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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X Annual Report pursuant to Section 13 of 15(d) of the Securities Exchange Act
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of 1934 for the fiscal year ended October 31, 1995, or
Transition Report pursuant to Section 13 of 15(d) of the Securities Exchange
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Act of 1934
Commission file number 2-63481
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ATHANOR GROUP, INC.
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(Name of small business issuer as specified in its charter)
CALIFORNIA 95-2026100
- ------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
3452 East Foothill boulevard, Suite 417, Pasadena, California 91107
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(Address of Principal Executive Offices) (Zip Code)
The Company's telephone number, including area code (818) 440-1602
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
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(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 of 15(d) of the Securities Exchange Act of 1934 during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. /X /
---
Issuer's revenues for its most recent fiscal year were $19,432,094.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1995 amounted to $1,189,000.
The registrant had 1,471,434 shares of common stock outstanding as of December
31, 1995.
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PART I
Item 1. DESCRIPTION OF BUSINESS
ATHANOR GROUP, INC. ("the Company") was incorporated under the laws of the
State of California in 1958, under the name ALGERAN, INC.
BUSINESS DEVELOPMENT
SUBSIDIARY CORPORATIONS
Since its inception in 1958, and since 1986 through its wholly-owned
subsidiary, ALGER MANUFACTURING COMPANY, INC., a California corporation
("Alger"), the company has been engaged in the manufacture of screw machine
products (nonproprietary metal components) produced in large quantities to
customer specifications.
LOANS AND INVESTMENTS IN CORE SOFTWARE TECHNOLOGY
The Company is currently the single largest shareholder of Core Software
Technology, a California corporation ("Core"), owning 2,120,070 shares of the
issued and outstanding common stock of Core, representing approximately 21.5%
of the issued and outstanding shares of Core's capital stock (assuming the
options to purchase additional shares of the capital stock of Core owned by the
Company and others are not exercised). As a condition to a closing of a
private placement of the common stock of Core for gross proceeds to Core of
$4,705,000 which closing occurred during April and May 1994 (the "Core Private
Placement"), the original shareholders of Core agreed to deposit certain shares
of the common stock of Core owned by them into escrow. Accordingly, an
aggregate of 1,426,150 of the 2,120,070 shares of the common stock of Core
owned by the Company are currently held in an escrow account. All of the
escrowed shares will be released from escrow if Core meets a certain minimum
pretax income requirement in either 1996, or 1997. Core failed to meet this
minimum pretax income requirement in 1994 and 1995, and there can be no
assurance that Core will meet this pretax income requirement in the future. If
such minimum pretax income requirements is not been reached by April 30, 1998,
all shares held in the escrow account will be canceled and returned to Core and
the Company shall have no further rights with respect to those shares.
Core is the developer and marketer of an on-line geospatial (image,
cartographic, & demographic) information indexing and distribution system and
service, known as ImageNet. Core develops and distributes proprietary
client-server and application software but primarily uses its software products
as a delivery vehicle for ImageNet services. Through the Global implementation
of ImageNet , Core seeks to control the channel for distribution of geospatial
information products worldwide. As a single source access vehicle for such
information, the value and utility of ImageNet is a function of content.
Core is attempting to build, a worldwide, on-line database and
distribution infrastructure consisting of commercial and public data providers,
existing international distributors, satellite ground receiving stations, and
value added companies. ImageNet addresses the information
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access requirements of an international public policy movement to maximize the
benefits of existing scientific and geographic information and analysis tools.
Although Core has experienced losses on nominal revenues since its
inception and is still in a partial development stage, Core's management has
advised the Company that it anticipates an increase in revenues in fiscal year
1996.
The Company has also provided a portion of the working capital
requirements of Core during fiscal 1995, in the form of a series of loans to
Core in the aggregate principal amount of $123,500. The Company accounts for
its investment in Core using the equity method of accounting which requires the
Company to record its share of Core's earnings or losses. During fiscal 1995,
the Company reduced the loans to zero because of losses incurred by Core. (See
Item 12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS). Subsequent to the
Company's fiscal year end, the Company made additional loans to Core in the
amount of $50,000.
THE SCREW MACHINE PRODUCTS INDUSTRY IN GENERAL
It is estimated that there are in excess of 1600 manufacturing companies
making screw machine products in the Untied States. Screw machine products
usually are component parts for use in machines, appliances, automobiles, and
similar durable goods; they also have a wide variety of uses in individual,
industrial, military, and consumer products. These parts must be manufactured
strictly to customer's specifications and must be of precise dimensions,
demanding close individual control during production. The Company does not own
the designs for any of the products produced for customers. Historically, the
screw machine products industry has been extremely sensitive to downturns in
the general economy. In January 1996, the industry's trade association,
National Screw Machine Products Association (NSMPA), officially changed its
name to Precision Machined Products Association (PMPA). The name change was
made to better reflect the Industry today, the current technology and the
varying equipment used by the association members.
In meeting customer orders, the Company manufactures a wide range of
products. Before placing an order, a customer provides the Company with
detailed drawings and specifications for a specific product. Based upon these
drawings and specifications, the Company prepares a quote to manufacture the
product. Once the customer agrees to this quote, manufacturing of the product
is scheduled. Quality control inspections are made throughout the
manufacturing process. Emphasis is placed on quality in design. This supports
the Company's program of defect prevention rather than defect detection. The
results of this approach have shown significantly lower costs through the
reduction of scrap and associated indirect labor. Upon completion of the
manufacturing process, a final inspection is made to determine whether the
product conforms to the customer's specifications. If the product fails to
conform to the customer's specifications, the Company will correct the problem
at its own expense.
Many of the Company's customers are increasingly competing in the global
market. The Company, in its continuing effort to maintain a partner like
working relationship with these customers, has pursued a world class quality
program based on the internationally recognized ISO 9000 standard. This not
only supports the strategic direction of the Company's customer
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base, but also enhances the Company's appeal to potential new customers. While
the Company has designed its internal quality standards to meet ISO 9000
standards, the Company has not been certified.
Additionally, in today's competitive marketplace, customers are requiring
the Company to comply with a variety of delivery demands. These include "Just
in Time" (JIT), Kan-Ban and "Ship to Stock" requirements. The Company's
ability to adapt to the varying demands of its customers, allows the Company to
remain a leader in its industry. The Company has recently installed a fully
integrated computer system, which has the ability to purchase and schedule
materials in conjunction with the manufacturing process. This will give the
Company an effective tool to control in house inventories and to provide on
time deliveries to its customers.
All of the Company's business consists of the production of component
parts of proprietary products for other companies. A number of these companies
have the capacity to perform this work themselves, but for what appears to be
business reasons decline to do so. Should these companies decide in the future
to do this work themselves, the business of the Company could be adversely
affected.
As of October 31, 1995, the Company's unproduced backlog amounted to
approximately $6,134,000 of anticipated gross sales from projects on which
customers have authorized work to commence during the fiscal year 1996. The
Company believes the increase in the backlog is directly related to the current
business climate. The backlog is expected to be completed within the 1996
fiscal year, as the Company believes that all these orders are firm. The
Company's gross backlog, as of October 31, for the past three years was as
follows: 1994 - $4,419,000, 1993 - $3,240,000; 1992 - $2,1555,000.
MACHINERY
Of central importance to the screw machine product manufacturer is the
automatic screw machine. Most of the Company's machines are cam and gear
operated, which are extremely efficient for "High Speed - High Volume
Production". The Company, in essence, is in the business of selling machine
time, as well as the capabilities of its machines and the skill of its
personnel in preparing and operating its machines. The automatic screw machine
is a very complex piece of machinery that requires highly skilled machinists to
set up and operate. Because the Company specializes in high volume production,
it must operate the fastest machines that will produce a part within the
customers specifications. The Company feels that the combination of its
engineering capabilities, its experience and its well maintained equipment,
meet these requirements. All of the machinery utilized by the Company is in
good working order and adequate for the current needs of the Company and its
customers.
In 1995 the Company made the decision to expand into Horizontal and
Vertical CNC equipment. The CNC equipment will allow the Company to perform a
larger percent of the secondary operations required on customers products. In
the past, many of these operations have been sent to outside job shops. The
ability to perform these operations in-house will afford the Company better
control over its work-in-process inventory as well as better control over the
high quality standards required in today's business climate.
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RAW MATERIALS AND SUPPLIES
Screw machine products can be made from many materials, including various
grades of steel (carbon, alloy, or stainless), most brasses and bronzes,
aluminum, precious metals, and machinable plastics. The Company specializes in
manufacturing products primarily with brass, as well as carbon steel, aluminum,
and stainless steel.
Materials used by the Company are either purchased from mills, material
distributors, or supplied by the customer. Although the Company is not
presently faced with any shortages of materials, shortages of certain materials
have occurred in the past and may occur in the future. Future shortages of
materials would have an adverse affect on the Company's business. The Company
orders materials specifically for the jobs it is currently manufacturing and,
therefore, does not keep excess materials on hand. The Company usually has
sufficient materials in stock to continue operations for approximately one
month.
All of the metals purchased by the Company, for customer jobs, either
becomes product or are reclaimed, to be used in another process. The
reclamation of scrap material is very important in the manufacturing of screw
machine products. The value received from the sale of scrap is an essential
element in the pricing and profitability of each job. All reclaimed scrap is
either sold back to the mills or sold to a scrap dealer. In the case of brass,
the scrap is sold back to the supplying mill at a price established by the
mill. Aluminum and stainless scrap is sold to various scrap dealers at a price
established by the market demand. Both the cost of the material and the
anticipated return on the sale of scrap are considered in preparing a quote for
a particular job. The Company's principal suppliers are: Chase Brass and
Copper Company, Cerro Metal Products, Bralco Metals, and Joseph T. Ryerson and
Son, Inc.
The Company does not use , and has not used, solvents in the process for
the cleaning of parts for many years. In 1987, the Company purchased its first
soap and water parts cleaner. While the evolution of soap and water parts
cleaning has been slow in coming, the Company purchased a "State of the Art"
soap and water parts cleaner in 1995. The new parts cleaner has been a major
improvement in getting product cleaner and adds a new dimension in the
reclamation of cutting oils and the soap used in the cleaning process.
EMPLOYEES
The Company and its subsidiaries employed, on a full-time basis, one
hundred and ten (110) persons on October 31, 1995, of which ten (10) were
general and administrative, three (3) were in marketing and sales, and
ninety-seven (97) were production personnel.
The Company believes that it has good relations with its employees, none
of whom are covered by a collective bargaining agreement. The ability of the
Company to retain and attract skilled personnel, especially skilled machinists,
is of primary importance to the Company's operations. Qualified machinists are
generally in short supply in the industry, and, therefore, in great demand.
The Company has been able to attract and retain a staff of skilled machinists
and support staff by offering compensation packages comparable with larger
companies. In addition, the Company conducts informal training programs,
whereby selected unskilled personnel are given the opportunity to learn the
machinist trade.
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ENVIRONMENTAL
During 1992, perchloroethylene contamination was found in the ground soil
below the Alger manufacturing facility. The Company completed initial soil
testing in 1992 and has subsequently done additional testing during 1993. The
appropriate local agencies have been notified of the results of the Preliminary
Environmental Site Investigations. The Company is currently awaiting a
response and direction from such agencies. Until a plan of remediation has
been structured and approved by the appropriate agencies, the cost to remediate
the contamination can only be estimated. As of October 31, 1992, a provision
of $200,000 was recorded to Other Income (Expense) for the estimated costs of
this remediation. During 1993 the provision was increased by an additional
$50,000, bringing the total provision to $250,000 as of October 31, 1993, 1994
and 1995. It is anticipated that sometime in the near future a more
comprehensive analysis will be completed and a plan of remediation will be
approved. It is estimated that the costs associated with the remediation will
be expended over a two to four year period. Although the matter has not been
fully investigated, the Company believes that its insurance may recover a
portion of the remediation cost; however, the Company has not recognized any
potential recovery in its financial statements.
SALES PRACTICES
Historically, the majority of the company's customer base is located in
the western United States. However, in the last few years the Company has
continued to expand outside of its traditional territory. Sales in the midwest
and southern portion of the United States have shown steady growth. Sales in
the Southern California region are handled by the Company's sales department,
while the balance of the country is handled through manufacturers'
representatives. The Company currently uses seven (7) manufacturers'
representatives located throughout the western, midwest, and southern regions
of the United States. The geographical distribution of the Company's sales
during the fiscal years ended October 31, 1995, 1994, and 1993 was as follows:
Dollar Amount of Total Sales (000's)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
California $5,389 $4,445 $3,707
Other Western States 4,314 3,285 2,985
All Others 6,047 6,797 5,142
Scrap 3,682 3,144 2,528
------- ------- -------
$19,432 $17,671 $14,362
</TABLE>
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Percentage of Total Sales
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
California 28% 25% 26%
Other Western States 22 19 21
All Others 31 38 36
Scrap 19 18 17
--- --- ---
100% 100% 100%
</TABLE>
Export sales have never been, nor are the anticipated to be, a significant
part of the Company's business. During the fiscal years ended October 31,
1995, 1994, and 1993, foreign sales represented less than one-half of one per
cent of total sales.
The Company believes that its sales effort outside of its local sales
territories, specifically Southern California and recently Phoenix, is unique
to the screw machine industry, since generally screw machine companies are
localized in their sales and operations. The addition of qualified
manufacturers' representatives is, and has been for many years, an integral
part of the Company's strategy for continued growth outside of these
traditional sales territories.
The Company uses many methods to advertise its capabilities including
sales brochures, directory advertising, and trade shows. The Company also uses
a sales video, the latest vehicle for visual communication. The video has
proven to be an excellent sales tool to communicate the Company's capabilities.
A prospective customer, as well as existing customers, have the opportunity to
see the inside workings of the Company's manufacturing facilities and to
generate a sense of confidence in the Company's ability to produce a product to
the customer's required specifications and quantities.
CUSTOMERS
The Company manufactures parts for a variety of customers. During 1995
there was one customer, from multiple divisions, which accounted for
approximately 13% of the Company's consolidated revenues. The Company does not
believe that the loss of this customer would have a material adverse effect on
its overall operations. The products associated with this customer require
substantial outside processing and the actual utilization on the Company's
facilities required for this customer is substantially less than 10%.
During 1995, none of the Company's business was government related.
Item 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company and its subsidiary, Alger, lease office and manufacturing
space in Pasadena and Ontario, California, and in Phoenix, Arizona. The
Company's Pasadena corporate office consists of 735 square feet on a two year
lease which ends in February 1996.
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Alger leases three manufacturing facilities: 35,600 square feet and 17,000
square feet in Ontario on leases ending in September 1997, and 5,842 square
feet in Phoenix, Arizona until August 1996. The Company plans on expanding the
Phoenix operation during 1996. This expansion, originally planned for 1995,
will require the Company to lease and build-out new manufacturing facilities
for the Phoenix division during 1996. The manufacturing facilities in Ontario,
with the addition of the 17,000 square feet in February 1995, are considered
adequate for the current operations at this location. The Company is presently
building office space in the Ontario facility to house its corporate office
when the current lease expires.
In management's opinion, all of the Company's interests in its leased
properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Written consents were received from certain shareholders of
the Company on or before August 30, 1995.
(b) Not applicable
(c) A majority in interest of the shareholders of the Company
(without counting as outstanding or consenting the shares of common
stock owned by Robert W. Miller) approved a loan to Mr. Miller of an
amount up to $25,000 on such terms and conditions as the Board of
Directors may determine. (See Item 12). Consents for: 822,072.
A majority in interest of the shareholders of the Company (without
counting as outstanding or consenting the shares of ccommon stock by
Robert W. Miller) approved an amendment to the By-Laws of the Company
with the power and authority to make loans of money or property to,
or guarantee the obligation of, any director or officer of the
Company. Consents for: 772,392
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Part II
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was traded over the counter on the NASDAQ
system until December 10, 1991, when it was delisted for failing to comply with
the current entry requirements approved by the Securities and Exchange
Commission on August 31, 1991. The Company is currently still a part of the
NASDAQ system and can be located on The Bulletin Board using the symbol "ATHR".
The following chart lists the stock price range from the company's market
makers, as published by the National Quotation Bureau; these over-the-counter
market quotations reflect the inter-dealer prices without retail mark-up,
mark-down, or commissions and may not necessarily represent actual
transactions.
Market Information
<TABLE>
<S> <C> <C> <C> <C>
12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- -------
Ask 1 13/16 1 1/2 1 3/4 1 3/8
Bid 1 3/8 1 5/16 1 5/16 1 1/4
12/31/94 9/30/94 6/30/94 3/31/94
-------- ------- ------- -------
Ask 1 3/8 1 3/8 1 13/16
Bid 1 1/4 1 3/16 5/8 5/8
12/31/93 9/30/93 6/30/93 3/31/93
-------- ------- ------- -------
Ask 7/8 3/4 3/4 3/4
Bid 5/8 3/8 3/8 3/8
</TABLE>
As of December 31, 1995, the approximate number of shareholders of record
of common shares was 318.
No dividends were declared during the fiscal year ended October 31, 1995
on the Company's common stock. The Company does not plan to pay dividends on
its common stock in the foreseeable future and anticipates that any future
earnings will be retained to support the Company's business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the changes in working capital for the
fiscal years 1995, 1994, and 1993 (Thousands of Dollars).
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Current Assets $5,532 $5,352 $3,924
Current Liabilities $3,686 $3,486 $2,726
Working Capital $1,846 $1,866 $1,198
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, AS COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1994
The Company's working capital as of October 1995, remained fairly constant
with 1994, even though during 1995 the company expanded its manufacturing
facilities and increased sales. The increase in accounts receivable and
inventory of approximately $340,000 were financed using the Company's line of
credit and out of cash flow.
The Company expanded its Ontario manufacturing facilities, during fiscal
1995, with the lease of a 17,000 square foot facility. The original lease is
for thirty seven months with an option for an additional five years. The
opportunity to lease this facility, caused the Company to defer the expansion
of its Phoenix division. The Company has expended approximately $200,000 on
improvements and equipment in this expansion. $100,000 of the cost was financed
using the Company's equipment line of credit, with the balance coming from cash
flow. This does not include the lease cost along with the time and labor
associated with getting the facility up and running. The Company is using the
additional space for warehousing, assembly and secondary operations. The
additional space has also given the Company the room to expand its secondary
operation department, with the addition of CNC equipment, as well as other
necessary equipment. This will allow the Company to perform substantially more
of the required secondary operations in house, which in turn will give the
Company greater control over its inventory, costs and delivery schedules. The
Company feels the cost associated with the addition of this facility will
eventually be returned through lower outside processing costs and more
efficient inventory control.
During 1996 the Company has plans to expand its Phoenix division, which
currently occupies 5,842 square feet. This expansion was originally planned
for 1995, but was deferred when the Company decided to expand its Ontario
facility. Even though a specific new location has not yet been designated, it
is anticipated that a minimum of 12,000 to 15,000 square feet will be required.
The larger facility will allow for planned expansion over the next few years
as well as provide the division with a better equipped, autonomous working
environment. The expansion is expected to cost between $150,000 and $200,000,
including equipment and leasehold improvements, over a period of six to twelve
months commencing in August 1996.
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The Company believes it will be able to fund these costs of expansion from
working capital and its equipment line of credit.
The Company purchased $460,000 of manufacturing and computer equipment
during 1995. This included a new $215,000 "State of the Art" parts washing
system. The Company financed the equipment additions with a new five year
lease on the parts washer, utilization of $100,000 of its equipment line of
credit, with the balance coming from cash flow. The Company has available the
remaining new equipment line of credit of $300,000 for additional equipment
purchases in 1996. At the present the Company does not anticipate any major
equipment purchases in 1996 other than associated with the expansion of the
Phoenix division.
In April 1995, the Company entered into an agreement whereby it agreed to
acquire 100,000 shares of its common stock for $2 per share or $200,000. The
agreement called for $40,000 at closing and the balance to be paid in equal
installments of $40,000 beginning in April 1996 through April 1999. Interest
payments on the unpaid balance are to be paid quarterly at 8.5%. The note is
secured by an equal number of shares of the Company's stock, in direct
relationship to the unpaid balance, at $2 per share. Each year as a payment is
made, the amount of stock held as security is reduced accordingly. The Company
retains all voting rights to the stock held as security as long as the Company
is not in default on the agreement.
In August 1995 the Company completed an amendment to its credit agreement,
extending the agreement to August 13, 1996. The amended credit agreement
increased the Company's working capital line to $2,000,000 and retained the
long term equipment loan of $1,000,000, with a balance owing of $783,000 as of
October 1995. The net effect of the amended credit agreement was to increase
available financing by approximately $300,000. In addition, the amended
agreement continued a new equipment line of $400,000 (with a balance available
of $300,000) for the purchase of additional equipment. The equipment line must
be used in increments of a minimum of $100,000 and shall not exceed 75% of the
purchase price of equipment. At October 31, 1995, the Company had
approximately $823,000 available under the working capital line and $300,000
available under the new equipment line as compared to $780,000 and $400,000
respectively in 1994. Management believes the amended agreement is adequate to
fund the Company's working capital requirement during fiscal year 1996 and
anticipated equipment purchases in fiscal year 1996.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994, AS COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1993
1994 proved to be a year of sustained growth for the Company. The net
affect was a substantial improvement in the Company's overall financial
condition. Working capital improved due to the growth in sales and profits, a
restructuring of the Company's credit agreement and the effects of the adoption
of The Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes (Statement 109)".
The Company's 1994 sales growth created a substantial increase in accounts
receivable and inventory of approximately $1,311,000. The increase was
financed through an increase in accounts payable and utilization of the
Company's working capital line of credit.
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During 1994 the Company purchased $394,000 of additional equipment. The
equipment was financed using working capital, partially from the old equipment
line of credit and partially from financing obtained from a new source. The
Company had availability of $400,000 under the equipment line of credit for
additional equipment purchases in 1995.
In April 1994 the Company exercised options to acquire 260,000 shares of
the common stock of Core Software Technology, Inc. ("Core") at $1 per share or
an aggregate of $260,000. The Company exercised the options concurrently with
the initial closing of the Core Private Placement of shares of its capital
stock, whereby Core raised an aggregate of $4,705,000. The loans that the
Company had made to Core were substantially converted into equity at the
closing of the private placement. However, Core also paid the balance of the
loans remaining to the Company, as well as $56,234 of interest income, which
was unrecorded on the Company's books prior to payment. As of October 31,
1994, the Company had no outstanding loans receivable from Core.
In October 1994 the Company foreclosed on certain assets of ("IDC") which
the Company held as security for loans made by the Company to IDC. The Company
served IDC with a notice of default under such loans in September 1994. At the
foreclosure proceeding the Company acquired 858,863 shares of the common stock
of Core for $100,000 in the form of a reduction of its then outstanding loans
to IDC by $100,000, which shares of Core common stock IDC had pledged as
security to secure its loans from the Company. IDC still has unpaid loans
owing to the Company in the amount of $561,520 plus interest. In 1994 the
Company carried a provision for losses on the loans of $534,062.
In July 1994 the Company completed an amendment to its credit agreement,
extending the agreement to August 13, 1995. The amended credit agreement
increased the Company's working capital line to $1,700,000 and included a long
term equipment loan of $1,000,000. The net effect of the amended credit
agreement was to increase working capital by approximately $250,000 by
restructuring the long term portion of the credit agreement. In addition, the
amended agreement included a new equipment line of $400,000 for the purchase of
additional equipment. The equipment line must be used in increments of a
minimum of $100,000 and shall not exceed 75% of the purchase price of
equipment. At October 31, 1994, the Company had approximately $780,000
available under the working capital line and $400,000 available under the
equipment line as compared to $753,000 and $125,000 respectively in 1993.
As of October 1994, the Company adopted the Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes (Statement 109)".
Statement 109 requires a change from the deferred method of accounting for
income taxes under APB Opinion 11 to the asset and liability method of
accounting for income taxes. The Company's Notes to Consolidated Financial
Statements more thoroughly discuss the implementation of Statement 109. The
net effect to working capital from the adoption of Statement 109 was an
increase of $377,000 as of October 1994.
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RESULTS OF OPERATIONS
The following table summarizes the results of operations for the fiscal
years 1995, 1994, and 1993 (Thousands of Dollars):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Sales $19,432 $17,671 $14,362
Cost of Sales $16,130 $14,633 $12,043
Operating Profit $869 $885 $422
Net Earnings $264 $557 $201
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1994
While sales for 1995 shows a 10% increase over 1994, the operating profits
are similar to 1994. The main reasons for this stagnation in operating profits
are the higher cost of raw material, a larger percent of sales outside of
Southern California and the addition of operating facilities in 1995.
Raw material price increases for the last two years have totaled 31% for
the higher quantity usage materials. While the majority of price increases are
passed on to customers as new orders are quoted, the substantial increases have
a negative effect on profit percentages. For 1995 the cost of raw material
associated with sales increased from 43% to 45%. While the impact of these
higher material costs has been partially offset by spreading certain fixed
costs over higher sales, the net effect of a large portion of the sales
increase is a pass through of costs.
The cost associated with the addition of 17,000 square feet of
manufacturing and warehousing facilities, was absorbed in fiscal 1995. While
the Company feels that the additional costs associated with this facility will
be more than covered with lower outside processing costs and more efficient
inventory control, the additional lease costs, along with the labor and
overhead associated with setting up the facility, before the facility became
functional, were all absorbed in 1995.
The Company has continued the expansion of its sales territory with the
addition of new manufacturers representatives. As sales to territories outside
Southern California and Phoenix have become a larger portion of the Company's
total sales, direct costs associated with these sales, specifically freight and
commissions, have also continued to rise as a percent of sales. While the
Company feels that the expansion of its sales territory is necessary for
continued growth, there is always a learning curve and costs associated with
such expansion.
The Company's unproduced backlog of approximately $6,134,000 at October
1995 as compared to $4,419,000 is an indication of the Company's success in
expanding its sales territory and the continued strength in the market place
for its services. While sales for fiscal 1995 were originally projected to be
similar to, or even slightly lower than, 1994, the Company's customer base has
maintained a constant demand for its services, and along with the addition of
new customers, has pushed sales and backlog to new records.
13
<PAGE> 14
The Company's investment in Core continued to under perform from its
projections, in fiscal 1995. While the Company had originally decided not to
invest any additional funds, through equity or loans, the conditions seemed to
warrant the investment and risk associated therewith. The Company invested a
total of $123,500 through loans to Core in fiscal 1995. The Company is required
to account for its investment in Core using the equity method of accounting.
Under the equity method the Company is required to include its proportionate
share of the net loss reported by the investee(Core) for the periods subsequent
to acquisition. Accordingly, the Company's fiscal 1995 results of operations
include a loss associated with its investment in Core, using the equity method,
of $123,500.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1994, COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1993
The Company's 1994 sales saw a continuation of the business recovery
started in the second half of 1993. Sales increases of 23% for the year were
fairly consistent throughout the entire year. A portion of the substantial
sales increase can be attributed to a large contract with one customer of which
the major portion is expected to be completed by the first quarter of 1995.
The contract continued, but at a reduced level throughout 1995. In addition, a
portion of the sales increase for 1994 is attributable to an unusually large
increase in the cost of raw materials. Brass prices as of October 1994 had
increased by 22% from the beginning of fiscal year 1994. While the cost of raw
materials is normally passed on to customers, such large increases in the
Company's costs have a tendency to skew the sales increases and cost of sales
during the year.
During 1994 the Company increased its capabilities in the larger diameter
equipment. Sales demand in the larger diameter equipment have continued to be
the higher percentage of the Company's sales growth. Sales associated with the
larger diameter equipment also tend to carry a higher percentage of raw
material cost, thereby reflecting a larger sale and cost of sale associated
with these products.
The Company's backlog of $4,419,000 at October 1994 was very strong as
compared to $3,240,000 at October 1993. The backlog was down from a peak of
$5,359,000 at July 1994. A large portion of the decrease from July 1994 was
attributable to one customer, and was an anticipated decrease as the original
contract was being completed.
The Company's relationship with Core changed during 1994 as the Company
converted the majority of its loans to Core into equity as a condition to the
closing of the Core Private Placement which raised gross proceeds to Core of
$4,705,000 (see Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS). In
addition, the Company acquired 858,863 shares of the common stock of Core in a
foreclosure sale. The shares of Core foreclosed upon were owned by IDC and had
been pledged by IDC to the Company as collateral to secure the IDC Loans. The
Company's investment in the stock of Core totals $360,459 and represents
approximately 21.5% of the issued and outstanding shares of Core's capital
stock. The Company is required to account for its investment in Core using the
equity method. Under the equity method of accounting for investments in common
stock, the Company is required to include its proportionate share of the net
loss reported by the investee (Core) for the periods subsequent to acquisition.
In 1994 the Company's results of operations include a loss associated with its
investment in Core, using the equity method, of $360,459.
14
<PAGE> 15
The Company is not required to recognize losses associated with its investee
(Core) in excess of its investment.
EFFECTS OF INFLATION
During 1995 and 1994 the Company experienced substantial increases in the
cost of some raw materials, approximately 9% and 22% respectively. All of the
price increases for 1995 took place during the Company's first quarter. The
cause of such increases appeared to be associated with the economic recovery
the country was experiencing and the resulting increase being passed on by
mills and distributors flush with orders.
In the past the Company has not normally committed to long-term fixed
price contracts. However, the current business climate, with customers placing
longer term contracts, has required the Company to commit to longer term fixed
price contracts. If material price increases are unusually high, the Company
has been able to request and usually get a price adjustment. The effect of
these material increases on the operating profit during 1995 and 1994 was
minimal, as the majority of the increases were passed on to customers as new
orders were quoted. However, the abnormally large increases in the cost of raw
materials tends to skew the percentages, when making cost comparisons between
periods.
The Company is unable to predict if raw materials will experience similar
increases in 1996. If similar increases do occur in 1996, the Company does not
believe such increases would have a material effect on its operations.
Inflation for the fiscal year ended 1993 was minimal and had no effect on
the Company's operations.
15
<PAGE> 16
Item 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TITLE PAGE
<S> <C>
Independent Auditor's Report ......................................... 18
Consolidated Balance Sheets
at October 31, 1995, and 1994 ........................................ 19
Consolidated Statements of Earnings
for each of the three years ended October 31, 1995, 1994, and 1993 ... 21
Consolidated Statements of Stockholders' Equity
for each of the three years ended October 31, 1995, 1994, and 1993 .. 23
Consolidated Statements of Cash Flows
for each of the three years ended October 31, 1995, 1994, and 1993 .. 24
Notes to Consolidated Financial statements ........................... 26
</TABLE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 17
ATHANOR GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
October 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
17
<PAGE> 18
Independent Auditors' Report
The Board of Directors and Stockholders
Athanor Group, Inc.:
We have audited the accompanying consolidated balance sheets of Athanor Group,
Inc. and subsidiaries as of October 31, 1995 and 1994 and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended October 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 misstatements. 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 Athanor Group, Inc.
and subsidiaries as of October 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1995 in conformity with generally accepted accounting
principles. As discussed in note E to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," for the year ended October 31, 1994.
Los Angeles, California
December 21, 1995
18
<PAGE> 19
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ---------
<S> <C> <C>
Current assets:
Cash $ 62,382 149,185
Accounts receivable, net of allowance for
doubtful accounts of $11,785 and $11,443
at October 31, 1995 and 1994, respectively 2,145,381 1,935,379
Note receivable - related parties 25,000 19,500
Income tax receivable 99,500 --
Inventories:
Raw materials 835,152 860,636
Work in process 519,363 312,382
Finished goods 1,617,754 1,668,673
---------- ---------
2,972,269 2,841,691
---------- ---------
Prepaid expenses 36,141 29,407
Deferred income tax asset (note E) 191,298 376,864
---------- ---------
Total current assets 5,531,971 5,352,026
Property, plant and equipment, net (note B) 1,108,541 903,512
Other assets 82,708 86,350
---------- ---------
$6,723,220 6,341,888
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
--------- --------
<S> <C> <C>
Current liabilities:
Note payable (note C) $1,177,163 919,928
Current portion of long-term debt (note D) 365,961 246,327
Accounts payable 1,537,976 1,521,275
Accrued liabilities:
Salaries, wages and other compensation 275,770 315,125
Income tax payable -- 141,622
Other 329,246 341,765
---------- ---------
Total current liabilities 3,686,116 3,486,042
---------- ----------
Long-term debt, less current portion (note D) 974,143 850,665
Deferred gain on sale and leaseback 39,257 80,562
Noncurrent deferred income tax liability (note E) 55,424 20,090
Stockholders' equity:
Redeemable, convertible preferred stock, $3 stated value
Authorized 5,000,000 shares; none issued -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; issued and outstanding 1,471,434 shares in
1995 and 1,571,434 shares in 1994 14,714 15,714
Additional paid-in capital 1,447,391 1,447,391
Retained earnings 506,175 441,424
---------- ---------
Total stockholders' equity 1,968,280 1,904,529
---------- ---------
Commitments (note G)
$6,723,220 6,341,888
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Net sales $ 19,432,094 17,670,680 14,362,489
Cost of sales 16,130,070 14,633,034 12,043,001
------------ ----------- -----------
Gross profit 3,302,024 3,037,646 2,319,488
Selling, general and administrative
expenses 2,433,298 2,152,960 1,897,201
------------ ----------- -----------
Operating profit 868,726 884,686 422,287
Other income (expense):
Interest expense (281,434) (141,124) (176,333)
Equity in loss of unconsolidated investee (123,500) (360,458) --
Miscellaneous, net 20,859 58,883 2,106
------------ ----------- -----------
Earnings before income taxes,
extraordinary credit and
cumulative effect of change in
accounting for deferred income
taxes 484,651 441,987 248,060
Income tax expense (note E) 220,900 344,275 124,332
------------ ----------- -----------
Earnings before extraordinary
credit and cumulative effect of
change in accounting for deferred
income taxes 263,751 97,712 123,728
Extraordinary credit - tax benefit of
carryforwards -- -- 77,137
------------ ----------- -----------
Earnings before cumulative effect
of change in accounting for
deferred income taxes 263,751 97,712 200,865
Cumulative effect of change in accounting for
deferred income taxes (note E) -- 478,683 --
------------ ----------- -----------
Net earnings $ 263,751 576,395 200,865
============ =========== ===========
</TABLE>
(Continued)
21
<PAGE> 22
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Earnings per common share:
Primary and fully diluted:
Earnings before
extraordinary credit and
cumulative effect of
change in accounting for
deferred income taxes $.18 .06 .08
Extraordinary credit -- -- .05
---- --- ---
Earnings before
cumulative effect of
change in accounting for
deferred income taxes .18 .06 .13
Cumulative effect of
change in accounting for
deferred income taxes -- .31 --
---- --- ---
Net earnings $.18 .37 .13
==== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS
--------------- ----------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1992 -- $-- 1,477,884 $ 14,779 1,395,027 (335,836) 1,073,970
Issuance of common stock -- -- 89,216 892 49,157 -- 50,049
Net earnings for the year -- -- -- -- -- 200,865 200,865
-- --- ---------- -------- --------- -------- ----------
Balance at October 31, 1993 -- -- 1,567,100 15,671 1,444,184 (134,971) 1,324,884
Issuance of common stock -- -- 4,334 43 3,207 -- 3,250
Net earnings for the year -- -- -- -- -- 576,395 576,395
-- --- ---------- -------- --------- -------- ----------
Balance at October 31, 1994 -- -- 1,571,434 15,714 1,447,391 441,424 1,904,529
Retirement of common stock (note L) -- -- (100,000) (1,000) -- (199,000) (200,000)
Net earnings for the year -- -- -- -- -- 263,751 263,751
-- --- ---------- -------- --------- -------- ----------
Balance at October 31, 1995 -- $-- 1,471,434 $ 14,714 1,447,391 506,175 1,968,280
== === ========== ======== ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1995 1994 1993
--------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 263,751 576,395 200,865
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Cumulative effect of change in accounting for
deferred income taxes -- (478,683) --
Equity in loss of unconsolidated investee 123,500 360,458 --
Depreciation and amortization 250,944 237,928 225,536
Loss on sale of fixed asset 21,460 5,683 --
Amortization of deferred gain on sale and
leaseback (41,305) (41,304) (41,304)
Provision for contamination -- -- 50,000
Provision for deferred income taxes 220,900 160,046 --
(Increase) decrease in operating assets:
Accounts receivable (309,502) (664,821) 93,718
Inventories (130,578) (646,078) (198,557)
Prepaid expenses (6,734) 3,744 (10,347)
Other assets 3,642 3,916 25,326
Increase (decrease) in operating liabilities:
Accounts payable 16,701 282,823 334,176
Accrued liabilities (193,496) 195,126 92,391
--------- ------- -------
Net cash provided by (used in) operating
activities 219,283 (4,767) 771,804
--------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (517,318) (236,933) (243,433)
Proceeds from sales of property and equipment 39,885 10,044 --
Write-off of note receivable - related party 19,500 -- --
Investment/advances in unconsolidated investee (123,500) (260,458) --
--------- ------- -------
Net cash used in investing activities (581,433) (487,347) (243,433)
--------- ------- -------
</TABLE>
(Continued)
24
<PAGE> 25
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Note receivable - related party $ (25,000) 198,672 (97,463)
Net borrowings (repayments) under line of credit 257,235 284,416 (293,478)
Repayments of note payable -- (15,834) (21,109)
Proceeds from long-term debt 312,083 336,546 175,000
Repayments of long-term debt (228,971) (269,373) (277,281)
Issuance of stock -- -- 50,049
Installment on retirement of stock (note D) (40,000) -- --
--------- ------- -------
Net cash provided by (used in) financing
activities 275,347 534,427 (464,282)
--------- ------- -------
Net increase (decrease) in cash (86,803) 42,313 64,089
Cash at beginning of year 149,185 106,872 42,783
--------- ------- -------
Cash at end of year $ 62,382 149,185 106,872
========= ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 278,952 175,509 173,639
========= ======= =======
Income taxes paid $ 254,635 103,000 14,000
========= ======= ======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
1995
The Company purchased $206,826 of machinery and equipment under a capital
lease obligation.
1994
The Company purchased $157,854 of machinery and equipment under a capital
lease obligation.
The Company issued 4,334 shares valued at $3.250 of common stock to a
director for payment of director fees.
The Company increased its investment in CORE by $100,000 through reduction of
related party notes receivable.
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Athanor Group, Inc. (Athanor or the Company) is principally in the
business of manufacturing and marketing screw machine products.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Athanor
and its wholly owned subsidiary, Alger Manufacturing Co., Inc. (Alger).
Athanor sold its 85% interest in Athanor Environmental Services, Inc.
effective May 31, 1993. Significant intercompany accounts and
transactions have been eliminated.
2. INVENTORIES
Inventories are stated at the lower of cost, based on the first-in,
first-out method, or market.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include
expenditures for major renewals and betterments. Repairs and
maintenance are expensed as incurred. Cost and accumulated
depreciation applicable to assets retired or disposed of are eliminated
from the accounts, and any resultant gains or losses are included in
operations.
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line method.
Depreciation is based on estimated useful lives of assets, which are as
follows:
<TABLE>
<S> <C>
Machinery and equipment 4 to 7 years
Leasehold improvements 5 to 9 years
</TABLE>
4. INCOME TAXES
During 1994, the Company changed its method of accounting for deferred
taxes from the deferred method under APB No. 11 to the asset and
liability method now required under SFAS No. 109.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, net operating loss carryforwards and credit carryforwards are
included as deferred tax assets. A valuation allowance against
deferred tax assets is recorded if necessary. All deferred tax amounts
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. Changes in tax rates are recognized in
income in the period that includes the enactment date.
26
<PAGE> 27
Under the deferred method, used by the Company in 1993 and prior,
deferred income taxes were recognized for income and expense items that
were reported in different years for financial reporting purposes and
income tax purposes using the income tax rate applicable in the year of
calculation. Under the deferred method, deferred taxes were not
adjusted for subsequent changes in tax rates. Available net operating
loss carryforwards and credit carryforwards were not treated as
deferred tax assets and were recorded as extraordinary items when
utilized.
5. INVESTMENT
The Company accounts for its investment in Core Software Technology
(Core) on the equity method which requires the Company to record its
share of Core's earnings or losses. During 1994, the Company invested
$360,458 into Core which was subsequently reduced to zero because of
losses incurred by Core. At October 31, 1995 and 1994, the Company
owned 21.5% of Core's common stock. During 1995, the Company invested
$123,500 in Core which was subsequently reduced to zero because of
losses incurred by Core.
6. EARNINGS PER SHARE
Earnings per share is based on the weighted average of common shares
outstanding during each year.
7. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's debt instruments is based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
NOTE B - PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification follows:
<TABLE>
<CAPTION>
October 31
------------------------------
1995 1994
------------- ---------
<S> <C> <C>
Machinery and equipment $ 4,378,968 4,079,866
Leasehold improvements 77,278 71,442
------------- ---------
4,456,246 4,151,308
Less accumulated depreciation and amortization 3,347,705 3,247,796
------------- ---------
$ 1,108,541 903,512
============= =========
</TABLE>
NOTE C - NOTE PAYABLE
Alger has a $3,400,000 credit agreement with a lending institution for
working capital and other business financing needs. The credit
agreement is collateralized by substantially all of the assets of Alger
(a wholly owned subsidiary). Under the line of credit, the subsidiary
may borrow amounts up to $2,000,000 based on eligible accounts
receivable and inventories. Interest on drawings on this line of
credit is payable at the prime rate plus 1.50% (8.75% at October 31,
1995). The line of credit expires in August 1996. The amount
outstanding was $1,177,163 and $919,828 at October 31, 1995 and 1994,
respectively. The amount available under the line of credit was
approximately $823,000 and $780,000 at October 31, 1995 and 1994,
respectively. The agreement also provides for a term loan not to
exceed $1,000,000 (see note D). The Company borrowed $1,000,000 under
the term loan, of which $750,000
27
<PAGE> 28
was outstanding at October 31, 1995. In addition, the agreement
provides for an equipment line of up to $400,000, of which $100,000 has
been drawn and $300,000 was available at October 31, 1995. The Company
has guaranteed borrowings outstanding under this credit agreement on
behalf of Alger.
Note D - Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Note payable to an individual at an
annual rate of 8.5%, payable in
yearly installments of $40,000, with
interest payable quarterly, due April
1999 (see note L) $ 160,000 --
Notes payable to a lending
institution at the prime rate plus
1.5% (8.75% at October 31, 1995),
payable in monthly installments of
$18,334 plus interest, due July 1999,
collateralized by substantially all
assets of Alger 843,332 950,000
Notes payable to others at rates
ranging from 7.9% to 12.9%, payable
in monthly installments of $1,133
including interest, due through May
1999, collateralized by equipment and
automobiles 40,110 3,832
Capital lease obligations (see note G) 296,662 143,160
---------- ---------
1,340,104 1,096,992
Less current portion 365,961 246,327
---------- ---------
$ 974,143 850,665
========== =========
</TABLE>
A schedule of aggregate, annual principal payments on long-term debt as
of October 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31 AMOUNT
----------- ----------
<S> <C>
1996 $ 365,961
1997 351,257
1998 351,257
1999 271,629
2000 --
----------
$1,340,104
==========
</TABLE>
NOTE E - INCOME TAXES
During 1994, the Company changed its method of accounting for deferred
taxes from the deferred method under APB No. 11 to the asset and
liability method now required under SFAS No. 109. The cumulative
effect of this change in accounting method was to establish a
28
<PAGE> 29
$478,683 net deferred tax asset as of the beginning of the fiscal year
(November 1, 1993) and record a corresponding increase to net income.
Income tax expense for 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
Federal State Total
-------- ------ -------
<S> <C> <C> <C>
1995:
Current $ -- -- --
Deferred 189,628 31,272 220,900
-------- ------ -------
$189,628 31,272 220,900
======== ====== =======
1994:
Current $135,975 48,254 184,229
Deferred 131,605 28,441 160,046
-------- ------ -------
$267,580 76,695 344,275
======== ====== =======
</TABLE>
During 1993, the Company utilized approximately $22,000 in net
operating loss carryforwards and approximately $55,000 in general
business credit carryforwards, primarily investment tax credit
carryforwards.
The difference between the Federal and income tax rate and the
effective income tax rate on net earnings is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S.
Federal tax rate 34.0% $164,781 34.0% $150,276 34.0% $ 84,394
State income taxes,
net of Federal
benefit 6.1 29,297 6.1 26,961 6.1 15,132
Increase in
valuation allowance -- -- 32.7 144,681 -- --
Benefit not
recorded due to net
carryforward
position -- -- -- -- 10.0 24,806
Other 5.4 26,822 5.1 22,357 -- --
---- -------- ---- -------- ---- --------
45.5% $220,900 77.9% $344,275 50.1% $124,332
==== ======== ==== ======== ==== ========
</TABLE>
29
<PAGE> 30
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
October 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 4,730 219,228
Equity in loss of unconsolidated investee 194,251 144,681
Contamination reserve 100,345 100,345
Deferred gain on sale and leaseback 15,757 32,336
Other 36,653 57,290
-------- -------
Total gross deferred tax asset 351,736 553,880
Valuation allowance 144,681 144,681
Deferred tax liability - accelerated
depreciation on fixed assets 71,181 52,425
-------- -------
Net deferred tax asset $135,874 356,774
======== =======
</TABLE>
The net deferred tax asset is presented on the balance sheets at
October 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred income tax asset $191,298 376,864
Noncurrent deferred income tax liability 55,424 20,090
-------- -------
$135,874 356,774
======== =======
</TABLE>
Included as a deferred tax asset is the deferred tax benefit associated
with the Company's 1994 equity loss in an unconsolidated investment.
Because of uncertainties surrounding the realizability of this deferred
tax benefit, the Company established a valuation allowance in 1994 by
an amount equal to this deferred tax asset. Future equity earnings in
this unconsolidated investment, if any, will reduce this valuation
allowance accordingly. The Company believes its remaining deferred tax
assets to be realizable based on historical and projected taxable
income levels.
NOTE F - SALE AND LEASEBACK
In September 1986, the Company sold for $750,000 its manufacturing
facility in Ontario, California. The proceeds from the sale of the
facilities were used, in part, to satisfy the secured claim against the
property.
The facilities were leased back (note G) to the Company's wholly owned
subsidiary, Alger Manufacturing Co., Inc. A gain of approximately
$411,000 was deferred and is being amortized over the life of the
lease. For each of the past three years, $41,304 per year of deferred
gain has been amortized and recorded as other income.
30
<PAGE> 31
NOTE G - COMMITMENTS
The Company leases machinery under capital lease agreements. The
carrying value of these assets, included in machinery and equipment, at
October 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Cost $286,000 158,000
Less accumulated depreciation 78,000 31,600
-------- -------
$208,000 126,400
======== =======
</TABLE>
The Company leases three premises which are accounted for as operating
leases. Real estate taxes, insurance and other taxes are the
obligations of the Company.
The following is a schedule of future minimum rental commitments under
capital leases and noncancelable operating leases as of October 31,
1995:
<TABLE>
<CAPTION>
Capital Operating
leases leases Total
-------- -------- -------
<S> <C> <C> <C>
Year ending October 31:
1996 $ 97,655 251,247 348,902
1997 97,655 228,940 326,595
1998 97,655 8,772 106,427
1999 76,655 3,655 80,310
2000 -- -- --
-------- -------- -------
Minimum lease payments 369,620 $492,614 862,234
======== =======
Less amount
representing interest and taxes 72,958
--------
Present value of future
capital lease payments $296,662
========
</TABLE>
Rental expense for operating leases was approximately $230,000 in 1995,
$170,000 in 1994 and $166,000 in 1993.
NOTE H - EARNINGS PER SHARE
Primary earnings per common share are computed by using the weighted
average number of common shares outstanding during the year; 1,471,434
shares in 1995, 1,571,434 shares in 1994 and 1,522,492 shares in 1993.
NOTE I - STOCKHOLDERS' EQUITY
During 1993, the Company issued approximately 9,000 shares of common
stock to an individual in lieu of director's fees at approximately $.56
per share and approximately 80,000 shares of common stock to executives
in lieu of bonus at approximately $.56 per share. Both share prices
were equal to fair market value.
During 1994, the Company issued 4,334 shares of common stock to an
individual as payment for 1993 director's fees at $.75 per share which
was equal to the fair market value.
31
<PAGE> 32
During 1995, the Company repurchased 100,000 shares of its common stock
for $2.00 per share.
NOTE J - MAJOR CUSTOMER
For the year ended October 31, 1995, the Company had one customer which
accounted for approximately thirteen percent (13%) of net sales.
For the years ended October 31, 1994 and 1993, the Company had one
customer which accounted for approximately thirteen percent (13%) of
net sales.
NOTE K - EMPLOYEE BENEFIT PLAN
The Company and its subsidiaries have a 401(k) plan covering
substantially all of its employees. Employees may contribute up to 15
percent (15%) of their wages subject to IRS limitations. The Company
will match 100 percent (100%) of the employees' contribution not
exceeding 1 percent (1%) of their wages plus 50 percent (50%) of the
employee's remaining contribution up to 4 percent (4%). The Company
may also make discretionary contributions to the plan that are
allocated to each employee based upon his pro rata compensation to all
compensation. The Company's contributions under the plan amounted to
approximately $72,000, $61,000 and $60,000 for the years ended October
1995, 1994 and 1993, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
The Company is currently the single largest stockholder of Core owning
2,120,070 shares of Core's capital stock which represents approximately
21.5% of the issued and outstanding shares of Core's capital stock.
The Company acquired the majority of its shares in Core through a
series of purchases and conversions of existing indebtedness into
equity during the Company's previous two fiscal years. In addition,
858,863 of the shares of Core owned by the Company were acquired by the
Company for an aggregate purchase price of $100,000, in the form of a
reduction of its then outstanding loans to Image Data Corporation (IDC)
by $100,000, in a foreclosure sale of such shares held in October 1994.
The shares of Core acquired by the Company in the foreclosure sale
were shares owned by IDC which shares had been pledged by IDC to the
Company to secure certain indebtedness of IDC to the Company. The
Company's total investment in Core was $360,458 as of October 31, 1994.
The Company is accounting for its investment in Core using the equity
method. In 1994, the Company's results of operations include a loss
associated with its investment in Core, using the equity method, of
$360,458. Accordingly, the Company is carrying the investment in Core
at no value as of October 31, 1994.
The Company had provided a substantial portion of the working capital
requirements of Core in the form of loans to Core totaling $198,672 as
of October 31, 1993. The Company made additional loans during 1994 of
$89,351. During 1994, in conjunction with a private placement of
Core's common stock, the Company exercised options to acquire 260,000
shares of the common stock of Core at $1.00 per share, converting
$260,000 of the loans made to
32
<PAGE> 33
Core into equity in Core common stock. In addition, the Company
received a repayment of the balance of its loans from Core. During
1995, the Company advanced an additional $123,500 to Core, which, under
the equity method, has been written off. Accordingly at October 31,
1995, the Company has no outstanding loans receivable from Core.
During 1991 and 1992, the Company loaned IDC a total of $653,500,
secured by a senior lien on the assets of IDC. As of October 31, 1993,
the Company recorded a $534,062 provision for losses relating to the
notes receivable from IDC. Accordingly, the Company had $119,500, net
of the allowance of $534,062, receivable from IDC at October 31, 1993.
In October 1994, the Company converted $100,000 of its then outstanding
loans receivable from IDC in a foreclosure proceeding on IDC assets.
Accordingly, the Company had a total receivable of $553,500 at October
31, 1994 and a net receivable of $19,500, net of allowance of $534,062,
from IDC at October 31, 1994. During 1995, the Company wrote off the
remaining balance of the loans receivable.
In October 1991, IDC transferred substantially all of its assets and
technology to Core, subject to the Company's security interest. In
addition, in March 1992, IDC filed a petition for relief under Chapter
11 of the Federal bankruptcy laws. IDC's plan of reorganization (Plan)
was confirmed by the court in April 1993 and became effective in June
1994. The Plan provides for IDC to receive payment under a
distribution agreement with Core, and the Company will receive
approximately fifty percent (50%) of the amounts received by IDC until
the principal balance plus accrued interest is repaid. The
distribution agreement has been extended through December 31, 1997. If
the Company has not been repaid principal and interest in full by March
1996, the Company has the right to foreclosure on the assets of Core.
The Chairman of the Board of the Company also serves as the chief
executive officer of IDC. He is currently the only employee of IDC and
his primary function is the implementation of IDC's plan of
reorganization. Until July 1992, he served as chief operating officer
of IDC. He has also been a director of Core since September 1991.
During 1993, the chief operating/chief financial officer of the Company
became a director of Core.
In September 1995, the Company loaned $25,000 to the Chairman of the
Board of Directors in exchange for a secured promissory note. The note
bears interest at 10% and is due September 1996.
NOTE M - OTHER INCOME (EXPENSE)
During the year ended October 31, 1992, a provision of $200,000 was
recorded to other income (expense) relating to the estimated cost to
remediate perchlorocthlyene contamination in the subsurface soil below
Alger. During the year ended October 31, 1993, the provision was
increased to $250,000 and is included with other accrued liabilities at
October 31, 1995 and 1994.
33
<PAGE> 34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth information with respect to the directors and
executive officers of Registrant as of December 31, 1995.
DIRECTOR/OFFICER INFORMATION
<TABLE>
<CAPTION>
Principal Director
Name Occupation Age Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gregory J. Edwards Director 51 1990
Duane L. Femrite President, Chief Executive Officer, 50 1985
Chief Financial Officer
of the Company
William H. Harris, Jr. Director 51 1986
Richard A. Krause Vice President of the Company 60 1992
President, Alger Manufacturing
Company, Inc.
Robert W. Miller Chairman of the Board, 53 1976
Secretary of the Company
</TABLE>
Listed Below are descriptions of the business experience for at least the
past five years for each director and officer listed in the preceding table.
Unless otherwise described below, none of the following persons (i) is related
in any way, or (ii) has been involved in certain legal proceedings in the past
five years.
GREGORY J. EDWARDS President and Chief Executive Officer of CASS Corp.
("CASS") since January 1993. CASS owns several
manufacturing companies: Nelco Mfg. Corp., a
manufacturer of portable shotblasting equipment;
Milamar Coatings, Inc., a producer of epoxy coating
products used in the industrial and commercial seamless
floor coating business; Berry Corp., a manufacturer of
equipment for the maintenance and marking of pavement
services, specializing in designing and manufacturing
joint/crack sealers and thermoplastic melting
equipment; and Government Services Division ( formerly
known as R. T . Nelson Painting Service, Inc.) a
government contractor involved with surface preparation
and re-coating for U.S. Naval ships and portable
landing mats. Between July 1991 and January 1993, Mr.
Edwards was self-employed as a financial consultant and
investor. Previously, he was an investment banker with
34
<PAGE> 35
Stephens, Inc. of Little Rock, Arkansas from mid-1990 to
July 1991.
DUANE L. FEMRITE President, Chief Executive Officer of the Company since
April 1995, Chief Operating Officer from January 1987 to
April 1995, and Chief Financial Officer since December
1982. Secretary of the Company from October 1984 to
April 1995 and Director of the Company since December
1985. Chairman of the Board and Chief Executive Officer
of Alger since September 1986 and October 1987
respectively. Director of Core Software Technology from
November 1993 to March 1995. Mr. Femrite is a Certified
Public Accountant.
WILLIAM H. HARRIS, JR. Account executive with Dean Witter Reynolds, Inc. in
Phoenix, Arizona since October 1992. President of Sun
Rental and Sales, Inc. a construction equipment sales
and rental company located in Yuma, Arizona from July
1978 to September 1992. President of El Camino Rentals,
Inc., Temecula, California from June 1989 to January
1990.
RICHARD A. KRAUSE Director and Vice President of the Company since
December 1992. President and Chief Operating Officer of
Alger Manufacturing Company, Inc. since 1987.
ROBERT W. MILLER Chairman of the Board since 1976 Chief Executive
Officer of the Company from 1976 to April 1995 Corporate
Secretary since April 1995 Director and Vice President
of Alger since 1986. Director of Image Data Corporation
since 1988 and Chief Operating Officer from May 1990 to
July 1992. Elected Chief Executive Officer of Image Data
Corporation on January 7, 1993. Director of Core
Software Technology since September 1991. Director of
OneCard International since 1988 and elected Chairman
and Chief Executive Officer of this company in September
1992.
In March 1992 Image Data Corporation filed a bankruptcy
petition. Its Plan of Reorganization was confirmed in
April 1993 and became effective in 1994.
35
<PAGE> 36
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all plan and non-plan compensation awarded
to, earned by, or paid to the Company's four most highly compensated executive
officers, each of whose annual salary and bonus was in excess of $100,000 and to
the Company's Chief Executive Officer regardless of compensation level, for
services to the Company during the three fiscal years ended October 31, 1995.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Name and Principal
Position Year Salary Bonus Other (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duane L. Femrite 1995 $129,038 $10,000 $3,826
President, Chief Executive 1994 125,000 24,000 3,124
Officer and Chief Financial 1993 123,270 15,000 3,082
Officer
Richard A. Krause 1995 $141,673 $41,066 $4,748
Vice President and 1994 125,000 48,283 3,732
President of Alger 1993 122,406 24,000 3,261
Manufacturing Co., Inc.
Robert W. Miller 1995 $125,000 $10,000 $1,250
Chairman of the Board 1994 125,000 24,000 1,250
Corporate Secretary 1993 123,270 15,000 1,232
(Footnotes)
</TABLE>
(1) Other compensation includes contributions made to the Company's 401-K
Plan. Does not include use of automobile paid for by the Company.
EMPLOYMENT AGREEMENTS
Effective January 1, 1991, the Company entered into written employment
agreements with Robert W. Miller, as Chairman of the Board and Chief Executive
Officer, and Duane L. Femrite, as President, Chief Operating Officer, Chief
Financial Officer, and Secretary of the Company. Effective January 1, 1993,
Alger entered into a written agreement with Richard A. Krause as President and
Chief Operating Officer. Each of the employment agreements are identical as to
their terms except for the description of the duties which each employee is to
provide.
Each agreement is for an initial term of five (5) years, renewable
automatically for additional one (1) year periods unless either the employee,
the Company, or Alger wishes to terminate it. The employment agreements for
Robert W. Miller and Duane L. Femrite were automatically renewed ,on January 1,
1996, for an additional year.
36
<PAGE> 37
The agreements provide that the salaries of the employees shall be
determined by the Board of Directors but may not be less than the salary paid in
the preceding year. Each employee shall be entitled to the use of an automobile
at the Company's expense and shall be entitled to all benefits and perquisites
available to the Company's other employees.
If the agreement terminates because of the death of the employee, then the
employee's heirs and/or successors shall continue to receive the employee's
salary, monthly, for a period of twelve (12) months. If the agreement should
terminate for any reason other than cause or death of the employee, including,
without limitation, employee's voluntary termination, the Company shall pay the
employee a lump sum payment equal to employee's then monthly salary multiplied
by the number of years during which the employee was employed by the Company, or
Alger, as the case may be, prorated for any partial year of employment. Payment
is limited to twenty-four (24) years of employment.
The agreements permit the employee to engage in other employment or
business opportunities provided that such outside activities do not interfere
with employee carrying out his duties to the Company, are not competitive with
the Company, and do not result in employee breaching any of his fiduciary
obligations to the Company or its shareholders.
COMPENSATION OF DIRECTORS
Outside Directors are to receive fees of $300 per month and $500 per
meeting attended. In 1994 the Board established a Nominating Committee, which
Committee is charged with the responsibility of nominating a slate of candidates
to serve as directors of the Company. Outside directors on the Compensation
Committee, Audit Committee, and Nominating Committee receive $50 for each
meeting attended when such committee meetings are held on a day which the full
Board does not meet. The Audit Committee, Nominating Committee, and Compensation
Committee met once in 1995.
Non-employee directors of Alger receive directors' fees for serving as
directors and for meetings attended. Certain directors of the Company are also
directors of Alger.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1995, information
concerning: (a) beneficial ownership of voting securities of the Company by
persons who are known by the Company to own beneficially more than five percent
(5%) of the Company's Common Stock; (b) beneficial ownership of voting
securities of the Company by each director, nominee for director, and by all
directors and officers as a group; and (c) the percentage of the total votes
held by each person or group described in subparagraphs (a) and (b) immediately
above.
37
<PAGE> 38
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Amount and Percentage of
Beneficial Ownership
Title Name and Address of Number of Percent of
of Class Beneficial Owner Shares Class
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Gregory J. Edwards 11,000 .7%
Stock 3109 Rolling Stone Road
Oklahoma City, Oklahoma 73120
Common Duane L. Femrite 253,713 17.2%
Stock 3452 East Foothill Blvd., Suite 417
Pasadena, California 91107
Common William H. Harris, Jr. (3) 51,050 3.5%
Stock 302 Las Palmaritas
Phoenix, Arizona 85021
Common Richard A. Krause 256,983 17.5%
Stock 3452 East Foothill Blvd., Suite 417
Pasadena, California 91107
Common Robert W. Miller (1) (2) 164,912 11.2%
Stock 3452 East Foothill Blvd., Suite 417
Pasadena, California 91107
Common All Officers and Directors 737,658 50.1%
Stock as a Group (5 persons)
</TABLE>
- ---------------------------------------
(Footnotes on next page)
All shares are owned either directly or beneficially by the owner named in
the table except as otherwise indicted in a footnote below.
Percentages of class are based on the number of shares of Common Stock
outstanding on December 31, 1995. There was 1,471,434 shares of Common Stock
outstanding on December 31, 1995.
None of the officers or directors of the Company has options to acquire any
shares of Common Stock of the Company. Messrs. Miller, Femrite and Krause, are
the only persons known to the Company to beneficially own more than five percent
(5%) of its Common Stock.
The Company knows of no contractual arrangements which may at a subsequent
date result in a change in control of the Company.
38
<PAGE> 39
- -------------------------------
(Footnotes)
(1) Includes 160 shares of Common Stock owned by Mr. Miller's two minor
children, as to which Mr. Miller disclaims beneficial ownership.
(2) Does not include 24,000 shares of Common Stock owned by Mr.
Miller's father as to which Mr. Miller disclaims beneficial ownership.
(3) Includes 41,050 shares of Common Stock owned by The Harris Family
Irrevocable Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS AND INVESTMENTS IN CORE SOFTWARE TECHNOLOGY AND IMAGE DATA CORPORATION
The Company is the single largest shareholder of Core owning 2,120,070
shares of Core's outstanding capital stock which shares represent approximately
21.5% of the issued and outstanding shares of Core's capital stock (assuming the
options to purchase additional shares of the capital stock of Core owned by the
Company and others are not exercised). An aggregate of 1,426,150 of the shares
of Core owned by the Company are held in an escrow account established in
connection with the Core Private Placement, which shares are to be released to
the Company upon Core meeting certain minimum pre-tax income requirements in
either 1996, or 1997. If these requirements are not met by April 30, 1998, all
escrowed shares will be returned to Core and the Company will have no further
interest in such escrowed shares.
The Company has also provided a portion of the working capital requirements
of Core during fiscal 1995, in the form of a series of loans to Core in the
aggregate principal amount of $123,500. The Company accounts for its investment
in Core using the equity method of accounting, which requires the Company to
record its share of Core's earnings or losses. During fiscal 1995, the Company
reduced the loans to zero because of losses incurred by Core. Subsequent to the
Company's fiscal year end, the Company made additional loans to Core in the
amount of $50,000.
In addition to loans to Core, the Company made a series of loans to Image
Data Corporation (IDC), predecessor to Core, from December 1990 to November 1991
aggregating $661,520 (the IDC loans). The IDC Loans were evidenced by promissory
notes bearing interest at the rate of 14% per annum (8% per annum subsequent to
IDC's Chapter 11 discussed below), which notes were secured by all of the assets
of IDC, including a first priority security interest in 858,863 shares of the
common stock of Core owned by IDC, and which notes were also secured by
substantially all of the assets of Core.
In March 1992, IDC filed a petition for relief seeking protection under
Chapter 11 of the federal bankruptcy laws. A plan of reorganization sponsored by
IDC and its secured creditor (the "Plan") was later approved and confirmed in
April 1993 and became effective in June 1994. The Plan provides that, in payment
of its claim with respect to the IDC Loans, the
39
<PAGE> 40
Company will receive 50% of the proceeds payable to IDC under the Distribution
Agreement until the amount due to the Company is paid in full. Payments are to
be made to the Company every calendar quarter. Pursuant to the Distribution
Agreement, Core is obligated to pay to IDC royalty payments equal to a declining
percentage of the annual revenues of Core from all sources. The royalty
payments, originally scheduled to be paid through 1995 were extended to 1997.
From inception of the Distribution Agreement through December 31, 1995, Core
paid an aggregate of approximately $49,500 to IDC. If the total gross revenues
payable to IDC under the Distribution Agreement do not meet or exceed certain
minimum percentages of the total gross revenues projected to be received by IDC
under the Plan, then IDC shall be deemed to have defaulted and the Company will
be entitled to exercise its rights as a secured creditor.
In October 1994, with the full $661,520 of principal amount of the IDC
Loans still outstanding, the Company determined to foreclose on a portion of the
collateral which the Company held to secure the IDC Loans. Accordingly, the
858,863 shares of the common stock of Core owned by IDC and held by the Company
as collateral to secure the IDC Loans were sold in a foreclosure sale. At such
foreclosure sale the Company purchased all of such shares of the common stock of
Core for an aggregate purchase price of $100,000. Accordingly, an aggregate of
$561,520 principal balance, plus accrued, at 8% per annum, but unrecorded
interest from January 1 ,1994, still remains outstanding under the IDC Loans.
The Company has provided a 100% loss provision on the IDC Loans. The Company
maintains a security interest in the remaining assets of IDC to secure repayment
of the IDC Loans and in all of the assets of Core; however, pursuant to a
standstill agreement with Core entered into in connection with the Core Private
Placement, the Company has agreed not to foreclose on the assets of Core which
secure the IDC Loans until on or after April 1, 1996.
Robert W. Miller, the Chairman of the Board of the Company, has served on
the Board of Directors of Core since its formation and on the Board of Directors
of IDC since 1988. Until July 1992 Mr. Miller was the Chief Operating Officer of
IDC. Mr. Miller is currently serving as Chief Executive Officer of IDC. Mr.
Miller's primary function as Chief executive Officer of IDC is to oversee the
implementation of the Plan.
Duane L. Femrite, the President and Chief Executive Officer of the Company,
served on the Board of Directors of Core from November 1993 to March 1995.
Mr. Miller as a director of Core, and Mr. Femrite during his tenure, were
entitled to receive $500 per month and $1000 per board meeting attended and each
committee meeting not held in conjunction with a board meeting. In addition,
they were to be reimbursed for all business related expenses associated with
their duties as a director of Core.
During 1993, all cash compensation payable to Mr. Miller and Mr. Femrite
from Core was deferred. After the Closing of the Core Private Placement, R & D
Financial, a California general partnership of which Messrs. Miller and Femrite
are the general partners ("R&D"), which partnership was assigned the right to
receive all directors fees in connection with Messrs. Miller and Femrite serving
as directors of Core, received payment of Core director's fees (including
deferred fees) in the form of $37,500 in cash and $22,000 in the form of 22,000
shares of the common stock of Core. In addition, R&D rendered certain consulting
services to Core in 1994 in connection with assisting Core in raising bridge
financing from unaffiliated third parties. In connection with such consulting
services, R&D received an aggregate of $18,000 in cash from Core. During 1995,
all cash compensation payable to Mr. Miller and Mr. Femrite from Core was
deferred.
40
<PAGE> 41
Mr. Miller was to have received $4,000 per month from IDC with respect to
his services rendered to IDC in accordance with the Plan commencing in April
1993, but has received no compensation to date. Such compensation may be paid to
Mr. Miller in the future.
Mr. Femrite and Mr. Miller have a beneficial ownership interest in 242,986
shares of the common stock of Core owned by R&D. In addition, R&D holds stock
options entitling it to purchase an additional 122,000 shares of Core common
stock at a price of $1 per share. Mr. Miller has a beneficial ownership interest
in 23,929 shares of the common stock of Core as well as options to purchase
46,887 shares of the common stock of Core at $1 per share.
Mr. Miller has a beneficial interest in less than 1% of IDC's outstanding
shares. In addition, Mr. Miller is owed $90,000, plus accrued interest at 8%,
for cash advanced by him to IDC. R&D is owed approximately $95,000 by IDC for
services rendered by Mr. Miller.
The Company owns less than 4% of the outstanding shares of the capital
stock of IDC and has options, which expire in February 1996, to acquire
additional shares of the capital stock of IDC. Because the only remaining asset
of IDC is essentially its rights under the Distribution Agreement, which
agreement will expire at the end of 1997, management believes such options to
purchase the stock of IDC to be of little, if any value, and management cannot
foresee any circumstances which would cause the Company to exercise its options
to purchase the capital stock of IDC.
The Internal Revenue Service ("IRS") has served Mr. Miller personally with
a Notice of Levy with respect to approximately $400,000 in taxes and penalties
purportedly owed by IDC. In connection therewith, the IRS has collected
approximately $30,000 from Mr. Miller and currently collects $500 per month from
Mr. Miller. Mr. Miller has advised the Company that he disputes the IRS levy and
responsibility for payment of IDC's taxes.
On September 7, 1995 the Company made a loan to Mr. Miller in the principal
amount of $25,000. The loan bears interest at the rate of 10% per annum and is
secured by 25,000 shares of the common stock of Registrant. The loan is due and
payable, together with accrued interest thereon, on the one year anniversary of
the making of the loan.
41
<PAGE> 42
PART IV
EXHIBITS
(a) See Index to Exhibits.
The Exhibits therein listed and attached hereto and the Exhibits
therein incorporated by reference, are filed as a part of this
report.
(b) Reports on Form 8-K.
None
42
<PAGE> 43
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATHANOR GROUP, INC.
Date 1/27/96 By /s/
-------------------------- --------------------------------------
Duane L. Femrite, President, Chief
Executive Officer, Chief Financial
Officer and Director
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 Company
and in the capacities and on the dates indicated.
/s/ 1/27/96
- ----------------------------------------------------- ----------------
Gregory J. Edwards, Director Date
/s/ 1/27/96
- ----------------------------------------------------- ----------------
Duane L. Femrite, President, Chief Executive Officer, Date
Chief Financial Officer and Director
/s/ 1/27/96
- ----------------------------------------------------- ----------------
William H. Harris, Jr., Director Date
/s/ 1/27/96
- ----------------------------------------------------- ----------------
Richard A. Krause, Vice President and Director Date
/s/ 1/27/96
- ----------------------------------------------------- ----------------
Robert W. Miller, Chairman of the Board, Corporate Date
Secretary, and Director
43
<PAGE> 44
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 Restated articles of Incorporation of the Company dated April 2,
1979, and all amendments thereto filed prior to August 25, 1989.
Incorporated by reference to the same numbered exhibit to report on
Form 10-K, filed on February 12, 1990.
3.2 Certificate of Amendment of Articles of Incorporation of the
Company filed August 25, 1989. Incorporated by reference to the same
numbered exhibit to report on Form 10-K, filed on February 12, 1990.
3.3 Certificate of Amendment of Articles of Incorporation of the
Company filed August 25, 1989. Incorporated by reference to the same
numbered exhibit to report on Form 10-K, filed on February 12, 1990.
3.4 Bylaws of the Company. Incorporated by reference to Registration
Statement No. 2-63481, Exhibit 3(b). Amendment thereto, dated as of
September 11, 1987, filed January 28, 1988.
4.0 Certificate of Determination of Preferences of Preferred Stock.
Incorporated by reference to the same numbered exhibit to report on
Form 10-K, filed June 9, 1987.
10.1 Standard Industrial Lease - Special Net. Incorporated by reference
to the same numbered exhibit to report on Form 10-K, filed
June 9, 1987.
10.2 Equipment Lease with Dover Industries Acceptance Inc., dated
April 4, 1988. Incorporated by reference to the same numbered exhibit
to report on Form 10-K, filed January 30, 1989.
10.3 Loan and Security Agreement, dated January 19, 1990, between Alger
and Sanwa Business Credit Corporation. Incorporated by reference to
the same numbered exhibit to report on Form 10-K, filed February 12,
1990.
10.4 Amendment to Loan and Security Agreement dated February 10, 1992,
between Alger and Sanwa Business Credit Corporation. Incorporated by
reference to the same numbered exhibit to report on Form 10-K, filed
February 12, 1993
10.5 Second Amendment to Loan and Security Agreement dated July 29, 1992,
between Alger and Sanwa Business Credit Corporation. Incorporated by
reference to the same numbered exhibit to report on Form 10-K, filed
February 12, 1993.
10.6 The Company's Guaranty of the Loan and Security Agreement, dated
January 19, 1990, between Alger and Sanwa Business Credit
Corporation.
44
<PAGE> 45
Incorporated by reference to the same numbered exhibit to report on
Form 10-K, filed February 12, 1990.
10.7 Agreement between the Company and William A. Mitchell dated January
30, 1991. Incorporated by reference to the same numbered exhibit to
report on Form 8-K, filed January 30, 1991.
10.8 Agreement between the Company and Paul Abramowitz dated May 15,
1991. Incorporated by reference to Exhibit 10.7 to report on Form
8-K, dated May 15, 1991.
10.9 Agreement between the Company and John S. Slater, Jr., Trustee of
the Richert Family Trust, Dated December 15, 1991. ncorporated by
reference to Exhibit 10.7 to report on Form 8-K, dated December 15,
1991.
10.10 Sublease dated September 24, 1992, for property in Phoenix, Arizona,
between Alger and N.I.C.O. Machine, Inc. Incorporated by reference to
the same numbered exhibit to report of Form 10-K, filed February 12,
1993.
10.11 Agreement for Sale of Stock dated May 31, 1993, between the Company
and George A. Johnson. Incorporated by reference to the same numbered
exhibit to report of Form 10-K, filed February 14, 1994.
10.12 Employment Agreement dated January 1, 1991, between the Company and
Robert W. Miller. Incorporated by reference to the same numbered
exhibit to report of Form 10-K, filed February 14, 1994.
10.13 Employment Agreement dated January 1, 1991, between the Alger
Manufacturing Co., Inc. and Richard A. Krause. Incorporated by
reference to the same numbered exhibit to report of Form 10-K, filed
February 14, 1994.
10.14 Employment Agreement dated January 1, 1991, between the Company and
Duane L. Femrite. Incorporated by reference to the same numbered
exhibit to report of Form 10-K, filed February 14, 1994.
10.15 Third Amendment to Loan and Security Agreement dated July 13, 1994,
by and between Sanwa Business Credit Corporation and Alger.
10.16 Loan and Security Agreement (Equipment) dated June 2, 1994, by and
between Alger and Phoenixcor, Inc.
10.17 Secured Promissory Note and Pledge Agreement dated September 7, 1995
by and between Athanor Group, Inc. and Robert W. Miller. Filed
Herewith.
16.1 Letter from Grant Thornton to the Commission dated August 15, 1991.
Incorporated by reference to the same numbered exhibit to report on
Form 8-K, dated August 13, 1991.
22.0 Subsidiaries of the Company.
45
<PAGE> 1
EXHIBIT 10.17
SECURED PROMISSORY NOTE
$25,000 September 7, 1995
Los Angeles, California
FOR VALUE RECEIVED, the undersigned, Robert W. Miller, an individual (the
"Maker"), promises to pay the sum of Twenty-Five Thousand Dollars ($25,000) or
such lesser sum up to such maximum amount, as Athanor Group, Inc. ("Payee") may
hereinafter advance to or for the benefit of the undersigned. Interest on any
amount advanced under this Note shall be at the rate of 10% per annum until
paid. The full amount of principal, plus all accrued but unpaid interest
thereon, shall be due and payable on the one year anniversary date of the first
advance made by Payee under this Note. Payee shall advance any amounts requested
to be advanced by Maker under this Note on demand; provided, however, Payee
shall not be obligated to advance more than Seven Thousand Five Hundred Dollars
($7,500) to Maker under this Note in any one-month period.
This Note is secured pursuant to the terms of a certain Pledge Agreement of
even date herewith between Maker and Payee which is on file at the principal
place of business of the Payor.
If action be instituted on this Note, Payor promises to pay all costs of
collection, including, but not limited to, such sums as the Court may fix as
reasonable attorneys' fees.
This Note may be prepaid, in whole or in part, at any time and from time to
time, without penalty or premium.
This Note has been made in, and shall be governed by the internal laws of
the State of California, without giving effect to principles of conflicts of
laws.
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed as of the day and year first above written.
/s/ Robert W. Miller
-------------------------------
Robert W. Miller
<PAGE> 2
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT, dated as of September 7, 1995, is entered into by
and between Athanor Group, Inc., a California corporation ("Pledgee") and Robert
W. Miller ("Pledgor").
W I T N E S S E T H:
WHEREAS, contemporaneously with the execution of this Agreement the Pledgee
has agreed to advance to Pledgor an amount up to $25,000 (the "Loan"), which
Loan is evidenced by a certain secured promissory note of even date herewith
(the "Note");
WHEREAS, the Pledgor has agreed to secure his obligations under the Note by
pledging an aggregate of 25,000 shares of the common stock of Athanor Group,
Inc. which Pledgor owns (the "Pledged Shares");
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and for other good and valuable consideration, the parties
hereto agree as follows:
1. Pledge. As collateral security for the performance of the obligations of
Pledgor under the Note, the Pledgor does hereby pledge, hypothecate, assign,
transfer, set over and deliver unto the Pledgee, and grant to the Pledgee a
first priority security interest in, the Pledged Shares and the certificates
representing the Pledged Shares.
2. Delivery of Pledged Shares. The Pledgor hereby delivers to the Pledgee,
and the Pledgee hereby acknowledges receipt of, the Pledged Shares owned by the
Pledgor duly endorsed in blank or accompanied by a stock power, duly endorsed by
the Pledgor in blank.
3. Representations, Warranties and Covenants. The Pledgor hereby represents
and warrants to, and covenants with, the Pledgee as follows:
(a) The execution, delivery and performance of this Agreement and the
pledging of the Pledged Shares hereunder do not conflict with, result in a
violation of, or constitute a default under, any agreement binding upon the
Pledgor.
(b) The Pledgor is the legal and equitable owner of the Pledged Shares,
free and clear of all liens, security interests, charges and encumbrances of
every kind and nature (other than those created or permitted by this Agreement)
and the Pledgor has good, right and lawful authority to pledge, assign and
deliver the Pledged Shares in the manner herein contemplated.
4. Transfer of Interests. Pledgor hereby covenants that until such time as
the Note has been fully paid, performed and satisfied, Pledgor will not sell,
convey or otherwise dispose of any of the Pledged Shares or any interest
therein, or create, incur or permit to exist any pledge, mortgage, lien, charge,
encumbrance or any security interest
<PAGE> 3
whatsoever in or with respect to any of the Pledged Shares, or the proceeds
thereof, other than the security interest created hereby.
5. Default. As used herein, the term "Default" shall mean the failure by
the Pledgor to pay, perform or satisfy any payment obligation under the Note
which failure remains uncured by Pledgor ten (10) business days after Pledgor
receives written notice of such failure from Pledgee.
6. Rights of Pledgee. Upon the occurrence of a default, Pledgee may
exercise any and all of the rights and remedies of a secured party as provided
for by the California Uniform Commercial Code, including the transfer of the
Pledged Shares to its name and disposition of such Pledged Shares.
7. Proceeds. The proceeds of any disposition of all or any part of the
Pledged Shares, as provided in Section 6 above, shall be applied as follows: (a)
first, to the costs and expenses incurred in connection herewith or incidental
thereto, including reasonable attorneys' fees and legal expenses; (b) second, to
the satisfaction of the Note; (c) third, to the payment of any other amounts
required by applicable law; and (d) fourth, to Pledgor to the extent of any
surplus remaining.
8. Full Performance by Pledgor. Upon full payment of all principal and
accrued interest on the Note, and upon payment of all additional costs and
expenses provided herein, this Agreement shall terminate and Pledgee shall,
immediately upon request, deliver or cause to be delivered to Pledgor the stock
certificates evidencing the Pledged Shares hereunder and any accompanying stock
powers.
9. Voting Rights. So long as no Default shall have occurred or exist under
the Pledge Agreement, Pledgor shall retain all voting rights with respect tot
the Pledged Shares. Upon the occurrence of a Default, the Pledgee shall succeed
to all such voting rights; provided, however, upon the cure by Pledgor of a
Default, all voting rights with respect to the Pledged Shares shall be
reinstated in the Pledgor.
10. Cash Distributions. So long as no Default shall have occurred or exist
under the Pledge Agreement, the Pledgor shall be entitled to receive all cash
dividends or other distributions paid by the Company with respect to the Pledges
Shares. Upon the occurrence of a Default, the Pledgee shall thereafter receive
and may apply al cash dividends and distributions against the obligation secured
hereunder; provided, however, that upon the cure by Pledgor of a Default, all
rights to receive cash dividends and other distributions with respect to the
Pledged Shares shall be reinstated in the Pledgor.
11. Binding on Successors and Assigns. This Agreement and each of its
provisions shall be binding on the heirs, executors, administrators, successors,
and assigns of each of the parties hereto.
12. Applicable Law. This Agreement shall, in all respects, be governed by
the laws of the State of California applicable to agreements executed and to be
wholly performed within the State of California.
<PAGE> 4
13. Amendment. No amendment, change or modification of this Agreement shall
be binding upon the parties hereto unless in writing and unless executed by each
of the parties hereto.
14. Entire Agreement. This Agreement, together with any related documents
referred to in this Agreement, constitutes the entire understanding and
agreement of the parties with respect to the subject matter of this Agreement,
and any and all prior agreements, understandings or representations are hereby
terminated and canceled in their entirety.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first set forth above.
PLEDGOR: /s/ Robert W. Miller
--------------------------------
Robert W. Miller
PLEDGEE: Athanor Group, Inc.
By: /s/ Duane L. Femrite, President
--------------------------------
Duane L. Femrite, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF
EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-1-1994
<PERIOD-END> OCT-31-1995
<CASH> 62
<SECURITIES> 0
<RECEIVABLES> 2,182
<ALLOWANCES> 12
<INVENTORY> 2,972
<CURRENT-ASSETS> 5,532
<PP&E> 4,456
<DEPRECIATION> 3,347
<TOTAL-ASSETS> 6,723
<CURRENT-LIABILITIES> 3,686
<BONDS> 0
15
0
<COMMON> 0
<OTHER-SE> 1,954
<TOTAL-LIABILITY-AND-EQUITY> 6,723
<SALES> 19,432
<TOTAL-REVENUES> 19,432
<CGS> 16,130
<TOTAL-COSTS> 18,563
<OTHER-EXPENSES> 103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281
<INCOME-PRETAX> 485
<INCOME-TAX> 221
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
