet the quarterly-calculated cash flow coverage covenant
in each quarter of fiscal 1996. In February, 1996 the Company received from
Midland a waiver of compliance with the cash flow coverage covenant requirement
from September 30, 1995 through December 31, 1996. In August, 1996 Midland
extended the waiver of compliance through June 30, 1997. In connection with
obtaining the aforementioned waiver, the Company has agreed to certain
conditions, including limiting the assets against which the Company may borrow
to certain accounts receivable and requiring the Company to maintain higher
tangible net worth and achieve certain annual operating results. Also, as long
as the Company is in violation of the cash flow coverage covenant, 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 of July 31, 1996, the
Company had complied with all conditions contained in the waiver, as well as
with all the other covenants contained in the Agreement.
There can be no assurance that the Company will not require additional waivers
in the future or, if required, that Midland will grant them. Furthermore, in the
event that management determines that, based on its projections, it is probable
that the Company will not be able to comply with any covenant contained in the
Agreement within twelve months after the balance sheet date for which compliance
with the covenant has been waived, the entire balance of the long-term debt
would have to be reclassified as short-term debt. Starting in August, 1997 the
Company may repay the entire debt balance with Midland with no prepayment
penalty.
Long-term debt maturities as of June 30, 1996 are as follows (in thousands):
1997 $ --
1998 --
1999 636
2000 978
2001 163
Thereafter --
- -------------------------------
$1,777
===============================
- -------------------------------------------------------------------------------
5. LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company has established a Leveraged Employee Stock Ownership Plan and Trust
(the Plan), which allows eligible Company employees to participate in ownership
of the Company. In June 1989, the Company loaned the Plan $500,000 which the
Plan used to acquire 114,285 newly issued shares of the Company's common stock
directly from the Company. The note bears interest at 9.23% per annum and
matures May 31, 2004.
The terms of the Plan require the Company to make a contribution equal to the
greater of i) the Board established percentage of pretax income before the
contribution (5% in 1996, 5% in 1995 and 0% in 1994) or ii) the annual interest
payable on the note. Contributions to the Plan were $9,000, $70,000, and $15,000
for the years ended June 30, 1996, 1995, and 1994, respectively. The
contributions represented principal repayments on the loan of $55,000 in 1995
and interest on the loan of $9,000, $15,000, and $15,000 in 1996, 1995, and
1994, respectively. The remaining loan balance as of June 30, 1996 was $102,000.
14
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. STOCK OPTIONS AND WARRANTS
On June 15, 1987, the Company entered into a long-term financing agreement which
was fully repaid in fiscal year 1994. Warrants to purchase 300,000 shares of the
Company's common stock were issued to the lender in connection with the issuance
of this debt; the current exercise price is $6.39 per share (subject to
adjustments up to $6.46 per share). The warrants remain outstanding and are
exercisable through June 1997.
At June 30, 1996, 610,121 shares of common stock were available for grant under
the Company's stock option plans (Note 14). 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. All options become exercisable evenly over three years starting one year
from the date of grant and expire seven years from the date of grant. Option
activity in fiscal years 1995 and 1996 was as follows:
Number of Option Price
Shares Range Per Share
- --------------------------------------------------------------------------------
Outstanding June 30, 1994 320,356 $2.313 - $3.813
Granted 88,500 $ 3.00 - $3.75
Exercised (17,500) $ 2.313 - $3.00
Canceled/Forfeited (28,500) $ 2.375 - $3.75
- --------------------------------------------------------------------------------
Outstanding June 30, 1995 362,856 $ 2.313 - $3.75
Granted 22,500 $ 2.66 - $2.813
Canceled/Forfeited (52,500) $ 2.375 - $3.50
- --------------------------------------------------------------------------------
Outstanding June 30, 1996 332,856 $ 2.313 - $3.75
================================================================================
Total Exercisable at June 30, 1996 250,856 $ 2.313 - $3.75
================================================================================
- --------------------------------------------------------------------------------
7. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in 1996 and 1995
is as follows (in thousands):
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenues $ 7,511 $ 9,678 $8,274 $ 9,948
Operating income (loss) (1,105) 121 (694) (61)
Net income (loss) (751) 7 (507) 238
================================================================================
Primary and fully diluted
net income (loss) per share $ (0.18) $ (0.00) $(0.12) $ 0.06
================================================================================
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenues $ 9,418 $10,408 $9,405 $10,607
Operating income 68 240 297 664
Net income 90 188 245 319
================================================================================
Primary and fully diluted
net income per share $ 0.02 $ 0.04 $ 0.06 $ 0.07
================================================================================
15
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires an
asset and liability approach to financial accounting and reporting for income
taxes. The difference between the financial statement and tax basis of assets,
liabilities and carryforwards is determined annually. Deferred income tax assets
and liabilities are computed for those differences that have future tax
consequences using the currently enacted tax laws and rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are
established, if necessary, to reduce the deferred tax asset to the amount that
will more likely than not be realized. Income tax expense is the current tax
payable or refundable for the period plus or minus the net change in deferred
tax assets and liabilities.
The benefit (provision) for income taxes is based on income (loss) from
continuing operations before income taxes as follows (in thousands):
1996 1995 1994
- -------------------------------------------------
Domestic $(1,160) $ 948 $1,169
Foreign (238) 373 106
- -------------------------------------------------
Income (loss) from
continuing operations
before income taxes $(1,398) $1,321 $1,275
=================================================
Components of the benefit (provision) for income taxes attributable to
continuing operations are as follows (in thousands):
1996 1995 1994
- -----------------------------------------------------------
Current benefit (provision):
Domestic $222 $(414) $(183)
Foreign 8 (74) 111
Deferred benefit (provision):
Domestic 155 9 (235)
Foreign -- -- (13)
- -----------------------------------------------------------
Benefit (provision) attributable to
continuing operations $385 $(479) $(320)
===========================================================
The benefit (provision) for income taxes is attributable to continuing
operations, operations of divested segment and gain on sale of segment as
follows (in thousands):
1996 1995 1994
- ----------------------------------------------------------
Benefit (provision) attributable
to continuing operations $385 $(479) $(320)
Provision allocated
to operations of
divested segment -- -- (453)
Provision allocated to
gain on sale of segment -- -- (900)
- ----------------------------------------------------------
Total benefit (provision)
for income taxes $385 $(479) $(1,673)
==========================================================
The benefit (provision) for income taxes attributable to continuing operations
differs from the amount determined by applying the federal statutory rate as
follows (in thousands):
1996 1995 1994
- -----------------------------------------------------
Tax benefit (provision)
computed at statutory rate $475 $(449) $(434)
State tax, net of federal
benefit (2) (25) (61)
Nondeductible expenses (90) (69) (71)
Income tax credits (72) 73 --
Non-benefitted losses of
foreign subsidiaries (33) (5) (39)
Recovery of prior year
foreign taxes paid 84 -- --
Change in valuation
allowance 37 (11) 270
Other (14) 7 15
- -----------------------------------------------------
Benefit (provision)
for income taxes $385 $(479) $(320)
=====================================================
The tax effects of significant temporary differences and credit carryforwards
that give rise to the net deferred tax asset as of June 30, 1996 and 1995 under
SFAS 109 are as follows (in thousands):
1996 1995
- --------------------------------------------
Allowances and other
accrued liabilities $1,401 $1,242
Tax credit carryforwards 88 160
Net operating loss
carryforwards 31 --
Valuation allowance (627) (664)
- --------------------------------------------
Net deferred tax asset $ 893 $ 738
============================================
At June 30, 1996, the Company has paid foreign advance corporation tax of
$88,000 which may be utilized to reduce future foreign taxes due and has a
foreign loss carryforward of $93,000 which can be carried forward indefinitely.
16
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. GEOGRAPHIC SEGMENT DATA
The Company's foreign subsidiaries are based in Europe and Canada and are
included in the continuing operations in the accompanying consolidated financial
statements. Financial information for the four wholly-owned foreign
subsidiaries, since their formation or acquisition by the Company, is
summarized below (in thousands):
1996 1995 1994
- -----------------------------------------------
Revenues $7,261 $8,879 $8,437
Income (loss) before
income taxes (238) 373 106
Identifiable assets 4,636 5,744 6,027
===============================================
The Company's export sales from continuing domestic operations were
approximately $6,753,000 in 1996, $7,265,000 in 1995 and $6,838,000 in 1994,
each representing 24%, 23%, and 20%, respectively, of total sales from
continuing 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. COMMITMENTS AND CONTINGENCIES
LEASES
At June 30, 1996, the Company maintained leases for certain facilities and
equipment. Minimum future rental commitments under all noncancelable operating
leases, net of minimum rental receivables totaling $33,000 under related
subleases, are as follows (in thousands):
Fiscal Year Amount
- ----------------------
1997 $ 741
1998 476
1999 369
2000 143
2001 139
Thereafter 1,469
- ----------------------
$3,337
======================
Net rental expense was $822,000, $1,035,000, and $951,000 in 1996, 1995 and
1994, respectively.
LITIGATION
The Company has been named as a defendant in certain actions that have arisen
out of the ordinary course of business. Management, based upon the advice of the
Company's legal counsel, believes the actions are without merit and will not
significantly affect the Company's consolidated financial position or results of
operations.
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 acquiror 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 $1,689,000 as of June 30, 1996.
17
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 to be paid based on the
achievement of specified returns on equity and share price growth plus dividends
paid over a three year performance period, 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 of certain subsidiaries and divisions of the Company.
The annual bonus, which is payable in cash following each fiscal year-end,
amounted to zero in 1996 and 1995 and $95,000 in 1994.
For the three year performance period ending June 30, 1996, the long-term
incentive bonus was payable at the end of the performance period in up to
210,000 shares of Company common stock. 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 are
reflected as adjustments to Additional paid-in capital in the accompanying
balance sheets. 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 ending June 30, 1996.
On August 15, 1996 the Board of Directors approved the issuance of stock options
to the executive officers to replace the expired long-term incentive plan (Note
14).
As of June 30, 1996, the maximum amount that could be required to be paid under
the termination clause of these agreements was approximately $766,000.
INTERNAL REVENUE SERVICE REVIEW
The Company has filed amended tax returns for fiscal years 1992 through 1994 to
change the tax treatment of certain intercompany transactions with foreign
subsidiaries. The Internal Revenue Service is currently reviewing the affected
tax returns. The Company anticipates that the outcome of these reviews will not
have a material adverse effect on the Company's financial position or results of
operations.
STOCK REPURCHASE PROGRAMS
During fiscal 1994, the Board of Directors approved a public stock repurchase
program whereby the Company could use up to $500,000 to repurchase its common
stock from stock available on the NASDAQ National Market System. Effective
June 30, 1995, the Board of Directors discontinued the public stock repurchase
program. As of June 30, 1995, 64,778 shares had been repurchased under this
program for approximately $196,000.
Also in fiscal 1994, the Board of Directors approved an employee stock
repurchase program whereby the Company may use up to $1,000,000 to repurchase
its common stock from its employees at the current market value. As of June 30,
1996, the Company had repurchased 256,106 shares for approximately $839,000,
with $161,000 available for future employee stock repurchases. The Company's
Agreement with Midland limits employee stock repurchases to $170,000 in calendar
year 1996 and $120,000 per calendar year thereafter, as long as the Company is
in violation of the cash flow coverage covenant contained in the Agreement (Note
4). As of June 30, 1996, $131,000 was available under the calendar year 1996
limit.
During the first quarter of fiscal 1995, the Board of Directors approved two
special stock repurchases. The Company purchased 141,000 shares of the Company's
common stock from a significant non-affiliated shareholder at a price equal to
the then fair market value, which totaled approximately $441,000. The Company
also repurchased 132,000 shares from a non-employee director of the Company at a
price equal to the then fair market value which totaled approximately $478,000.
All repurchased stock is being retained by the Company in its treasury.
Combined with previous purchases, the Company held treasury stock with a
total cost of $3,705,000 as of June 30, 1996.
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
which have never been issued.
18
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. RESTRUCTURING OF OPERATIONS
In the fourth quarter of fiscal 1996, the Company recorded a $338,000 pretax
charge 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 will be combined with the operations of HSL. In addition, the Company
has 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 are aimed at reducing costs and
enhancing productivity and efficiency. The restructuring provision is primarily
comprised of estimated costs for employee severance and other benefits and fixed
asset writeoffs. While these actions had been initiated as of June 30, 1996,
due to the timing of the payouts, a majority of the charge remains to be paid.
The Company currently anticipates that the remaining balance will be expended by
the end of fiscal 1997.
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
During fiscal year 1994 and in accordance with the Officer and Director Loan
Plan which was approved by stockholders on October 26, 1989, the Company made
loans of $504,000 to certain executive officers and members of the Board of
Directors. The proceeds of these loans were used to buy stock under stock
options which had been granted to the officers and directors in prior periods.
The loans have remaining unpaid balances of $133,000 at June 30, 1996 and are
presented in the Stockholders' Investment section in the Consolidated Balance
Sheets. The loans are full recourse, due on demand but no later than five years
from the date of issue, and accrue interest at the applicable federal rate.
During the second quarter of fiscal year 1995, the Board of Directors approved a
loan of up to $35,000 to be made by the Company after November 30, 1994 to a
non-employee director. The loan will be made for the purpose of purchasing
Hathaway common stock from stock available on the NASDAQ National Market System.
The loan had not been made as of June 30, 1996.
- --------------------------------------------------------------------------------
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, 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.
- --------------------------------------------------------------------------------
14. SUBSEQUENT EVENT (UNAUDITED)
On August 15, 1996 the Board of Directors approved a grant of 148,500 stock
options at an exercise price equal to the fair market value of $2.8125 at the
grant date to the Company's two executive officers. 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.
19
================================================================================
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, 1996 and
1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 31, 1996.
20
================================================================================
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,
Secretary and Chief Financial Officer
Marvin J. Fein
Private Investor
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 2:30
p.m., on Thursday, October 24, 1996 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 Accountants
ARTHUR ANDERSEN LLP
Denver, Colorado
Stock Data High Low
- ---------------------------------------------------
First Quarter 3 1/8 2 1/2
Second Quarter 2 7/8 1 7/8
Third Quarter 2 9/16 1 13/16
Fourth Quarter 4 1 11/16
===================================================
CORPORATE OFFICERS
Eugene E. Prince
Chairman of the Board,
President and Chief Executive Officer
Richard D. Smith
Executive Vice President, Treasurer,
Secretary and Chief Financial Officer
Herbert Franson
Assistant Treasurer, Corporate Controller
and Assistant Secretary
Susan M. Chiarmonte
Assistant Secretary
SUBSIDIARIES AND DIVISIONS
Domestic Subsidiaries and Divisions
Computer Optical Products, Inc.
Chatsworth, California
Hathaway Motion Control
Tulsa, Oklahoma
Hathaway Motors and Instruments
Tulsa, Oklahoma
Hathaway Power Instrumentation
Littleton, Colorado
Hathaway Process Instrumentation
Carrollton, Texas
Hathaway Automation Technology
Kent, Washington
International Subsidiaries
Hathaway, Inc.
Toronto, Canada
Hathaway Systems Limited
Belfast, Northern Ireland
Hathaway Instruments Limited
Hoddesdon, England
21
[LOGO OF HATHAWAY APPEARS HERE]
================================================================================
Hathaway Corporation
8228 Park Meadows Drive
Littleton, Colorado 80124
U.S.A.
Telephone: (303) 799-8200
Fax: (303) 799-8880
(NASDAQ/NMS: HATH)
5
1,000
YEAR
JUN-30-1996
JUL-01-1995
JUN-30-1996
5,237
201
6,614
321
4,972
18,453
7,837
6,110
21,139
5,080
1,777
0
0
100
14,182
21,139
35,411
35,411
21,926
21,926
0
87
194
(1,398)
(385)
(1,013)
0
0
0
(1,013)
(0.24)
(0.24)
Presented gross
