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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number: 0-4041
HATHAWAY CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0518115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8228 PARK MEADOWS DRIVE
LITTLETON, COLORADO 80124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 799-8200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
As of August 27, 1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of such stock approximated $3,722,000.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated September 17,
1998 are incorporated by reference in Part III of this Report.
--------------------------
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Table of Contents
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Part I. Page
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Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 4
Item 3. Legal Proceedings......................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders....................... 4
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 4
Item 6. Selected Financial Data................................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 6
Item 8. Financial Statements and Supplementary Data............................... 12
Report of Independent Public Accountants.................................. 13
Item 9. Disagreements on Accounting and Financial Disclosure...................... 33
PART III.
Item 10. Directors and Executive Officers of the Registrant........................ 33
Item 11. Executive Compensation.................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 33
Item 13. Certain Relationships and Related Transactions............................ 33
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 34
Consent of Independent Public Accountants................................. 37
Signatures................................................................ 38
Officers and Directors / Investor Information............................. 41
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PART I
ITEM 1. BUSINESS.
Hathaway Corporation (the Company) was organized under the laws of Colorado in
1962. The Company is engaged in the business of designing, manufacturing and
selling advanced systems and instrumentation to the worldwide power and
process industries, as well as motion control products to a broad spectrum of
customers throughout the world. The Company operates primarily in the United
States and the United Kingdom and has three joint venture investments in
China.
POWER AND PROCESS BUSINESS
Power Instrumentation
Hathaway's complete line of power instrumentation products helps ensure that
electric utilities provide high quality service to consumers of electricity.
With manufacturing facilities in Seattle and Belfast, Northern Ireland, and
sales and engineering functions in Seattle, Belfast and Denver, the power
products group produces a comprehensive and cost-effective range of products
designed exclusively for the power industry worldwide. Hathaway's equipment
assists the electric power system operators in operating and maintaining
proper system performance. The products, which are used to monitor and control
the power generation, transmission and distribution processes, include fault
recording products, fault location products, condition monitoring (circuit
breaker) products and remote terminal units (RTUs) for Supervisory Control and
Data Acquisition (SCADA) systems.
The Company also has three joint venture investments in China - Zibo Kehui
Electric Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company
(Si Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). The
Company holds a 25% interest in Kehui and Si Fang and a 40% interest in HPMS.
Kehui designs, manufactures and sells cable and overhead fault location, SCADA
systems and other test instruments in China. Si Fang designs, manufactures
and sells a new generation of digital protective relays, control equipment and
instrumentation products for substations in power transmission and
distribution systems in China. The Company will sell these products outside
of China. HPMS will design, manufacture and sell, under a license from the
Company, instrumentation products designed by the Company, to electric power
companies in China.
Process Instrumentation
The process instrumentation products group manufactures and markets products
for the process and power industries including monitoring systems, calibration
equipment and process measurement instrumentation. The monitoring systems,
called visual anunciators and sequential event recorders, provide both visual
and audible alarms and are used to control processes in various plants
including, chemical, petroleum, food and beverage, pulp and paper, and
textiles. Calibration equipment is used to test and adjust instrumentation
for proper and accurate operation in measuring electricity, temperatures and
pressure within the process industry. Process measurement instrumentation
includes signal conditioning products and transducers used to measure such
variables as temperature, voltage, current and power in various industrial
applications.
Systems Automation
Effective September 30, 1996, the Company acquired a 100% partnership interest
in Tate Integrated Systems, L.P. and 100% of the stock of its sole general
partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS").
The ownership interests were acquired for an adjusted negotiated price of
$1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable of TIS
were collected during fiscal year 1998. Hathaway purchased the stock and
partnership interest from Tate Engineering Services Corporation and its
affiliate, Tate Engineering Services, Inc., both divisions of Tate Industries,
a privately held company.
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TIS has operated under the ownership of Hathaway Industrial Automation (HIA),
a newly formed wholly-owned subsidiary of the Company, since October 1, 1996.
HIA is located near Baltimore, Maryland and is a full service supplier of
process automation systems for industrial applications. HIA has developed a
state-of-the-art software system for Supervisory Control and Data Acquisition
(SCADA) and Distributed Control Systems (DCS). The HIA system has been used
to fully automate such industrial applications as water and wastewater
treatment plants, glass manufacturing plants, oil and gas terminals and tank
farm facilities. In addition to expanding into its traditional process
markets, HIA's system is being marketed to the power utility industry. The
Company expects to team the HIA system with certain existing Hathaway products
and target the combined product at substation automation and integration
applications used in power transmission and distribution facilities.
Restructuring
In the fourth quarter of fiscal 1996 the Company decided to reorganize its
Canadian and U.K. operations. Effective June 30, 1996 the net assets and
substantially all operations of Hathaway Instruments Limited (HIL), the
Company's subsidiary located in Hoddesdon, England, were transferred to
Hathaway Systems Limited (HSL), the Company's Belfast, Northern Ireland
subsidiary. In connection with the asset transfer, substantially all
operations of HIL were combined with the operations of HSL. In addition, the
Company closed its Toronto, Canada facility and combined substantially all of
its operations with the operations of Hathaway Process Instrumentation
Corporation, the Carrolton, Texas subsidiary. The initiatives were aimed at
reducing costs and enhancing productivity and efficiency. The restructuring
provision of $338,000 recorded in 1996 was primarily comprised of estimated
costs for employee severance benefits and fixed asset writeoffs. The payouts
related to the restructuring charge were made in fiscal years 1996 and 1997,
and the related restructuring accrual fully utilized.
In the first quarter of fiscal year 1997, management decided to restructure
the power products manufacturing operations to produce operating efficiencies
and to better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Denver was consolidated in fiscal year 1997
into two manufacturing facilities located in Seattle, Washington and Belfast,
Northern Ireland.
MOTION CONTROL BUSINESS
The motion control group offers quality, cost-effective products that suit a
wide range of applications in the industrial, medical, military and aerospace
sectors, as well as in manufacturing of analytical instruments and computer
peripherals. The end products using Hathaway technology include special
industrial and technical products such as satellite tracking systems, MRI
scanners, and high definition printers.
The motion control group is organized into one division and two subsidiaries,
respectively, of Hathaway Motion Control Corporation, a wholly-owned
subsidiary of the Company: Motors and Instruments Division (MI Tulsa), Emoteq
Corporation (Emoteq Tulsa) and Computer Optical Products, Inc., (COPI -
Chatsworth, CA).
Subsequent to fiscal year 1998, Emoteq Corporation acquired all of the
outstanding shares of Ashurst Logistic Electronics Limited of Bournemouth,
England (Ashurst) for $289,000. Ashurst manufactures drive electronics and
position controllers for a variety of motor technologies as well as a family
of static frequency converters for military and aerospace applications and has
extensive experience in power electronics design and software development
required for the application of specialized drive electronics technology. For
calendar year ended December 31, 1997, Ashurst reported revenues of $353,000.
The acquired company was renamed Emoteq UK Limited.
The MI division manufactures precision direct-current fractional horsepower
motors and certain motor components. Industrial equipment and military
products are the major application for the motors. This division also supplies
spare parts and replacement equipment for general-purpose instrumentation
products.
Emoteq designs, manufactures and markets direct current (DC) brushless motors,
related components, and drive and control electronics. Markets served include
semiconductor manufacturing, industrial automation, medical equipment, and
military and aerospace. A new motion technology center was established in
Evergreen, Colorado in fiscal year 1998 to develop more automated methods of
manufacturing and advance the state of Emoteq's core technology base.
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Optical encoders are manufactured by COPI. They are used to measure rotational
and linear movements of parts in diverse applications such as machine tools,
robots, printers and medical equipment. The primary markets for the optical
encoders are in the industrial, medical and computer peripheral manufacturing
sectors. COPI also designs, manufactures and markets fiber optic-based
encoders with special characteristics, such as immunity to radio frequency
interference and high temperature tolerance, suited for industrial, aerospace
and military environments. Applications include airborne navigational
systems, anti-lock braking transducers, missile flight surface controls and
high temperature process control equipment.
PRODUCT DISTRIBUTION AND PRINCIPAL MARKETS
The Company maintains a direct sales force. In addition to its own marketing
and sales force, the Company has developed a worldwide network of independent
sales representatives and agents to market its various product lines.
The Company faces competition in all of its markets, although the number of
competitors varies depending upon the product. The Company believes there are
only a small number of competitors in the power and process markets, but there
are numerous competitors in the motion control market. No clear market share
data is available for the Company's other product areas. Competition involves
primarily product performance and price, although service and warranty are
also important.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
The information required by this item is set forth in Note 9 of the Notes to
Consolidated Financial Statements on page 30 herein.
AVAILABILITY OF RAW MATERIALS
All parts and materials used by the company are in adequate supply. No
significant parts or materials are acquired from a single source.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS
The Company holds several patents and trademarks regarding components used by
the various subsidiaries; however, none of these patents and trademarks are
considered to be of major significance.
SEASONALITY OF THE BUSINESS
The Company's business is not of a seasonal nature, however, revenues derived
from the power market may be influenced by customers' fiscal year ends and
holiday seasons.
WORKING CAPITAL ITEMS
The Company currently maintains inventory levels adequate for its short-term
needs based upon present levels of production. The Company considers the
component parts of its different product lines to be readily available and
current suppliers to be reliable and capable of satisfying anticipated needs.
SALES TO LARGE CUSTOMERS
During fiscal 1998, no single customer accounted for more than 10% of the
Company's consolidated revenue from continuing operations.
SALES BACKLOG
The backlog of the Company's continuing operations at June 30, 1998 consisted
of sales orders totaling approximately $13,892,000. The Company expects to
ship goods filling $13,712,000 of those purchase orders within fiscal 1999.
This compares to a backlog from continuing operations of $14,742,000 at June
30, 1997, of which $14,229,000 was scheduled for shipment is fiscal 1998.
GOVERNMENT SALES
Approximately $238,000 of the Company's backlog as of June 30, 1998 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.
3
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ENGINEERING AND DEVELOPMENT ACTIVITIES
The Company's expenditures on engineering and development for continuing
operations were $4,411,000 in fiscal 1998, $3,646,000 in fiscal 1997 and
$3,722,000 in fiscal 1996. Of these expenditures, no material amounts were
charged directly to customers.
ENVIRONMENTAL ISSUES
No significant pollution or other types of emission result from the Company's
operations and it is not anticipated that the Company's proposed operations
will be affected by Federal, State or local provisions concerning
environmental controls. However, there can be no assurance that any future
regulations will not affect the Company's operations.
FOREIGN OPERATIONS
The information required by this item is set forth in Note 9 of the Notes to
Consolidated Financial Statements on page 32 herein.
EMPLOYEES
As of the end of fiscal 1998, the Company had approximately 349 full-time
employees.
ITEM 2. PROPERTIES.
The Company leases its administrative offices and manufacturing facilities as
follows:
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APPROXIMATE SQUARE
DESCRIPTION / USE LOCATION FOOTAGE
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Corporate headquarters and administrative office Littleton, Colorado 14,000
Engineering and development facility Evergreen, Colorado 3,000
Office and manufacturing facility Carrolton, Texas 29,000
Office and manufacturing facility Kent, Washington 16,000
Engineering, development and administrative office Hunt Valley, Maryland 14,000
Office and manufacturing facility Tulsa, Oklahoma 13,000
Office and manufacturing facility Chatsworth, California 13,000
Office and manufacturing facility Tulsa, Oklahoma 10,000
Office facility Hoddesdon, England 3,000
Office and manufacturing facility Belfast, Northern Ireland 17,000
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The Company's management believes the above-described facilities are adequate to
meet the Company's current and foreseeable needs. All facilities described
above are operating at or near full capacity.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain actions that have arisen out of the ordinary
course of business. Management believes that resolution of the actions will not
have a significant adverse effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of the Company in the
fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Hathaway Corporation's common stock is traded on the NASDAQ National Market
System under the symbol HATH. The number of holders of record of the Company's
common stock as of the close of business on August 27, 1998 was 619. The
Company declared no dividends during fiscal years 1998 and 1997.
4
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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.
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PRICE RANGE
HIGH LOW
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Fiscal 1997
First Quarter $4.38 $2.50
Second Quarter 4.13 3.25
Third Quarter 4.88 3.00
Fourth Quarter 3.81 2.38
FISCAL 1998
First Quarter $4.50 $2.63
Second Quarter 4.00 2.38
Third Quarter 2.94 2.13
Fourth Quarter 2.63 1.56
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ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes data from the Company's annual financial
statements for the fiscal years 1994 through 1998 and notes thereto; the
Company's complete annual financial statements and notes thereto for the current
fiscal year appear in Item 8 beginning on page 12 herein. See Item 1 in the
Business section of this report and Note 2 to Consolidated Financial Statements
on page 21 for discussion of a business acquisition completed in fiscal 1997.
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FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996 1995 1994
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In thousands (except per share data)
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STATEMENTS OF OPERATIONS DATA:
Net revenues from continuing operations $41,317 $39,946 $35,411 $39,838 $43,028
===============================================================================
Income (loss) from continuing operations $(2,161) $(2,192) $(1,398) $ 1,321 $ 1,275
before income taxes
Benefit (provision) for income taxes 184 763 385 (479) (320)
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Net income (loss) from continuing $(1,977) $(1,429) $(1,013) $ 842 $ 955
operations
Net income from operations of divested -- -- -- -- 885
segment and divested operation
Gain on sale of segment -- -- -- -- 4,023
Net income (loss) $(1,977) $(1,429) $(1,013) $ 842 $ 5,863
===============================================================================
Diluted earnings (loss) per share:
Continuing operations $ (0.46) $ (0.34) $ (0.24) $ 0.19 $ 0.20
Operations of divested segment and -- -- -- -- 0.18
divested operation
Sale of segment -- -- -- -- 0.83
Net income (loss) $ (0.46) $ (0.34) (0.24) $ 0.19 $ 1.21
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Cash dividends:
Per share $ -- $ -- $ 0.10 $ 0.12 $ 0.205
Total amount paid $ -- $ -- $ 426 $ 536 $ 992
BALANCE SHEET DATA:
Total assets at June 30 $17,820 $20,477 $21,139 $23,312 $24,432
Total current and long-term debt $ 1,245 $ 1,769 $ 1,777 $ 2,144 $ 2,298
at June 30
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
All statements contained herein that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. Among the factors that could cause actual results
to differ materially are the following: the unavailability of sufficient capital
on satisfactory terms to finance the Company's business plan, increased
competition, the introduction of new technologies and competitors into the
systems and instrumentation markets where the Company competes, adverse changes
in the regulatory environment, and general business and economic conditions. In
addition to statements that explicitly describe such risks and uncertainties,
readers are urged to consider statements labeled with the terms "believes,"
"expects," "plans," "anticipates," or "intends" to be uncertain and forward-
looking. All cautionary statements made herein should be read as being
applicable to all related forward-looking statements wherever they appear. In
this connection, investors should consider the risks described herein.
OPERATING RESULTS
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
The Company recorded a net loss of $1,977,000 in fiscal year 1998, compared to a
net loss of $1,429,000 in 1997. The fiscal 1998 and 1997 results include
$2,527,000 and $923,000 of net losses from Hathaway Industrial Automation (HIA),
respectively. HIA was acquired by the Company effective September 30, 1996 (see
discussion under "Business Acquisition" below) and is included in the Company's
Power and Process Business. Excluding HIA, the Company recognized net income
of $550,000 and a net loss of $506,000 for the years ended June 30, 1998 and
1997, respectively.
Revenues increased by $1,371,000, or 3%, from 1997 to 1998, comprised of a 2%
increase in sales of the Company's power and process instrumentation and systems
automation products and an 8% increase in sales of motion control products (the
fifth consecutive annual increase). The increase in sales of power and process
products consists of a $861,000 decrease in sales of the Company's traditional
product lines, offset by a $1,268,000 increase in HIA product sales.
Sales to international customers decreased 2% from $14,200,000, or 36% of sales,
in fiscal 1997, to $13,955,000, or 34% of sales, in fiscal 1998. Sales backlog
decreased from $14,742,000 at June 30, 1997 to $13,892,000 at June 30, 1998,
comprised of $11,874,000 of traditional product backlog and $2,018,000 of HIA
product backlog, compared to $11,996,000 of traditional product backlog and
$2,746,000 of HIA product backlog at June 30, 1997.
Cost of products sold remained at 64% of revenues in 1998 and 1997. Excluding
the effect of HIA, the cost of products sold in 1998 and 1997 represents 61% and
63% of related revenues, respectively. This decrease in cost of traditional
product sold was primarily due to manufacturing efficiencies and an improved
product sales mix in the motion control business.
Selling, general and administrative and engineering and development expenses
increased 3% from $16,018,000 in 1997 to $16,466,000 in 1998 due to a whole year
of HIA operations in 1998 versus a partial year in 1997. Excluding the effect
of HIA, these expenses would have totaled $14,129,000 in 1998, as compared to
$14,182,000 in the prior period.
Amortization of intangibles and other assets increased from $402,000 in 1997 to
$738,000 in 1998. The increase was primarily due to the $406,000 write-off in
fiscal 1998 of the unamortized portion of goodwill which resulted from the HIA
acquisition, offset by the $197,000 write-off in fiscal 1997 of unamortized
debt acquisition costs related to the Marine Midland loan facility. (See further
discussion under "Business Acquisition" and "Liquidity and Capital Resources"
below.)
In fiscal 1998 the Company recognized $222,000 of equity income from its
investment in two of its Chinese joint ventures, Zibo Kehui Electric Company
Ltd. and Hathaway Si Fang Protection and Control Company, Ltd., as compared to
none recognized in 1997. (See further discussion under "Liquidity and Capital
Resources" below.)
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In fiscal year 1998 the Company recognized a benefit for income taxes of
$184,000 compared to $763,000 in fiscal year 1997. The decrease is primarily
due to an increase in nondeductible expenses and goodwill amortization plus an
increase in the valuation allowance. Realization of the Company's net deferred
tax asset is dependent upon the Company generating sufficient United States
federal taxable income (approximately $2,291,000) in future years to obtain
benefit from the reversal of net deductible temporary differences and from tax
credit and net operating loss carryforwards. The Company's management believes
that, on a more likely than not basis, the recorded net deferred tax asset is
realizable. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods if estimates of future United States federal
taxable income are reduced.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company recorded a net loss of $1,429,000 in fiscal year 1997, compared to a
net loss of $1,013,000 in 1996. The fiscal 1997 net loss includes a $923,000
net loss from Hathaway Industrial Automation (HIA) which was acquired by the
Company effective September 30, 1996 (see discussion under "Business
Acquisition" below), and a $506,000 net loss from operation of the Company's
other businesses.
Revenues increased by $4,535,000, or 13%, from 1996 to 1997, comprised of a 16%
increase in sales of the Company's power and process instrumentation and systems
products and a 7% increase in sales of motion control products. The increase in
sales of power and process products consists of a 3% increase in sales of the
Company's traditional product lines. The remainder of the increase in power and
process revenues was due to product sales of HIA, totaling $2,993,000.
Sales to international customers increased 12% from $12,668,000, or 36% of sales
in fiscal 1996 to $14,200,000, or 36% of sales in fiscal 1997. Foreign sales as
a percentage of total sales remained constant because the growth in the
Company's traditional foreign business was offset by HIA's business, which is
primarily with domestic customers. Sales backlog increased from $9,998,000 at
June 30, 1996 to $14,742,000 at June 30, 1997, comprised of $11,996,000 of
traditional product backlog and $2,746,000 of HIA product backlog.
Cost of products sold increased to 64% of revenues in 1997 from 62% in 1996. The
increase occurred primarily because of price reductions implemented in response
to competitive pressures, changes in the mix of products sold, and manufacturing
inefficiencies resulting from the consolidation of manufacturing operations
implemented in 1997. In addition, HIA's cost of products sold represents a
higher percentage of revenues than that of the Company's traditional product
lines. Excluding the effect of HIA, the cost of products sold in 1997
represents 63% of related revenues.
Selling, general and administrative and engineering and development expenses
increased 9% from $14,671,000 in 1996 to $16,018,000 in 1997 primarily because
of such expenses incurred by HIA. Excluding the effect of HIA, these expenses
would have totaled $14,182,000 in 1997, representing a 3% decrease from the
prior period. This decrease reflects the overall cost reduction efforts
initiated by the Company in recent years.Amortization of intangibles and other
assets increased from $215,000 in 1996 to $402,000 in 1997, primarily due to the
$197,000 write-off of unamortized debt acquisition costs related to the Marine
Midland loan facility (see further discussion under "Liquidity and Capital
Resources" below.)
Other income in 1996 includes $165,000 of income recorded upon the Company's
consummation of an agreement with Global Software, Inc. (Global). Under the
terms of this agreement, the Company received $165,000 in exchange for, among
other things, consenting to Global's proposed disposition of certain assets
acquired after the Company's January 31, 1994 sale of Global and acknowledging
that this disposition would not violate the terms of the original sale
agreement.
7
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The Company recorded a $338,000 restructuring charge in the fourth quarter of
fiscal 1996 in connection with the reorganization of its Canadian and U.K.
operations. Effective June 30, 1996 the net assets and substantially all
operations of Hathaway Instruments Limited (HIL), the Company's subsidiary
located in Hoddesdon, England, were transferred to Hathaway Systems Limited
(HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with
the asset transfer, substantially all operations of HIL were combined with the
operations of HSL. In addition, the Company decided to close its Toronto,
Canada facility and to combine substantially all of its operations with the
operations of Hathaway Process Instrumentation, the Carrolton, Texas division.
The initiatives were aimed at reducing costs and enhancing productivity and
efficiency. The restructuring provision was primarily comprised of estimated
costs for employee severance benefits and fixed asset write-offs. The payouts
related to the restructuring charge were made in 1996 and 1997.
In the first quarter of 1997, management decided to restructure the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Littleton was consolidated in 1997 into two
manufacturing facilities located in Kent, Washington and Belfast, Northern
Ireland. The cost of consolidating these manufacturing facilities was not
material and was paid in fiscal year 1997.
In fiscal year 1997 the Company recognized a benefit for income taxes of
$763,000 compared to $385,000 in fiscal year 1996. The increase is primarily
due to an increase in the Company's loss before income taxes. Realization of
the Company's net deferred tax asset is dependent upon the Company generating
sufficient United States federal taxable income in future years to obtain
benefit from the reversal of net deductible temporary differences and from tax
credit and net operating loss carryforwards. The Company's management believes
that, on a more likely than not basis, the recorded net deferred tax asset is
realizable. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods if estimates of future United States federal
taxable income are reduced.
BUSINESS ACQUISITION
Effective September 30, 1996, the Company acquired a 100% partnership interest
in Tate Integrated Systems, L.P. and 100% of the stock of the sole general
partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS"). The
ownership interests were acquired for an adjusted negotiated price of
$1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable of TIS
were collected during fiscal 1998.
TIS has operated under the ownership of Hathaway Industrial Automation (HIA), a
newly formed wholly-owned subsidiary of the Company, since October 1, 1996. HIA
is located in Hunt Valley, Maryland and is a full service supplier of process
automation systems for industrial applications. HIA has developed a state-of-
the-art software system for Supervisory Control and Data Acquisition (SCADA) and
Distributed Control Systems (DCS). The HIA system has been used to fully
automate such industrial applications as water and wastewater treatment plants,
glass manufacturing plants, oil and gas terminals and tank farm facilities. In
addition to expanding into its traditional process markets, HIA's system is
being marketed to the power utility industry. The Company expects to team the
HIA system with certain existing Hathaway products and target the combined
product at substation automation and integration applications used in the
generation, distribution and transmission of power.The acquisition has been
accounted for using the purchase method of accounting; and, accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair values at the date of acquisition.
For the year ended June 30, 1998 and the nine month post-acquisition period
ended June 30, 1997, HIA had losses before income taxes of approximately $2.7
million and $1.3 million, respectively. HIA's traditional business is highly
dependent on sales to the industrial market which typically encompasses a long
sales cycle, significant customization to specific customer requirements, long
performance periods and large contract values which are subject to a high degree
of scrutiny and negotiation with customers. Since the Company's acquisition of
HIA in September 1996, the Company has seen significant deterioration in the
margins of contracts awarded in this market; and, in several instances, HIA has
declined to submit a bid or has not been awarded a project bid due to competitor
prices or customer specifications that would have resulted in insignificant or
negative contract margin.
8
<PAGE>
As a result of its acquisition of HIA, the Company recorded goodwill of
$624,000, primarily due to loss accruals on an in-process contract acquired by
the Company. At June 30, 1998 and in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company determined that the unamortized cost in excess of net assets
acquired from its acquisition of TIS was impaired; and, therefore, wrote-off the
remaining unamortized balance of $406,000. The Company's determination was based
on projections of undiscounted cash flows of HIA, which were based on current
marketplace and competitive conditions and resulting low margins for the
industrial applications of HIA's product. Such undiscounted cash flow estimates
were not sufficient to indicate realization of the related unamortized cost in
excess of net assets acquired. Utilizing such projections and discounting the
estimated cash flows, the Company determined that the entire unamortized amount
was impaired. The current year amortization of $202,000 and impairment write-off
of $406,000, totaling $608,000, is included in amortization of intangibles and
other in the fiscal year 1998 consolidated statement of operations.
The Company is investing substantial resources in HIA, consistent with the
Company's strategy to develop applications of the HIA software for the
deregulated power industry. Management believes that the software products
developed by HIA, as modified for the power industry and combined with other
Company products, will provide power companies with automated and integrated
systems solutions that will both reduce their operating costs and improve the
reliability of their power supply. However, there can be no assurance that such
modifications will be successful and/or economically viable. Management
believes that there is significant demand in the power industry for such
solutions as a result of the business environment created by the recent industry
deregulation.
The successful implementation of the Company's current business plan is
partially dependent on the Company's ability to successfully market HIA's
products to the deregulated power industry. The factors that will affect the
success of implementing this business plan include, but are not limited to, the
ability to win a sufficient amount of project work on favorable terms to the
Company, the ability to complete projects in a timely and cost-effective manner,
and the existence of sufficient demand for the HIA products. An inability to
achieve this plan in the planned timeframe may have a material adverse effect on
the Company's operating results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position as measured by cash and cash equivalents
(excluding restricted cash) increased $12,000 during the year to a balance of
$3,443,000 at June 30, 1998. Fiscal 1998 operating activities generated
$1,450,000, compared to $197,000 used in fiscal 1997 and $93,000 used in 1996.
Of the $1,450,000 generated in 1998, $1,628,000 was used to fund the operations
of the HIA business and $3,078,000 was generated from operating activities of
the Company's other businesses. Of the $197,000 used in 1997 by operating
activities, $1,592,000 was used to fund the operations of the HIA business and
$1,395,000 was generated from the operating activities of the Company's other
businesses. The consolidated increased cash generated from operations in 1998
was primarily due to increased revenues, the overall cost reduction efforts of
the Company and net income tax refunds of $1,037,000 received during fiscal
1998.
Cash of $914,000 and $1,313,000 was used by investing activities in fiscal 1998
and 1997, respectively, compared to $376,000 generated in fiscal 1996. The 1996
cash generated by investing activities was primarily due to proceeds of
$1,000,000 from maturities of marketable securities. The 1997 cash used for
investing activities includes $863,000 paid for the interest acquired in TIS.
The 1998 cash used for investing activities includes $229,000 paid for the
interest acquired in TIS and $685,000 paid for capital expenditures.
Financing activities used $526,000, $32,000 and $828,000 in fiscal years 1998,
1997 and 1996, respectively. The increase in cash used for financing activities
from 1997 to 1998 was primarily due to repayments on the line-of-credit. The
decrease in cash used for financing activities from 1996 to 1997 occurred
primarily because no dividends were paid to stockholders in 1997, as compared to
$426,000 of dividends paid to stockholders in 1996.
9
<PAGE>
At June 30, 1998, the Company had $1,245,000 of debt, compared with $1,769,000
at June 30, 1997, a reduction of $524,000. The debt at June 30, 1997 represents
borrowings on the Company's previous long-term financing agreement (Midland
Agreement) with Marine Midland Business Loans, Inc. The Midland Agreement was a
Reducing Revolving Line-of-Credit with a borrowing limit that was reduced
monthly over the seven-year term of the loan. On June 3, 1998, the Company
repaid the $1,232,000 balance on this loan and terminated the Midland Agreement.
The debt at June 30, 1998 represents borrowings on the Company's current long-
term financing agreement (Agreement) with Silicon Valley Bank (Silicon). The
Agreement matures on May 7, 2000 and is subject to automatic annual renewal.
Beginning in May 1999, the Company may terminate the Agreement with no
termination fee. Borrowings on the loan are restricted to the lesser of
$3,000,000 or 85% of the Company's eligible receivables (Maximum Credit Limit).
As of June 30, 1998, the Company could borrow an additional $1,385,000 up to the
Maximum Credit Limit of $2,630,000.
The loan bears interest at Silicon's prime borrowing rate (prime rate) plus 2%
(10.5% at June 30, 1998). The interest rate is adjustable on a quarterly basis
to prime rate plus 1.5% if the Company achieves a net loss less than $750,000
for each previous twelve month rolling period. The Company must continue to
meet this quarterly financial goal, or the rate will be re-adjusted to prime
rate plus 2%. In addition to interest, the loan bears a monthly unused line fee
at 0.125% of the Maximum Credit Limit less the average daily balance of the
outstanding loan during a month. The unused line fee is also adjustable on a
quarterly basis, if the Company achieves a net loss less than $750,000 for each
previous twelve-month rolling period, the monthly unused line fee will be
adjusted to 0.0625%. The Company must continue to meet this quarterly financial
goal, or the rate will be re-adjusted to 0.125%.
The debt is secured by all assets of the Company. The Agreement requires that
the Company maintain compliance with certain covenants related to tangible net
worth. At June 30, 1998, the Company was in compliance with such covenants.
The Company has three joint venture investments in China - Zibo Kehui Electric
Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company, Ltd. (Si
Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). Kehui
designs, manufactures and sells cable and overhead fault location, SCADA systems
and other test instruments within the China market and the Company will sell
these products outside of China. Si Fang designs, manufactures and sells a new
generation of digital protective relays, control equipment and instrumentation
products for substations in power transmission and distribution systems and the
Company will sell these products outside of China. HPMS will design,
manufacture and sell, under a license from Hathaway, instrumentation products
designed by Hathaway, to electric power companies in China. There are no future
commitments relating to these investments.
The Company accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and subsequently, the Company determined that due to the start-up
nature of the entities, their untested products and political uncertainty in
China, the realization of the initial investment and subsequent earnings (which
were not significant) was uncertain; and, therefore, the Company fully reserved
against the original investments and its share of any equity in income
thereafter, and recognized income from the Chinese joint ventures only as cash
dividends were received. During fiscal year 1998, the operations of Si Fang and
Kehui have continued to mature, their products have gained significant
acceptance and they have indicated sustained profitability while the operations
of HPMS are still in the development stage and continue to incur losses.
In fiscal year 1998, because of the sustained positive operating results of Si
Fang and Kehui combined with the fact that both of these joint ventures are
still subject to a certain amount of political and business uncertainty in
China, the Company recognized a portion of its share of equity in income from
these two joint ventures totaling $222,000, which is included in other assets
and equity income from investments in joint ventures in the fiscal year 1998
consolidated balance sheet and statement of operations, respectively. This
amount represents management's best estimate of the amounts expected to be
received from the joint ventures as of June 30, 1998. The Company will continue
to recognize the portion of its share of equity in income (loss) from these two
joint ventures to the extent it believes such amounts are realizable.
10
<PAGE>
The Company also has an 11.4% interest in a joint venture (JV) with KUB Holdings
BHD, a Malaysian firm. The interest, acquired by TIS for $400,000 in March
1995, was acquired by the Company in connection with the purchase of TIS
effective September 30, 1996. The fair market value of this asset was not
significant at the acquisition date. The JV was created for the purpose of
manufacturing, marketing and selling the TIS-4000 system in certain Asian
countries. If the JV requires funding, the Company may be required to
contribute in accordance with the agreed-upon proportions as defined in the JV
agreement. As of June 30, 1998, the Company had ceased all operations of the JV
due to unprofitablity. The Company is currently in the process of winding down
the partnership.
The JV agreement also requires the Company to continue as a going concern and to
provide support services to the JV at market rates. If the Company does not
meet this requirement, it could be required to refund a contractually-defined
portion ($1,688,000 at June 30, 1998) of the $2,500,000 proceeds TIS received in
1995 from the sale to the JV of licensing and marketing rights to the TIS-4000
technology. Because of the remote possibility of the Company being required to
make such a refund, this obligation was determined to be zero at the acquisition
date. Further, as of September 17, 1998, because sales have ceased, the Company
does not expect that such refunds will be required. In addition, the Company is
not aware of any violations of the requirements defined in the JV agreement nor
does it anticipate any future violations.
As in the three-year period ended June 30, 1998, the Company's fiscal 1999
working capital, capital expenditure and debt service requirements are expected
to be funded from the existing cash balance of $3,443,000 and the $1,385,000
available under the long-term financing agreement at June 30, 1998. The Company
believes that such amounts are sufficient to fund operations and working capital
needs for at least the next twelve months.
YEAR 2000 COMPLIANCE
Some computers and computer-based systems use only the last two digits to
identify a year in the date field and cannot distinguish the year 2000 from the
year 1900. The Company recognizes that the Year 2000 poses a challenge to the
proper functioning of computer systems included in its products, items purchased
from its suppliers and software systems used in its business. The Company is
taking what it believes to be appropriate steps necessary in preparation for
Year 2000 issues. The Company has assessed its products and application
software systems and has concluded that no major changes or updates are
required. Minor modifications and updates are being made as needed. An
assessment of its suppliers and service providers is ongoing and is expected to
be completed by June 30, 1999. The Company does not anticipate that the overall
costs of adaptation of its products and systems will be material, however the
Company will continue to review on an ongoing basis whether it needs to further
address any anticipated costs, problems and uncertainties associated with Year
2000 consequences.
PRICE LEVELS AND THE IMPACT OF INFLATION
Prices of the Company's products have not increased significantly as a result of
inflation during the past several years, primarily due to competition. The
effect of inflation on the Company's costs of production has been minimized
through production efficiencies and lower costs of materials. The Company
anticipated that these factors would continue to minimize the effects of any
foreseeable inflation and other price pressures from the industries in which it
operates. As the Company's manufacturing activities mainly utilize semi-skilled
labor, which is relatively plentiful in the areas surrounding the Company's
production facilities, the Company does not anticipate substantial inflation-
related increases in the wages of the majority of its employees.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and commodity market prices and rates. The Company is exposed to
market risk in the areas of changes in United States interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
These exposures are directly related to its normal operating and funding
activities. Historically and as of June 30, 1998, the Company has not used
derivative instruments or engaged in hedging activities.
11
<PAGE>
INTEREST RATE RISK
The interest payable on the Company's line-of-credit is variable based on the
prime rate, and, therefore, affected by changes in market interest rates. At
June 30, 1998, approximately $1.3 million was outstanding with a weighted
average interest rate of 10.5% (prime plus 2%). The line-of-credit matures in
May 2000 and is subject to automatic annual renewal. Beginning in May 1999, the
Company may pay the balance in full at any time without penalty. The Company
manages interest rate risk by investing excess funds in cash equivalents bearing
variable interest rates which are tied to various market indices. Additionally,
the Company monitors interest rates frequently and has sufficient cash balances
to pay off the line-of-credit and any early termination penalties, should
interest rates increase significantly. As a result, the Company does not
believe that reasonably possible near-term changes in interest rates will result
in a material effect on future earnings, fair values or cash flows of the
Company.
FOREIGN CURRENCY RISK
The Company has a wholly-owned subsidiary located in Northern Ireland. Sales
from this operation are typically denominated in British Pounds, thereby
creating exposures to changes in exchange rates. The changes in the
British/U.S. exchange rate may positively or negatively affect the Company's
sales, gross margins and retained earnings. The Company does not believe that
reasonably possible near-term changes in exchange rates will result in a
material effect on future earnings, fair values or cash flows of the Company,
and therefore, has chosen not to enter into foreign currency hedging
instruments. There can be no assurance that such an approach will be successful,
especially in the event of a significant and sudden decline in the value of the
British Pound.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
a) Report of Independent Public Accountants................................ 13
b) Consolidated Balance Sheets as of June 30, 1998 and June 30, 1997....... 14
c) Consolidated Statements of Operations for each of the fiscal years
in the three-year period ended June 30, 1998............................ 15
d) Consolidated Statements of Cash Flows for each of the fiscal years
in the three-year period ended June 30, 1998............................ 16
e) Consolidated Statements of Stockholders' Investment for each of the
fiscal years in the three-year period ended June 30, 1998............... 17
f) Notes to Consolidated Financial Statements.............................. 18
12
<PAGE>
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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended June 30, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
July 31, 1998 (except with respect to the matter
discussed in Note 13, as to which the date is
August 13, 1998).
13
<PAGE>
HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,443 $ 3,431
Restricted cash 480 253
Trade receivables, net of allowance for doubtful accounts of 6,400 6,910
$599 and $492 at June 30, 1998 and 1997, respectively
Inventories, net 3,649 4,907
Current deferred income taxes 779 854
Income tax refunds receivable, prepaid expenses and other 684 1,690
- ----------------------------------------------------------------------------------------------------
Total current assets 15,435 18,045
Property and equipment, net 1,730 1,841
Cost in excess of net assets acquired, net 374 591
Other (Note 3) 281 --
- ----------------------------------------------------------------------------------------------------
Total Assets $17,820 $20,477
====================================================================================================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Line-of-credit classified as current (Note 4) $ -- $ 1,769
Accounts payable 2,027 1,843
Accrued liabilities 2,500 2,594
Income taxes and other current liabilities 497 679
Product service reserve 475 566
- ----------------------------------------------------------------------------------------------------
Total current liabilities 5,499 7,451
Line-of-credit (Note 4) 1,245 --
- ----------------------------------------------------------------------------------------------------
Total Liabilities 6,744 7,451
Commitments and Contingencies (Notes 3, 4 and 8)
Stockholders' Investment:
Preferred stock, par value $1.00 per share, authorized 5,000 -- --
shares; no shares outstanding
Common stock, at aggregate stated value, authorized 50,000 100 100
shares; 5,405 issued at June 30, 1998 and 1997, respectively
Additional paid-in capital 9,954 9,954
Loans receivable for stock (Note 7) (235) (235)
Retained earnings 4,841 6,818
Cumulative translation adjustments (Note 1) 389 360
Treasury stock, at cost; 1,122 and 1,121 shares at June 30, (3,973) (3,971)
1998 and 1997, respectively (Note 8)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Investment 11,076 13,026
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Investment $17,820 $20,477
====================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
14
<PAGE>
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the fiscal years ended June 30,
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $41,317 $39,946 $35,411
Operating costs and expenses:
Cost of products sold 26,379 25,575 21,926
Selling 7,857 7,601 6,269
General and administrative 4,198 4,771 4,680
Engineering and development 4,411 3,646 3,722
Amortization of intangibles and other 738 402 215
Restructuring charge (Note 11) -- -- 338
- --------------------------------------------------------------------------------------------------
Total operating costs and expenses 43,583 41,995 37,150
- --------------------------------------------------------------------------------------------------
Operating loss (2,266) (2,049) (1,739)
Other income (expense), net:
Equity income from investments in joint
ventures (Note 3) 222 -- --
Interest and dividend income 217 245 325
Interest expense (148) (173) (194)
Other income (expense), net (186) (215) 210
- --------------------------------------------------------------------------------------------------
Total other income (expense), net 105 (143) 341
- --------------------------------------------------------------------------------------------------
Loss before income taxes (2,161) (2,192) (1,398)
Benefit for income taxes (Note 5) 184 763 385
- --------------------------------------------------------------------------------------------------
Net loss $(1,977) $(1,429) $(1,013)
==================================================================================================
Basic and diluted net loss per share (Note 1) $ (0.46) $ (0.34) $ (0.24)
==================================================================================================
Basic and diluted weighted average shares
outstanding (Note 1) 4,284 4,259 4,260
==================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE>
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the fiscal years ended June 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,977) $(1,429) $(1,013)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,490 1,199 960
Equity income from investments in joint ventures (Note 3) (222) -- --
Deferred income tax provision (benefit) 75 39 (155)
Other 201 241 (149)
Changes in assets and liabilities, net of effect in 1997 of
purchase of Tate Integrated Systems (Note 2):
(Increase) decrease in -
Restricted cash (227) 59 86
Trade receivables, net 374 (239) 1,177
Inventories, net 742 1,174 (503)
Income tax refunds receivable, prepaid expenses and other 1,177 (827) (282)
Increase (decrease) in -
Accounts payable 184 (46) 1
Accrued liabilities (94) (649) 187
Income taxes payable (182) 274 (360)
Product service reserve (91) 7 (42)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,450 (197) (93)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (685) (651) (719)
Purchase of Tate Integrated Systems (Note 2) (229) (863) --
Investments in joint ventures (Note 3) -- -- (70)
Proceeds from maturity of marketable securities -- 201 1,000
Other -- -- 165
Net cash provided by (used in) investing activities (914) (1,313) 376
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on line-of-credit (1,769) (8) (360)
Borrowings on line-of-credit 1,245 -- --
Dividends paid to stockholders -- -- (426)
Proceeds from exercise of employee stock options -- 81 --
Purchase of treasury stock (2) (105) (42)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (526) (32) (828)
2 48 (35)
Effect of foreign exchange rate changes on cash
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 12 (1,494) (580)
Cash and cash equivalents at beginning of year 3,431 4,925 5,505
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,443 $ 3,431 $ 4,925
================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid (received) during the year for:
Interest $ 146 $ 167 $ 177
Income taxes (1,037) 4 173
Noncash investing and financing activities:
Assets of Tate Integrated Systems purchased, net of liabilities $ -- $ 1,092 $ --
assumed (Note 2)
Acquisition of common stock as a result of stock option -- 161 --
exercises (Note 6)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE>
HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TREASURY STOCK
COMMON STOCK ADDITIONAL LOANS (NOTE 8)
---------------- PAID-IN RECEIVABLE RETAINED ----------------
SHARES AMOUNT CAPITAL (NOTE 7) EARNINGS SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5,307 $100 $9,767 $(235) $ 9,686 1,042 $(3,663)
Balances, June 30, 1995
Long-term incentive plan -- -- (55) -- -- -- --
bonus (Note 8)
Purchase of treasury stock -- -- -- -- -- 16 (42)
Dividend paid to stockholders -- -- -- -- (426) -- --
($.10 per share)
Net loss -- -- -- -- (1,013) -- --
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1996 5,307 $100 $9,712 $(235) $ 8,247 1,058 $(3,705)
Purchase of treasury stock -- -- -- -- -- 25 (105)
Exercise of employee stock 32 -- 81 -- -- -- --
options
Acquisition of common stock 66 -- 161 -- -- 38 (161)
as a result of stock option
exercises (Note 6)
Net loss -- -- -- -- (1,429) -- --
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1997 5,405 $100 $9,954 $(235) $ 6,818 1,121 $(3,971)
Purchase of treasury stock -- -- -- -- -- 1 (2)
Net loss -- -- -- -- (1,977) -- --
- ---------------------------------------------------------------------------------------------------------------
Balances, June 30, 1998 5,405 $100 $9,954 $(235) $ 4,841 1,122 $(3,973)
===============================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Hathaway Corporation (the Company) is engaged in the business of designing,
manufacturing and selling advanced systems and instrumentation to the
worldwide power and process industries, as well as motion control products to
a broad spectrum of customers throughout the world. The Company operates
primarily in the United States and Europe and has three joint venture
investments in China (Note 3).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.Investments in joint ventures,
in which the ownership is at least 20% but less than 50%, are accounted for
using the equity method (Note 3).
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include amounts which are readily convertible into cash (original
maturities of three months or less) and which are not subject to significant
risk of changes in interest rates. Cash flows in foreign currencies are
translated using an average rate.
RESTRICTED CASH
Restricted cash consists of certificates of deposit that serve as collateral
for letters of credit issued on behalf of the Company.
INVENTORIES
Inventories, valued at the lower of cost (first-in, first-out basis) or
market, are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
---------------------------------
<S> <C> <C>
Parts and raw materials, net $2,210 $2,141
Finished goods and work-in-process, net 1,439 2,766
$3,649 $4,907
================================
</TABLE>
Reserves established for anticipated losses on excess or obsolete inventories
were approximately $1,742,000 and $1,943,000 at June 30, 1998 and 1997,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, is classified as follows (in thousands):
<TABLE>
<CAPTION>
USEFUL LIVES JUNE 30, 1998 JUNE 30, 1997
-------------------------------------------
<S> <C> <C> <C>
Machinery, equipment, tools and dies 2-8 years $ 6,597 $ 6,738
Furniture, fixtures and other 3-10 years 2,662 2,056
-----------------------
9,259 8,794
Less accumulated depreciation
and amortization (7,529) (6,953)
-----------------------
$ 1,730 $ 1,841
=======================
</TABLE>
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.
18
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired represents the amount by which the
purchase price of acquired companies exceeds the fair market value of net
assets acquired, and is amortized using the straight-line method over ten
years. Cost in excess of net assets acquired as of June 30, 1998 and 1997
consists of $1,197,000 and $1,305,000 of original costs and $823,000 and
$714,000 of accumulated amortization, respectively.
The Company reviews its assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For assets that are held and used in operations, the asset would
be considered to be impaired if the undiscounted future cash flows related to
the asset did not exceed the net book value. The amount of the impairment is
assessed using the assets' fair market value, which is determined using
discounted cash flows. As discussed in Note 2, at June 30, 1998, the Company
determined that the cost in excess of net assets acquired related to its
acquisition of Tate Integrated Systems was impaired; and therefore, the
unamortized balance was written off.
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------------------------
<S> <C> <C>
Compensation and fringe benefits $ 973 $ 716
Commissions 474 592
Other accrued expenses 1,053 1,286
--------------------------------------
$2,500 $2,594
======================================
</TABLE>
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):
<TABLE>
<CAPTION>
June 30, 1998 JUNE 30, 1997
--------------------------------------
<S> <C> <C>
Cumulative Translation Adjustments, beginning of year $360 $163
Translation adjustments 29 197
--------------------------------------
Cumulative Translation Adjustments, end of year $389 $360
======================================
</TABLE>
REVENUE AND COST RECOGNITION ON CONTRACTS
Hathaway Industrial Automation (HIA) undertakes contracts for the installation
of integrated process control systems that use its proprietary software. The
Company recognizes contract revenues by applying the percentage of completion
achieved to the total contract sales price. The Company determines the
percentage of completion for all contracts using the "cost-to-cost" method of
measuring contract progress. Under this method, actual contract costs
incurred to date are compared to total estimated contract costs to determine
the estimated percentage of revenues to be recognized. To the extent these
estimates prove to be inaccurate, the revenues and gross profits, if any,
reported for the period during which work on the contract is ongoing may not
accurately reflect the final results of the contract, which can only be
determined upon contract completion. Provisions for estimated losses on
uncompleted contracts, to the full extent of the estimated loss, are made
during the period in which the Company first becomes aware that a loss on a
contract is probable. The Company's traditional businesses (other than HIA)
generally recognize revenue when products are shipped.
19
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
During fiscal year 1998, the Company adopted SFAS No. 128, "Earnings Per
Share", which establishes standards for computing and presenting basic and
diluted earnings per share (EPS). Under this statement, basic earnings (loss)
per share is computed by dividing the net earnings or loss by the weighted
average number of shares of common stock outstanding. Diluted earnings or loss
per share is determined by dividing the net earnings or loss by the sum of (1)
the weighted average number of common shares outstanding and (2) if not anti-
dilutive, the effect of outstanding warrants and stock options determined
utilizing the treasury stock method. In fiscal years 1998, 1997 and 1996,
stock options totaling 648,204, 708,704 and 332,856, respectively, were
excluded from the calculation of diluted earnings (loss) per share since the
result would have been anti-dilutive. The adoption of this statement had no
impact on prior year's reported per share amounts.
Basic and Diluted EPS have been computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $(1,977) $(1,429) $(1,013)
Denominator
Weighted average outstanding shares 4,284 4,259 4,260
----------------------------------------
Basic and Diluted net loss per share $(0.46) $ (0.34) $ (0.24)
=========================================
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans for employees
under the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, restricted cash, trade receivables, accounts payable and
accrued liabilities approximate fair value because of the immediate or short-
term maturities of these financial instruments. The carrying amount of the
line-of-credit approximates fair value because the underlying instrument is a
variable rate note that reprices frequently.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities as well as disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances in order to
conform to the current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income," (SFAS 130). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS 130 in fiscal year 1999,
beginning July 1, 1998. Historically, the only additional item considered
part of comprehensive income has been the cumulative translation adjustment.
20
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131). SFAS 131 requires that public
companies report information about their operating segments based on the
financial information used by the chief operating decision maker in their
annual financial statements and requires those companies to report selected
information in their interim statements. The Company adopted SFAS 131 at June
30, 1998 (see Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measures
those instruments at fair value. SFAS 133 is effective for fiscal quarters and
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS 133 will not have a significant impact on the Company's
financial condition and results of operations, as the Company has not
historically utilized such instruments.
2.BUSINESS ACQUISITION
Effective September 30, 1996, the Company acquired a 100% partnership interest
in Tate Integrated Systems, L.P. and 100% of the stock of its sole general
partner, Tate Integrated Systems, Inc. (collectively referred to as "TIS").
The ownership interests were acquired for an adjusted negotiated price of
$1,092,000, of which $718,000 was paid in cash at closing on October 10, 1996,
$145,000 on June 30, 1997 and $229,000 when certain accounts receivable were
collected during fiscal 1998.
TIS has operated under the ownership of HIA, a newly formed wholly-owned
subsidiary of the Company, since October 1, 1996. HIA is located near
Baltimore, Maryland and is a full service developer and supplier of integrated
process automation systems for industrial applications. HIA has developed a
state-of-the-art software system, the TIS-4000, for Supervisory Control and
Data Acquisition (SCADA) and Distributed Control Systems (DCS). The HIA
system has been used to fully automate such industrial applications as water
and wastewater treatment plants, glass manufacturing plants, oil and gas
terminals and tank farm facilities. In addition to expanding into its
traditional process markets, HIA's system is being marketed to the power
utility industry. The Company expects to team the HIA system with certain
existing Hathaway products and target the combined product at substation
automation and integration applications used in the generation, transmission
and distribution of power.
The acquisition was accounted for using the purchase method of accounting; and
accordingly, the purchase price was allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of acquisition. The
net purchase price allocation was as follows (in thousands):
Trade receivables, net $ 485
Inventories, net 649
Property and equipment, net 123
Cost in excess of net assets acquired 624
Accounts payable (580)
Accrued liabilities and other (209)
Net purchase price $1,092
======
For the year ended June 30, 1998 and the nine month post-acquisition period
ended June 30, 1997, HIA had losses before income taxes of approximately $2.7
million and $1.3 million, respectively. HIA's traditional business is highly
dependent on sales to the industrial market which typically encompass a long
sales cycle, significant customization to specific customer requirements, long
performance periods and large contract values which are subject to a high
degree of scrutiny and negotiation with customers. Since the Company's
acquisition of HIA in September 1996, the Company has seen significant
deterioration in the margins of contracts awarded in this market; and, in
several instances, HIA has declined to submit a bid or has not been awarded a
project bid due to competitor prices or customer specifications that would
have resulted in insignificant or negative contract margin.
21
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.BUSINESS ACQUISITION (CONTINUED)
As a result of its acquisition of HIA, the Company recorded goodwill of
$624,000, primarily due to loss accruals on an in-process contract acquired by
the Company. As a result of continuing and expected near term losses from HIA
at June 30, 1998 and in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
the Company determined that the unamortized cost in excess of net assets
acquired from its acquisition of TIS was impaired; and, therefore, wrote-off
the remaining unamortized balance of $406,000. The Company's determination was
based on projections of undiscounted cash flows of HIA, which were based on
current marketplace and competitive conditions and resulting low margins for
the industrial applications of HIA's product. Such undiscounted cash flow
estimates were not sufficient to indicate realization of the related
unamortized cost in excess of net assets acquired. Utilizing such projections
and discounting the estimated cash flows, the Company determined that the
entire unamortized amount was impaired. The current year amortization of
$202,000 and impairment write-off of $406,000, totaling $608,000, is included
in amortization of intangibles and other in the fiscal year 1998 consolidated
statement of operations.
The results of operations of TIS have been included in the Company's fiscal
1998 and 1997 Consolidated Statement of Operations starting on October 1,
1996.
The following unaudited pro forma summary (in thousands, except per share
data) combines the consolidated results of operations of the Company and TIS
as if the acquisition had occurred at the beginning of fiscal years 1997 and
1996, respectively, after giving effect to certain pro forma adjustments
related to such items as income taxes, depreciation, and amortization of cost
in excess of net assets acquired. The pro forma results are shown for
illustrative purposes only, and do not purport to be indicative of the actual
results which would have occurred had the transaction been consummated as of
those earlier dates, nor are they indicative of results of operations which
may occur in the future.
FOR THE YEARS ENDED JUNE 30,
1997 1996
-----------------------------------
(UNAUDITED)
Revenue $40,946 $40,016
Net loss (1,403) (1,072)
Basic net loss per share (0.33) (0.25)
3.INVESTMENTS IN JOINT VENTURES
The Company has three joint venture investments in China - Zibo Kehui Electric
Company Ltd. (Kehui), Hathaway Si Fang Protection and Control Company, Ltd.
(Si Fang), and Hathaway Power Monitoring Systems Company, Ltd. (HPMS). Kehui
designs, manufactures and sells cable and overhead fault location, SCADA
systems and other test instruments in China. Si Fang designs, manufactures
and sells a new generation of digital protective relays, control equipment and
instrumentation products for substations in power transmission and
distribution systems. HPMS will design, manufacture and sell, under a
license from Hathaway, instrumentation products designed by Hathaway, to
electric power companies in China. At June 30, 1998, the Company's original
investment and ownership interest in these Chinese joint ventures are as
follows (in thousands):
INVESTMENT OWNERSHIP INTEREST
----------------------------------
Kehui $100 25%
Si Fang 175 25%
HPMS 140 40%
-----------
$415
===========
As discussed below, the Company has fully reserved against these original
investments. The Company has no future commitments relating to these
investments.
22
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS IN JOINT VENTURES (CONTINUED)
The Company accounts for the Chinese joint ventures using the equity method of
accounting. At the time of the original investments in the Chinese joint
ventures and subsequently, the Company determined that due to the start-up
nature of the entities, their untested products and political uncertainty in
China, the realization of the initial investment and subsequent earnings
(which were not significant) was uncertain; and, therefore, the Company fully
reserved against the original investments and its share of any equity in
income thereafter, and recognized income from the Chinese joint ventures only
as cash dividends were received. During fiscal year 1998, the operations of
Si Fang and Kehui have continued to mature, their products have gained
significant acceptance and they have indicated sustained profitability while
the operations of HPMS are still in the development stage and continue to
incur losses.
In fiscal year 1998, because of the sustained positive operating results of Si
Fang and Kehui combined with the fact that both of these joint are still
subject to a certain amount of political and business uncertainty in China,
the Company recognized a portion of its share of equity in income from these
two joint ventures totaling $222,000, which is included in other assets and
equity income from investments in joint ventures in the fiscal year 1998
consolidated balance sheet and statement of operations, respectively. This
amount represents management's best estimate of the amounts expected to be
received from the joint ventures as of June 30, 1998. The Company will
continue to recognize the portion of its share of equity in income (loss) from
these two joint ventures to the extent it believes such amounts are
realizable.
In accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," summarized financial information for Si Fang as
of December 31, 1997 (Si Fang is on a calendar fiscal year) is presented as
follows (in thousands):
As of and
For the Year Ended
December 31, 1997
--------------------
Current assets $8,638
Non-current assets 1,498
Current liabilities 7,378
Non-current liabilities --
Revenues 8,918
Gross profit 2,232
Net income before income taxes 1,525
Net income 1,525
Summarized financial information for Si Fang for the years ended December 31,
1996 and 1995 and for Kehui for the years ended December 31, 1997, 1996 and
1995 is not presented because it is not significant relative to the Company's
consolidated financial statements.
The Company also has an 11.4% interest in a joint venture (JV) with KUB
Holdings BHD, a Malaysian firm. The interest, acquired by TIS for $400,000 in
March 1995, was acquired by the Company in connection with the purchase of TIS
effective September 30, 1996 (Note 2). The fair value of this asset was not
significant at the acquisition date. The JV was created for the purpose of
manufacturing, marketing and selling the TIS-4000 system in certain Asian
countries. If the JV requires funding, the Company may be required to
contribute in accordance with the agreed-upon proportions as defined in the JV
agreement. The Company has no significant involvement in, or influence over,
the JV. As of June 30, 1998, the JV had ceased all operations due to
unprofitability and the Asian economic downturn. The JV is currently in the
process of being dissolved and has adequate assets to settle its existing
obligations. The Company does not believe it will have any further
obligations regarding this JV after the wind-down.
23
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.INVESTMENTS IN JOINT VENTURES (CONTINUED)
The JV agreement also requires the Company to continue as a going concern and
to provide support services to the JV at market rates. If the Company does
not meet this requirement, it could be required to refund a contractually-
defined portion ($1,688,000 at June 30, 1998) of the $2,500,000 proceeds TIS
received in 1995 from the sale to the JV of licensing and marketing rights to
the TIS-4000 technology. Because of the remote possibility of the Company
being required to make such a refund, this obligation was determined to be
zero at the acquisition date. Further, as of July 30, 1998, because
operations have ceased, the Company does not expect that such refunds will be
required. In addition, the Company is not aware of any violations of the
requirements defined in the JV agreement nor does it anticipate any future
violations.
4.DEBT
On August 2, 1993, the Company entered into a long-term financing agreement
with Marine Midland Business Loans, Inc. (Midland Agreement). The Midland
Agreement was a Reducing Revolving Line-of-Credit with a borrowing limit that
was reduced monthly over the seven-year term of the loan. On June 3, 1998, the
Company fully repaid the remaining balance on this loan and terminated the
Midland Agreement.
On May 7, 1998, the Company entered into a long-term financing agreement
(Agreement) with Silicon Valley Bank (Silicon). The Agreement matures on May
7, 2000 and is subject to automatic annual renewal. Beginning in May 1999,
the Company may terminate the Agreement with no termination fee. Borrowings
on this line-of-credit are restricted to the lesser of $3,000,000 or 85% of
the Company's eligible receivables (Maximum Credit Limit). As of June 30,
1998, the Company could borrow an additional $1,385,000, up to the $2,630,000
Maximum Credit Limit.
The line bears interest at Silicon's prime borrowing rate (prime rate) plus 2%
(10.5% at June 30, 1998). The interest rate is adjustable on a quarterly
basis to prime rate plus 1.5% if the Company achieves a net loss less than
$750,000 for each previous twelve month rolling period. The Company must
continue to meet this quarterly financial goal, or the rate will be re-
adjusted to prime rate plus 2%. In addition to interest, the line bears a
monthly unused line fee at 0.125% of the Maximum Credit Limit less the average
daily balance of the outstanding loan during a month. The unused line fee is
also adjustable on a quarterly basis, if the Company achieves a net loss less
than $750,000 for each previous twelve-month rolling period, the monthly
unused line fee will be adjusted to 0.0625%. The Company must continue to
meet this quarterly financial goal, or the rate will be re-adjusted to 0.125%.
The debt is secured by all assets of the Company. The Agreement requires that
the Company maintain compliance with certain covenants related to tangible net
worth. At June 30, 1998, the Company was in compliance with such covenants.
Contractual maturities of long-term debt are as follows (in thousands):
1999 $ --
2000 1,245
Total $ 1,245
========
5.INCOME TAXES
The benefit for income taxes is based on income (loss) before income taxes as
follows (in thousands):
For the fiscal years ended June 30,
1998 1997 1996
-------------------------------------
Domestic $(2,179) $(2,471) $(1,160)
Foreign 18 279 (238)
-------------------------------------
Loss before income taxes $(2,161) $(2,192) $(1,398)
=====================================
24
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5.INCOME TAXES (CONTINUED)
Components of the benefit for income taxes are as follows (in thousands):
For the fiscal years ended June 30,
1998 1997 1996
-----------------------------------
Current benefit (provision):
Domestic $ 308 $ 682 $ 222
Foreign (49) 120 8
Total current benefit 259 802 230
Domestic deferred benefit (provision) (75) (39) 155
Benefit for income taxes $ 184 $ 763 $ 385
===================================
The benefit for income taxes differs from the amount determined by applying
the federal statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
For the fiscal years ended June 30,
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Tax benefit computed at statutory rate $ 735 $ 745 $ 475
State tax, net of federal benefit (2) (2) (2)
Nondeductible expenses and goodwill amortization (267) (32) (90)
Income tax credits -- -- (72)
Non-benefited losses of foreign subsidiaries -- (3) (33)
Recovery of prior year taxes paid 69 98 84
Change in valuation allowance (315) (89) 37
Other (36) 46 (14)
Benefit for income taxes $ 184 $ 763 $ 385
=================================
</TABLE>
The tax effects of significant temporary differences and credit and operating
loss carryforwards that give rise to the net deferred tax asset under SFAS No.
109 are as follows (in thousands):
June 30, 1998 JUNE 30, 1997
-----------------------------------
Allowances and other accrued liabilities $ 927 $1,047
Tax credit carryforwards 352 216
Net operating loss carryforwards 224 --
Valuation allowance (724) (409)
Net deferred tax asset $ 779 $ 854
===================================
As of June 30, 1998, the Company has paid foreign advance corporation tax of
$18,000 which may be utilized to reduce future foreign taxes due, domestic tax
credit carryforwards of $334,000 expiring in 2004 through 2008 and has a
domestic loss carryforward of $658,000 which will expire in 2013.
Realization of the Company's net deferred tax asset is dependent upon the
Company generating sufficient United States federal taxable income
(approximately $2,291,000) in future years to obtain benefit from the reversal
of net deductible temporary differences and from tax credit and net operating
loss carryforwards. The Company's management believes that, on a more likely
than not basis, the recorded net deferred tax asset is realizable. The amount
of deferred tax assets considered realizable is subject to adjustment in
future periods if estimates of future United States federal taxable income are
reduced.
25
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION
Hathaway Corporation Stock Option Plan
At June 30, 1998, 396,521 shares of common stock were available for grant
under the Company's stock option plans. Under the terms of the plans, options
may not be granted at less than 85% of fair market value. However, all options
granted to date have been granted at fair market value as of the date of
grant. Options generally become exercisable evenly over three years starting
one year from the date of grant and expire seven years from the date of grant.
During fiscal year 1997, the Company granted options for 125,000 shares of the
Company's common stock to certain key management personnel of HIA. Of the
total, 75,000 vest over seven years, subject to acceleration if certain
performance criteria are achieved by HIA, and expire ten years after the date
of grant. In fiscal year 1998, options to purchase 21,000 shares were
forfeited due to terminations. The remaining 50,000 shares vest over four
years only if certain performance criteria are met. Based on HIA's fiscal
years' 1998 and 1997 operating results, 17,200 options will never vest and
were forfeited, and options to purchase 11,200 shares were forfeited due to
terminations.
In fiscal year 1997, certain eligible employees of the Company exercised stock
options by surrendering to the Company their Company stock with an aggregate
fair market value of $161,000, in non-cash, tax-free transactions.
Option activity in fiscal years 1996, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE SHARES AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995 362,856 $2.88 228,856 $2.76
Granted 22,500 2.68
Canceled or forfeited (52,500) 2.75
-----------------------------------
Outstanding at June 30, 1996 332,856 $2.87 250,856 $2.88
Granted 503,350 3.58
Exercised (98,252) 2.46
Canceled or forfeited (29,250) 3.84
-----------------------------------
Outstanding at June 30, 1997 708,704 $3.45 187,104 $3.19
Granted 45,900 2.13
Canceled or forfeited (106,400) 3.48
-----------------------------------
Outstanding at June 30, 1998 648,204 3.36 303,138 $3.36
=====================================================================
</TABLE>
Exercise prices for options outstanding at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
TOTAL
$2.13 - $3.19 $3.50 - $4.31 $2.13 - $4.31
-------------------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding:
Number of options 295,004 353,200 648,204
Weighted average exercise price $ 2.73 $ 3.88 $ 3.36
Weighted average remaining contractual 4.27 years 4.6 years 4.45 years
life
Options Exercisable:
Number of options 141,604 161,534 303,138
Weighted average exercise price $ 2.86 $ 3.79 $ 3.36
</TABLE>
26
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION (CONTINUED)
The Company accounts for its stock-based compensation plans for employees
under the provisions of APB 25. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) which established an alternative method of expense
recognition for stock-based compensation awards to employees based on fair
values. Companies that elect to continue accounting for stock-based
compensation plans under the provisions of APB 25 must present certain pro
forma disclosures.
Pro forma information regarding net loss and loss per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
stock-based compensation plans using the fair value method prescribed by that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes pricing model with the following weighted average
assumptions:
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997
-----------------------------------------
Risk-free interest rate 5.7% 6.3%
Expected dividend yield 0.0% 0.0%
Expected life 6 years 6 years
Expected volatility 58.2% 58.5%
Using the fair value method of SFAS 123, the net loss and net loss per share
would have been adjusted to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997
---------------------------------------
<S> <C> <C>
Pro forma net loss $(2,128) $(1,686)
Pro forma basic and diluted net loss per share $ (0.50) $ (0.40)
</TABLE>
The weighted average fair value of options granted during fiscal years 1998
and 1997 was $1.28 and $1.98, respectively. The total fair value of options
granted was $59,000 and $978,000 in fiscal years 1998 and 1997, respectively.
These amounts are being amortized ratably over the vesting periods of the
options for purposes of this disclosure.
EMOTEQ CORPORATION STOCK OPTION PLAN
During fiscal 1998 the Company's wholly-owned subsidiary, Emoteq Corporation
(Emoteq), adopted a stock option plan. Under the terms of the plan, up to
360,000 (18%) of the 2,000,000 authorized shares of Emoteq are available for
stock option grants to officers and key employees of Emoteq. Options may not
be granted at less than 85% of fair market value, however all options granted
to date have been granted at fair market value as of the date of grant.
One hundred thousand of the options available under the plan are Time Vested
and 260,000 of the options available under the plan are Performance Vested.
The Time Vested options will become exercisable evenly over the fiscal years
from the date of grant through June 30, 2001. The Performance Vested options
may become exercisable during the fiscal years from the date of grant through
June 30, 2001 if certain performance criteria are met. All options will
expire as of the first Board of Directors meeting following the year ended
June 30, 2004. The Company may, in its discretion, purchase shares of Emoteq
acquired through the exercise of stock options.
27
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.STOCK COMPENSATION (CONTINUED)
Option activity during fiscal year 1998 was as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE REMAINING
NUMBER OF SHARES EXERCISE PRICE CONTRACTUAL LIFE
---------------------------- ---------------------------- -----------------------------
TIME PERFORMANCE Time PERFORMANCE Time PERFORMANCE
VESTED VESTED Vested VESTED Vested VESTED
---------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at June 30,
1997 -- -- $ -- $ --
Granted 80,000 187,600 1.37 1.37
Exercised -- -- -- --
Canceled or forfeited -- -- -- --
---------------------------- ---------------------------- -----------------------------
Outstanding at June 30,
1998 80,000 187,600 $ 1.37 $ 1.37 6 years 6 years
========================================================== =============================
</TABLE>
Exercise prices for options outstanding at June 30, 1998 under this plan are
as follows:
TIME VESTED PERFORMANCE
VESTED
--------------------------------
Number of Options Exercisable at 6/30/98 20,000 15,008
Weighted Average Exercise Price $ 1.37 $ 1.37
The potential dilution of the Company's ownership of Emoteq at June 30, 1998
is as follows:
COMPANY EMPLOYEES TOTAL
--------------------------------------------
Issued and Outstanding 1,640,000 -- 1,640,000
Exercisable Options -- 35,008 35,008
--------------------------------------------
Total 1,640,000 35,008 1,675,008
Percentage 97.9% 2.1% 100.0%
The Company has recognized $66,162 in compensation expense for the fiscal year
ended June 30, 1998 related to this plan.
7.LOANS RECEIVABLE FOR STOCK
The Company's loans receivable balance of $235,000 at June 30, 1998 and 1997
is comprised of a loan for $102,000 from the Leveraged Employee Stock
Ownership Plan and Trust (the Plan) and $133,000 from an Officer of the
Company.
The Plan allows eligible Company employees to participate in ownership of the
Company. The $102,000 receivable represents the unpaid balance of the
original $500,000 that the Company loaned to the Plan in fiscal year 1989 so
that the Plan could acquire from the Company 114,285 newly issued shares of
the Company's common stock. The note bears interest at an annual rate of
9.23% and matures May 31, 2004. The terms of the Plan require the Company to
make an annual contribution equal to the greater of i) the Board established
percentage of pretax income before the contribution (5% in fiscal years 1998,
1997 and 1996) or ii) the annual interest payable on the note. Company
contributions to the Plan were $9,000 in 1998, 1997 and 1996, representing
interest in all three years.
The $133,000 receivable represents the unpaid balance of a loan made in fiscal
year 1994 to an officer of the Company in connection with his purchase of the
Company's common stock, pursuant to the Officer and Director Loan Plan
approved by stockholders on October 26, 1989. The loan is full-recourse and
bears interest at the applicable federal rate determined by the Internal
Revenue Service (6.0% at June 30, 1998). The loan is due on demand but no
later than October 26, 1998. The Board of Directors of the Company has
proposed to authorize an extension of the due date of the loan to October 31,
2001, with all other terms of the loan to remain unchanged.
28
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.COMMITMENTS AND CONTINGENCIES
LEASES
At June 30, 1998, the Company maintained leases for certain facilities and
equipment. Minimum future rental commitments under all non-cancelable
operating leases are as follows (in thousands):
FISCAL YEAR Amount
---------------------------------------
1999 $1,006
2000 732
2001 566
2002 372
2003 223
Thereafter 223
--------
$3,122
========
Net rental expense was $869,000, $783,000 and $822,000 in fiscal years 1998,
1997 and 1996, respectively.
SHAREHOLDER RIGHTS PLAN
During fiscal year 1989, the Company adopted a shareholder rights plan under
which preferred stock purchase rights were distributed, one right for each
share of common stock outstanding. Each right entitles holders of the
Company's common stock to buy one one-hundredth of a newly issued share of
Series A Junior Participating Preferred Stock at an exercise price of $17.50,
following certain change of control events including a tender offer for, or
acquisition by, any entity of 20% or more of the Company's common stock.
At any time up to ten business days following the public announcement of
certain change of control events, the Company can redeem the rights at $.001
per right. If certain subsequent triggering events occur, the rights will give
shareholders the ability to acquire, upon payment of the then-current exercise
price, the Company's common stock or the common stock of an acquirer having a
value equal to twice the right's exercise price. The rights will expire June
25, 1999.
SEVERANCE BENEFIT AGREEMENTS
The Company has entered into annually-renewable severance benefit agreements
with certain key employees which, among other things, provide inducement to
the employees to continue to work for the Company during and after any period
of threatened takeover. The agreements provide the employees with specified
benefits upon the subsequent severance of employment in the event of change in
control of the Company and are effective for 24 months thereafter. The maximum
amount that could be required to be paid under these contracts, if such events
occur, aggregated approximately $1,876,000 as of June 30, 1998. (See Note 13
for discussion of termination of one of the severance benefit
agreements.)
EMPLOYMENT AGREEMENTS
Effective July 1, 1993, the Company entered into five-year employment
agreements with two of its executive officers. These agreements are renewable
after the initial five-year term on a year-to-year basis unless the Company or
the officers give termination notice at least sixty days prior to expiration
of the initial or subsequent terms. The agreements provide for base salary
plus 1) an annual incentive bonus to be paid in cash based on the achievement
of specified returns on equity and growth in share price plus dividends paid
for each fiscal year, 2) a long-term incentive bonus, 3) specified benefits
upon termination of employment (for reasons other than cause or change in
control) which are effective for one year thereafter and 4) a bonus paid for
gains on dispositions, if any, of certain subsidiaries and divisions of the
Company. (See Note 13 for discussion of amendment of one of the agreements
and termination of the other agreement.)
No annual bonus was paid in fiscal years 1998, 1997 or 1996.
29
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.COMMITMENTS AND CONTINGENCIES (CONTINUED)
To replace the expired long-term incentive bonus, on August 15, 1996, the
Board of Directors approved the issuance of stock options to the two executive
officers to purchase 148,500 shares at an exercise price equal to the fair
market value of $2.8125 at the grant date. The options become exercisable
evenly over three years starting one year from the date of grant and expire
seven years from the date of grant.
As of June 30, 1998, the maximum amount that could be required to be paid
under the termination clause of these agreements was approximately $779,000.
(See Note 13 for discussion of new employment agreement.)
STOCK REPURCHASE PROGRAM
Under an employee stock repurchase program approved by the Board of Directors,
the Company may repurchase its common stock from its employees at the current
market value. The Company's Agreement with Silicon limits employee stock
repurchases to $125,000 per fiscal year. Under Colorado law enacted in July
1994, repurchased shares of capital stock are considered authorized and
unissued shares and have the same status as shares that have never been
issued.
9.SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 requires disclosure
of operating segments, which as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance.
The Company operates in two different segments: Power and Process Business
(Power and Process) and Motion Control Business (Motion Control). Management
has chosen to organize the Company around these segments based on differences
in products and services.
POWER AND PROCESS BUSINESS
Hathaway's complete line of power instrumentation products helps ensure that
electric utilities provide high quality service to consumers of electricity.
The power products group produces a comprehensive and cost-effective range of
products designed exclusively for the power industry worldwide. Hathaway's
equipment assists the electric power system operators in operating and
maintaining proper system performance. The products, which are used to monitor
and control the power generation, transmission and distribution processes,
include fault recording products, fault location products, condition
monitoring (circuit breaker) products and remote terminal units (RTUs) for
Supervisory Control and Data Acquisition (SCADA) systems.
The process instrumentation products group manufactures and markets products
for the process and power industries including monitoring systems, calibration
equipment and process measurement instrumentation. The monitoring systems,
called visual anunciators and sequential event recorders, provide both visual
and audible alarms and are used to control processes in various plants
including, chemical, petroleum, food and beverage, pulp and paper, and
textiles. Calibration equipment is used to test and adjust instrumentation
for proper and accurate operation in measuring electricity, temperatures and
pressure within the process industry. Process measurement instrumentation
includes signal conditioning products and transducers used to measure such
variables as temperature, voltage, current and power in various industrial
applications.
Hathaway's state-of-the-art software system for Supervisory Control and Data
Acquisition (SCADA) and Distributed Control Systems (DCS) has been used to
fully automate such industrial applications as water and wastewater treatment
plants, glass manufacturing plants, oil and gas terminals and tank farm
facilities. In addition to expanding into its traditional process markets,
the system is being marketed to the power utility industry. The Company
expects to team the system with certain other Hathaway products and target the
combined product at substation automation and integration applications used in
power generation, transmission and distribution facilities.
30
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.SEGMENT INFORMATION (CONTINUED)
MOTION CONTROL BUSINESS
Motion Control offers quality, cost-effective products that suit a wide range
of applications in the industrial, medical, military and aerospace sectors, as
well as in manufacturing of analytical instruments and computer peripherals.
The end products using Hathaway technology include special industrial and
technical products such as satellite tracking systems, MRI scanners, and high
definition printers.
The group designs, manufactures and markets direct current (DC) brush and
brushless motors, related components, and drive and control electronics as
well as precision direct-current fractional horsepower motors and certain
motor components. Industrial equipment and military products are the major
application for the motors.
The group also manufactures optical encoders that are used to measure
rotational and linear movements of parts as well as fiber optic-based encoders
with special characteristics, such as immunity to radio frequency interference
and high temperature tolerance.
The following provides information on the Company's segments (in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
1998 1997 1996
----------------------- ----------------------- -----------------------
POWER AND MOTION POWER AND MOTION POWER AND MOTION
PROCESS CONTROL PROCESS CONTROL PROCESS CONTROL
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $27,476 $13,841 $27,069 $12,877 $23,337 $12,074
Equity income from investments in 222 -- -- -- -- --
joint ventures
Income (loss) before income taxes (4,659) 1,848 (3,402) 1,218 (2,961) 1,933
Identifiable assets 9,985 3,969 12,320 3,965 11,362 4,890
</TABLE>
The following is a reconciliation of segment information to consolidated
information:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED OR
AS OF JUNE 30,
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Segments' loss before income taxes $(2,811) $(2,184) $(1,028)
Corporate activities 650 (8) (370)
---------------------------------------
Consolidated loss before income taxes $(2,161) $(2,192) $(1,398)
=======================================
Segments' identifiable assets $13,954 $16,285 $16,252
Corporate assets and eliminations 3,866 4,192 4,873
---------------------------------------
Consolidated total assets $17,820 $20,477 $21,125
=======================================
</TABLE>
31
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.SEGMENT INFORMATION (CONTINUED)
The Company's wholly-owned foreign subsidiaries have been based in Northern
Ireland and Canada and are included in the accompanying consolidated financial
statements. The Company closed its Canadian operating facility during fiscal
year 1997. Financial information for the foreign subsidiaries is summarized
below (in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Revenues derived from foreign subsidiaries $7,197 $7,031 $7,261
Identifiable assets 3,723 4,335 4,636
</TABLE>
10.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Data for each of the four quarters in fiscal
years 1998 and 1997 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $9,539 $11,137 $ 9,804 $10,837
Operating loss (874) (79) (630) (683)
Net loss (589) (157) (690) (541)
Basic and diluted net loss per share $(0.14) $ (0.04) $ (0.16) $ (0.13)
1997 First Quarter Second Quarter Third Quarter FOURTH QUARTER
- ------------------------------------------------------------------------------------------------------------------
Revenues $8,818 $10,368 $ 9,443 $11,317
Operating income (loss) (540) (425) (1,186) 102
Net income (loss) (375) (226) (936) 108
Basic and diluted net income (loss) per $(0.09) $ (0.05) $ (0.22) $ 0.03
share
</TABLE>
11.RESTRUCTURING OF OPERATIONS
In the first quarter of fiscal 1997, management restructured the power
products manufacturing operations to produce operating efficiencies and to
better utilize local management talent and expertise. Accordingly, the
manufacturing operation located in Littleton, Colorado was consolidated in
1997 into two manufacturing facilities located in Kent, Washington and
Belfast, Northern Ireland. The cost of consolidating these manufacturing
facilities was not material and was paid in fiscal year 1997.
The Company recorded a $338,000 restructuring charge in the fourth quarter of
fiscal 1996 in connection with the reorganization of its Canadian and U.K.
operations. Effective June 30, 1996 the net assets and substantially all
operations of Hathaway Instruments Limited (HIL), the Company's subsidiary
located in Hoddesdon, England, were transferred to Hathaway Systems, Limited
(HSL), the Company's Belfast, Northern Ireland subsidiary. In connection with
the asset transfer, substantially all operations of HIL were combined with
the operations of HSL. In addition, the Company decided to close its Toronto,
Canada facility and to combine substantially all of its operations with the
operations of Hathaway Process Instrumentation operations, the Carrolton,
Texas subsidiary. The initiatives were aimed at reducing costs and enhancing
productivity and efficiency. The restructuring provision was primarily
comprised of estimated costs for employee severance benefits and fixed asset
writeoffs. The payouts related to the restructuring charge were made in
fiscal years 1996 and 1997 and the related restructuring accrual was fully
utilized.
32
<PAGE>
HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.INCOME TAX RULING REQUEST
In June 1998, the Company filed a request for an income tax ruling by the
Internal Revenue Service (IRS) with respect to the tax-free treatment of the
possible spin-off of its Power and Process Business. The proposed spin-off
would separate the Company's Power and Process Business from its Motion
Control Business. Prior to the spin-off, the Power and Process Business will
be organized under one of Hathaway's subsidiaries, Hathaway Systems
Corporation (HSC). If such transaction were to occur, all of the outstanding
shares of HSC would be distributed to the Hathaway shareholders, and
thereafter, the Power and Process Business would operate as a separate
publicly-owned company under the name of Hathaway Corporation and the Motion
Control Business would operate as a separate publicly-owned company under the
name of Hathaway Motion Control Corporation. The final decision as to whether
to proceed with the spin-off will be made by the Company's Board of Directors
only after the IRS has ruled on the Company's request and approval is
obtained from the Company's lenders and after consideration of other factors
at that time. Because management has not committed to such spin-off, the
Power and Process Business has not been treated as a discontinued operation.
13.SUBSEQUENT EVENTS
Effective August 13, 1998, Richard D. Smith was appointed President and CEO
of the Company. He succeeded Mr. Prince who retired from his employment with
the Company effective August 31, 1998. Mr. Prince will remain as Chairman of
the Board of Directors.
Effective August 31, 1998, Mr. Prince's severance benefit and employment
agreements were terminated upon his retirement and acceptance of his
resignation. Mr. Smith's severance benefit and employment agreements are
being amended and extended. The amended agreement will provide for 1) an
annual incentive bonus based on corporate performance, as defined each year
by the Board of Directors; 2) a long-term incentive bonus in the form of
stock options; 3) specified benefits upon termination of employment (for
reasons other than cause or change in control) which are effective for one
year thereafter; and 4) a bonus paid on dispositions of divisions or
subsidiaries of the Company.
The Company is in the process of entering into a Consulting Agreement with
Mr. Prince effective upon his retirement from employment on August 31, 1998.
Under the Agreement, Mr. Prince will be compensated for providing consulting
services to the Company primarily on matters involving the Company's Motion
Control Business, as well as other matters as requested by the President.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has not changed its accounting or auditing firm during the past 24
months, nor has it had any material disagreements with its accountants or
auditors regarding any accounting or financial statement disclosure matters.
PART III
The information required by Part III is included in the Company's Proxy
Statement, and is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is set forth in the sections entitled
"Election of Directors" (page 2), "Executive Officer" (page 3) and " Section
16(a) Beneficial Ownership Reporting Compliance" (page 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 9) 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, 1996, the Company has not entered into any material related party
transactions.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS
g) Consolidated Balance Sheets as of June 30, 1998 and June 30, 1997.
h) Consolidated Statements of Operations for each of the fiscal years in
the three-year period ended June 30, 1998.
i) Consolidated Statements of Cash Flows for each of the fiscal years in
the three-year period ended June 30, 1998.
j) Consolidated Statements of Stockholders' Investment for each of the
fiscal years in the three-year period ended June 30, 1998.
k) Notes to Consolidated Financial Statements.
l) Report of Independent Public Accountants.
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Subject Page
----------- ------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation. *
3.2 Amendment to Articles of Incorporation, dated September 24, 1993. *
3.3 By-laws of the Company adopted August 11, 1994. *
4 Rights Agreement between Hathaway Corporation and Bank of America National Trust and *
Savings Association, dated June 15, 1989. Incorporated by reference to the Company's
1989 Annual Report and Form 10-K for the fiscal year ended June 30, 1989.
10.1 The 1983 Incentive and Non-Qualified Stock Option Plan dated September 22, 1983. *
Incorporated by reference to the Company's Form S-8 filed May 10, 1984.
10.2 Severance Agreement dated June 15, 1989 between Hathaway Corporation and Richard D. *
Smith. Incorporated by reference to Exhibit 10n(ii) to the Company's 1989 annual
Report and Form 10-K for the fiscal year ended June 30, 1989.
10.3 Amendment to the 1983 Incentive and Non-Qualified Stock Option Plan dated January 4, *
1989. Incorporated by reference to the Company's Form S-8 filed October 25, 1990.
10.4 The 1989 Incentive and Non-Qualified Stock Option Plan dated January 4, 1989. *
Incorporated by reference to the Company's Form S-8 filed October 25, 1990.
10.5 Joint Venture Agreement between Zibo Kehui Electric Company and Hathaway Instruments *
Limited, for the establishment of Zibo Kehui Electric Company Ltd., dated July 25,
1993. Incorporated by reference to Exhibit 10.15 to the Company's Form 10-K for the
fiscal year ended June 30, 1994.
10.6 Promissory Note from Richard D. Smith to Hathaway Corporation, dated October 26, *
1993. Incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the
fiscal year ended June 30, 1994.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Subject Page
----------- ------- ----
<S> <C> <C>
10.7 Joint Venture Contract between Si Fang Protection and Control Company Limited and *
Hathaway Corporation for the establishment of Beijing Hathaway Si Fang Protection
and Control Company, Ltd., dated March 2, 1994. Incorporated by reference to
Exhibit 10.26 to the Company's Form 10-K for the fiscal year ended June 30, 1994.
10.8 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.
10.9 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.
10.10 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.
10.11 Supplementary Agreement between Wuhan Electric Power Instrument Factory, Beijing *
Huadian Electric Power Automation Corporation and Hathaway Corporation, dated August
30, 1995. Incorporated by reference to Exhibit 10.31 to the Company's Form 10-K for
the fiscal year ended June 30, 1995.
10.12 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.**
10.13 Purchase Agreement between Hathaway Corporation and Tate Engineering Services *
Corporation dated October 10, 1996, for the Company's purchase of all the issued and
outstanding stock of Tate Integrated Systems, Inc. Incorporated by reference to the
Company's Form 8-K dated October 25, 1996.
10.14 Joint Venture Agreement between KUB Holdings Bhd. And Tate Integrated Systems, L.P. *
dated March 9, 1995 and Supplement dated June 15, 1995. Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the fiscal year ended June 30, 1997.
10.15 License Agreement between Tate Integrated Systems, L.P. and KUB-TIS Controls Sdn. *
Bhd. dated March 9, 1995. Incorporated by reference to Exhibit 10.24 to the
Company's Form 10-K for the fiscal year ended June 30, 1997.
10.16 Loan and Security Agreement dated May 7, 1998 between Hathaway Corporation and 42
certain subsidiaries of Hathaway Corporation and Silicon Valley Bank.
10.17 Schedule to Loan and Security Agreement dated May 7, 1998 between Hathaway 57
Corporation and certain subsidiaries of Hathaway Corporation and Silicon Valley Bank.
10.18 Amendment Number One dated August 1, 1998 to the 1989 Incentive and Non-Qualified 63
Stock Option Plan.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Subject Page
----------- ------- ----
<S> <C> <C>
10.19 The Amended 1991 Incentive and Nonstatutory Stock Option Plan dated August 1, 1998. 65
21 List of Subsidiaries 41
22 Definitive Proxy Statement, dated September 17, 1998 for the Registrant's 1998 *
Annual Meeting of Shareholders.
23 Consent of ARTHUR ANDERSEN LLP. 37
27 Financial Data Schedule 34
</TABLE>
* These documents have been filed with the Securities and Exchange
Commission and are incorporated herein by reference.
** The Management Incentive Bonus Plans for the fiscal years ending June
30, 1997, 1998 and 1999 are omitted because they are substantially
identical in all material respects to the Management Incentive Bonus
Plan for the fiscal year ending June 30, 1996 previously filed with
the Commission, except for the fiscal years to which they apply.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of fiscal
1998.
36
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 31, 1998 (except with respect to the matter discussed in Note
13 to the Consolidated Financial Statements, as to which the date is August 13,
1998) included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (No. 2-73235) of the Hathaway Corporation
Amended 1980 Non-Incentive Stock Option Plan dated August 3, 1981, into the
Registration Statement on Form S-8 (No. 2-90687) of the 1983 Incentive and Non-
Qualified Stock Option Plan of Hathaway Corporation dated May 10, 1984, into the
Registration Statement on Form S-8 (No. 3344998) of the 1992 Employee Stock
Purchase Plan of Hathaway Corporation dated January 8, 1992, into the
Registration Statement on Form S-8 (No. 33-37473) of the 1989 Incentive and Non-
Qualified Stock Option Plan of Hathaway Corporation dated October 25, 1990, and
into the Registration Statements on Form S-8 (Nos. 3344997 and 333-21337) of the
1991 Incentive and Non-Statutory Stock Option Plan of Hathaway Corporation dated
January 8, 1992 and February 7, 1997, respectively.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 14, 1998.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HATHAWAY CORPORATION
By /s/ Richard D. Smith
-----------------------
Richard D. Smith
President, Chief Executive Officer and
Chief Financial Officer
Date: September 17, 1998
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.
<TABLE>
<CAPTION>
SIGNATURES Title DATE
<S> <C> <C>
/s/ Richard D. Smith President, Chief Executive September 17, 1998
- -------------------- Officer, Chief Financial Officer
Richard D. Smith and Director
/s/ Eugene E. Prince Chairman of the Board of Directors September 17, 1998
- --------------------
Eugene E. Prince
/s/ George J. Pilmanis Director September 17, 1998
- ----------------------
George J. Pilmanis
/s/ Delwin D. Hock Director September 17, 1998
- ------------------
Delwin D. Hock
/s/ Chester H. Clarridge Director September 17, 1998
- ------------------------
Chester H. Clarridge
/s/ Graydon D. Hubbard Director September 17, 1998
- ----------------------
Graydon D. Hubbard
</TABLE>
38
<PAGE>
OFFICERS AND DIRECTORS/INVESTOR INFORMATION
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS
Eugene E.Prince Richard D. Smith
Chairman of the Board President and Chief Executive Officer and Chief
Financial Officer
Delwin D. Hock Herbert Franson
Former Chairman of the Board of Directors, Assistant Treasurer, Corporate Controller
President and CEO of Public Service Company and Assistant Secretary
of Colorado
Susan M. Chiarmonte
Chester H. Clarridge Secretary
Consultant
SUBSIDIARIES AND DIVISIONS
DOMESTIC SUBSIDIARIES AND DIVISIONS
Graydon D. Hubbard Hathaway Systems Corporation
Retired Partner, Arthur Andersen LLP Littleton, Colorado
George J. Pilmanis Hathaway Automation Technology, a division of
President of Balriga International Corporation Hathaway Systems Corporation
Business Development in the Far East and Kent, Washington
Eastern Europe
Hathaway Process Instrumentation Corporation
INVESTOR INFORMATION Carrolton, Texas
ANNUAL MEETING
The Annual Meeting of Shareholders of Hathaway Industrial Automation, Inc.
Hathaway Corporation will be held at 2:00 p.m., Hunt Valley, Maryland
on Thursday, October 22, 1998 at the Lone Tree
Country Club, 9808 Sunningdale Boulevard, Hathaway Motors and Instruments, a division of
Littleton, Colorado. Hathaway Motion Control Corporation
Tulsa, Oklahoma
INFORMATION REQUESTS
Copies of the Company's reports to the Computer Optical Products, Inc.
Securities and Exchange Commission, excluding Chatsworth, California
exhibits, on Form 10-K and Form 10-Q may be
obtained from the Company without charge. Emoteq Corporation
Direct your written request to: Hathaway Tulsa, Oklahoma
Corporation, 8228 Park Meadows Drive, Evergreen, Colorado
Littleton, Colorado 80124.
INTERNATIONAL SUBSIDIARY
TRANSFER AGENT Hathaway Systems Limited
American Stock Transfer & Trust Company Belfast, Northern Ireland
40 Wall Street
New York, NY 10005
INDEPENDENT PUBLIC ACCOUNTANTS
ARTHUR ANDERSEN LLP
Denver, Colorado
</TABLE>
41
<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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LOAN AND SECURITY AGREEMENT -.L
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: HATHAWAY CORPORATION
HATHAWAY SYSTEMS CORPORATION
HATHAWAY PROCESS INSTRUMENTATION CORPORATION
HATHAWAY MOTION CONTROL CORPORATION
HATHAWAY INDUSTRIAL AUTOMATION, INC.
COMPUTER OPTICAL PRODUCTS, INC.
EMOTEQ CORPORATION
TATE INTEGRATED SYSTEMS, INC.
ADDRESS: 8228 PARK MEADOWS
LITTLETON, CO 80214
DATE: MAY 7, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount
of Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its sole
discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
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Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon
harmless from any loss, cost, expense, or liability, including payments made by
Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising
out of or in connection with any Letters of Credit. Borrower agrees to be bound
by the regulations and interpretations of the issuer of any Letters of Credit
guarantied by Silicon and opened for Borrower's account or by Silicon's
interpretations of any Letter of Credit issued by Silicon for Borrower's
account, and Borrower understands and agrees that Silicon shall not be liable
for any error, negligence, or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the Letters of Credit or
any modifications, amendments, or supplements thereto. Borrower understands
that Letters of Credit may require Silicon to indemnify the issuing bank for
certain costs or liabilities arising out of claims by Borrower against such
issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless
with respect to any loss, cost, expense, or liability incurred by Silicon under
any Letter of Credit as a result of Silicon's indemnification of any such
issuing bank. The provisions of this Loan Agreement, as it pertains to Letters
of Credit, and any other present or future documents or agreements between
Borrower and Silicon relating to Letters of Credit are cumulative.*
*NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS SECTION 1.5, THE TERM
"LETTERS OF CREDIT" WILL NOT INCLUDE THE EXISTING CASH SECURED LETTERS OF CREDIT
ISSUED BY COLORADO NATIONAL BANK, THE TOTAL AMOUNT OF WHICH DO NOT EXCEED
$750,000 IN THE AGGREGATE (THE "COLORADO NATIONAL BANK LETTERS OF CREDIT").
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement
or instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.*
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever requested by Silicon, use its best
efforts to cause such third party to execute and deliver to Silicon, in form
acceptable to Silicon, such waivers and subordinations as Silicon shall specify,
so as to ensure that Silicon's rights in the Collateral are, and will continue
to be, superior to the rights of any such third party. Borrower will keep in
full force and effect, and will comply with all the terms of, any lease of real
property where any of the Collateral now or in the future may be located.
*CERTAIN OF THE BORROWER'S CURRENT LEASES PROVIDE THAT IN ADDITION TO ANY
STATUTORY LANDLORD'S LIENS GRANTED UNDER APPLICABLE STATE LAW, BORROWER HAS
GRANTED THE LANDLORD OF SUCH LEASE A SECURITY INTEREST IN THE ASSETS OF BORROWER
AS SECURITY FOR ALL OBLIGATIONS OF BORROWER UNDER SUCH LEASE. BORROWER
REPRESENTS AND WARRANTS THAT (I) NO BORROWER HAS EXECUTED A UCC-1 FINANCING
STATEMENT OR SIMILAR INSTRUMENT OR DOCUMENT IN FAVOR OF ANY SUCH LANDLORD AND
WILL NOT DO SO WITHOUT SILICON'S PRIOR WRITTEN CONSENT, AND (II) BORROWER IS
PERFORMING ITS OBLIGATIONS UNDER ALL SUCH LEASES AND NO EVENT OF DEFAULT HAS
OCCURRED UNDER ANY SUCH LEASE.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or business
of Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments* proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower**.
*(THAT HAVE NOT ALREADY BEEN ACCRUED FOR)
**EXCEPT WITH RESPECT TO BORROWER'S OFFICES LOCATED AT THE BORROWER'S ADDRESS
AND IN SEATTLE, WASHINGTON
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
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4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day. *Together with each such schedule and
assignment, or later if requested by Silicon, Borrower shall furnish Silicon
with copies (or, at Silicon's request, originals) of all contracts, orders,
invoices, and other similar documents, and all original shipping instructions,
delivery receipts, bills of lading, and other evidence of delivery, for any
goods the sale or disposition of which gave rise to such Receivables, and
Borrower warrants the genuineness of all of the foregoing. Borrower shall also
furnish to Silicon an aged accounts receivable trial balance in such form and at
such intervals as Silicon shall request. In addition, Borrower shall deliver
to Silicon the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Silicon with copies of all credit memos** within two days
after the date issued.***
*IF REQUESTED BY SILICON, TOGETHER
**IN EXCESS OF $10,000
***IF THE STREAMLINE FACILITY AGREEMENT OF APPROXIMATE EVEN DATE HEREWITH AND
EXECUTED BY BORROWER AND SILICON TERMINATES, THEN BORROWER SHALL PROVIDE SILICON
WITH THE INFORMATION SET FORTH ABOVE ON A WEEKLY BASIS, OR MORE FREQUENTLY AS
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REQUESTED BY SILICON.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may specify,
pursuant to a blocked account agreement in such form as Silicon may specify.
Silicon or its designee may, at any time, notify Account Debtors that the
Receivables have been assigned to Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors
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for amounts and upon terms which Silicon considers advisable in its reasonable
credit judgment and, in all cases, Silicon shall credit Borrower's Loan account
with only the net amounts received by Silicon in payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or audit, but Silicon shall have the right to
disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business*; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for the sale of obsolete or unneeded Equipment
in the ordinary course of business; (v) store any Inventory or other Collateral
with any warehouseman or other third party; (vi) sell any Inventory on a sale-
or-return, guaranteed
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sale, consignment, or other contingent basis; (vii) make any loans of any money
or other assets**; (viii) incur any debts, outside the ordinary course of
business, which would have a material, adverse effect on Borrower or on the
prospect of repayment of the Obligations; (ix) guarantee or otherwise become
liable with respect to the obligations of another party or entity; (x) pay or
declare any dividends on Borrower's stock (except for dividends payable solely
in stock of Borrower); (xi) redeem, retire, purchase or otherwise acquire,
directly or indirectly, any of Borrower's stock***; (xii) make any change in
Borrower's capital structure which would have a material adverse effect on
Borrower or on the prospect of repayment of the Obligations; or (xiii) pay total
compensation, including salaries, fees, bonuses, commissions, and all other
payments, whether directly or indirectly, in money or otherwise, to Borrower's
executives, officers and directors (or any relative thereof) in an amount in
excess of the amount set forth on the Schedule; or (xiv) dissolve or elect to
dissolve. Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default would occur as a result of such
transaction.
*(PROVIDED THAT BORROWER MAY SEPARATE HATHAWAY MOTION CONTROL CORPORATION,
EMOTEQ CORPORATION AND COMPUTER OPTICAL PRODUCTS, INC. (COLLECTIVELY, THE "HMCC
PARTIES") FROM HATHAWAY SYSTEMS CORPORATION, HATHAWAY PROCESS INSTRUMENTATION
CORPORATION, HATHAWAY INDUSTRIAL AUTOMATION, INC., TATE INTEGRATED SYSTEMS, INC.
(COLLECTIVELY, THE "HSC PARTIES"), HATHAWAY SYSTEMS UK GROUP LIMITED, HATHAWAY
SYSTEMS LIMITED AND HATHAWAY INSTRUMENTS LIMITED (COLLECTIVELY WITH THE HSC
PARTIES, THE "NON-HMCC PARTIES") THROUGH A SALE, DISPOSITION OR TAX FREE
DISTRIBUTION OF EITHER THE HMCC PARTIES OR THE NON-HMCC PARTIES (THE "PERMITTED
DISPOSITION") AND THE CONTINUING BORROWER UNDER THIS AGREEMENT SHALL BE THE HSC
PARTIES, PROVIDED THAT IF AND ONLY IF PRIOR TO THE PERMITTED DISPOSITION,
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SILICON TO ITS SATISFACTION HAS DETERMINED (I) THAT THE ELIGIBLE RECEIVABLES OF
THE CONTINUING BORROWER (I.E., THE HSC PARTIES) ARE SUFFICIENT TO SUPPORT ALL
OBLIGATIONS AND NAY APPLICABLE RESERVES, (II) THAT THE OBLIGATIONS DO NOT EXCEED
THE CREDIT LIMIT AS MODIFIED HEREIN AFTER THE PERMITTED DISPOSITION AND (III)
THAT NO EVENT OF DEFAULT EXISTS BEFORE OR AS A RESULT OF THE PERMITTED
DISPOSITION. IN ADDITION, IMMEDIATELY AFTER THE COMPLETION OF THE PERMITTED
DISPOSITION, THE MINIMUM TANGIBLE NET WORTH REQUIREMENT OF SECTION 5.1 SHALL BE
REDUCED TO $6,000,000, AND THE MAXIMUM CREDIT LIMIT SHALL BE REDUCED TO
$2,000,000 ANND THE INTEREST RATE IN THE AGREEMENT (AS IIT IS DEFINED IN SECTION
2 OF THE SCHEDULE TO LOAN AND SECURITY AGREEMENT SHALL INCREASE TO A RATE EQUAL
TO PRIME PLUS 3.0% PER ANNUM, PROVIDED FURTHER THAT THE APPLICABLE INTEREST
RATE MAY BE REDUCED TO PRIME PLUS 1.5% (AND POSSIBLY LATER INCREASED TO PRIME
PLUS 3%) UPON COMPLIANCE BY BORROWER WITH THE TERMS FOR SUCH REDUCTION (OR
INCREASE) AS SET FORTH IN THE SCHEDULE TO LOAN AND SECURITY AGREEMENT.)
**EXCEPT FOR (A) INTERCOMPANY LOANS MADE AFTER THE DATE HEREOF, WHICH IN THE
AGGREGATE TOTAL LESS THAN $500,000, PROVIDED, FURTHER, THAT SUCH DOLLAR
LIMITATION SHALL NOT APPLY TO INTERCOMPANY LOANS MADE AFTER THE DATE HEREOF TO
OTHER CO-BORROWERS UNDER THIS AGREEMENT OR ANY GUARANTOR OF THE BORROWERS'
OBLIGATIONS UNDER THIS AGREEMENT AND (B) NON-CASH LOANS RELATED TO THE EXERCISE
OF STOCK OPTIONS FROM TIME TO TIME
***EXCEPT THAT BORROWER MAY REPURCHASE SHARES OF BORROWER'S STOCK PURSUANT TO
ANY EMPLOYEE STOCK PURCHASE OR BENEFIT PLAN, PROVIDED THAT THE TOTAL AMOUNT PAID
--------
BY BORROWER FOR SUCH STOCK DOES NOT EXCEED $125,000 IN ANY FISCAL YEAR,
PROVIDED, FURTHER, THAT, AFTER GIVING EFFECT THERETO, NO EVENT OF DEFAULT HAS
- --------
OCCURRED AND NO EVENT HAS OCCURRED WHICH, WITH NOTICE OR PASSAGE OF TIME OR
BOTH, WOULD CONSTITUTE AN EVENT OF DEFAULT
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2*, Borrower shall pay to Silicon a termination fee in an amount
equal to** of the Maximum Credit Limit***. The termination fee shall be due and
payable on the effective date of termination and
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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thereafter shall bear interest at a rate equal to the highest rate applicable to
any of the Obligations.
*PRIOR TO THE FIRST ANNIVERSARY DATE OF THIS AGREEMENT
**ONE PERCENT (1.0%)
***PROVIDED, HOWEVER, NO SUCH TERMINATION FEE SHALL BE CHARGED (I) IF THE
CREDIT FACILITY HEREUNDER IS REPLACED WITH A NEW FACILITY FROM ANOTHER DIVISION
OF SILICON VALLEY BANK OR (II) IF THIS AGREEMENT IS TERMINATED AFTER THE FIRST
ANNIVERSARY DATE OF THIS AGREEMENT OR (III) SILICON TERMINATES THIS AGREEMENT
PURSUANT TO THE TERMS OF SECTION 7.1(P) OR (Q)
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right
or remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other non-
monetary Obligation which by its nature cannot be cured; or (e) Borrower shall
fail to perform any other non-monetary Obligation, which failure is not cured
within 5 Business Days after the date due; or (f) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (h)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition; or (i) Dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n) or (o) Borrower shall
generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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under any bankruptcy, fraudulent conveyance or similar law; or (p) there shall
be a material adverse change in Borrower's business or financial condition; or
(q) Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date. Silicon
may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
*THERE SHALL BE A CHANGE IN THE MAJORITY OF THE BORROWER'S BOARD OF DIRECTORS
AFTER THE DATE HEREOF;
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Silicon's sole discretion,
to grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Silicon with respect to the foregoing shall be added
to and become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of Silicon's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional* per annum.
*1.5%
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general, non-
specific terms; (iii) The sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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Collateral, in its discretion, if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall Silicon's rights under the foregoing power of attorney or any of Silicon's
other rights under this Agreement be deemed to indicate that Silicon is in
control of the business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8. DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE
FOLLOWING MEANINGS:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the State
----
of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both, would
-------
constitute an Event of Default.
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SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
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"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Inventory" [NOT APPLICABLE].
------------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate.* Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
-------
Eligibility Requirements") are the minimum requirements for a Receivable to be
- ------------------------
an Eligible Receivable: (i) the Receivable must not be outstanding for more
than 90 days from its invoice date, (ii) the Receivable must not represent
progress billings, or be due under a fulfillment or requirements contract with
the Account Debtor, (iii) the Receivable must not be subject to any
contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iv) the Receivable must not be owing from an Account
Debtor with whom the Borrower has any dispute** (whether or not relating to the
particular Receivable), (v) the Receivable must not be owing from an Affiliate
of Borrower, (vi) the Receivable must not be owing from an Account Debtor which
is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not acceptable to Silicon, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon's satisfaction, with the United States
Assignment of Claims Act), (viii) the Receivable must not be owing from an
Account Debtor located outside the United States or Canada (unless pre-approved
by Silicon in its discretion in writing, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the
Receivable must not be owing from an Account Debtor to whom Borrower is or may
be liable for goods purchased from such Account Debtor or otherwise. Receivables
owing from one Account Debtor will not be deemed Eligible Receivables to the
extent they exceed 25% of the total eligible Receivables outstanding. In
addition, if more than 50% of the Receivables owing from an Account Debtor are
outstanding more than 90 days from their invoice date (without regard to
unapplied credits) or are otherwise not eligible Receivables, then all
Receivables owing from that Account Debtor will be deemed ineligible for
borrowing. Silicon may, from time to time, in its discretion, revise the
Minimum Eligibility Requirements, upon written notice to the Borrower.
*WITHOUT LIMITING THE FACT THAT THE DETERMINATION OF WHICH RECEIVABLES ARE
ELIGIBLE FOR BORROWING IS A MATTER OF SILICON'S DISCRETION, UNTIL SILICON GIVES
WRITTEN NOTICE TO THE CONTRARY, ALL RECEIVABLES OF HATHAWAY INDUSTRIAL
AUTOMATION, INC. SHALL BE DEEMED INELIGIBLE.
**IN EXCESS OF $5,000
"Equipment" means all of Borrower's present and hereafter acquired machinery,
---------
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
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indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
---------------
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit*, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
*(EXCLUDING, HOWEVER, THE COLORADO NATIONAL BANK LETTERS OF CREDIT AND THE
CERTIFICATES OF DEPOSIT SECURING SUCH COLORADO NATIONAL BANK LETTERS OF CREDIT)
"Reserves" means, as of any date of determination, such amounts as Silicon may
--------
from time to time establish and revise in good faith reducing the amount of
Loans and Letters of Credit which would otherwise be available to Borrower under
the lending formula(s) provided in the Schedule: (a) to reflect events,
conditions, contingencies or risks which, as determined by Silicon in good
faith, do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary
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<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
-----------------
understandings, representations or agreements between the parties which are not
- -------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
- --------------------------------------------------------------------------------
in connection herewith.
- -----------------------
9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
-----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
- --------------------------------------------------------------------
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
- --------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
- ------------------------------------------------------------------------------
only Silicon and not Borrower in connection with this Agreement. If either
- ----------------------------------------------------------------
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable
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<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. All attorneys' fees and costs
to which Silicon may be entitled pursuant to this Paragraph shall immediately
become part of Borrower's Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of the
Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and any prohibited assignment
shall be void. No consent by Silicon to any assignment shall release Borrower
from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
HATHAWAY CORPORATION
BY_/S/ RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/ SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
HATHAWAY SYSTEMS CORPORATION
BY /S/ RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/ SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
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<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
HATHAWAY PROCESS INSTRUMENTATION CORPORATION
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
HATHAWAY MOTION CONTROL CORPORATION
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
HATHAWAY INDUSTRIAL AUTOMATION, INC.
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
COMPUTER OPTICAL PRODUCTS, INC.
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
EMOTEQ CORPORATION
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
TATE INTEGRATED SYSTEMS, INC.
BY /S/RICHARD D. SMITH
PRESIDENT OR VICE PRESIDENT
BY /S/SUSAN M. CHIARMONTE
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /S/CHRIS HILL
TITLE VICE PRESIDENT
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<PAGE>
SILICON LOAN DOCUMENTS
- --------------------------------------------------------------------------------
SCHEDULE TO LOAN AND SECURITY AGREEMENT -.S.
57
<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: HATHAWAY CORPORATION
HATHAWAY SYSTEMS CORPORATION
HATHAWAY PROCESS INSTRUMENTATION CORPORATION
HATHAWAY MOTION CONTROL CORPORATION
HATHAWAY INDUSTRIAL AUTOMATION, INC.
COMPUTER OPTICAL PRODUCTS, INC.
EMOTEQ CORPORATION
TATE INTEGRATED SYSTEMS, INC.
ADDRESS: 8228 PARK MEADOWS
LITTLETON, CO 80124
DATE: MAY 7, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(SECTION 1.1): An amount not to exceed the lesser of: (i) $3,000,000 at
any one time outstanding (the "Maximum Credit Limit");
or (ii) 85% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above).
LETTER OF CREDIT SUBLIMIT
(SECTION 1.5): $500,000
================================================================================
2. INTEREST.
INTEREST RATE (SECTION 1.2):
A rate equal to the "Prime Rate" in effect from time to
time, plus 2.0% per annum. Provided, however, upon
Borrower achieving a net loss (on a consolidated basis)
of less than $750,000 at the end of any fiscal quarter
ending after the date hereof for the twelve month period
ending as of the end of such fiscal quarter, then the
interest rate shall be reduced to a rate equal to the
Prime Rate in effect from time to time, plus 1.50% per
annum.
Provided, further, that if thereafter Borrower incurs a
net loss (on a consolidated basis) of greater than
$750,000 at the end of any fiscal quarter ending after
the date thereof for the twelve month period ending as
of the end of such fiscal quarter, then the interest
rate shall be increased to a rate equal to the Prime
Rate in effect from time to time, plus 2.0% per annum.
Any such rate reduction shall go into effect following
Silicon's review and approval of Borrower's financial
statements (on a consolidated basis) showing Borrower is
entitled to such rate reduction.
If Borrower is entitled to a rate reduction and
thereafter the rate is increased pursuant to the terms
set forth above, Borrower shall still be entitled to
future rate reductions
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<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
(and subject to future rate increases) upon
compliance with the terms for such reduction (or
increase) set forth above.
Interest shall be calculated on the basis of a
360-day year for the actual number of days
elapsed. "Prime Rate" means the rate announced
from time to time by Silicon as its "Prime
Rate;" it is a base rate upon which other rates
charged by Silicon are based, and it is not
necessarily the best rate available at Silicon.
The interest rate applicable to the obligations
shall change on each date there is a change in
the Prime Rate.
MINIMUM MONTHLY
INTEREST (SECTION 1.2): Not Applicable.
================================================================================
3. FEES (SECTION 1.4):
Loan Fee: $30,000, payable concurrently herewith. (Any
Commitment Fee previously paid by the Borrower
in connection with this loan shall be credited
against this Fee.)
Collateral Monitoring
Fee: $1,500, per calendar month, payable in arrears
(prorated for any partial calendar month at the
beginning and at termination of this Agreement).
Unused Line Fee: Borrower shall pay Silicon an Unused Line Fee,
in addition to all interest and other fees
payable hereunder. The amount of the Unused Line
Fee shall be 0.125% per month multiplied by an
amount equal to the Maximum Credit Limit minus
the average daily balance of the outstanding
Loans. Provided, however, upon Borrower
achieving a net loss (on a consolidated basis)
of less than $750,000 at the end of any fiscal
quarter ending after the date hereof for the
twelve month period ending as of the end of such
fiscal quarter, then the Unused Line Fee shall
be reduced to an amount equal to 0.0625% per
month multiplied by an amount equal to the
Maximum Credit Limit minus the average daily
balance of the outstanding Loans. Provided,
further, that if thereafter Borrower incurs a
net loss (on a consolidated basis) of greater
than $750,000 at the end of any fiscal quarter
ending after the date thereof for the twelve
month period ending as of the end of such fiscal
quarter, then the Unused Line Fee shall be
increased to an amount equal to 0.125% per month
multiplied by an amount equal to the Maximum
Credit Limit minus the average daily balance of
the outstanding Loans. Any such reduction in the
unused line fee shall go into effect following
Silicon's review and approval of Borrower's
financial statements (on a consolidated basis)
showing Borrower is entitled to such reduction.
If Borrower is entitled to a reduction in the
Unused Line Fee and thereafter the Unused Line
Fee is increased pursuant to the terms set forth
above, Borrower shall still be entitled to
future reductions (and subject to future
increases) upon compliance with the terms for
such reduction (or increase) set forth above.
the Unused Line Fee shall be computed and paid
monthly, in arrears (prorated for any partial
calendar month at the beginning and at
termination of this agreement), and shall be due
on the last day of each calendar month.
================================================================================
4. MATURITY DATE
(SECTION 6.1): Two years from the date of this Agreement,
subject to automatic renewal as provided in
Section 6.1 above, and early termination as
provided in Section 6.2 above.
================================================================================
5. FINANCIAL COVENANTS
(SECTION 5.1): Borrower shall comply with all of the following
covenants. Compliance shall be
determined as of the end of each month (on a
consolidated basis), except as otherwise
specifically provided below:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of
not less than $8,000,000.
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<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
DEFINITIONS. For purposes of the foregoing financial covenants, the
following terms shall have the following meanings:
"Current assets", "current liabilities" and
"liabilities" shall have the meanings ascribed to them
by generally accepted accounting principles.
"Tangible Net Worth" shall mean the excess of total
assets over total liabilities, determined in accordance
with generally accepted accounting principles, with the
following adjustments:
(A) there shall be excluded from assets: (i) notes,
accounts receivable and other obligations owing to
the Borrower from its officers or other Affiliates,
and (ii) all assets which would be classified as
intangible assets under generally accepted
accounting principles, including without limitation
goodwill, licenses, patents, trademarks, trade
names, copyrights, capitalized software and
organizational costs, licenses and franchises
(B) there shall be excluded from liabilities: all
indebtedness which is subordinated to the
Obligations under a subordination agreement in form
specified by Silicon or by language in the
instrument evidencing the indebtedness which is
acceptable to Silicon in its discretion.
================================================================================
6. REPORTING.
(SECTION 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice date,
within fifteen days after the end of each month,
except when the Streamline Facility of
approximate even date is in effect.
2. Monthly accounts payable agings, aged by invoice
date within fifteen days after the end of each
month, except when the Streamline Facility of
approximate even date is in effect.
3. Monthly outstanding or held check registers, if
any, within thirty days after the end of each
month.
4. Monthly reconciliations of Receivable agings
(aged by invoice date), transaction reports, and
general ledger, within fifteen days after the
end of each month.
5.
6. Monthly unaudited financial statements, as soon
as available, and in any event within thirty
days after the end of each month.
7. Monthly Compliance Certificates, within thirty
days after the end of each month, in such form
as silicon shall reasonably specify, signed by
the Chief Financial Officer of Borrower,
certifying that as of the end of such month
Borrower was in full compliance with all of the
terms and conditions of this Agreement, and
setting forth calculations showing compliance
with the financial covenants set forth in this
Agreement and such other information as Silicon
shall reasonably request, including, without
limitation, a statement that at the end of such
month there were no held checks.
8. Quarterly unaudited financial statements, as
soon as available, and in any event within
thirty days after the end of each fiscal quarter
of Borrower.
9. Annual operating budgets (including income
statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal
year of Borrower within thirty days prior to the
end of each fiscal year of Borrower.
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<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------
10. Annual financial statements, as soon as available, and
in any event within 120 days following the end of
Borrower's fiscal year, certified by independent
certified public accountants acceptable to Silicon.
================================================================================
7. COMPENSATION
(SECTION 5.5): Not Applicable.
================================================================================
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(SECTION 3.2): See Representations and Warranties of Borrower dated
February 6, 1998.
PRIOR TRADE
NAMES OF BORROWER
(SECTION 3.2): See Representations and Warranties of Borrower dated
February 6, 1998.
EXISTING TRADE
NAMES OF BORROWER
(SECTION 3.2): See Representations and Warranties of Borrower dated
February 6, 1998.
OTHER LOCATIONS AND
ADDRESSES
(SECTION 3.3): See Representations and Warranties of Borrower
dated February 6, 1998.
MATERIAL ADVERSE
LITIGATION
(SECTION 3.10): None
================================================================================
9. OTHER COVENANTS
(SECTION 5.1): Borrower shall at all times comply with all of the
following additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all times
maintain its primary banking relationship with
Silicon.
2. GUARANTY BY U.K. COMPANIES. Borrower shall cause
each of Hathaway Systems U.K. Group, Ltd., and
Hathaway Systems, Ltd. (collectively, the "UK
Guarantors") to, concurrently with the date hereof,
execute and deliver to Silicon a guaranty, in form
and substance acceptable to Silicon in its sole
discretion, pursuant to which the UK Guarantors shall
guarantee the obligations of the Borrower (the "UK
Guaranty"). Borrower
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<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
shall cause such UK Guaranty to continue in full
force and effect while any obligations remain
outstanding.
Borrower: Borrower:
HATHAWAY CORPORATION HATHAWAY SYSTEMS CORPORATION
By /s/Richard D. Smith By /s/ Richard D. Smith
Vice President President
By /s/ Susan M. Chiarmonte By /s/ Susan M. Chiarmonte
Secretary Secretary
Borrower: Borrower:
HATHAWAY PROCESS INSTRUMENTATION HATHAWAY MOTION CONTROL CORPORATION
CORPORATION
By /s/ Richard D. Smith By /s/ Richard D. Smith
Vice President Vice President
By /s/ Susan M. Chiarmonte By /s/ Susan M. Chiarmonte
Secretary Secretary
Borrower: Borrower:
HATHAWAY INDUSTRIAL AUTOMATION, INC. COMPUTER OPTICAL PRODUCTS, INC.
By /s/ Richard D. Smith By /s/ Richard D. Smith
Vice President Vice President
By /s/ Susan M. Chiarmonte By /s/ Susan M. Chiarmonte
Secretary Secretary
Borrower: Borrower:
EMOTEQ CORPORATION TATE INTEGRATED SYSTEMS, INC.
By /s/ Richard D. Smith By /s/ Richard D. Smith
Vice President Vice President
By /s/ Susan M. Chiarmonte By /s/ Susan M. Chiarmonte
Secretary Secretary
Silicon:
SILICON VALLEY BANK
By /s/ Chris Hill
Title Vice President
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<PAGE>
HATHAWAY CORPORATION AMENDMENT NO. 1 TO THE 1989 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
- --------------------------------------------------------------------------------
AMENDMENT NO. 1
TO THE
HATHAWAY CORPORATION
1989 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
THIS AMENDMENT is made this 13th day of August, 1998, by Hathaway
Corporation, a Colorado corporation (the "Corporation").
WHEREAS, the Corporation entered into and executed the 1989 Incentive
and Non-Qualified Stock Option Plan of Hathaway Corporation (the "Plan"); and
WHEREAS, Article 16 of the Plan provides that the Board of Directors
of the Corporation "may amend or discontinue this Plan at any time..."; and
WHEREAS, the Corporation desires to amend the Plan.
NOW THEREFORE, the Corporation hereby amends the Plan as follows:
1. A new Section 13.4 hereby is added to the Plan to read in its
entirety as follows:
13.4 ACCELERATION OF VESTING IN APPROVED TRANSACTIONS: In
the event of any Approved Transaction, notwithstanding any contrary
waiting period or vesting schedule in any stock option agreement, any
outstanding option granted under the Plan and held, as of the date of
such Approved Transaction, by an Optionee whose employment with the
Corporation or a Subsidiary is affected in such Approved Transaction,
shall become exercisable in full (100% vested) in respect of the
aggregate number of shares covered thereby as of the date of the
Approved Transaction. An Approved Transaction will include (a) the
acquisition directly or indirectly by any Person (other than the
Corporation, any Subsidiary, or any employee stock ownership plan or
other employee benefit plan of the Corporation) during any period of
12 consecutive months of beneficial ownership (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as
in effect on the date of this Agreement) of voting stock of any
Subsidiary representing in the aggregate more than 50% of the total
voting power of all voting stock of the Subsidiary; (b) the sale,
exchange or other disposition (other than by reason of the pledge or
assignment of such assets as security for a loan) of all or
substantially all of the assets of any Subsidiary or any division of
the Corporation or a Subsidiary, if immediately after such transaction
substantially all of such assets are not owned by the Corporation, any
Subsidiary, or any employee stock ownership plan or other employee
benefit plan of the Corporation. A "division" means any operating or
business unit designated by the Corporation, in its discretion, as
constituting a division of the Corporation or of a Subsidiary. An
Optionee's employment with the Corporation or a Subsidiary is affected
in an Approved Transaction if such employment is terminated by the
Corporation or Subsidiary solely as a result of the Approved
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HATHAWAY CORPORATION AMENDMENT NO. 1 TO THE 1989 INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
- --------------------------------------------------------------------------------
Transaction, if such employment is transferred to any employer other
than the Corporation or a Subsidiary, or if the Optionee remains
employed with a Subsidiary which is no longer a Subsidiary of the
Corporation as a result of the Approved Transaction. The Corporation
will determine whether any Optionee's employment is affected by any
Approved Transaction.
2. Except as provided above, the Corporation hereby reaffirms and
readopts each and every other provision of the Plan, to the extent not
inconsistent with this amendment.
3. The effective date of this amendment shall be August 1, 1998, and
shall apply to all currently outstanding stock option agreements and all future
stock options granted under the Plan.
IN WITNESS WHEREOF, the officers of the Corporation, having been duly
authorized by the Board of Directors of the Corporation, have signed this
amendment as of the date first written above.
HATHAWAY CORPORATION
By:/s/Richard D. Smith
--------------------
President
ATTEST:
/s/Susan M. Chiarmonte
- -----------------------
Secretary
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE & NONSTATUTORY STOCK OPTION PLAN
-----------------------------------------------------------------------------
HATHAWAY CORPORATION
1991 INCENTIVE & NONSTATUTORY
STOCK OPTION PLAN
AS AMENDED
ARTICLE 1
Purpose
-------
THIS 1991 INCENTIVE & NONSTATUTORY STOCK OPTION PLAN (the "Plan") is adopted
this 19th day of September, 1991, and amended by First Amendment effective
November 29, 1993, by Second Amendment effective October 24, 1996 and by Third
Amendment effective August 1, 1998, by Hathaway Corporation (the "Company") in
order that selected officers, directors, and certain employees of the Company
and its present and future subsidiaries (as defined in Section 424(f) of the
Code) who are responsible for the conduct and management of the Company's
business or who are involved in endeavors significant to its success may be
given an inducement to acquire a proprietary interest in the Company, to gain an
added incentive to advance the interests of the Company, and to remain
affiliated with the Company. Accordingly, the Company will offer to sell shares
of Common Stock as provided in this Plan to such Qualified Individuals as are
designated in accordance with the provisions of the Plan.
ARTICLE 2
Definitions
-----------
2.1 "Board means the board of directors of the Company.
2.2 "Code" means the Internal Revenue Code of 1986, as amended.
2.3 "Common Stock" means authorized but unissued shares or treasury shares, or
any combination thereof, of Common Stock, without par value, of the Company.
2.4 "ERISA" means the Employee Retirement Income Security Act.
2.5 "Fair Market Value" of a share of Common Stock on any date shall be
the average of the closing bid and asked price in the over-the-counter market,
as reported by the National Associate of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") for the date in question, or such other system then
in use. If no sale of the Common Stock shall have been made on that day, the
determination of Fair Market Value shall be made as stated above on the next
preceding day on which there was a sale of Common Stock or, if on any such date
the shares of Common Stock are not quoted by any such organization, the average
of the closing bid and asked priced as furnished by a professional market maker
making a market in the Common Stock selected by the Committee. In the event the
Common Stock is not traded in the over-the-counter market or no market maker is
making a market in the Common Stock, the Fair Market Value of a share of Common
Stock on any date shall be determined in good faith by the Committee.
2.6 "Option StocK" or "Optioned Stock" means shares of Common Stock for
which options to purchase have been granted under the Plan.
2.7 "Participant" means a Qualified Individual to whom a Stock Option is
granted.
2.8 "Plan" means the Hathaway Corporation 1991 Incentive and Nonstatutory
Stock Option Plan.
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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2.9 "Qualified Individual" means a director, officer, or employee of the
Company whose judgement, initiative, and continued efforts are expected to
contribute to the successful conduct of the business of the Company, as
determined by the Committee.
2.10 "Stock Option" means the right granted under the Plan to a Participant
to purchase, at such time or times and at such price or prices (the "Stock
Option Price"), as determined by the Committee and as specified in his or her
Stock Option Agreement, the number of shares of Common Stock specified in his or
her Stock Option Agreement.
2.11 "1934 Act" means the Securities Exchange Act of 1934, as amended.
ARTICLE 3
Incentive Stock Options and Non-Statutory Stock Options
-------------------------------------------------------
3.1 The Stock Options granted under the Plan may be either:
a) Incentive Stock Options ("ISOs") which are intended to be
"Incentive Stock Options," as that term is defined in Code Section 422; or
b) Non-Statutory Stock Options ("NSOs") which are intended to be
options that do not qualify as "Incentive Stock Options" under Code Section 422.
3.2 All Stock Options granted under this Plan shall be ISOs unless the
agreement evidencing such Stock Options (the "Stock Option Agreement")
designates the Stock Options granted thereunder, or a specified portion thereof,
as NSOs. Subject to the other provisions of the Plan, a Participant may receive
ISOs and NSOs at the same time, provided that the ISOs and NSOs are designated
as such. Except as otherwise provided herein, all of the provisions and
requirements of the Plan relating to Stock Options shall apply to ISOs and NSOs.
ARTICLE 4
Administration
--------------
4.1 Committee. The Plan shall be administered either by the Board or by
---------
one or more committees of two or more persons appointed by the Board (any such
committee the "Committee"). References to Committee shall mean any committee so
appointed or, if none, the Board.
4.2 Authority of Committee. The Committee shall have full authority to
----------------------
administer the Plan,including authority to interpret and construe any provision
of the Plan and to adopt such rules and regulations for administering the Plan
as it may deem necessary in order to comply with the requirement of the Plan, or
in order to conform to any regulation or to any change in any law or regulation
applicable thereto. In addition, the Committee is authorized to:
a) direct the grant of Stock Options;
b) determine which Qualified Individuals shall be granted Stock
Options, when such grant shall be made, and the number of shares of Option
Stock to be covered by such Stock Options;
c) determine the Fair Market Value of the Option Stock covered by
each Stock Option;
d) determine the nature and amount of consideration for the Option
Stock;
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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e) determine the manner and the times at which the Stock Options
shall be exercisable, including the discretion to accelerate the time of
the exercise of such Stock Options;
f) determine other conditions and limitation, if any, on each Stock
Option granted under the Plan (which need not be identical);
g) prescribe the form or forms of the instruments evidencing the
Stock Options and any restrictions imposed on the Option Stock and of any
other instruments required under the Plan and to change such forms from time
to time;
h) waive compliance (either generally or in any one or more
particular instances) by a Participant with the requirements of any rule or
regulation with respect to a Stock Option, subject to the Plan provisions or
other applicable requirement;
i) waive any restrictions imposed with respect to the
transferability of shares acquired by the exercise of Stock Options; and
j) decide all questions and settle all controversies and disputes
which may arise in connection with the Plan.
4.3 Actions of Committee. All actions taken and all interpretations and
--------------------
determinations made by the Committee in good faith (including determinations of
Fair Market Value) shall be final and binding upon all Participants, the
Company, and all other interested persons.
4.4 Indemnification. In addition to any other rights of indemnification,
---------------
the Company shall provide indemnification, either directly or indirectly through
insurance policies or otherwise, for directors, Committee members, employees and
former employees against liabilities and expenses they incur with respect to
this Plan in connection with holding such positions, in each case to the fullest
extent permitted by law. Whenever such a person seeks indemnification by the
Company against any liability or expenses incurred in any threatened, pending or
completed proceeding in which such person is a party because he or she holds or
has held any such position, the Company shall proceed diligently and in good
faith to make a determination, in a manner permitted by the Colorado Corporation
Code, whether indemnification is permissible in the circumstances. If
indemnification is determined to be permissible, the Company shall indemnify
such persons to the fullest extent permissible, provided that any
indemnification for expenses shall be limited to the amount found to be
reasonable by an evaluation conducted in a manner permitted by the Colorado
Corporation Code, and this authorization shall include reimbursement for
reasonable expenses incurred in advance of final disposition of the proceeding.
This Section shall not be interpreted to limit in any manner any indemnification
the Company may be required to pay pursuant to the Colorado Corporation Code,
any court order, or any contract, resolution or other commitment which is
legally valid.
ARTICLE 5
Option Shares for Directors
---------------------------
5.1 Shares Available. No more than 30% of the shares of Stock for which
----------------
Stock Options may be granted and which may be sold pursuant to Article 6 may be
granted as Stock Options to non-employee directors of the Company and no non-
employee director may be granted Stock Options to purchase more than 80,000
shares of Option Stock. The sum of (i) the aggregate number of shares sold to
non-employee directors under the Plan and (ii) the aggregate number of shares
subject to outstanding Stock Options granted to non-employee directors shall not
exceed the limit on the number of shares specified for non-employee directors
under this Article (after any adjustment pursuant to Article 8). All shares for
which a Stock Option is granted under this Article and which for any reason are
released from such Stock Option shall be available for the granting of further
Stock Options under this Agreement to any Optionee, including non-employee
directors.
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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5.2 Other Terms. Stock Options granted to directors under this Article 5
-----------
shall be exercisable in cumulative annual installments as follows: one-third of
the Stock Options granted may be exercised on or after the first anniversary of
the date of grant; an additional one-third of the Stock Options granted may be
exercised on or after the second anniversary of the date of grant; and the final
one-third of the Stock Options granted may be exercised on or after the third
anniversary of the date of grant. In the case of any Stock Options granted
under this Article or that were previously granted under this Article which are
subsequently cancelled prior to their expiration and for which replacement Stock
Options are granted in immediate substitution therof, such replacement Stock
Options will retain the same cumulative annual installment exercise schedule as
the Stock Options which were so cancelled and replaced. To the extent
unexercised, each Stock Option granted under this Article 5 shall expire seven
(7) years from the date of grant, unless earlier terminated pursuant to this
Plan. All of the remaining terms and conditions of this Plan, including,
without limitation, its provisions respecting the date of grant, form of
agreement, and manner of exercise, shall be fully applicable to the grant of
Stock Options to directors. The provision of Article 6 relating to the number
of shares subject to the grant of Stock Options under the Plan shall be
qualified by this Article 5 in the case of directors. Despite their common
provisions, the arrangements set forth in this Article for the granting of Stock
Options to directors shall be regarded as separate and distinct from the
arrangements set forth in other Articles for the granting of Stock Options to
other Participants.
ARTICLE 6
Participation, Stock Option Price, and Stock Option Limitations
---------------------------------------------------------------
6.1 Stock Subject to Plan. Subject to Article 8, the number of shares
---------------------
available for issued under the Plan shall not exceed 900,000 shares of Common
Stock (including Options granted under Article 5). All shares for which a Stock
Option is granted under this Plan, which for any reason are released from such
Stock Option, shall be available for the granting of further Stock Options under
this Plan. A total of 200,000 shares available for issue under the Plan are
reserved for Stock Options which may be granted to key employees of any
companies acquired after August 15, 1996 who are Qualified Individuals.
6.2 Participation. ISOs shall not be granted to non-employee Directors.
-------------
Qualified Individuals who have been granted Stock Options may, if otherwise
eligible, be granted an additional Stock Option or Stock Options.
6.3 Stock Option Price. The Stock Option Price for an ISO shall be the
------------------
Fair Market Value of the Common Stock on the date the Stock Option is granted;
provided, however, if, at the time an ISO is granted, the person to whom the
- --------- -------
Option is granted owns more than 10% of the total combined voting power of all
classes of stock of the Company, the Stock Option Price of such ISO may not be
less than 110% of the Fair Market Value of the Stock Option. The Stock Option
Price for NSOs shall be determined by the Committee, but in no event may the
Stock Option Price be less than 85% of Fair Market Value of the Common Stock on
the date of grant.
6.4 Grant of Stock Option. For all purposes, the date of grant of a
---------------------
Stock Option under the Plan shall be the date on which the Committee makes the
determination granting such Stock Option, or the date of shareholder approval of
the Plan if later, and no grant shall be deemed effective prior to such date.
Each Stock Option shall be evidenced by a written Stock Option Agreement
containing such terms and provisions as the Committee may determine, subject to
the provisions of this Plan.
6.5 Period of Grant. No Stock Option shall be granted under this Plan
---------------
after ten years from the date this Plan is adopted by the Board.
6.6 Other Limitations The Committee may impose such other limitations
-----------------
upon the exercise of a Stock Option as the Committee shall deem appropriate, in
its discretion, including but not limited to Stock Option vesting provisions,
periods for exercise of Stock Options, limitations on transferability of Stock
Options, and manner of exercise of Stock Options, and any such limitations shall
be provided in the Stock Option Agreement for such Stock Option.
6.7 Maximum Option Value for ISO. In any calendar year, no Qualified
----------------------------
Individual may be granted ISOs for which the Fair Market Value (determined as of
the time the ISO is granted) of the Stock with respect to which ISOs are
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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exercisable for the first time by the Qualified Individual (under all such plans
of the Company) shall exceed $100,000. This Section 6.7 shall be applied by
taking ISOs into account in the order in which the ISOs were granted.
ARTICLE 7
Exercise of Stock Options
-------------------------
7.1 Time of Exercise. Stock Options granted under this Plan shall be
----------------
exercisable at the time prescribed in the Stock Option Agreement, as determined
by the Committee, and may be exercised at any time from the date prescribed in
the Stock Option Agreement until the expiration of ten (10) years from the date
of the grant of such Stock Option, unless such Stock Option is terminated
earlier, as provided in this Plan. Upon the expiration of ten years from the
date of the grant of a Stock Option, any such unexercised Stock Option shall be
deemed to have been forfeited, shall terminate and may not thereafter be
exercised; provided, however, if at the time an ISO is granted, the Qualified
-------- --------
Individual to which the ISO is granted owns more than 10% of the total combined
voting power of all classes of stock of the Company, the ISO may not be
exercisable after the expiration of five (5) years from the date such ISO is
granted.
7.2 Manner of Exercise. Each exercise of a Stock Option granted shall be
------------------
made as provided in the Stock Option Agreement.
7.3 Issuance of Stock. On the exercise date specified in the notice of
-----------------
exercise as provided in the Stock Option Agreement, the Company shall deliver,
or cause to be delivered to the Participant, stock certificates for the number
of shares with respect to which the Stock Option is being exercised, providing
that payment has been made therefor. Delivery of the shares may be made at the
office of the Company or at the office of a transfer agent appointed for the
transfer of shares of the Company, as the Company shall determine. Shares shall
be registered in the name of the Participant or his or her legal representative,
as the case may be. In the event of any failure to take and pay, on the dated
stated, for the full number of shares specified in the notice of exercise, the
Stock Option shall become inoperative only as to those shares which are taken,
but shall continue with respect to any remaining shares subject to the Stock
Option as to which exercise has not yet been made.
7.4 Payment for Stock. Common Stock subject to a Stock Option shall be
-----------------
issued only upon receipt by the Company of full payment in consideration for
such stock, as set forth in the Stock Option Agreement. The Committee, in its
sole discretion, may permit a Participant to surrender to the Company shares of
Common Stock previously acquired by the Participant as part or full payment for
the exercise of a Stock Option. Such surrendered shares shall be valued at
their Fair Market Value on the date of exercise. Notwithstanding the above, the
Company shall not be obligated to deliver any Optioned Stock unless and until,
in the opinion of the Company's counsel, all applicable federal and state laws
and regulations have been complied with, nor , in the event the Common Stock is
at the time listed upon any stock exchange, unless and until the shares to be
delivered have been listed or authorized to be added to the list upon official
notice of issuance upon such exchange, nor unless or until all other legal
matters in connection with the issuance and delivery of such Option Stock have
been approved by the Company's counsel. Without limiting the generality of the
foregoing, the Company may require from the Participant such investment
representation or such agreement, if any, as counsel for the Company may
consider necessary in order to comply with the Securities Act of 1933 and may
require that the Participant agree that any sale of the Option Stock obtained by
exercise of a Stock Option will be made only in such manner as is permitted by
the Committee and that he or she will notify the Company when he or she makes
any disposition of the Option Stock whether by sale, gift, or otherwise. The
Company shall use its best efforts to effect any such compliance and listing and
the Participant shall take any such action reasonably requested by the Company.
A Participant shall have the rights of a shareholder only as to shares actually
acquired by him under the Plan.
7.5 Termination of Employment Before Exercise. If a Participant's
-----------------------------------------
employment with the Company (or, in the case of a director, the directorship of
the Company) shall terminate for any reason other than the Participant's
disability (as defined in Code Section 22(e)(3)) or death, any Stock Option then
held by the Participant, to the extent then exercisable under the applicable
Stock Option Agreement(s), shall be cancelled on the effective date of the
Participant's termination of employment (or directorship). If a Participant's
employment with the Company (or, in the case of a director, the directorship of
the Company) shall terminate because of the disability (as defined in Code
Section 22 (e)(3)) of the Participant, any Stock
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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Option then held by the Participant, to the extent then exercisable under the
applicable Stock Option Agreement(s), shall remain exercisable for 3 months from
the date of such termination of employment or directorship because of the
Participant's disability. If a Participant's employment with the Company (or, in
the case of a director, the directorship of the Company) shall terminate because
of the death of the Participant any Stock Option then held by the Participant,
to the extent then exercisable under the applicable Stock Option Agreement(s),
shall remain exercisable for 6 months from the date of such termination of
employment or directorship because of the Participant's death. Notwithstanding
the above, no Stock Option may be exercised after the expiration of the Stock
Option, as provided in the Stock Option Agreement.
7.6 Disposition of Forfeited Stock Options. Any shares of Common Stock
--------------------------------------
subject to Stock Options forfeited by a Participant shall not thereafter be
eligible for purchase by the Participant but may be made subject to Stock
Options granted to other Participants.
7.7 Bonuses. The Committee, in conjunction with any NSOs granted under
-------
this Plan, but not including any option granted to a director, may grant a cash
bonus to any Participant to pay in whole or in part for any portion of the
exercise price or any tax liability incurred by his/her exercise of such NSO.
In no event may any bonus exceed the difference between the Fair Market Value of
the Stock (as determined using the procedures found in Section 2.5 of this Plan)
and the exercise price. The amount of any bonus and the time of payment shall
be determined in the sole discretion of the Committee and shall be included in
any Stock Option Agreement in conjunction with which a bonus is to be granted.
ARTICLE 8
Capital Changes
---------------
8.1 Stock Changes. In the event of a change to the shares of Common
-------------
Stock by reason of recapitalization, stock dividend, stock split, combination of
shares, exchange of shares, change in corporate structure or otherwise,
appropriate adjustments shall be made in:
a) the number of shares of Common Stock theretofore made subject to
Stock Options and in the purchase price of said shares; and
b) the aggregate number of shares which may be made subject to Stock
Options.
Such adjustment shall be made by the Committee, in its sole discretion. If
any of the foregoing adjustments shall result in a fractional share, the
fraction shall be disregarded, and the Company shall have no obligation to make
any cash or other payment with respect to such a fractional share.
8.2 Acquisition Event. As used in Section 8.3, "Acquisition Event"
-----------------
means:
a) any merger or consolidation of the Company with one or more other
corporations, whether or not the Company is the surviving corporation;
b) any sale or other disposition of all or substantially all of the
assets of the Company pursuant to a plan which provides for the liquidation
of the Company;
c) any exchange by the holders of more than 50% of the outstanding
shares of Common Stock for securities issued by another entity, or in whole
or in part for cash or other property, pursuant to a plan of exchange approved
by the holders of a majority of such outstanding shares; or
d) a change in the majority of members of the Board of Directors of
the Company other than by voluntary resignation; or
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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e) any transaction to which Code Section 424(a) applies and to which
the Company is a party.
8.3 Acceleration, Substitution or Cancellation Upon Acquisition.
-----------------------------------------------------------
a) In connection with any Acquisition Event and upon such terms and
conditions as the Committee may establish, the Participant may be given the
opportunity to make a final settlement for the entire unexercised portion of
any Stock Option granted under this Plan, including any portion not then
currently exercisable, in any one or more of the following manners:
1) Surrender such unexercised portion for cancellation in
exchange for the payment in cash of an amount not less than the
difference between the value per share of Common Stock as measured by
the value to be received by the holders of the outstanding shares of
Common Stock pursuant to the terms of the Acquisition Event, as
determined by the Committee in its discretion and the price at which
such Stock Option is or would become exercisable, multiplied by the
number of shares represented by such unexercised portion.
2) Exercise such Stock Option, including any portion not then
otherwise currently exercisable, prior to the Acquisition Event, so that
the Participant would be entitled, with respect to shares thereby acquired,
to participate in the Acquisition Event as a holder of Common Stock.
3) Surrender such Stock Option for cancellation in exchange for a
substitute Stock Option, providing substantially equal benefits are
granted or are to be granted by an employer corporation, or a parent or
subsidiary of such an employer corporation, which corporation after the
Acquisition Event, is expected to continue to conduct substantially the
same business as that acquired from the Company pursuant to the Acquisition
Event.
b) If the Participant is given one or more of such opportunities
with respect to the entire unexercised portion of any Stock Option granted
under this Plan, the Stock Option may be cancelled by the Company upon the
occurrence of the Acquisition Event and thereafter the Participant will be
entitled only to receive the appropriate benefit pursuant to clause (1),
(2) or (3) above, whichever may be applicable.
c) The provisions of this Article are not intended to be exclusive
of any other arrangements that the Committee might approve for settlement
of all outstanding Stock Options in connection with an Acquisition Event or
otherwise.
8.4 Post-Effective Rights. Upon the occurrence of a corporate merger,
---------------------
consolidation, sale of all or substantially all of the Company's assets, change
in the ownership of a majority of the outstanding shares of the Company, or a
change in the majority of members of the Board of Directors of the Company,
other than by voluntary resignation, or other reorganization, or a liquidation
of the Company ("Change in Control"), each Participant who holds an unexercised
option under this Plan regardless of whether his right to exercise has vested in
whole, in part, or not at all on the date of such occurrence, shall be entitled
to exercise his option in whole or in part at any time within sixty (60) days
following such occurrence and to receive upon such exercise those shares,
securities, assets or payments that he would have received had the option been
exercised prior to such occurrence and had the Participant been a stockholder of
the Company with respect to such shares. Notwithstanding any other provision of
this Plan, any unexercised option under this Plan shall expire at 5:00 o'clock
p.m., Denver time, on the sixtieth (60th) day following such Change in Control.
8.5 Acceleration of Vesting in Approved Transactions. In the event of any
-------------------------------------------------
Approved Transaction, notwithstanding any contrary waiting period or vesting
schedule in any Stock Option Agreement, any outstanding Stock Option granted
under the Plan and held, as of the date of such Approved Transaction, by a
Participant whose employment with the Company or a subsidiary of the Company (as
defined in Code Section 424(f) and hereafter referred to as a "Subsidiary") is
affected in such Approved Transaction, shall become exercisable in full (100%
vested) in respect of the aggregate number of shares covered thereby as of the
date of the Approved Transaction. An Approved Transaction will include (a) the
acquisition directly or indirectly by any Person (other than the Company, any
Subsidiary, or any employee stock ownership plan or other employee
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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benefit plan of the Company) during any period of 12 consecutive months of
beneficial ownership (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, as in effect on the date of this Agreement) of
voting stock of any Subsidiary representing in the aggregate more than 50% of
the total voting power of all voting stock of the Subsidiary; (b) the sale,
exchange or other disposition (other than by reason of the pledge or assignment
of such assets as security for a loan) of all or substantially all of the assets
of any Subsidiary or any division of the Company or a Subsidiary, if immediately
after such transaction substantially all of such assets are not owned by the
Company, any Subsidiary, or any employee stock ownership plan or other employee
benefit plan of the Company. A "division" means any operating or business unit
designated by the Company, in its discretion, as constituting a division of the
Company or of a Subsidiary. An Optionee's employment with the Company or a
Subsidiary is affected in an Approved Transaction if such employment is
terminated by the Company or Subsidiary solely as a result of the Approved
Transaction, if such employment is transferred to any employer other than the
Company or a Subsidiary, or if the Optionee remains employed with a Subsidiary
which is no longer a Subsidiary of the Corporation as a result of the Approved
Transaction. The Committee will determine whether any Optionee's employment is
affected by any Approved Transaction.
ARTICLE 9
No Contract of Employment
-------------------------
Nothing in this Plan shall confer upon the Participant the right to
continue in the employ of the Company, nor shall it interfere in any way with
the right of the Company to discharge the Participant at any time for any reason
whatsoever, with or without cause. Neither the existence of the Plan nor the
grant of any Stock Option hereunder shall be taken into account in determining
any damages to which a Qualified Individual may be entitled upon his or her
termination of employment.
ARTICLE 10
No Rights as a Shareholder
--------------------------
A Participant shall have no rights as a shareholder with respect to any
shares of Common Stock subject to Stock Options granted him under the Plan.
Except as provided in Article 8, no adjustment shall be made in the number of
shares of Common Stock issued to a Participant, or in any other rights of the
Participant upon exercise of a Stock Option by reason of any dividend,
distribution, or other right granted to shareholders for which the record date
is prior to the date of exercise of the Participant's Stock Option.
ARTICLE 11
Transferability
---------------
No Stock Option, Option Stock, nor any other rights acquired by a
Participant under this Plan, shall be assignable or transferable by a
Participant, other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of ERISA, or the rules thereunder, and are exercisable, during his or her
lifetime, only by the Participant. In the event of the Participant's death, the
Stock Option may be exercised by the personal representative of the
Participant's estate or, if no personal representative has been appointed, by
the successor or successors in interest determined under the Participant's will
or under the applicable laws of descent and distribution. Any such assignment,
transfer, pledge, hypothecation or other disposition of any Stock Option
contrary to the provisions of the Plan, and any levy of any attachment or
similar process upon a Stock Option will be without effect, and the Committee
may, in its discretion, upon the occurrence of such an event, terminate the
Stock Option.
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HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
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ARTICLE 12
Amendment
---------
The Company may from time to time alter, amend, suspend, or discontinue the
Plan, including, where applicable, any modifications or amendments as it shall
deem advisable in order that ISOs will be classified as incentive stock options
under the Code, or in order to conform to any regulation or to any change in any
law or regulation applicable thereto: provided, however, that no such action
------------------
shall adversely affect the rights and obligations with respect to Stock Options
at any time outstanding under the Plan; and provided further that no such action
shall, without the approval of the shareholders of the Company:
a) increase the maximum number of shares of Common Stock that may be
made subject to Stock Options (unless necessary to effect the adjustments
required by Article 8);
b) extend the term of the Plan beyond the period provided in Section
6.5; or
c) materially modify the requirements as to eligibility for
participation in the Plan.
ARTICLE 13
Withholding Taxes
-----------------
The Company may take such steps as it may deem necessary or appropriate for
the withholding of any taxes which the Company is required by any law or
regulation of any governmental authority, whether federal, state, or local,
domestic or foreign, to withhold in connection with any Stock Option or Stock
Appreciation Right, including, but not limited to, the withholding of issuance
of shares of Common Stock to be issued upon the exercise of any Stock Option,
until the Participant pays the Company the amount the Company is required to
withhold with respect to such taxes, or cancelling any portion of such payment
or issuance in any amount sufficient to pay the amount the Company is required
to withhold.
73
<PAGE>
HATHAWAY CORPORATION 1991 AMENDED INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
- ------------------------------------------------------------------------------
ARTICLE 14
Effective Date
--------------
This Plan was adopted by the Board of Directors and became effective on
September 19, 1991, and was approved by the Company's shareholders on October
24, 1991. The First Amendment was adopted by the Board of Directors on September
16, 1993 and was approved by the Company's shareholders on November 29, 1993,
the Second Amendment was adopted by the Board of Directors and approved by the
Company's shareholders on October 24, 1996 and the Third Amendment was adopted
by the Board of Directors on August 13, 1998.
74
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