ALLIENT INC - Annual Report: 2002 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

OR

For the transition period from                            to                             

Commission file number: 0-4041

HATHAWAY CORPORATION
(Exact name of registrant as specified in its charter)

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 ý    No o

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.    o

        As of September 16, 2002, 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 $12,767,000.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive Proxy Statement dated September 21, 2002 are incorporated by reference in Part III of this Report.

Table of Contents

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 motion control products to a broad spectrum of customers throughout the world. Prior to July 29, 2002, the Company was also engaged in designing, manufacturing and selling advanced systems and instrumentation to the worldwide power and process industries. As discussed more fully in Note 10 of the Notes to Consolidated Financial Statements on page 36, on July 29, 2002, the Company sold substantially all of its Power and Process Business, and intends to focus substantially all of its resources in the motor and motion control products markets. The Company operates primarily in the United States and the United Kingdom. Prior to the sale of its Power and Process Business, the Company also had joint venture investments in China. In connection with the sale of its Power and Process Business as discussed below, the Hathaway name will become the property of the buyers; therefore, the Company, at its upcoming Annual Meeting, is asking its shareholders to consider and vote on a proposal to amend the Articles of Incorporation to change the Company's name to Allied Motion Technologies, Inc.

Motion Control Business

        Hathaway's motion control business offers quality, cost-effective products that suit a wide range of applications in the telecommunications, semiconductor processing, industrial, medical, military and aerospace industries, as well as in the manufacturing of analytical instruments and computer peripherals. End products using Hathaway technology include tuneable lasers, wavelength meters and spectrum analyzers for the fiber optic industry, robotic systems for the semiconductor industry, anti-lock braking transducers, 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).

        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-Tulsa designs, manufactures and markets direct current brushless motors, related components, and drive and control electronics. Markets served include semiconductor manufacturing, industrial automation, medical equipment, and military and aerospace. Effective July 1, 1998, Emoteq Corporation acquired all of the outstanding shares of Ashurst Logistic Electronics Limited of Bournemouth, England (Ashurst). 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. The acquired company was renamed Emoteq UK Limited.

        Optical encoders are manufactured by COPI. They are used to measure rotational and linear movements of parts in diverse applications such as tunable lasers, spectrum analyzers, machine tools, robots, printers and medical equipment. The primary markets for the optical encoders are in the telecommunications, computer peripheral manufacturing, industrial and medical 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.

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        Effective July 30, 2002 the Company acquired 100% of the stock of Motor Products—Owosso Corporation and Motor Products—Ohio Corporation ("Motor Products") from Owosso Corporation, a publicly held corporation. Motor Products, located in Owosso, Michigan has been a motor producer for more than fifty years and is a vertically integrated manufacturer of customized, highly engineered sub-fractional horsepower permanent magnet DC motors serving a wide range of original equipment applications. The motors are used in HVAC and actuation systems in a variety of markets including trucks, buses, RV's, off-road vehicles, health, fitness, medical and industrial equipment. Motor Products will continue to operate its business in Owosso, Michigan under the existing management team.

Power and Process Business

        On July 29, 2002, the Company sold substantially all of its Power and Process Business.

Power Instrumentation

        Hathaway's power instrumentation products help 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 range of products designed exclusively for the power industry worldwide. Hathaway's equipment assists 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 for Supervisory Control and Data Acquisition (SCADA) systems.

        The Company had three joint venture investments in China—a 20% interest in Hathaway Si Fang Protection and Control Company, Ltd. (Si Fang), a 25% interest in Zibo Kehui Electric Company Ltd. (Kehui) and a 40% interest in Hathaway Power Monitoring Systems Company, Ltd. (HPMS). 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 and is one of the largest Chinese supplier of digital relays in China. The Company sold its interest in Si Fang effective July 5, 2001 for cash of $3,020,000. Kehui designs, manufactures and sells cable and overhead fault location products, Supervisory Control and Data Acquisition (SCADA) systems and other test instruments within the China market. HPMS manufactures and sells instrumentation products designed by the Company to electric power companies in China. The Company sold its investments in Kehui and HPMS effective July 29, 2002 as part of the sale of the Power and Process Business.

Systems Automation

        Effective September 30, 1996, the Company acquired Tate Integrated Systems which has since operated under the name of Hathaway Industrial Automation (HIA), a wholly-owned subsidiary of the Company. 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 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. The focus of the systems business has shifted from industrial automation applications to the power generation and transmission industry.    The automation system provides the user the ability to securely send and receive information to and from intelligent electronic devices in transmission and distribution substations to help monitor and control the delivery of electricity. In addition, the automation system is used by organizations responsible for operating the transmission grid and ensuring the reliable delivery of electricity. It is used to communicate with and control the output of power generators and to securely communicate metering information from such generators to ensure the proper billing for such electricity.

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Process Instrumentation

        The process instrumentation products group manufactures and markets products for industrial applications including monitoring systems and calibration equipment. The monitoring systems, called visual annunciators and sequential event recorders, provide both visual and audible alarms and are used to control processes in various plants, including electrical generating plants, 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. The calibration equipment products were not part of the sale of substantially all of the Power and Process Business. Subsequent to June 30, 2002, the Company committed to a plan to dispose of the calibrator business within one year.

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 numerous competitors in the motion control market. 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 34 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 2002, 2001 and 2000, no single customer accounted for more than 10% of the Company's consolidated revenue.

Sales Backlog

        The Company's backlog at June 30, 2002, excluding backlog related to the Power and Process Segment sold or committed to sale subsequent to year-end, consisted of sales orders totaling approximately $5,836,000, of which $5,599,000 is expected to ship within fiscal 2003. This compares to a

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backlog of $13,044,000 at June 30, 2001, of which $12,699,000 was scheduled for shipment in fiscal 2002. Backlog at June 30, 2001 included $7,426,000 of orders to supply motors and optical encoders to the fiber optic telecommunications industry which were cancelled in fiscal 2002. Without including the backlog related to these order cancellations in the June 30, 2001 backlog, backlog for fiscal 2002 increased 4%. The July 2002 Motor Products acquisition adds approximately $6,800,000 in sales order backlog to the Motion Control Business backlog. There can be no assurance that the Company's backlog can be converted into revenue.

Government Sales

        Approximately $671,000 of the Company's backlog as of June 30, 2002 related to the Motion Control Business consisted of contracts with the United States Government. The Company's contracts with the government contain a provision generally found in government contracts that permits the government to terminate the contract at its option. When the termination is attributable to no fault of the Company, the government would, in general, have to pay the Company certain allowable costs up to the time of termination, but there is no compensation for loss of profits.

Engineering and Development Activities

        The Company's expenditures on engineering and development were $4,490,000 in fiscal 2002, $4,806,000 in fiscal 2001 and $4,274,000 in fiscal 2000. 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.

        In 2001, the Company, with other parties, was named as a defendant in an environmental contamination lawsuit. Additional information required by this item is set forth in Note 7 of the Notes to Consolidated Financial Statements on page 34 herein.

Foreign Operations

        The information required by this item is set forth in Note 9 of the Notes to Consolidated Financial Statements on page 34 herein.

Employees

        As of the end of fiscal 2002, the Company had approximately 331 full-time employees, of which 151 remained with the Company after the sale of the Power and Process Business on July 29, 2002. After the acquisition of Motor Products on July 30, 2002, the Company had 378 employees.

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Item 2. Properties.

        As of June 30, 2002, the Company leased its administrative offices and manufacturing facilities as follows:

        Subsequent to the July 2002 Power and Process Business sale and the July 2002 Motor Products acquisition, the Company occupies the following administrative offices and manufacturing facilities:

        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.

        In 2001, the Company, with other parties, was named as a defendant in an environmental contamination lawsuit. The lawsuit relates to property that was occupied by the Company's Power and Process Business over 37 years ago. In connection therewith, subsequent to June 30, 2002, the Company agreed to settle this environmental contamination lawsuit. Accordingly, during the quarter ended June 30, 2002, the estimated charge for the settlement and related legal fees of $1,429,000 ($961,000 net of the tax effect) was recorded. While the Company believes that the suit against the Company was without merit, it agreed to the settlement to eliminate future costs of defending itself and the uncertain risks associated with litigation. This settlement is subject to approval by the court, and accordingly, may change based upon the ultimate outcome. Additional information required by this item is set forth in Note 7 of the Notes to Consolidated Financial Statements on page 34 herein.

        The Company is also 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 affect on the Company's consolidated financial position or results of operations.

Item 4. Submission of Matters to a 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 2002.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

        Hathaway Corporation's common stock is traded on the Nasdaq Small Cap Market System and trades under the symbol HATH. The number of holders of record of the Company's common stock as of the close of business on September 9, 2002 was 572. The Company did not pay or declare any dividends during fiscal years 2002 and 2001 as the Company's long-term financing agreement prohibits the Company from doing so without prior approval.

        The following table sets forth, for the periods indicated, the high and low prices of the Company's common stock on the Nasdaq Small Cap Market System, as reported by Nasdaq.

Item 6. Selected Financial Data.

        The following table summarizes data from the Company's annual financial statements for the fiscal years 1998 through 2002 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 15 herein. See Management's Discussion and Analysis for discussion of non-recurring items that affect the comparability of results between periods. Further, as discussed herein and in Note 10 to the

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consolidated financial statements, on July 29, 2002, the Company sold its Power and Process Business. In future periods, this business will be treated as a discontinued operation.

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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. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word "believe," "anticipate," "expect," "project," "intend," "will continue," "will likely result," "should," "growth," "growing," "significant demand," "expanding growth opportunities," "new market," "maximize profits," or words or phrases of similar meaning. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of the Company to differ materially from the forward-looking statements. Due to the sale of the Power and Process Business and the purchase of Motor Products, the Company's past business practices and operating results may not provide a meaningful basis to predict future risks and uncertainties. Risks and uncertainties include, among others, the following: international, national and local general business and economic conditions in the Company's motion control business, risks related to the acquisition of Motor Products and other acquisitions that the Company may pursue and/or complete in the future, introduction of new technologies, products and competitors, the ability to protect the Company's intellectual property, the ability of the Company to sustain, manage or forecast its growth and product acceptance, the continued success of the Company's customers to allow the Company to realize revenues from its order backlog and to support the Company's expected delivery schedules, the continued viability of the Company's customers and their ability to adapt to changing technology and product demand, the ability of the Company to meet the technical specifications of its customers or the emerging industry standards and practices on a cost effective and timely basis the continued availability of parts and components, increased competition and changes in competitor responses to the Company's products and services, changes in government regulations, the ability to attract and retain qualified personnel who can design new applications and products for the motion control industry, ability to retain and the performance of sales personnel, availability of financing and the ability of the Company's lenders and financial institutions to provide additional funds if needed. We may have to seek third party investment in order to provide additional working capital and to finance acquisitions to enhance our motion control business. We cannot be certain that financing from third parties will be available on acceptable terms to us or at all. If we cannot raise funds on acceptable terms, we may not be able to develop our motion control products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, any of which could have a material adverse affect on our ability to grow our business. Further, if we issue equity securities, the new equity securities may have rights, preferences or privileges senior to those of our Common Stock and such securities could be dilutive to the holders of the Company's common stock.

        New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis; however, the Company makes no assurance that expectations, beliefs or projections will be achieved.

        Because of the risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has no obligation or intent to release publicly any revisions to any forward-looking statements, whether as a result of new information, future events, or otherwise.

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OPERATING RESULTS
Fiscal year 2002 compared to fiscal year 2001

Consolidated Results

        The Company achieved consolidated net income before the estimated charge for litigation settlement and related legal fees of $695,000 or $.15 per share for its fiscal year ended June 30, 2002 compared to $1,996,000, or $.41 per diluted share for the year ended June 30, 2001. After the estimated litigation charge of $961,000 (net of taxes), the Company reported a consolidated net loss for fiscal 2002 of $266,000 or $.06 per share.

        Subsequent to June 30, 2002, the Company agreed to settle an environmental contamination lawsuit filed in 2001 pursuant to which Hathaway, with other parties, was named as a defendant. Accordingly, during the fourth quarter, an estimated charge for the settlement and related legal fees of $961,000, net of tax, was recorded. The lawsuit relates to property that was occupied by the Company's Power business over 37 years ago. While the Company believes the suit against the Company was without merit, it agreed to the settlement to eliminate future costs of defending itself and the risks associated with litigation. This settlement is subject to approval by the court, and accordingly, may change based upon the ultimate outcome.

        Consolidated results for fiscal 2002 also include the gain on the sale of the Company's investment in the Si Fang joint venture, resulting in a pretax gain of $674,000. Consolidated net income for fiscal years 2001 and 2000 included $1,116,000 and $670,000, pretax, of equity income related to the Company's investment in Si Fang, respectively.

        Revenues for the fiscal year 2002 decreased 13% to $42,059,000 this year from $48,386,000 last year. Refer to segment results below for discussion of the decrease.

        Total gross product margin as a percentage of revenues remained consistent at 39% during fiscal year 2002 and 2001. Selling, general and administrative expenses increased just over 1% to $11,897,000 this year from $11,725,000 last year due to cost reduction efforts by the Company offset by increased employee insurance costs. Engineering and development expenses decreased 7% to $4,490,000 from $4,806,000 for fiscal years 2002 and 2001, respectively primarily due to one-time costs incurred in fiscal 2001 to develop a configuration tool kit for the Company's remote terminal units used by the power industry.

        Sales to international customers decreased 12% to $13,496,000 in fiscal 2002 from $15,282,000 in fiscal 2001 but remained consistent at 32% of sales.

        At June 30, 2002, total backlog, consisting of sales orders received, was $15,002,000 compared to $21,713,000 at June 30, 2001. Excluding backlog related to the Power and Process Segment sold or committed to sale subsequent to year-end, backlog consisted of sales orders totaling approximately $5,836,000 and $13,044,000 at June 30, 2002 and 2001, respectively. The decrease was primarily due to the cancellation of $7,426,000 of orders to supply motors and optical encoders to the fiber optic telecommunications industry, which were included in the backlog at June 30, 2001. Without including the backlog related to these order cancellations in the June 30, 2001 backlog, backlog for fiscal 2002 increased 4%. There can be no assurance that the Company's backlog as of any date can be converted into revenue.

        For the year ended June 30, 2002, the Company recognized a benefit from income taxes of $320,000 compared to a provision for income taxes of $576,000 for last year. The effective income tax rate as a percentage of income before income taxes was 55% in fiscal 2002 and 22% in fiscal 2001. The difference in the effective tax rate between periods is primarily due to the impact of foreign tax rates,

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foreign tax jurisdiction income and loss, expenses not deductible for tax purposes and changes in the valuation allowance recorded against the Company's net deferred tax assets.

        Effective July 29, 2002, the Company sold substantially all of its Power and Process Business, and intends to focus substantially all of its resources in the motor and motion control products markets. Prior to the sale, the Company managed its business in two operating segments. Because the sale of the Power and Process Business was subject to shareholder approval (which approval was obtained on July 25, 2002), and in accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," related to the presentation of discontinued operations, the assets, liabilities and operations for the Power and Process Business were not reflected as a discontinued operation as of June 30, 2002, but will be so in future reporting periods. See the information provided in Note 10 to the consolidated financial statements for further discussion. To facilitate analysis, the following represents the results of operations of the two segments (in thousands):

        The following is a reconciliation of segment information to consolidated information (in thousands):

        In future periods, the results of the power and process business will be reported as results of discontinued operations, and the Motion Control Segment's results will include the results of operations of Motor Products subsequent to the acquisition date.

Motion Control Segment Results

        Pretax profit for Motion Control for fiscal 2002 was $842,000 compared to $3,584,000 last fiscal year. Revenues for the year ended June 30, 2002 decreased 26% to $15,723,000 from $21,188,000 last year. Gross margin for Motion Control was 31% for fiscal 2002 compared to 38% for fiscal 2001. In 1999, the motion control industry began to suffer from the slowdown in the economy. The continued slowdown adversely affected the revenue, gross margin and income before income taxes of the Motion Control Segment in fiscal year 2002. The decrease in gross margin was due to fixed overhead costs that

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cannot be reduced in direct correlation to reduced revenue. The Company responded early to these changing market conditions by reducing operating costs and developing applications for the Company's products into new markets and broader segments of existing markets. The Company's two largest industry sectors, telecommunications and semiconductor processing, have not yet begun to recover, but the Company has been successful in expanding into other industry sectors including military and automotive applications. The Company has received significant orders from these sectors during this fiscal year. During this period of economic adversity, the Company has not lost any significant customers.

        At June 30, 2002 backlog for Motion Control for fiscal 2002 decreased 55% to $5,836,000 from $13,044,000 at June 30, 2001. The decrease was primarily due to the cancellation of $7,426,000 of orders to supply motors and optical encoders to the fiber optic telecommunications industry, which were included in the backlog at June 30, 2001. Without including the backlog related to these order cancellations in the June 30, 2001 backlog, backlog for fiscal 2002 increased 4%. There can be no assurance that the Company's backlog as of any date can be converted into revenue.

        On July 30, 2002 the Company acquired 100% of the stock of Motor Products—Owosso Corporation and Motor Products—Ohio Corporation ("Motor Products") for $11,800,000 from Owosso Corporation, a publicly held corporation. Motor Products, located in Owosso, Michigan has been a motor producer for more than fifty years and is a vertically integrated manufacturer of customized, highly engineered sub-fractional horsepower permanent magnet DC motors serving a wide range of original equipment applications. The motors are used in HVAC and actuation systems in a variety of markets including trucks, buses, RV's, off-road vehicles, health, fitness, medical and industrial equipment. Motor Products had revenues of $25,300,000, pretax income before corporate allocation of $1,850,000, and earnings before interest, depreciation and taxes of $2,800,000 for its fiscal year ended October 28, 2001 and total assets of $11,000,000 at October 28, 2001. Motor Products also brings $6,800,000 of sales order backlog to the Company. Motor Products will continue to operate out of Owosso, Michigan under the existing management team.

Power and Process Segment Results

        Power and Process reported a pretax loss of $1,883,000 for the year ended June 30, 2002 compared to $1,539,000 for the year ended June 30, 2001. The current year's Power and Process results include the estimated pretax charge for litigation settlement and related legal fees of $1,429,000. Without consideration of such loss, pretax loss would have been $454,000. Revenues for fiscal 2002 decreased 3% to $26,336,000 from $27,198,000 for last year. The decrease in Power and Process revenues is due to the Company's decision to shift the focus of the systems automation business to power generation and transmission automation systems and away from industrial automation applications. The new power business has not accelerated as quickly as the industrial projects have completed resulting in a significant decline in systems revenues.

        During the first quarter of the current fiscal year, the Company completed the sale of its 20% equity interest in Hathaway Si Fang Protection and Control Company, Ltd., the largest of the Chinese joint venture investments. The Power and Process Segment results include a $674,000 pretax gain on the $3,020,000 sale of Si Fang. In addition, the Segment results include $159,000 in equity income in fiscal 2002 from its remaining two joint venture investments in China, compared to $1,170,000 equity income from all joint venture investments included in fiscal 2001 (including $1,116,000 related to Si Fang).

        On July 30, 2002 the Company sold substantially all of its Power and Process segment for $6,550,000 in cash subject to certain closing adjustments. The Company will recognize a pretax gain on the sale of approximately $1,800,000, subject to settlement of the closing adjustments. The remaining assets of the Power and Process Segment relate to the calibration equipment product line. Subsequent to June 30, 2002, the Company committed to a plan to dispose of the calibrator business within one year.

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Fiscal year 2001 compared to fiscal year 2000

Consolidated Results

        The Company achieved a 67% increase in net income before a restructuring charge for its fiscal year ended June 30, 2001 compared to fiscal year ended June 30, 2000. Net income before the restructuring charge was $2,465,000 in fiscal year 2001, compared to net income of $1,475,000 in fiscal 2000. Net income for fiscal 2001 after the restructuring charge was $1,996,000, a 35% increase over fiscal 2000. As a result of changing business conditions in the process instrumentation business, the Company restructured the process instrumentation portion of its Power and Process segment. The restructuring, which was successfully completed during fiscal 2001, consisted of retaining a portion of the business in Dallas, moving manufacturing of two product lines from Dallas to the Company's power instrumentation manufacturing facility in Seattle and selling the remaining two product lines. A pretax charge of $587,000 was recorded related to this restructuring. Revenues increased 7% to $48,386,000 in fiscal 2001 from $45,133,000 in fiscal 2000, representing increases in both the Motion Control and the Power and Process segments.

        Selling expenses decreased 4% to $6,174,000 in fiscal 2001 from $6,433,000 in fiscal 2000 resulting from savings from continued cost reduction efforts by the Company. General and administrative expenses increased 7% to $5,551,000 in fiscal 2001 from $5,194,000 in fiscal 2000 primarily due to increased employee and insurance costs.

        Engineering and development expenses increased 12% to $4,806,000 in fiscal 2001 from $4,274,000 in fiscal 2000, primarily due to one-time costs incurred to develop a configuration tool kit for the Company's remote terminal units (RTUs) used by the power industry.

        Sales to international customers increased 32% to $15,282,000, or 32% of sales, in fiscal 2001, from $11,577,000 or 26% of sales, in fiscal 2000 due to an increase in sales of motion control products in foreign markets.

        Sales order backlog decreased 9% to $21,713,000 at June 30, 2001 from $23,827,000 at June 30, 2000. Gross margin for fiscal 2001 increased to 39% from 38% in fiscal 2000 due to increased sales volume and changes in the mix of products sold.

        In fiscal year 2001, the Company recognized a provision for income taxes of $576,000 compared to $129,000 in fiscal year 2000. The effective tax rate as a percentage of the income before income taxes was 22% in fiscal 2001 and 8% in fiscal 2000. The difference in the effective tax rate between periods is primarily due to changes in the valuation allowance recorded against the deferred tax assets as well as adjustments related to the resolution of various income tax related issues. The reduction in the valuation allowance decreased in 2001 compared to 2000 due to larger utilization of net operating loss carryforwards in 2000. The impact of changes in the Company's recorded valuation allowance has different impacts on the Company's effective tax rate due to differing amounts of pretax income in each respective period.

Motion Control Segment Results

        Revenues from the Motion Control segment for the year ended June 30, 2001 increased 14% to $21,188,000 from $18,591,000 for the year ended June 30, 2000. Pretax profit for Motion Control for fiscal 2001 was $3,584,000 compared to $3,139,000 for fiscal 2000, a 14% increase. The increase in revenues and pretax profits is primarily due to the segment's success in providing products for specialty applications in OEM programs in numerous industry sectors including the telecommunications, semiconductor and industrial automation industries.

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Power and Process Segment Results

        The Power and Process segment reported revenues for fiscal 2001 of $27,198,000 compared to revenues of $26,542,000 in fiscal 2000, a 2% increase. The segment recorded a $952,000 pretax loss before the restructuring charge compared to a pretax loss of $1,643,000 in fiscal 2000, a 42% improvement. The reported pretax loss for fiscal 2001 was $1,539,000. Sales order backlog for Power and Process orders was $8,669,000 at June 30, 2001 which is down 25% from June 30, 2000—primarily reflecting a decline in backlog of large process systems projects partially offset by an increase in power instrumentation and systems backlog reflecting the Company's shift of focus to automation and communications products for the power industry and away from large process system projects.

        Equity income from investments in joint ventures increased to $1,170,000 in fiscal 2001 from $698,000 in fiscal 2000. This increase was due to the continued success of the Si Fang joint venture which supplies digital relays in China. During fiscal years 2001 and 2000, the Company recognized equity income from Si Fang of $1,116,000 and $670,000 respectively.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's liquidity position as measured by cash and cash equivalents (excluding restricted cash) increased $2,367,000 during the year to a balance of $4,278,000 at June 30, 2002. Operating activities generated $552,000, $815,000 and $440,000 of cash in fiscal years 2002, 2001 and 2000, respectively primarily reflecting net loss or income adjusted for non-cash charges and working capital changes.

        Cash of $2,117,000 was generated by investing activities in fiscal year 2002 while $908,000 and $1,109,000 was used by investing activities in fiscal 2001 and 2000, respectively. The 2002 cash generated includes $3,020,000 cash received from the sale of Si Fang. Cash uses primarily reflect the purchases of property and equipment.

        Financing activities used cash of $411,000 and $864,000 in fiscal years 2002 and 2001, respectively, and generated cash of $1,186,000 in fiscal year 2000. During fiscal year 2002, $553,000 of cash was used to pay off the line of credit. This was offset by proceeds from repayments on loans receivable from the Employee Stock Ownership Plan of $27,000 and proceeds from employee stock purchases of $235,000. In fiscal year 2001, the Company made net repayments of $993,000 to the line of credit, offset by $75,000 of cash received from the Employee Stock Ownership Plan loan and $149,000 received for employee stock purchases. In fiscal year 2000, cash was generated by proceeds from the exercise of employee stock options, as well as increased net borrowings on the line-of-credit.

        At June 30, 2002, the Company had no bank debt, compared with $553,000 and $1,546,000 at the end of fiscal 2001 and 2000, respectively. The debt represents borrowings on the Company's current long-term financing agreement (Agreement) with Silicon Valley Bank (Silicon). The Agreement is subject to automatic and continuous annual renewal for successive additional terms of one year each unless either party notifies the other of its intention to terminate the Agreement at least sixty days before the next maturity date. The Agreement was renewed on May 7, 2002. Borrowings on the loan were restricted to the lesser of $3,000,000 or 85% of the Company's eligible receivables (Maximum Credit Limit). As of June 30, 2002, 85% of the Company's eligible receivables exceeded the maximum loan amount, therefore, the Company could borrow up to the Maximum Credit Limit of $3,000,000.

        The line-of-credit bears interest at Silicon's prime borrowing rate (prime rate, 4.75% at June 30, 2002) plus 1.5%. The interest rate is adjustable on a quarterly basis to prime rate plus 2% if the Company incurs a net loss greater than $750,000 in each previous twelve-month rolling period. In addition to interest, the loan bears a monthly unused line fee at 0.0625% of the Maximum Credit Limit less the average daily balance of the outstanding loan during a month. The unused line fee is also

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adjustable on a quarterly basis to 0.125% if the Company incurs a net loss greater than $750,000 in each previous twelve-month rolling period.

        The line-of-credit is secured by all assets of the Company. The Agreement prohibits the Company from paying dividends without prior approval and requires that the Company maintain compliance with certain covenants related to tangible net worth. At June 30, 2002, the Company was in compliance with such covenants.

        Subsequent to year-end, the Company and Silicon amended the Agreement to increase the Maximum Credit Limit on the line-of-credit to $4,000,000 and to add an additional $1,750,000 term loan to the Agreement.

        Under the amended Agreement, borrowing on the line-of-credit is restricted to the Maximum Credit Limit which is calculated as the lesser of $4,000,000 or 80% of the Company's eligible receivables plus the lesser of 1) 25% of the Company's eligible inventory, or 2) 30% of the Company's eligible receivables, or 3) $750,000. The Agreement matures on September 10, 2003. The interest rate on the line-of-credit is equal to the prime rate plus 1.5%. The interest rate is adjustable on a quarterly basis to prime rate plus 1% if the Company achieves a Quick Ratio (cash and cash equivalents to current liabilities) for two consecutive fiscal quarters of greater than or equal to 1.20 to 1.00 but less than 1.50 to 1.00. If the Company achieves a Quick Ratio for two consecutive fiscal quarters of greater than or equal to 1.50 to 1.00, the interest rate will be adjusted to prime rate plus 0.75%. If the interest rate is so reduced and the Company's Quick Ratio deteriorates, the interest rate will be increased in accordance with the above parameters on a quarterly basis. In addition to interest, the line bears a monthly unused line fee at 0.375% on the difference between the amount of the Maximum Credit Limit and the average daily principal balance of the line-of-credit outstanding during the month. The Company borrowed $2,250,000 on July 30, 2002 under this line-of-credit to fund the purchase of Motor Products.

        Also under the amended Agreement, the Company obtained a term loan of $1,750,000. The loan matures the earlier of February 1, 2006 or the date the line-of-credit terminates. The loan bears interest at 8.38%, but may be reduced on a quarterly basis. If the Company achieves a Quick Ratio for two consecutive fiscal quarters of greater than or equal to 1.20 to 1.00 but less than 1.50 to 1.00, the rate will be reduced to 7.88%. If the Company achieves a Quick Ratio for two consecutive fiscal quarters of greater than or equal to 1.50 to 1.00, the interest rate will be adjusted to 7.63%. If the interest rate is so reduced and the Company's Quick Ratio deteriorates, the interest rate will be increased in accordance with the above parameters on a quarterly basis. The Company borrowed $1,750,000 under this term loan on July 30, 2002 to fund the purchase of Motor Products. The term loan is being repaid in forty-two equal monthly payments of principal beginning September 1, 2002.

        Both loan facilities are secured by all of the assets of the Company. The Agreement prohibits the Company from paying dividends and requires that the Company maintain compliance with certain covenants related to tangible net worth, profitability and debt service coverage.

        On July 29, 2002 the Company sold substantially all of its Power and Process segment for $6,550,000 in cash, subject to certain closing adjustments. The Company used the proceeds from this sale, plus the $4,000,000 in new bank debt, plus cash on hand to acquire Motors Products for $11,800,000 on July 30, 2002. The Motor Product operations acquired have historically and are currently generating positive cash flows. The Company believes the acquisition will have a positive effect on the Company's liquidity and capital resources although there can be no guarantee thereof.

        Subsequent to June 30, 2002, the Company agreed to settle an environmental contamination lawsuit pursuant to which Hathaway, with other parties, was named as a defendant. The settlement, exclusive of estimated legal costs, will be paid as follows: $500,000 within 30 days after the settlement is approved by the court, $350,000 one year after the court approval and the remaining $250,000 two

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years after court approval. The related legal fees are expected to be paid by December 31, 2002. The settlement is subject to court approval, and therefore, the amount of the settlement will be fixed only upon such approval, and is subject to change prior to that time.

        The Company's fiscal 2003 working capital, capital expenditure and debt service requirements (including payment of the settlement discussed above) are expected to be funded from cash provided by operations, the Company's existing cash balance and amounts available under the line of credit facility.    The Company believes the capital currently available to it is sufficient for its currently anticipated needs, but if additional capital is needed in the future, the Company would pursue additional capital via debt or equity financing. A key component of the Company's liquidity relates to the availability of amounts under the line of credit with Silicon Valley Bank. Any lack of availability of this facility could have a material adverse impact on the Company's liquidity position.

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 anticipates that these factors will continue to minimize the effects of any foreseeable inflation and other price pressures from the industries in which it operates. As the Company's manufacturing activities mainly utilize semi-skilled labor, which is relatively plentiful in the areas surrounding the Company's production facilities, the Company does not anticipate substantial inflation-related increases in the wages of the majority of its employees.

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, 2002, the Company has not used derivative instruments or engaged in hedging activities.

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. The line-of-credit matures in September 2003. The Company manages interest rate risk by investing excess funds in cash equivalents bearing variable interest rates that are tied to various market indices. 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. A change in the interest rate of 1% on the Company's variable rate debt would have the impact of changing interest expense by approximately $22,000 annually.

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Foreign Currency Risk

        After July 29, 2002, upon the sale of the Power and Process Business, the Company had a wholly-owned subsidiary located in England. 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, net income 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.

RECENTLY ISSUED ACCOUNTING STANDARDS

        In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting. The use of the pooling-of-interest method of accounting for business combinations is prohibited. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The Company will account for any future business combinations in accordance with SFAS No. 141, including the Company's acquisition of Motor Products.

        In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill and intangible assets and requires that goodwill no longer be amortized but be tested for impairment at least annually at the reporting unit level in accordance with SFAS No. 142. Goodwill must also be reviewed for impairment when certain events indicate that the goodwill may be impaired. Recognized intangible assets should, generally, be amortized over their useful life and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Because the Company has been a noncalendar year-end company, the FASB has allowed adoption of SFAS No. 142 either in fiscal year 2002 or fiscal year 2003, except for provisions related to the nonamortization and amortization of goodwill and intangible assets acquired after June 30, 2001, which will be subject immediately to the provisions of SFAS No. 142.    The Company adopted SFAS No. 142 on July 1, 2002. SFAS No. 142 will impact the Company's results of operations and financial position in future periods as goodwill resulting from its July 2002 acquisition (see Note 10 to the accompanying financial statements) will not be amortized.

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001 (effective for the Company on July 1, 2002). This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and replaces the provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of Segments of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segments of a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Under SFAS No. 144, long-lived assets are measured at the lower of carrying amount or fair value less cost to sell The adoption of SFAS No. 144 on July 1, 2002 did not have a material impact on the Company's financial position or results of operations. Because of the sale of the Power and Process Business was subject to shareholder approval (which approval was obtained on July 25, 2002), and in accordance with the provisions of SFAS No. 144 related to the presentation of discontinued operations, the assets, liabilities and operations of the Power and Process Business were not reflected as a discontinued operations as of June 30, 2002, but will be so in future reporting periods. See the information provided in Note 10 to the consolidated financial statements for further discussion.

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        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," (effective January 1, 2003) which replaces Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and states that an entity's commitment to an exit plan, by itself, does not create a present obligation that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The Company does not expect the adoption of SFAS No. 146 to have a material impact upon the Company's financial position or results of operations.

CRITICAL ACCOUNTING POLICIES

        The Company has prepared its financial statements in conformity with accounting principles generally accepted in the United States, and these statements necessarily include some amounts that are based on informed judgments and estimates of management. The Company's significant accounting policies are discussed in Note 1 to the consolidated financial statements. The Company's critical accounting policies are subject to judgments and uncertainties which affect the application of such policies. The Company uses historical experience and all available information to make these judgments and estimates. As discussed below the Company's financial position or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. The Company's critical accounting policies include:

        The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance is based on historical experience and judgment based on current economic and customer-specific factors. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

        The Company provides for the estimated cost of product warranties at the time revenue is recognized. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers. The Company's warranty obligation is based upon historical experience and is also affected by estimates of product failure rates and material usage incurred in correcting product failures. Should actual product failure rates or material usage costs differ from the Company's estimates, revisions to the estimated warranty liability would be required.

        The Company establishes inventory valuation allowances for estimated obsolescence or lack of marketability for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions and future demand are less favorable than those projected by management, additional inventory write-downs may be required.

        The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts recorded in the consolidated financial statements, and for operating loss and tax credit carryforwards. Realization of the recorded deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdiction in future years to obtain benefit from the reversal of net deductible temporary differences and from tax credit and operating loss carryforwards. A valuation allowance is provided to the extent that management deems it more likely than not that the net deferred tax assets will not be realized. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

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        The Company reviews the carrying values of its long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstances indicate that such carrying values may not be fully recoverable. Under standards applicable at June 30, 2002, the assets must be carried at historical cost if the projected undiscounted cash flows from their use will recover their carrying amounts. However, if such projected cash flows are less than their carrying value, even by one dollar, the long-lived assets must be reduced to their estimated fair value. Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived asset. Effective July 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142 provides a more restrictive fair value test to evaluate goodwill. Upon adoption of SFAS No. 142, the carrying value of goodwill will be evaluated based upon its current fair values which can involve highly subjective estimates of fair value. Depending upon future assessments of fair value, there could be impairment recorded related to goodwill.

        Some projects undertaken by the Company's wholly-owned subsidiary, Hathaway Industrial Automation, involve significant production, modification and/or customization of the software being licensed and integrated into customer processes. As a result, revenues related to these software arrangements are recognized over the course of these arrangements under the percentage-of-completion method of accounting in conformity with ARB No. 45, SOP 81-1 and SOP 97-2. Under the percentage-of-completion method of accounting, revenues are recognized as work is performed. The Company typically uses costs incurred on the arrangement as the basis to determine the percentage of work completed. The use of the percentage-of-completion method of revenue recognition requires estimates of percentage of project completion and total estimated project costs upon completion. The judgments made in this area could: (i) have a significant effect on revenue recognized in any period by changing the amount and/or the timing of the revenue recognized; and (ii) determine whether an overall loss on an arrangement is required to be recorded.

CONTRACTUAL COMMITMENTS

        For more information on the Company's contractual obligations on operating leases and contractual commitments, see Notes 3 and 7 to the consolidated financial statements. At June 30, 2002, the Company's commitments under these obligations were as follows (in thousands):

(1)

On August 15, 2002, the Board of Directors approved the change of the Company's fiscal year end from June 30 to December 31. The change will be effective December 31, 2002.

(2)

Adjusted to reflect the sale of the Power and Process business and the acquisition of Motor Products.

(3)

Amounts under the term loan were borrowed subsequent to June 30, 2002. In addition, this table assumes the Company's line of credit will be renewed annually which allows for the term loan to be repaid over a forty two month period.

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Hathaway Corporation:

        We have audited the accompanying consolidated balance sheet of HATHAWAY CORPORATION (a Colorado corporation) AND SUBSIDIARIES as of June 30, 2002, and the related consolidated statements of operations, cash flows and stockholders' investment for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule for the year ended June 30, 2002 of Schedule II-Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. The accompanying consolidated balance sheet as of June 30, 2001 and the related consolidated statements of operations, cash flows and stockholders' investment and financial statement schedule of valuation and qualifying accounts for each of the two fiscal years in the period ended June 30, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and financial statement schedules in their report dated July 27, 2001.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule for the year ended June 30, 2002, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

KPMG LLP                              

Denver, Colorado,
    August 6, 2002, except as to Note 6, which is as of September 16, 2002.

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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, 2001 and 2000, 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, 2001. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of Hathaway Corporation and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June30, 2001 in conformity with accounting principles generally accepted in the United States.

        Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP                              

Denver, Colorado,
    July 27, 2001.

        The report of Arthur Andersen LLP (Andersen) is a copy of a report previously issued by Andersen on July 27, 2001. We have not been able to obtain a re-issued report from Andersen. Andersen has not consented to the inclusion of its report in this Annual Report on Form 10-K. The report of Andersen refers to certain financial statements which are not included herein. Because Andersen has not consented to the inclusion of its report in this Annual Report, stockholders and other readers may not be able to commence an action against Andersen under Section 11 of the Securities Act of 1933, or at least their ability to seek relief against Andersen may be impaired.

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HATHAWAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.

21

HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

22

HATHAWAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

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HATHAWAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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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 had joint venture investments in China(Note 2).

        On July 29, 2002, the Company sold substantially all of its power and process business, and operations subsequently will primarily be related to motion control product markets. Because the sale of the Power and Process Business was subject to shareholder approval (which approval was obtained on July 25, 2002), and in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," related to the presentation of discontinued operations, the assets, liabilities and operations of the Power and Process Business were not reflected as a discontinued operation as of June 30, 2002, but will be so reflected in future reporting periods. See the information provided in Note 10.

        On July 30, 2002, the Company purchased 100% of the stock of Motor Products—Owosso Corporation and Motor Products—Ohio Corporation ("Motor Products"). See further information provided in Note 10.

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.

        Investments in joint ventures, in which the ownership is less than 50% but where the Company has the ability to exercise significant influence, are accounted for using the equity method (Note 2).

Cash and Cash Equivalents

        Cash and cash equivalents include instruments 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.

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Inventories

        Inventories include costs of materials, direct labor and manufacturing overhead, and are valued at the lower of cost (first-in, first-out basis) or market, as follows (in thousands):

        Reserves established for anticipated losses on excess or obsolete inventories were approximately $2,042,000 and $1,844,000 at June 30, 2002 and 2001, respectively.

Property and Equipment

        Property and equipment is classified as follows (in thousands):