SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
DECEMBER 31, 2001 0-4041
(UNAUDITED)
HATHAWAY CORPORATION
(Incorporated Under the Laws of the State of Colorado)
8228 PARK MEADOWS DRIVE
LITTLETON, COLORADO 80124
TELEPHONE: (303) 799-8200
84-0518115
(IRS Employer Identification Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days.
YES /X/ NO / /
Number of Shares of the only class of Common Stock outstanding:
(4,660,688 as of December 31, 2001)
HATHAWAY CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets December 31, 2001
and June 30, 2001 (Unaudited).................................. 1
Condensed Consolidated Statements of Operations Three and
six months ended December 31, 2001 and 2000 (Unaudited)........ 2
Condensed Consolidated Statements of Cash Flows Six months
ended December 31, 2001 and 2000 (Unaudited) .................. 3
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................... 4
Item 2. Management's Discussion and Analysis of Operating Results and
Financial Condition............................................ 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 6. Exhibits and Reports on Form 8-K............................... 12
HATHAWAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, JUNE 30,
2001 2001
------------ --------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,412 $ 1,911
Restricted cash 409 346
Trade receivables, net of allowance for doubtful
accounts of $505 and $496 at December 31 and
June 30, 2001, respectively 6,931 7,708
Inventories, net 5,484 4,931
Deferred income taxes 608 229
Prepaid expenses and other 972 486
-------- --------
Total Current Assets 17,816 15,611
Property and equipment, net 1,867 1,781
Investment in joint ventures, net 129 2,459
Other 348 352
-------- --------
Total Assets $ 20,160 $ 20,203
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Line-of-credit $ -- $ 553
Accounts payable 1,275 1,583
Accrued liabilities and other 3,761 3,345
Income taxes payable 633 380
Product warranty reserve 521 514
-------- --------
Total Current Liabilities 6,190 6,375
-------- --------
Commitments and Contingencies
Stockholders' Investment:
Preferred stock, par value $1.00 per share,
authorized 5,000 shares; no shares outstanding -- --
Common stock, at aggregate stated value,
authorized 50,000 shares: 5,783 and 5,719 shares
issued at December 31 and June 30, 2001, respectively 100 100
Additional paid-in capital 11,415 11,230
Loans receivable for stock (133) (160)
Retained earnings 6,624 6,787
Cumulative translation adjustment (59) (152)
Treasury stock, at cost; 1,122 shares (3,977) (3,977)
-------- --------
Total Stockholders' Investment 13,970 13,828
-------- --------
Total Liabilities and Stockholders' Investment $ 20,160 $ 20,203
======== ========
1
HATHAWAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $ 10,659 $ 13,166 $ 19,764 $ 24,499
Cost of products sold 6,667 8,058 12,896 15,156
-------- -------- -------- --------
Gross margin 3,992 5,108 6,868 9,343
Operating costs and expenses:
Selling, general and administrative 2,786 3,096 5,388 5,908
Engineering and development 1,093 1,129 2,250 2,263
Restructuring charge -- 113 -- 441
Amortization and other 4 16 4 31
-------- -------- -------- --------
Total operating costs and expenses 3,883 4,354 7,642 8,643
-------- -------- -------- --------
Operating income (loss) 109 754 (774) 700
Other income (expenses), net:
Equity income from investments in joint ventures -- 175 -- 350
Gain on sale of investment in joint ventures -- -- 674 --
Interest and dividend income 22 15 47 46
Interest expense -- (14) (10) (54)
Other expenses, net (102) (36) (146) (53)
-------- -------- -------- --------
Total other (expense) income, net (80) 140 565 289
-------- -------- -------- --------
Income (loss) before income taxes 29 894 (209) 989
Benefit from (provision for) income taxes 46 (123) 46 (209)
-------- -------- -------- --------
Net income (loss) $ 75 $ 771 $ (163) $ 780
======== ======== ======== ========
Basic net income (loss) per share $ 0.02 $ 0.17 $ (0.04) $ 0.17
======== ======== ======== ========
Diluted net income (loss) per share $ 0.02 $ 0.16 $ (0.04) $ 0.16
======== ======== ======== ========
Basic weighted average common shares 4,632 4,477 4,623 4,473
======== ======== ======== ========
Diluted weighted average common shares 4,736 4,772 4,623 4,869
======== ======== ======== ========
2
HATHAWAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (163) $ 780
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 360 386
Provision for doubtful accounts 63 38
Provision for obsolete inventory 128 90
Equity income from investment in joint venture, net of dividend -- (157)
Gain on sale of investment in joint venture (674) --
Deferred income tax (benefit) provision (379) 62
Other 32 18
Changes in assets and liabilities:
(Increase) decrease in -
Restricted cash (55) (57)
Trade receivables 755 (1,735)
Inventories (652) (323)
Other current assets (497) (194)
Increase (decrease) in -
Accounts payable (319) (79)
Accrued liabilities and other 657 1,156
------- -------
Net cash used in operating activities (744) (15)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (461) (411)
Proceeds from sale of investment in joint venture 3,020 --
------- -------
Net cash provided by (used in) investing activities 2,559 (411)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line-of-credit (553) (1,116)
Borrowings on line-of-credit -- 79
Repayment on loan to employee stock ownership plan 27 74
Sale of stock to employee stock ownership plan 106 --
Sale of stock to employees through stock purchase plan 69 --
Proceeds from exercise of employee stock options 2 35
------- -------
Net cash used in financing activities (349) (928)
Effect of foreign exchange rate changes on cash 35 (32)
------- -------
Net increase (decrease) in cash and cash equivalents 1,501 (1,386)
Cash and cash equivalents at beginning of year 1,911 2,928
------- -------
Cash and cash equivalents at December 31 $ 3,412 $ 1,542
======= =======
3
HATHAWAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION AND PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Hathaway Corporation and its wholly-owned
subsidiaries (the Company). All significant inter-company accounts and
transactions have been eliminated in consolidation.
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission and include all adjustments which are,
in the opinion of management, necessary for a fair presentation. Certain
information and footnote disclosures normally included in financial
statements which are prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures herein are adequate to make the information presented not
misleading. The financial data for the interim periods may not necessarily
be indicative of results to be expected for the year.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States 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.
It is suggested that the accompanying condensed interim financial
statements be read in conjunction with the Consolidated Financial
Statements and related Notes to such statements included in the June 30,
2001 Annual Report and Form 10-K previously filed by the Company.
2. INVENTORIES
Inventories, valued at the lower of cost (first-in, first-out basis) or
market, are as follows (in thousands):
DECEMBER 31, JUNE 30,
2001 2001
------------ --------
Parts and raw materials, net $3,439 $3,251
Finished goods and work-in process, net 2,045 1,680
------ ------
$5,484 $4,931
====== ======
3. BASIC AND DILUTED EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (EPS), basic and diluted EPS have been computed
as follows (in thousands, except per share data):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
BASIC EPS COMPUTATION DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Net income (loss) $ 75 $ 771 $ (163) $ 780
Denominator:
Basic weighted average
outstanding shares 4,632 4,477 4,623 4,473
------- ------- ------- -------
Basic net income (loss) per share $ 0.02 $ 0.17 $ (0.04) $ 0.17
4
HATHAWAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. BASIC AND DILUTED EARNINGS PER SHARE (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DILUTED EPS COMPUTATION DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Net income (loss) $ 75 $ 771 $ (163) $ 780
Denominator:
Diluted weighted average
outstanding shares 4,736 4,772 4,623 4,869
------- ------- ------- -------
Diluted net income (loss) per share $ 0.02 $ 0.16 $ (0.04) $ 0.16
For the three months ended December 31, 2001, stock options to purchase
104,644 shares of common stock were included in the calculation of diluted
earnings per share. For the six months ended December 31, 2001, stock
options to purchase 490,915 shares were excluded in the calculation of
diluted loss per share since the result would have been anti-dilutive. For
the three and six months ended December 31, 2000, stock options to purchase
295,525 and 396,028 shares of common stock, respectively, were included in
the calculation of diluted earnings per share.
4. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires disclosure of operating segments, which as defined,
are components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The Company operates in two different segments: Power and Process Business
(Power and Process) and Motion Control Business (Motion Control).
Management has chosen to organize the Company around these segments based
on differences in products and services.
The following provide information on the Company's segments (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
--------------------- --------------------- --------------------- ---------------------
POWER POWER POWER POWER
AND MOTION AND MOTION AND MOTION AND MOTION
PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL
-------- -------- -------- -------- -------- -------- -------- --------
Revenues from
external customers $ 6,437 $ 4,222 $ 7,531 $ 5,635 $ 11,896 $ 7,868 $ 13,195 $ 11,304
Gain on sales of
investments in
joint ventures -- -- -- -- 674 -- -- --
Equity income from
investments in
joint ventures -- -- 175 -- -- -- 350 --
Income (loss) before
income taxes (523) 432 (246) 1,008 (1,022) 438 (1,505) 2,160
AS OF DECEMBER 31, 2001 AS OF JUNE 30, 2001
POWER AND MOTION POWER AND MOTION
PROCESS CONTROL PROCESS CONTROL
--------- ------- --------- -------
Identifiable assets $10,671 $ 6,978 $12,142 $ 6,532
5
HATHAWAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. SEGMENT INFORMATION (CONTINUED)
The following is a reconciliation of segment information to consolidated
information:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
----- ----- ----- -----
Segments' income before income
taxes $ (91) $ 762 $(584) $ 655
Corporate activities 120 132 375 334
----- ----- ----- -----
Consolidated income (loss)
before income taxes $ 29 $ 894 $(209) $ 989
===== ===== ===== =====
AS OF AS OF
DECEMBER 31, JUNE 30,
2001 2001
----------- -------
Segments' identifiable assets $17,649 $18,674
Corporate assets and eliminations 2,511 1,529
------- -------
Consolidated total assets $20,160 $20,203
======= =======
5. COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners.
Comprehensive income (loss) is computed as follows (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
----- ----- ----- -----
Net income (loss) $ 75 $ 771 $(163) $ 780
Translation adjustment (42) 73 93 (37)
----- ----- ----- -----
Comprehensive income
(loss) $ 33 $ 844 $ (70) $ 743
===== ===== ===== =====
6. INVESTMENT IN JOINT VENTURES
On July 5, 2001, the Company completed the sale of its 20% equity interest
in Hathaway Si Fang Protection and Control Company, Ltd. (Si Fang) for
$3,020,000 in cash. The sale became effective upon receipt of the net
proceeds in U.S. dollars and the required approvals from the State
Administration of Foreign Exchange in China. The Company sold its interest
to Beijing Si Fang Tongchuang Protection and Control Co., Ltd.
(Tongchuang), a Chinese company. Prior to the sale, Tongchuang held a 22%
interest in Si Fang.
The Company recorded a pretax gain on the sale, net of selling costs, of
$674,000, or $.15 per basic or diluted share, in the six months ending
December 31, 2001 and equity income of $350,000, or $.07 per fully diluted
share in the six months ending December 31, 2000. These amounts are
included in other income in the Company's consolidated financial
statements.
6
HATHAWAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting. The
use of the pooling-of-interest method of accounting for business
combinations is prohibited. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. The Company will
account for any future business combinations in accordance with SFAS No.
141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill and intangible
assets and requires that goodwill no longer be amortized but be tested for
impairment at least annually at the reporting unit level in accordance with
SFAS No. 142. Goodwill must also be reviewed for impairment when certain
events indicate that the goodwill may be impaired. Recognized intangible
assets should, generally, be amortized over their useful life and reviewed
for impairment in accordance with SFAS No. 121. Because the Company is a
noncalendar year-end company, the FASB has allowed adoption of SFAS No. 142
either in fiscal year 2002 or fiscal year 2003, except for provisions
related to the nonamortization and amortization of goodwill and intangible
assets acquired after June 30, 2001, which will be subject immediately to
the provisions of SFAS No. 142. The Company will adopt SFAS No. 142 on July
1, 2002. The Company has not yet quantified the effects of adopting SFAS
No. 142 on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 did not address the
accounting for a segment of a business accounted for as a discontinued
operation which resulted in two accounting models for long-lived assets to
be disposed of. SFAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 144 on
July 1, 2002, and has not yet quantified the effects of adopting SFAS No.
144 on its financial position or results of operations.
7
HATHAWAY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, ANY STATEMENT THAT MAY PREDICT, FORECAST, INDICATE, OR IMPLY
FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS, AND MAY CONTAIN THE WORD
"BELIEVE," "ANTICIPATE," "EXPECT," "PROJECT," "INTEND," "WILL CONTINUE," "WILL
LIKELY RESULT," "SHOULD" OR WORDS OR PHRASES OF SIMILAR MEANING. FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
MAY CAUSE THE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS,
THE FOLLOWING: INTERNATIONAL, NATIONAL AND LOCAL GENERAL BUSINESS AND ECONOMIC
CONDITIONS IN THE COMPANY'S MOTION CONTROL, PROCESS AND POWER MARKETS,
INTRODUCTION OF NEW TECHNOLOGIES, PRODUCTS AND COMPETITORS, THE ABILITY TO
PROTECT THE COMPANY'S INTELLECTUAL PROPERTY, THE ABILITY OF THE COMPANY TO
SUSTAIN, MANAGE OR FORECAST ITS GROWTH AND PRODUCT ACCEPTANCE, THE CONTINUED
SUCCESS OF THE COMPANY'S CUSTOMERS TO ALLOW THE COMPANY TO REALIZE REVENUES FROM
ITS ORDER BACKLOG AND TO SUPPORT THE COMPANY'S EXPECTED DELIVERY SCHEDULES, THE
CONTINUED VIABILITY OF THE COMPANY'S CUSTOMERS AND THEIR ABILITY TO ADAPT TO
CHANGING TECHNOLOGY AND PRODUCT DEMAND, THE ABILITY OF THE COMPANY TO MEET THE
TECHNICAL SPECIFICATIONS OF ITS CUSTOMERS, THE CONTINUED AVAILABILITY OF PARTS
AND COMPONENTS, INCREASED COMPETITION AND CHANGES IN COMPETITOR RESPONSES TO THE
COMPANY'S PRODUCTS AND SERVICES, CHANGES IN GOVERNMENT REGULATIONS, AVAILABILITY
OF FINANCING, THE ABILITY OF THE COMPANY'S LENDERS AND FINANCIAL INSTITUTIONS TO
PROVIDE ADDITIONAL FUNDS IF NEEDED AND THE ABILITY TO ATTRACT AND RETAIN
QUALIFIED PERSONNEL WHO CAN DESIGN NEW APPLICATIONS AND PRODUCTS FOR THE MOTION
CONTROL AND POWER INDUSTRIES. DEREGULATION AND CHANGES IN DEMOGRAPHIC PATTERNS
AND WEATHER CONDITIONS HAVE CHANGED THE PRODUCT NEEDS AND REQUIREMENTS OF THE
POWER INDUSTRY AND NEW PRODUCTS ARE BEING INTRODUCED ON A REGULAR BASIS. THEY
ARE OFTEN PRODUCTS FOR IMPROVING THE EFFICIENCY AND RELIABILITY OF THE POWER
SYSTEMS AND INCLUDE PRODUCTS THAT AUTOMATE AND IMPROVE THE AVAILABILITY OF
INFORMATION REGARDING THE PERFORMANCE OF THE POWER SYSTEM. THE COMPANY'S ABILITY
TO COMPETE IN THIS MARKET DEPENDS UPON ITS CAPACITY TO ANTICIPATE THE NEED FOR
NEW PRODUCTS, AND TO CONTINUE TO DESIGN AND MARKET THOSE PRODUCTS TO MEET
CUSTOMERS' NEEDS IN A COMPETITIVE WORLD.
NEW RISK FACTORS EMERGE FROM TIME TO TIME AND IT IS NOT POSSIBLE FOR MANAGEMENT
TO PREDICT ALL SUCH RISK FACTORS, NOR CAN IT ASSESS THE IMPACT OF ALL SUCH RISK
FACTORS ON ITS BUSINESS OR THE EXTENT TO WHICH ANY FACTOR, OR COMBINATION OF
FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN
ANY FORWARD-LOOKING STATEMENTS. THE COMPANY'S EXPECTATIONS, BELIEFS AND
PROJECTIONS ARE EXPRESSED IN GOOD FAITH AND ARE BELIEVED TO HAVE A REASONABLE
BASIS; HOWEVER, THE COMPANY MAKES NO ASSURANCE THAT EXPECTATIONS, BELIEFS OR
PROJECTIONS WILL BE ACHIEVED.
BECAUSE OF THE RISKS AND UNCERTAINTIES, INVESTORS SHOULD NOT PLACE UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS AS A PREDICTION OF ACTUAL RESULTS. THE
COMPANY HAS NO OBLIGATION OR INTENT TO RELEASE PUBLICLY ANY REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS, OR OTHERWISE.
OPERATING RESULTS
CONSOLIDATED RESULTS
For the second quarter ended December 31, 2001, the Company recognized net
income of $75,000, or $.02 per fully diluted share, compared to net income of
$771,000, or $.16 per fully diluted share, for the same period last year. Last
year's second quarter net income includes a pretax restructuring charge of
$113,000. Excluding the restructuring charge, net income for the second quarter
last year was $862,000 or $.18 per fully diluted share.
For the six months ended December 31, 2001, the Company recognized a net loss of
$163,000, or $.04 per fully diluted share, compared to net income of $780,000,
or $.16 per fully diluted share, for the same period last year. Last year's six
months net income includes a pretax restructuring charge of $441,000. Excluding
the restructuring charge, net income for the first six months last year was
$1,112,000 or $.23 per fully diluted share.
Total revenues for the second quarter of fiscal year 2002 decreased 19% to
$10,659,000 from $13,166,000 last year. Total revenues for the first half of
fiscal 2002 decreased 19% to $19,764,000 from $24,499,000 last year. Factors
contributing to lower revenues are described below in the discussion of segment
results.
8
HATHAWAY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
Total gross product margin as a percentage of revenues during the second quarter
this year decreased to 37% from 39% last year. Total gross product margin as a
percentage of revenues during the first six months this year decreased to 35%
from 38% last year. The decrease is due to the decrease in revenues and changes
in the mix of products sold.
Selling, general and administrative expenses for the quarter decreased 10% to
$2,786,000 this year from $3,096,000 last year and for the six months decreased
9% to $5,388,000 this year from $5,908,000 last year. The decrease is a result
of savings from continued cost reduction efforts by the Company.
Engineering and development expenses decreased 3% to $1,093,000 from $1,129,000
for the quarter ended December 31, 2001 and 2000, respectively while remaining
constant at $2,250,000 and $2,263,000 for the first six months of this year and
last year, respectively.
In the quarter ended December 31, 2001, the Company recognized a benefit from
income taxes of $46,000 compared to a $123,000 income tax provision for the same
period last year. In the first six months of fiscal year 2002, the Company
recognized a benefit from income taxes of $46,000 compared to a $209,000 income
tax provision for the same period last year. The effective rate used to
calculate income taxes is based on projected income for the year. The current
year amounts differ from statutory amounts primarily due to changes in the
valuation allowance because of utilization of tax loss and credit carryforwards
that have not been previously benefited. Prior year amounts differ from
statutory amounts primarily due to losses in foreign jurisdictions that cannot
be benefited.
MOTION CONTROL SEGMENT RESULTS
Pretax profit for Motion Control for the second quarter fiscal 2002 was $432,000
compared to $1,008,000 for the same period last year. For the first six months
of fiscal 2002 pretax profit for Motion Control was $438,000 compared to
$2,160,000 for the same period last year.
Revenues from Motion Control decreased 25% to $4,222,000 for the second quarter
this year from $5,635,000 for the second quarter last year. Revenues from Motion
Control for the six months decreased 30% to $7,868,000 this year from
$11,304,000 for the six months last year.
The decrease in profits and revenues from the Motion Control segment is
primarily attributable to the adverse effects of the continued economic
slowdown, especially in the telecommunications and semiconductors processing
industries.
Gross product margins from Motion Control decreased in the second quarter this
year to 33% from 40% last year and decreased in the first six months to 30% from
40% last year. The decrease is primarily due to the decrease in sales volume
resulting in less favorable absorption of fixed costs.
POWER AND PROCESS SEGMENT RESULTS
Power and Process reported a pretax loss of $523,000 for the quarter ended
December 31, 2001 compared to $133,000 pretax loss before a restructuring charge
of $113,000 for the second quarter last year. For the six months ended December
31, 2001, Power and Process reported a pretax loss of $1,022,000 compared to a
$1,064,000 pretax loss before restructuring charge of $441,000 for the same
period last year. The current year's six months results include a $674,000
pretax gain from the sale of the Company's interest in Hathaway Si Fang
Protection and Control Company, Ltd. (Si Fang), compared with $350,000 equity
income from Si Fang included in the first six months last year. Without the
income from the China joint venture or the restructuring charge, the Power and
Process segment reported a pretax loss of $1,696,000 for the first six months of
fiscal 2002 compared with a pretax loss of $1,414,000 for the first six months
of fiscal 2001.
During the first quarter of the current fiscal year, the Company completed the
sale of our 20% equity interest in Si Fang, the largest of our Chinese joint
venture investments. The sale price for our investment was $3,020,000. Si
9
HATHAWAY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
Fang had begun the process of becoming a publicly traded company in the Chinese
stock market and was encountering difficulties with a successful IPO due to the
foreign ownership by the Company. In addition, Si Fang had begun developing
product lines and engaging in business transactions which were not compatible
with Hathaway's business. Accordingly, the largest owner in Si Fang made an
offer to buy out Hathaway's interest and the Company felt this was the
appropriate time and structure to dispose of the investment. The proceeds
received from the sale will be used to look for other opportunities to expand
the Company, including investing in internal growth as well as pursuing
complementary acquisitions.
Power and Process revenues for the second quarter of fiscal 2002 were $6,437,000
compared to $7,531,000 for the same period last year and for the six months
ended December 31, 2001 were $11,896,000 compared to $13,195,000 for the same
period last year. The 10% decrease in Power and Process revenues for the first
six months this year compared to last year reflects a decline in revenues from
systems automation products partially offset by an 11% increase in revenues from
the power instrumentation products. The decrease in systems revenues is a result
of the Company's decision to shift the focus of the systems automation business
to power generation and transmission automation systems and away from industrial
automation applications.
Gross product margins from Power and Process for the second quarter ended
December 31, 2001 increased to 40% from 38% in the second quarter last year and
for the first six months this year increased to 38% from 37% for the same period
last year. The increase is primarily due to changes in the mix of products sold.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
(excluding restricted cash) increased $1,501,000 during the first six months of
fiscal 2002 to $3,412,000 at December 31, 2001, compared to a decrease of
$1,386,000 in the first six months of fiscal 2001. This difference is largely
due to differences in activities from our Si Fang joint venture and debt
repayments. During this year's first six months, $3,020,000 was received from
the sale of our 20% ownership in Si Fang, compared to $193,000 dividend received
last year. Repayments to pay off the Company's line of credit totaled $553,000
during the first six months this year compared to $1,037,000 net repayments in
the same period last year. Excluding the Si Fang activities and net repayments
on the line of credit, cash used in the first six months of fiscal 2002 was
$784,000 compared to $542,000 used during the same period last year.
The Company expects to fund its remaining fiscal 2002 working capital, capital
expenditure and debt service requirements from the existing cash balance of
$3,412,000 and the $2,250,000 available under the financing agreement at
December 31, 2001. The Company believes that such amounts are sufficient to fund
operations and working capital needs for at least the next twelve months. The
Company's financing agreement with Silicon Valley Bank matures on May 7, 2002
but will continue for successive additional terms of one year unless either
party gives notice of termination at least sixty days before the maturity date.
The Company has not received notice of termination and does not anticipate
receiving or giving such notice, however, if such notice was received, the
Company would pursue other lenders to meet its long-term financing needs.
Although the Company believes it would be successful in its efforts to obtain
alternate financing, there are no assurances that it would be successful in
doing so. An inability to obtain such alternate financing may have a material
adverse effect on the Company's results of operations and financial condition
and could require the Company to implement various strategic alternatives.
OUTLOOK
The Company's total sales order backlog at December 31, 2001 was $16,946,000,
down 27% from December 31 last year; however 75% of the decrease resulted from
the cancellation of a $4,750,000 Motion Control order that was received in March
2001 to supply motors and optical encoders to a customer in the fiber optic
telecommunications industry over an 18 month period. While the Company's
products are still designed into the customer's products, deliveries of our
products have been halted by the customer due to excess inventories and the
economic downturn. The Company believed it was important to have the order
cancelled and obtain reimbursement for the current inventory exposure and have
the customer release new orders at the time they are ready to start accepting
deliveries.
10
HATHAWAY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATING RESULTS AND FINANCIAL CONDITION
Currently, the Company is delivering products to this customer under other
orders and hopes to receive new orders as the economy recovers and the customer
begins accelerating delivery of its products.
At December 31, 2001, backlog for Motion Control orders was $8,758,000, down 25%
from the same time last year, due to the cancellation of the $4,750,000
telecommunications order described above. The Company believes that when
deliveries of tunable lasers and spectrum analyzers that use our products begin
to accelerate, we should be able to obtain new orders with higher margins.
Additionally, the Company has recently been successful in winning new orders for
Motion Control products from the military, medical, automotive and industrial
automation markets and will continue to explore other opportunities to expand
into new industry sectors and posture the Motion Control business for a quick
recovery as the economy strengthens.
Sales order backlog for Power and Process orders was $8,188,000 at December 31,
2001 which is down 29% from the same time last year, reflecting a decline in
systems automation backlog. The Company continues to be a leading supplier of
products and systems that provide solutions to the new challenges being faced by
the electric power companies and generator owners; however, the new power
systems business is not accelerating as quickly as the completion of the
industrial projects backlog. While the Company will continue to selectively
pursue industrial projects, the future growth in revenues for our systems
business is highly dependent on the continued growth in the power applications
side of this business. Power and Process continues to build momentum and future
opportunities with successful installations of its evaluation systems into the
transmission substations of major power companies.
During the second quarter of this fiscal year, the Company announced it had been
selected as the Lead Bidder to acquire the business and related assets of the
Industrial Devices Division (IDC) of Automation Solutions International LLC
(ASI), located in Petaluma, California. ASI is currently a debtor-in-possession
in a pending Chapter 11 bankruptcy case and the sale of IDC is being negotiated
in accordance with bankruptcy procedures. The Company was selected by ASI, its
secured creditor and Creditors' Committee as the Lead Bidder in a bidding
process that was completed on Monday, December 17, 2001. The bankruptcy sale
procedures called for an auction on February 5, 2002 where other bids were
entertained. The Company was outbid during the auction process and will,
therefore, receive a break-up fee of $140,000, equal to five percent of the
Company's previous bid. The Company believed that the acquisition of IDC's
product lines would have enhanced the motion control segment, but was not
prepared to pay more than what was believed to be the fair value of the
business. The Company will continue to explore other opportunities to enhance
the motion control product lines.
The continued economic slowdown has adversely affected the Company's revenues
and profits, especially in the motion control segment, and continued general
economic softness may result in future adverse impacts on the Company's revenue
and profits. The Company responded quickly to the market conditions by reducing
costs wherever possible and developing applications for the motion control
products into new markets and broader segments of existing markets. The Company
believes it is well positioned for growth as the economy strengthens and demand
for our customers' products accelerates. We will continue to actively seek new
opportunities to mitigate the effects of the economy on our business.
The Company's power and process segment has not been as affected by changes in
the state of the economy. The power instrumentation business has experienced a
growth in revenues this year over last year. However, the segment's total
revenues have declined due to a significant decrease in systems automation
revenues as a result of our decision to shift the focus of the systems
automation business to power generation and transmission automation systems and
away from industrial automation applications. The new power business is not
accelerating as quickly as the industrial projects are completed. The future
growth in revenues for the systems automation business is highly dependent on
the continued growth in the power applications side of this business. Recent
successful installations of our technology in evaluation systems have created
momentum and growth opportunities. We continue to generate new opportunities for
expansion of our products into the power industry and are striving to bring
those opportunities to fruition. We are also evaluating several alternatives as
to how to return the Company to growth and profitability as quickly as possible.
11
HATHAWAY CORPORATION
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual stockholders' meeting on October 25, 2001. The
stockholders elected E.E. Prince, R.D. Smith, D.D. Hock, G.D. Hubbard and
G.J. Pilmanis to serve on the Board of Directors for the coming year. The
vote tabulation was as follows:
1) Election of Directors
NUMBER OF VOTES
WITHHELD OR TOTAL SHARES % OF SHARES
NOMINEE FOR AGAINST OUTSTANDING VOTING FOR
------------- --------- ----------- ----------- -----------
E.E. Prince 4,293,931 63,451 4,630,587 92%
R.D. Smith 4,294,033 63,349 4,630,587 92%
G.D. Hubbard 4,293,931 63,451 4,630,587 92%
D.D. Hock 4,293,931 63,451 4,630,587 92%
G.J. Pilmanis 4,277,931 79,451 4,630,587 92%
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Agreement for Assignment of Equity Interest in Hathaway Si Fang
Protection and Control Co., Ltd. *
13. Annual Report containing Notes to Consolidated Financial
Statements in the Registrant's June 30, 2001 Annual Report to
Stockholders. *
* These documents were filed with the Securities and Exchange
Commission and are incorporated herein by reference.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the six months
ended December 31, 2001:
1. Form 8-K dated July 5, 2001 reporting the sale of the Company's
20% equity interest in Hathaway Si Fang Protection and Control
Co., Ltd. (Si Fang) for $3,020,000 in cash.
2. Amendment No. 1 to Form 8-K dated August 31, 2001 presenting
unaudited pro forma financial information to give effect to the
sale of the Company's joint venture investment in Si Fang as if
it had occurred on July 1, 1999. The financial statements
included were the unaudited pro forma consolidated balance sheet
as of March 31, 2001 and the unaudited pro forma consolidated
statements of operations for the year ended June 30, 2000 and the
nine months ended March 31, 2001.
3. Form 8-K dated December 19, 2001, reporting the Company's
announcement that it has been selected as the Lead Bidder to
acquire the business and related assets of the Industrial Devices
Division (IDC) of Automation Solutions International LLC (ASI),
located in Petaluma, California.
12
SIGNATURES
Pursuant to the requirements 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
DATE: February 11, 2002 By: /s/ Richard D. Smith
---------------------------------
President, Chief Executive Officer
and Chief Financial Officer
13
