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, 2000 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: (4,479,000 as of December 31, 2000)
HATHAWAY CORPORATION INDEX <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 2000 and June 30, 2000 (Unaudited)................... 1 Condensed Consolidated Statements of Operations Three and Six months ended December 31, 2000 and 1999 (Unaudited).................................................. 2 Condensed Consolidated Statements of Cash Flows Six months ended December 31, 2000 and 1999 (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 </TABLE>
HATHAWAY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 2000 2000 ------------ -------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 1,542 $ 2,928 Restricted cash 324 270 Trade receivables, net 9,674 7,976 Inventories, net 4,764 4,550 Other current assets 922 962 -------- -------- Total current assets 17,226 16,686 Property and equipment, net 1,736 1,707 Investment in joint ventures, net 1,639 1,482 Cost in excess of net assets acquired, net 31 59 Other long-term assets 177 3 -------- -------- Total Assets $ 20,809 $ 19,937 ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Line of credit $ 509 $ 1,546 Accounts payable 1,823 1,879 Accrued liabilities and other 6,590 5,205 -------- -------- Total Liabilities 8,922 8,630 -------- -------- Stockholders' Investment: Common stock 100 100 Additional paid-in capital 11,214 10,594 Loans receivable for stock (659) (235) Retained earnings 5,212 4,791 Cumulative translation adjustment (3) 34 Treasury stock (3,977) (3,977) -------- -------- Total Stockholders' Investment 11,887 11,307 -------- -------- Total Liabilities and Stockholders' Investment $ 20,809 $ 19,937 ======== ======== </TABLE> 1
HATHAWAY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenues $ 13,166 $ 11,151 $ 24,499 $ 20,056 Cost of products sold 8,058 6,736 15,156 12,499 -------- -------- -------- -------- Gross Margin 5,108 4,415 9,343 7,557 Operating costs and expenses: Selling 1,605 1,467 3,221 2,962 General and administrative 1,491 1,343 2,687 2,584 Engineering and development 1,129 1,083 2,263 2,227 Restructuring charge 113 -- 441 -- Amortization of intangibles and other 16 21 31 45 -------- -------- -------- -------- Total operating costs and expenses 4,354 3,914 8,643 7,818 -------- -------- -------- -------- Operating income (loss) 754 501 700 (261) Other income (expenses), net: Equity income from investments in joint ventures 175 100 350 200 Interest and dividend income 15 14 46 32 Interest expense (14) (36) (54) (71) Other income (expenses), net (36) 116 (53) 32 -------- -------- -------- -------- Total other income, net 140 194 289 193 -------- -------- -------- -------- Income (loss) before income taxes 894 695 989 (68) Provision for income taxes (123) (78) (209) (36) -------- -------- -------- -------- Net income (loss) $ 771 $ 617 $ 780 $ (104) ======== ======== ======== ======== Basic net income (loss) per share $ 0.17 $ 0.14 $ 0.17 $ (0.02) ======== ======== ======== ======== Diluted net income (loss) per share $ 0.16 $ 0.14 $ 0.16 $ (0.02) ======== ======== ======== ======== Basic weighted average shares outstanding 4,477 4,283 4,473 4,283 ======== ======== ======== ======== Diluted weighted average shares outstanding 4,772 4,297 4,869 4,283 ======== ======== ======== ======== </TABLE> 2
HATHAWAY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 1999 ------- ------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 780 $ (104) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 386 438 Equity income from investment in joint venture (350) (200) Gain on partial sale of investment in joint venture -- (126) Other 65 131 Changes in assets and liabilities: (Increase) decrease in - Restricted cash (57) 438 Trade receivables (1,735) (600) Inventories (242) (1,042) Other current assets (132) 207 Increase (decrease) in - Accounts payable (79) 194 Accrued liabilities and other 1,156 229 ------- ------- Net cash used in operating activities (208) (435) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (411) (272) Investment in joint venture -- (425) Proceeds from partial sale of investment in joint venture -- 143 Dividends from joint venture 193 139 ------- ------- Net cash used in investing activities (218) (415) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments on line of credit (1,116) (65) Borrowings on line of credit 79 200 Repayment on loan to employee stock ownership plan 74 -- Proceeds from exercise of employee stock options 35 -- ------- ------- Net cash provided by (used in) financing activities (928) 135 Effect of foreign exchange rate changes on cash (32) 7 ------- ------- Net decrease in cash and cash equivalents (1,386) (708) Cash and cash equivalents at June 30 2,928 2,416 ------- ------- Cash and cash equivalents at December 31 $ 1,542 $ 1,708 ======= ======= </TABLE> 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. Certain reclassifications have been made to prior year balances in order to conform with the current year's presentation. 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 generally accepted accounting principles 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 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. 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, 2000 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): <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 2000 2000 ------------ -------- <S> <C> <C> Parts and raw materials, net $2,915 $2,827 Finished goods and work-in process, net 1,849 1,723 ------ ------ $4,764 $4,550 ====== ====== </TABLE> 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): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED BASIC EPS COMPUTATION DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------- ------- ------- ------- <S> <C> <C> <C> <C> Numerator: Net income (loss) $ 771 $ 617 $ 780 $ (104) Denominator: Basic weighted average outstanding shares 4,477 4,283 4,473 4,283 ------- ------- ------- ------- Basic net income (loss) per share $ 0.17 $ 0.14 $ 0.17 $ (0.02) </TABLE> 4
HATHAWAY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. BASIC AND DILUTED EARNINGS PER SHARE (CONTINUED) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED DILUTED EPS COMPUTATION DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------- ------- ------- ------- <S> <C> <C> <C> <C> Numerator: $ 771 $ 617 $ 780 $ (104) Net income (loss) Denominator: Diluted weighted average outstanding shares 4,772 4,297 4,869 4,283 ------- ------- ------- ------- Diluted net income (loss) per share $ 0.16 $ 0.14 $ 0.16 $ (0.02) </TABLE> 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. For the three months ended December 31, 1999, stock options to purchase 13,156 shares of common stock were included in the calculation of diluted earnings per share. For the six months ended December 31, 1999, stock options to purchase 885,004 shares were excluded in the calculation of diluted loss per share since the result would have been anti-dilutive. 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): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 --------------------- -------------------- --------------------- --------------------- POWER POWER POWER POWER AND MOTION AND MOTION AND MOTION AND MOTION PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL -------- -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues from $ 7,531 $ 5,635 $ 6,640 $ 4,511 $ 13,195 $ 11,304 $ 11,478 $ 8,578 external customers Equity income from investments in joint ventures 175 -- 100 -- 350 -- 200 -- Income (loss) before income taxes (246) 1,008 35 721 (1,505) 2,160 (1,327) 1,346 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, 2000 AS OF JUNE 30, 2000 POWER AND MOTION POWER AND MOTION PROCESS CONTROL PROCESS CONTROL --------- ------- --------- ------- <S> <C> <C> <C> <C> Identifiable assets $11,945 $ 8,012 $10,620 $ 7,134 </TABLE> 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: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------ ------ ------ ------ <S> <C> <C> <C> <C> Segments' income before income taxes $ 762 $ 756 $ 655 $ 19 Corporate activities 132 (61) 334 (87) ----- ----- ----- ----- Consolidated income (loss) before income taxes $ 894 $ 695 $ 989 $ (68) ===== ===== ===== ===== </TABLE> <TABLE> <CAPTION> AS OF AS OF DECEMBER 31, JUNE 30, 2000 2000 ------------ -------- <S> <C> <C> Segments' identifiable assets $19,957 $17,754 Corporate assets and eliminations 852 2,183 ------- ------- Consolidated total assets $20,809 $19,937 ======= ======= </TABLE> 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): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net income (loss) $ 771 $ 617 $ 780 $(104) Translation adjustment 73 (60) (37) 76 ----- ----- ----- ----- Comprehensive income (loss) $ 844 $ 557 $ 743 $ (28) ===== ===== ===== ===== </TABLE> 6. RESTRUCTURING CHARGE As a result of changing business conditions in the process instrumentation business, the Company restructured its process instrumentation operations in Dallas. The restructuring consisted of retaining a portion of the business in Dallas, moving the manufacturing of two product lines to its power instrumentation manufacturing facilities in Seattle and selling the remaining two product lines. As anticipated, the Company's restructuring is substantially completed at the end of the second fiscal quarter ended December 31, 2000. 6
HATHAWAY CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. RESTRUCTURING CHARGE (CONTINUED) The costs associated with the restructuring were $113,000 and $441,000 for the three and six months ended December 31, 2000, respectively. The total of $441,000 includes $282,000 of employee termination expenses related to 15 employees and $159,000 of closure and moving costs. The restructuring charge has been included in operating costs and expenses in the condensed consolidated statement of operations. During the second quarter, $173,000 of the expenses were paid resulting in an accrual balance of $268,000 as of December 31, 2000. 7. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Derivative Instruments and Hedging Activities," ("SFAS 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It also specifies the accounting for changes in the fair value of a derivative instrument depending on the intended use of the instrument and whether (and how) it is designated as a hedge. SFAS 133 was effective for all fiscal years beginning after June 15, 1999. During 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133," ("SFAS 137") which delayed the effective date of SFAS 133 until all fiscal years beginning after June 15, 2000. Through December 31, 2000, the Company had not entered into any transactions involving derivative financial instruments and, therefore, the adoption of SFAS 133 has had no financial statement impact. In December 1999, the SEC staff released Staff Accounting Bulleting No. 101, "Revenue Recognition," ("SAB 101") to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. In order to recognize revenue, there must be persuasive evidence that an arrangement exists, delivery must have occurred or services must have been rendered, the selling price must be fixed or determinable, and collectibility must be reasonably assured. The accounting and disclosures described in SAB 101 must be applied no later than the fourth fiscal quarter of the Company's current fiscal year. The Company believes that adoption of SAB No. 101 will not materially impact its financial statements. However, implementation guidelines for this bulletin, as well as potential new bulletins, could result in unanticipated changes to the Company's current revenue recognition policies. These changes could affect the timing of the Company's future revenue recognition and results of operations. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 clarifies the applications of APB No. 25 for certain issues related to equity-based instruments issued to employees. FIN 44 is effective on July 1, 2000, except for certain transactions, and is applied on a prospective basis. 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 WHICH MAY CAUSE THE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, THE FOLLOWING: INTERNATIONAL, NATIONAL AND LOCAL GENERAL BUSINESS AND ECONOMIC CONDITIONS; THE WORLDWIDE POWER AND PROCESS PRODUCT MARKET, INCLUDING A MOVEMENT FROM SINGLE PURPOSE PRODUCTS TO THOSE WITH MULTIPLE USES; THE MOTION CONTROL PRODUCT MARKET; THE ABILITY OF THE COMPANY TO SUSTAIN, MANAGE OR FORECAST ITS GROWTH AND PRODUCT ACCEPTANCE; NEW PRODUCT DEVELOPMENT AND INTRODUCTION; INCREASED COMPETITION AND CHANGES IN COMPETITOR RESPONSES TO THE COMPANY'S PRODUCTS AND SERVICES; 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 ABILITY TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY; BUSINESS DISRUPTION; CHANGES IN GOVERNMENT REGULATIONS; CONTINUED UNCERTAINTY ABOUT THE IMPACT OF DEREGULATION OF THE POWER BUSINESS ON THE COMPANY'S PRODUCTS; THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; AVAILABILITY OF FINANCING; AND OTHER FACTORS REFERENCED OR INCORPORATED HEREIN. THE COMPANY OPERATES IN A VERY COMPETITIVE ENVIRONMENT. 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 For the second quarter ended December 31, 2000, the Company recognized net income of $771,000, or $.16 per fully diluted share, compared to net income of $617,000, or $.14 per fully diluted share, for the same period last year. This years second quarter net income includes a pretax restructuring charge of $113,000. Excluding the restructuring charge, net income for the second quarter was $862,000 or $.18 per fully diluted share. Revenues increased 18% in the second quarter to $13,166,000 this year from $11,151,000 last year. The 18% increase was due to a 25% increase in revenues from the Company's motion control products and a 13% increase in revenues from the Company's power and process systems and instrumentation products. The Company recognized net income of $780,000, or $.16 per fully diluted share, for the six months ended December 31, 2000, compared to a net loss of $104,000, or $.02 per fully diluted share, for the six months ended December 31, 1999. This year's six months net income includes a pretax restructuring charge of $441,000. Excluding the restructuring charge, net income for the six months was $1,112,000 or $.23 per fully diluted share. Revenues for the first six months increased by 22% to $24,499,000 in fiscal 2001 from $20,056,000 in fiscal 2000. The 22% increase was due to a 32% increase in revenues from the Company's motion control products and a 15% increase in revenues from the Company's power and process systems and instrumentation products. Revenues from Motion Control for the second quarter increased 25% to $5,635,000 for the second quarter this year from $4,511,000 for the second quarter last year. Revenues for the six months increased 32% to $11,304,000 for the current six-month period from $8,578,000 for the six months last year. Pretax profit for Motion Control for the second quarter was $1,008,000 compared to $721,000 last year and, for the six months, pretax profit was $2,160,000 compared to $1,346,000 last year. At December 31, 2000, backlog for Motion Control orders was 76% higher than at the end of the second quarter last year and orders received during the three and six months ended December 31, 8
HATHAWAY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION 2000 were 57% and 35% higher than the same periods last year, respectively. The growth in Motion Control is a reflection of expansion into new markets and broader segments of existing markets. Power and Process revenues increased to $7,531,000 for the second quarter this year from $6,640,000 for the second quarter last year, a 13% increase, and to $13,195,000 for the first six months this year from $11,478,000 for the six months last year, a 15% increase. Power and process realized a pretax loss of $246,000 for the second quarter this year compared to a profit of $35,000 last year. For the six months, power and process had a pretax loss of $1,505,000 compared to a loss of $1,327,000 last year. The segment's six months results ending December 31, 2000 contain a pretax charge of $441,000 for restructuring the process instrumentation business. Excluding the restructuring charge, pretax loss for Power and Process for the first six months was $1,064,000, a 20% improvement over the same period last year. Orders received for Power and Process for the second quarter were 8% higher that the second quarter last year . Sales order backlog for the segment at December 31, 2000 was $11,500,000 which is 5% lower than at the same time last year. This decrease in backlog reflects a 16% increase in backlog for instrumentation products offset by a 23% decrease in systems automation backlog as compared to this time last year. Recently the systems automation business has been primarily focused on power industry projects which are typically delivered over a shorter time frame than the industrial automation products. Shifting focus to power projects has resulted in the decrease in backlog in the systems automation business and the continued growth in revenues for this business is highly dependent on the continued growth in the power applications side of the business. As a result of changing business conditions in the process instrumentation business, the Company restructured its process instrumentation operations in Dallas. The restructuring consisted of retaining a portion of the business in Dallas, moving the manufacturing of two product lines to its power instrumentation manufacturing facilities in Seattle and selling the remaining two product lines. As anticipated, the Company's restructuring is substantially complete at the end of the second fiscal quarter ended December 31, 2000. Sales to international customers increased to $4,409,000 in the second quarter of the current year from $3,337,000 in the second quarter of the prior year. In the first six months, sales to international customers increased to $7,947,000 in fiscal year 2001 from $5,825,000 in fiscal year 2000. Foreign sales represented 34% of total sales in the quarter ended December 31, 2000 compared to 30% for the same quarter in fiscal year 2000 and 32% and 29% of total sales were foreign sales for the six months ended December 31, 2000 and 1999, respectively. Gross product margins for the second quarter of fiscal 2001 decreased slightly to 39% from 40% for the same quarter last year, primarily due to the restructuring. Gross product margin remained constant at 38% for the six months ended December 31, 2000 and 1999. Selling increased 9% in the second quarter and first six months compared to last year, primarily due to increased sales and marketing activities. General and administrative, engineering and development expenses and amortization of intangibles increased 8% in the second quarter and 3% in the first six months, as compared to the same periods last year, primarily in support of new product development efforts. During the first six months of fiscal year 2001, the Company recognized a portion of its share of estimated income from its Chinese joint ventures. The amounts recognized were $175,000 and $350,000 in the quarter and six months ended December 31, 2000, respectively, as compared to $100,000 and $200,000 in the same periods last year. The increase reflects the improvement in revenues and profits being experienced by the Hathaway Si Fang joint venture. For the quarter ended December 31, 2000, the Company recognized a $123,000 provision for income taxes compared to $78,000 for the same period last year. For the first six months this year, a provision of $209,000 was recognized compared to $36,000 for the first six months last year. The amounts are based on projected taxable income and differ from statutory amounts primarily due to the mix of income and losses in domestic vs. foreign jurisdictions. 9
HATHAWAY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity position as measured by cash and cash equivalents (excluding restricted cash) decreased $1,386,000 during the first six months of fiscal 2001 to a balance of $1,542,000 at December 31, 2000, compared to a decrease of $708,000 in the first six months of fiscal 2000. During the six months ending December 31, 2000 net repayments made on the Company's line of credit totaled $1,008,000 compared to net borrowings of $135,000 in the same period last year. Excluding the changes in the line of credit, cash used in the first six months of fiscal 2001 and 2000 was $378,000 and $843,000, respectively. In the first six months of fiscal 2001, $162,000 was used for operating activities, compared to $435,000 used in operations for the same period last fiscal year. The decreased use of cash was due to net income of $780,000 in the first six months this year compared to a net loss of $104,000 in the first six months last year partially offset by changes in working capital balances. Receivables increased $1,735,000 during the first six months of fiscal 2001 due to an increase in sales during the period. Inventories increased $242,000 due to additional inventory purchases made to fulfil the Company's increased backlog of orders and anticipated future orders. Cash of $218,000 was used by investing activities in the first six months of fiscal 2001, compared to $415,000 used by investing activities last year. The variance was primarily due to the additional investment in the Company's Si Fang joint venture in fiscal 2000. Financing activities used $974,000 in the first six months of fiscal 2001 compared to $135,000 provided in fiscal 2000. The increase use of cash was due to an increase in repayments on the line of credit during the first six months as explained above partially offset by proceeds from the exercise of employee stock options. The Company's remaining fiscal 2001 working capital, capital expenditure and debt service requirements are expected to be funded from future cash flows from operations, the existing cash balance of $1,542,000 and the $2,491,000 available under the long-term financing agreement. 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 long-term financing agreement with Silicon Valley Bank matures on May 7, 2001 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 will be successful in doing so. An inability to obtain such alternate financing may have a material adverse effect on the Company's results of operations and financial condition and could require the Company to implement various strategic alternatives. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Derivative Instruments and Hedging Activities," ("SFAS 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It also specifies the accounting for changes in the fair value of a derivative instrument depending on the intended use of the instrument and whether (and how) it is designated as a hedge. SFAS 133 was effective for all fiscal years beginning after June 15, 1999. During 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS 133," ("SFAS 137") which delayed the effective date of SFAS 133 until all fiscal years beginning after June 15, 2000. Through December 31,2000, the Company had not entered into any transactions involving derivative financial instruments and, therefore, the adoption of SFAS 133 has had no financial statement impact. In December 1999, the SEC staff released Staff Accounting Bulleting No. 101, "Revenue Recognition," ("SAB 101") to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. In order to recognize revenue, there must be persuasive evidence that an arrangement exists, delivery must have 10
HATHAWAY CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION occurred or services must have been rendered, the selling price must be fixed or determinable, and collectibility must be reasonably assured. The accounting and disclosures described in SAB 101 must be applied no later than the fourth fiscal quarter of the Company's current fiscal year. The Company believes that adoption of SAB No. 101 will not materially impact its financial statements. However, implementation guidelines for this bulletin, as well as potential new bulletins, could result in unanticipated changes to the Company's current revenue recognition policies. These changes could affect the timing of the Company's future revenue recognition and results of operations. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"). FIN 44 clarifies the applications of APB No. 25 for certain issues related to equity-based instruments issued to employees. FIN 44 is effective on July 1, 2000, except for certain transactions, and is applied on a prospective basis. 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 26, 2000. 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 <TABLE> <CAPTION> Number of Votes Witheld or Total Shares % of Shares Nominee For Against Outstanding Voting For ------------- --------- ---------- ------------ ----------- <S> <C> <C> <C> <C> E.E. Prince 3,890,355 237,645 4,475,601 87% D.D. Hock 3,939,779 188,221 4,475,601 88% G.D. Hubbard 3,939,089 188,911 4,475,601 88% G.J. Pilmanis 3,939,284 188,716 4,475,601 88% R.D. Smith 3,941,074 186,926 4,475,601 88% </TABLE> 2) Approval of 2000 Stock Incentive Plan <TABLE> <CAPTION> Withheld or Total Votes Broker For Against Counted Abstaining Non-Votes --------- ----------- ----------- ---------- --------- <S> <C> <C> <C> <C> <C> Number of votes 1,498,351 336,291 1,834,642 47,711 2,245,647 % of votes counted 82% 18% 100% </TABLE> 3) Approval of 2001 Employee Stock Purchase Plan <TABLE> <CAPTION> Withheld or Total Votes Broker For Against Counted Abstaining Non-Votes --------- ----------- ----------- ---------- --------- <S> <C> <C> <C> <C> <C> Number of votes 1,661,380 160,057 1,821,437 60,916 2,245,647 % of votes counted 91% 9% 100% </TABLE> Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3. ii) Bylaws 13. Annual Report containing Notes to Consolidated Financial Statements in the Registrant's June 30, 2000 Annual Report to Stockholders. * * This document was filed with the Securities and Exchange Commission and is incorporated herein by reference. (b) Reports on Form 8-K There were no reports on Form 8-K filed in the three months ended December 31, 2000. 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 12, 2001 By: /s/ Richard D. Smith ---------------------------------- President, Chief Executive Officer and Chief Financial Officer 13