ALNT

Business Context and Reporting Period

Company: Allied Motion Technologies, Inc. (formerly Hathaway Corporation)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter ended March 31, 2003

Allied Motion Technologies designs, manufactures, and sells motion products globally. During the period, the company completed its transformation into a pure-play Motion Business by selling the final portion of its Power and Process segment (the Calibrator Business) on March 6, 2003. This follows the earlier sale of the bulk of the Power and Process Business in July 2002. The company also integrated the Motor Products acquisition (completed July 2002) into its operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 126% year-over-year, primarily driven by the inclusion of Motor Products revenues. On a pro forma basis (including Motor Products in 2002), revenues were approximately flat.
• Margin Compression: Gross margin percentage declined from 29% to 24%. Management attributes this to the Motor Products acquisition, which historically operates with lower margins than the company's other sectors. Pro forma gross margin for Q1 2002 would have been 18%.
• Operating Expenses: Selling, General & Administrative (SG&A), and Engineering expenses increased significantly due to the Motor Products acquisition and new executive compensation. A one-time restructuring charge of $105,000 was recorded in Q1 2003 for workforce reductions.
• Discontinued Operations: Q1 2002 included $434,000 in income from discontinued operations (Power and Process segment). Q1 2003 had zero income from discontinued operations as the Calibrator Business was sold.
• Liquidity: Cash and cash equivalents decreased by $841,000 during the quarter, compared to an increase of $376,000 in the prior year. This was driven by negative operating cash flow and debt repayments.

Outlook, Risks, and Management Commentary

• Backlog: Total sales order backlog was $14,387,000 at March 31, 2003, up 5% from the previous quarter and significantly higher than the prior year (which excluded Motor Products).
• Restructuring: The company is consolidating facilities to three locations, with completion expected by the end of Q3 2003. Lean manufacturing initiatives are expected to improve productivity.
• Acquisitions: Management is actively discussing strategic acquisitions to support external growth and technology expansion.
• Liquidity Risks: The company relies on a line of credit with Silicon Valley Bank maturing in September 2003. As of March 31, $1,371,000 was available. The company is currently in compliance with covenants but anticipates meeting requirements prior to the end of Q2.
• Market Risks: Exposure to variable interest rates (line of credit) and foreign currency exchange rates (British Pound for UK subsidiary). No hedging instruments are currently used.

Investor Verification Checklist

• Pro Forma Comparability: Verify that year-over-year comparisons account for the Motor Products acquisition, as organic growth appears flat when adjusted.
• Restructuring Costs: Monitor future quarters for additional restructuring charges related to lease terminations and relocation expenses, as only severance costs were paid in Q1.
• Debt Covenants: Confirm compliance with the Silicon Valley Bank line of credit covenants (tangible net worth and debt service coverage) prior to the September 2003 maturity.
• Margin Recovery: Assess whether lean manufacturing initiatives successfully improve gross margins in the Motor Products segment to match historical company averages.
• Discontinued Operations: Ensure financial analysis excludes the discontinued Power and Process segment results to accurately assess the ongoing Motion Business performance.