<PAGE> 1
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
of 1934 for the fiscal year ---- ended October 31, or
___Transition Report pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934.
Commission file number 2-63481
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ATHANOR GROUP, INC.
- -------------------------------------------------------------------------------
(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)
921 East California Avenue, Ontario, California 91761
(Address of Principal Executive Offices)
The Company's telephone number, including area code (909) 467-1205
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
- -------------------------------------------------------------------------------
(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
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 $23,744,232.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1996 amounted to $2.091,682.
The registrant had 1,468,934 shares of common stock outstanding as of December
31, 1996.
<PAGE> 2
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.
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 United 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. This approach has
resulted in 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 base, but also
enhances the Company's appeal to potential new customers. While the
<PAGE> 3
Company has designed its internal quality standards to meet ISO 9002 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. In late 1996, the Company purchased
a new fully integrated software system, which has the ability to purchase and
schedule materials in conjunction with the manufacturing process. The new system
will give the Company an effective tool to control in-house inventories and to
provide on time deliveries to its customers. The Company has hired outside
consultants to assist in the implementation of the new system, which is
scheduled to be completed by late 1997.
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, 1996, the Company's unproduced backlog amounted to
approximately $6,184,000 of anticipated gross sales from projects on which
customers have authorized work to commence during the fiscal year 1997. The
backlog is expected to be completed within the 1997 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:
1995 - $6,134,000, 1994 - $4,419,000; 1993 - $3,240,000.
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 is 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 to produce parts 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.
During 1996 the Company has continued to expand its second operation
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.
<PAGE> 4
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
become 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. The evolution of soap and water parts cleaning has
been slow in coming. The Company has recently purchased (for delivery in
mid-1997) its third generation soap and water parts cleaner. The new parts
cleaner will be 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 forty-six (146) persons on October 31, 1996, of which eleven (11)
were general and administrative, three (3) were in marketing and sales, and one
hundred and thirty-two (132) were production personnel.
The Company believes that it has good relations with its employees,
none of whom is 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 formal training programs, whereby
selected unskilled personnel are given the opportunity to learn the machinist
trade. The Company also conducts other regular training programs for its skilled
and unskilled employees.
<PAGE> 5
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.
In 1996 the provision was increased by $15,262, a reimbursement of certain
expenses by one of the Company's insurance carriers, to a total of $265,262. 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, 1996, 1995, and 1994 was as follows:
Dollar Amount of Total Sales (000's)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
California $ 7,130 $ 5,389 $ 4,445
Other Western States 4,431 4,314 3,285
All Others 7,458 6,047 6,797
Scrap 4,725 3,682 3,144
------- ------- -------
$23,744 $19,432 $17,671
</TABLE>
<PAGE> 6
Percentage of Total Sales
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
California 30% 28% 25%
Other Western States 19 22 19
All Others 31 31 38
Scrap 20 19 18
--- --- ---
100% 100% 100%
</TABLE>
Export sales have never been, nor are they anticipated to be, a
significant part of the Company's business. During the fiscal years ended
October 31, 1996, 1995, and 1994, 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 1996
there were no customers that accounted for 10% or more of the Company's
consolidated revenue.
During 1996, none of the Company's business was government related.
<PAGE> 7
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company and its subsidiary, Alger, lease office and manufacturing
space in Ontario, California, and in Phoenix, Arizona. 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.
Effective November 1, 1996, the Company signed a five year lease on new
facilities in Glendale, Arizona to replace the existing Phoenix facility. The
new facility is 15,700 square feet and became operational in December 1996. The
Company believes that with the addition of the new facility in Arizona, its
manufacturing facilities are adequate for the current operations. The Company
built office space at the Ontario facility to house its corporate office in
1996.
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
None
<PAGE> 8
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is currently 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>
<CAPTION>
12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Ask 3 3 1/2 3 3/8 1 3/4
Bid 1 7/8 2 1/8 2 3/4 1 3/8
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
</TABLE>
As of December 31, 1996, the approximate number of shareholders of
record of common shares was 318.
No dividends were declared during the fiscal year ended October 31,
1996, 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.
<PAGE> 9
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 1996, 1995, and 1994 (Thousands of Dollars).
1996 1995 1994
---- ---- ----
Current Assets $6,097 $ 5,532 $ 5,352
Current Liabilities $3,706 $ 3,686 $ 3,486
Working Capital $2,391 $ 1,846 $ 1,866
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, AS COMPARED TO THE FISCAL
YEAR ENDED OCTOBER 31, 1995
The Company's working capital improved by approximately $545,000 during
1996. Approximately $300,000 of the increase was associated with a restructuring
of the Company's long term debt under its credit agreement, with the balance
coming from operations. The increase allowed the Company to finance the current
growth in sales, as accounts receivable and inventory increased by $529,000.
The planned expansion of the Phoenix division did not materialize
during 1996. However, as of November 1, 1996 the Company signed a new five year
lease on a 15,700 square foot facility. The new facility became operational in
December 1996. The Company plans on expending approximately $300,000 - $400,000
on improvements and equipment for this facility during 1997. 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.
During 1996 the Company purchased $353,000 of manufacturing and
computer equipment. Approximately $271,000 of the purchases was financed with
two new leases, the balance coming from cash flow. The Company is currently
planning on capital expenditures for 1997 to be approximately $1,000,000 -
$1,200,000, including the Arizona division. The 1997 capital expenditures for
the Ontario facility, includes approximately $400,000 for a new "third
generation" soap and water parts cleaner (delivery in mid-1997), with the
balance of $300,000 - $400,000 for additional manufacturing and second operation
equipment. This large capital expenditure forecast will require the Company to
obtain new financing and get amendments approved to its credit agreement. The
Company does not anticipate any difficulties obtaining the financing or the
credit agreement amendments. However, if such financing or amendments are not
obtained or are obtained for lower amounts, the Company does not feel it will
have a major impact on its operations for 1997, although it will slow down the
Company's plans for expansion and growth.
In July 1996 the Company completed an amendment to its credit
agreement, extending the agreement to August 13, 1997. The amended credit
agreement increased the Company's working capital line to $2,200,000 and renewed
the long term equipment loan for $900,000 with a balance owing of $850,000 as of
October 1996. The net effect of the amended credit agreement was to increase
available financing by approximately $500,000. In addition, the
<PAGE> 10
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, 1996, the Company had
approximately $1,260,000 available under the working capital line and $300,000
available under the new equipment line as compared to $823,000 and $300,000
respectively in 1995. Management believes the amended agreement is adequate to
fund the Company's working capital requirements and expansion in Arizona, other
than the Company's major capital expenditure noted above, during fiscal year
1996.
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 from 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 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 and
the time and labor associated with getting the facility up and running. The
Company used 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 allowing the Company to perform substantially more
of the required secondary operations in house. In turn, the Company will have
greater control over its inventory, costs, and delivery schedules.
The Company purchased $460,000 of manufacturing and computer equipment
during 1995. This included a new $215,000 parts washing system. The Company
financed the equipment additions with a new five year lease on the parts washer
and 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.
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
annual 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
<PAGE> 11
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.
RESULTS OF OPERATIONS
The following table summarizes the results of operations for the fiscal
years 1996, 1995, and 1994 (Thousands of Dollars):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $23,744 $19,432 $17,671
Cost of Sales $19,911 $16,130 $14,633
Operating Profit $ 1,178 $ 869 $ 885
Net Earnings $ 529 $ 264 $ 557
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, COMPARED TO THE FISCAL
YEAR ENDED OCTOBER 31, 1995
1996 proved to be a continuation of the sales growth that started in
1995, with a 22% increase over 1995. The sales increase was universal in all of
the Company's departments, but most significant in its larger diameter
equipment. During the last few years, the Company has concentrated the majority
of its capital equipment budget toward the larger diameter equipment as demand
for this type of work has grown and continues to grow. The addition of
manufacturing and warehousing facilities in 1995 has given the Company the
needed space to accommodate this sales growth. The addition of selected
manufacturing, as well as second operation equipment in the last few years, has
given the Company the ability to meet the current demand for its services.
Cost of sales increased 1% over 1995. This increase is largely due to
the higher percentage of material associated with larger diameter equipment
sales. Since the majority of sales growth during 1996 was associated with the
larger diameter equipment, this increase was anticipated. While total selling,
general and administrative (S,G&A) cost has decreased as a percent of total
sales, S,G&A costs increased by approximately $222,000 over 1995. The majority
of this increase, approximately $120,000, related to an increase in commissions
paid to the Company's manufacturers representatives and was directly related to
the increase in sales. The Company's effective tax rate for 1996 decreased to
34% from 45% in 1995. Approximately 6.7% of this change is associated with a
reduction in the effective state tax rate due to the California Manufacturers
Investment Credit, which was available to the Company in 1996. The Company's
operating profit increased 36% over 1995. This increase is directly related to
the current increase in sales.
<PAGE> 12
The Company's unproduced backlog of $6,184,000 at October 1996 is
virtually unchanged from $6,134,000 at 1995. Considering the substantial
increase in sales during 1996, the Company's ability to maintain its backlog at
high levels, has been very encouraging. In addition, the backlog levels during
the year have not experienced the normal fluctuations we are used to seeing.
This would appear to be an indication that the current business climate is
healthy and the demand for the Company's services will remain strong into the
beginning of 1997.
The Company continued to add to its investment in Core during 1996 with
additional loans of $149,739. See Item 12 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. Since Core is still incurring losses, the Company is required
under the equity method of accounting to include its proportionate share of the
net loss. The Company's fiscal 1996 results of operations include a loss
associated with its additional investment in Core of $149,739, compared to
$123,500 for 1995.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, COMPARED TO THE FISCAL
YEAR ENDED OCTOBER 31, 1994
While sales for 1995 show 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. The
Company felt that the additional costs associated with this facility would be
more than covered with lower outside processing costs and more efficient
inventory control. The additional lease cost, along with the labor and overhead
associated with setting up the facility before the facility became functional,
were absorbed in 1995.
During 1995 the Company 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. While sales for fiscal 1995 were originally
projected to be similar to, or even slightly
<PAGE> 13
lower than 1994, the Company's customer base maintained a constant demand for
its services and, along with the addition of new customers, pushed sales and
backlog to new records.
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.
EFFECTS OF INFLATION
Inflation for the fiscal year ended 1996 was minimal and had no effect
on the Company's operations.
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 as those which took place in 1995 and 1994. If similar
increases do occur in the future, the Company does not believe such increases
would have a material effect on its operations.
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS
TITLE PAGE
- ----------------------------------------------------------------------------
Independent Auditor's Report................................................
Consolidated Balance Sheets
at October 31, 1996, and 1995...............................................
Consolidated Statements of Earnings
for each of the three years ended October 31, 1996, 1995, and 1994..........
Consolidated Statements of Stockholders' Equity
for each of the three years ended October 31, 1996, 1995, and 1994.........
Consolidated Statements of Cash Flows
for each of the three years ended October 31, 1996, 1995, and 1994.........
Notes to Consolidated Financial Statements .................................
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 15
ATHANOR GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
October 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE> 16
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, 1996 and 1995 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, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1996 in conformity with generally accepted accounting
principles.
Los Angeles, California
December 13, 1996
<PAGE> 17
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash $ 115,476 62,382
Accounts receivable, net of allowance for doubtful accounts of
$11,785 at October 31, 1996 and 1995 2,471,110 2,145,381
Note receivable - related parties (note L) 40,000 25,000
Income tax receivable -- 99,500
Inventories:
Raw materials 871,774 835,152
Work in process 505,569 519,363
Finished goods 1,797,388 1,617,754
---------- ----------
3,174,731 2,972,269
---------- ----------
Prepaid expenses 34,935 36,141
Deferred income tax asset (note E) 261,179 191,298
---------- ----------
Total current assets 6,097,431 5,531,971
Property, plant and equipment, net (note B) 1,177,450 1,108,541
Other assets 90,020 82,708
---------- ----------
$7,364,901 6,723,220
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---------- ----------
<S> <C> <C>
Current liabilities:
Note payable (note C) $ 939,757 1,177,163
Current portion of long-term debt (note D) 419,901 365,961
Accounts payable 1,443,659 1,537,976
Accrued liabilities:
Salaries, wages and other compensation 402,077 275,770
Income tax payable 122,769 --
Other 377,540 329,246
---------- ----------
Total current liabilities 3,705,703 3,686,116
---------- ----------
Long-term debt, less current portion (note D) 1,095,228 974,143
Deferred gain on sale and leaseback (note F) -- 39,257
Noncurrent deferred income tax liability (note E) 66,573 55,424
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 1,471,354 shares in 1996 and 1,471,434
shares in 1995 14,713 14,714
Additional paid-in capital 1,447,391 1,447,391
Retained earnings 1,035,293 506,175
---------- ----------
Total stockholders' equity 2,497,397 1,968,280
Commitments (notes C, D and G)
---------- ----------
$7,364,901 6,723,220
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 23,744,232 19,432,094 17,670,680
Cost of sales 19,910,869 16,130,070 14,633,034
------------ ------------ ------------
Gross profit 3,833,363 3,302,024 3,037,646
Selling, general and administrative expenses
2,655,621 2,433,298 2,152,960
------------ ------------ ------------
Operating profit 1,177,742 868,726 884,686
Other income (expense):
Interest expense (279,779) (281,434) (141,124)
Equity in loss of unconsolidated investee (149,739) (123,500) (360,458)
Miscellaneous, net 58,197 20,859 58,883
------------ ------------ ------------
Earnings before income taxes and
cumulative effect of change in
accounting for deferred income
taxes 806,421 484,651 441,987
Income tax expense (note E) 277,183 220,900 344,275
------------ ------------ ------------
Earnings before cumulative effect
of change in accounting for
deferred income taxes 529,238 263,751 97,712
Cumulative effect of change in accounting for
deferred income taxes (note E) -- -- 478,683
------------ ------------ ------------
Net earnings $ 529,238 263,751 576,395
============ ============ ============
</TABLE>
(Continued)
<PAGE> 20
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Earnings per common share:
Primary and fully diluted:
Earnings before cumulative effect of change
in accounting for deferred income taxes $ .36 .18 .06
Cumulative effect of change in accounting
for deferred income taxes -- -- .31
------- ------- -------
Net earnings $ .36 .18 .37
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
--------------------- ------------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 I) -- -- (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
Retirement of common stock (note I) -- -- (80) (1) -- (120) (121)
Net earnings for the year -- -- -- -- -- 529,238 529,238
-------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at October 31, 1996 -- $ -- 1,471,354 $ 14,713 1,447,391 1,035,293 2,497,397
======== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 22
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 529,238 263,751 576,395
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 149,739 123,500 360,458
Depreciation and amortization 283,877 250,944 237,928
Loss on disposal of fixed asset -- 21,460 5,683
Amortization of deferred gain on sale and leaseback
(39,257) (41,305) (41,304)
Provision for deferred income taxes (58,732) 220,900 160,046
(Increase) decrease in operating assets:
Accounts receivable (226,229) (309,502) (664,821)
Inventories (202,462) (130,578) (646,078)
Prepaid expenses 1,206 (6,734) 3,744
Other assets (7,312) 3,642 3,916
Increase (decrease) in operating liabilities:
Accounts payable (94,317) 16,701 282,823
Accrued liabilities 174,601 (193,496) 195,126
Income taxes payable 122,769 -- --
--------- --------- ---------
Net cash provided by (used in) operating
activities 633,121 219,283 (4,767)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (81,631) (517,318) (236,933)
Proceeds from sales of property and equipment -- 39,885 10,044
Note receivable - related party (15,000) (25,000) 198,672
Write-off of note receivable - related party -- 19,500 --
Investment/advances in unconsolidated investee (149,739) (123,500) (260,458)
--------- --------- ---------
Net cash used in investing activities (246,370) (606,433) (288,675)
--------- --------- ---------
(Continued)
</TABLE>
<PAGE> 23
ATHANOR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) under line of credit $(237,406) 257,235 284,416
Repayments of note payable -- -- (15,834)
Proceeds from long-term debt 267,334 312,083 336,546
Repayments of long-term debt (363,464) (268,971) (269,373)
Repurchase of stock (121) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities (333,657) 300,347 335,755
--------- --------- ---------
Net increase (decrease) in cash 53,094 (86,803) 42,313
Cash at beginning of year 62,382 149,185 106,872
--------- --------- ---------
Cash at end of year $ 115,476 62,382 149,185
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 283,040 278,952 175,509
========= ========= =========
Income taxes paid $ 113,646 254,635 103,000
========= ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
1996
The Company purchased $271,155 of machinery and equipment under a capital
lease obligation.
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.
<PAGE> 24
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
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). 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:
Machinery and equipment 4 to 7 years
Leasehold improvements 5 to 9 years
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
<PAGE> 25
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
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.
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 1996 and 1995, the
Company invested $149,739 and $123,500, respectively, into Core
which was subsequently reduced to zero because of losses incurred by
Core. At October 31, 1996 and 1995, the Company owned 28.0% and
21.5% of Core's common stock, respectively.
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 carrying amounts of cash and cash equivalents, trade accounts
receivable, note receivable related party, notes payable to banks,
trade accounts payable and accrued expenses approximate fair value
because of the short maturity of those 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.
8. USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles.
Actual results could differ from those estimates.
9. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of
<PAGE> 26
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of fair
value less costs to sell. Adoption of this statement did not have a
material impact on the Company's financial position, results of
operations or liquidity.
10. RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994
financial statements to conform to the 1996 presentation.
NOTE B - PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification
follows:
<TABLE>
<CAPTION>
OCTOBER 31
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Machinery and equipment $4,738,016 4,378,968
Leasehold improvements 77,278 77,278
---------- ----------
4,815,294 4,456,246
Less accumulated depreciation and amortization 3,637,844 3,347,705
---------- ----------
$1,177,450 1,108,541
========== ==========
</TABLE>
NOTE C - NOTE PAYABLE
Alger has a $3,500,000 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 $2,200,000 based on eligible
accounts receivable and inventories, as defined. Interest on
drawings on this line of credit is payable at the prime rate (8.25%
at October 31, 1996), plus 1.25%. The line of credit expires in
August 1997. The amount outstanding was $939,757 and $1,177,163 at
October 31, 1996 and 1995, respectively. The amount available under
the line of credit was approximately $1,260,000 and $823,000 at
October 31, 1996 and 1995, respectively. The agreement also provides
for a term loan not to exceed $900,000, of which $850,000 was
outstanding at October 31, 1996. In addition, the agreement provides
for an equipment line of up to $400,000, of which $73,000 has been
drawn and $300,000 was available at October 31, 1996. Borrowings on
both the term loan and equipment line are included in long-term debt
in the accompanying consolidated balance sheets (see note D). The
Company has guaranteed borrowings outstanding under this credit
agreement on behalf of Alger.
<PAGE> 27
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
NOTE D - LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notepayable 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) $ 120,000 160,000
Notes payable to a lending institution at the prime rate
(8.25% at October 31, 1996) plus 1.25%, payable in monthly
installments of $18,334 plus interest, due July 1999,
collateralized by substantially all assets of Alger
923,328 843,332
Notes payable to others at rates ranging from 10.0% to 12.9%,
payable in monthly installments of $1,133, including
interest, due through May 1999, collateralized by
equipment and automobiles 119,596 40,110
Capital lease obligations (see note G) 352,205 296,662
---------- ----------
1,515,129 1,340,104
Less current portion 419,901 365,961
---------- ----------
$1,095,228 974,143
========== ==========
</TABLE>
A schedule of aggregate, annual principal payments on long-term debt as of
October 31, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31 AMOUNT
----------- --------
<S> <C> <C>
1997 $419,901
1998 401,620
1999 620,076
2000 54,388
2001 19,144
----------
$1,515,129
==========
</TABLE>
<PAGE> 28
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 $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 (benefit) for 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1996:
Current $ 303,425 32,490 335,915
Deferred (51,440) (7,292) (58,732)
--------- --------- ---------
$ 251,985 25,198 277,183
========= ========= =========
1995:
Current $ -- -- --
Deferred 189,628 31,272 220,900
--------- --------- ---------
$ 189,628 31,272 220,900
========= ========= =========
</TABLE>
The difference between the Federal and income tax rate and the
effective income tax rate on net earnings is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. Federal tax
rate 34.0% $ 274,183 34.0% $ 164,781 34.0% $ 150,276
State income taxes, net of
Federal benefit 6.1 48,788 6.1 29,297 6.1 26,961
(Decrease) increase in
valuation allowance -- -- -- -- 32.7 144,681
Benefit due to state tax
credits (6.7) (54,123) -- -- -- --
Other 1.0 8,335 5.4 26,822 5.1 22,357
------------ ------------ ------------ ------------ ----------- -----------
34.4% $ 277,183 45.5% $ 220,900 77.9% $ 344,275
============ ============ ============ ============ =========== ===========
</TABLE>
<PAGE> 29
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
October 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 4,730 4,730
Equity in loss of unconsolidated investee 254,354 194,251
Contamination reserve 106,471 100,345
Other 40,305 36,653
-------- --------
Total gross deferred tax asset 405,860 335,979
Valuation allowance 144,681 144,681
-------- --------
Net deferred tax asset $261,179 191,298
======== ========
Deferred tax liabilities:
Accelerated depreciation on fixed assets $ 66,573 71,181
Deferred gain on sale and leaseback -- (15,757)
-------- --------
Net deferred tax liability $ 66,573 55,424
======== ========
</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.
<PAGE> 30
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
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. Amortization on the deferred gain of $39,257, $41,304 and
$41,304 has been recorded as other income for the years ended October
31, 1996, 1995 and 1994, respectively.
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company leases machinery under capital lease agreements. The
carrying value of these assets, included in machinery and equipment,
at October 31, 1996 and 1995 is as follows:
1996 1995
-------- --------
Cost $515,000 241,000
Less accumulated depreciation 71,000 26,000
-------- --------
$444,000 215,000
======== ========
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, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Year ending October 31:
1997 $114,214 236,746 350,960
1998 114,214 88,535 202,749
1999 114,214 12,526 126,740
2000 58,558 7,640 66,198
2001 19,660 -- 19,660
-------- -------- --------
Minimum lease payments 420,860 $345,447 766,307
======== ========
Less amount representing interest
and taxes 68,655
--------
Present value of future
capital lease payments $352,205
========
</TABLE>
<PAGE> 31
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
Rental expense for operating leases was approximately $254,000 in
1996, $230,000 in 1995 and $170,000 in 1994.
As of October 31, 1996 and 1995, the Company has accrued $265,000
and $250,000, respectively, relating to the estimated cost to
remediate perchloroethylene contamination in the subsurface soil
below Alger.
The aggregate undiscounted amount has been accrued since it
represents management's best estimate of the cost, but the payments
are not considered to be fixed and reliably determinable. The
estimate of costs and their timing of payment could change as a
result of (1) changes to the remediation plan required by the State
Environmental Agency, (2) changes in technology available to treat
the site, (3) unforeseen circumstances existing at the site and (4)
differences between actual inflation rates and rates assumed in
preparing the estimate. It is not possible to estimate the amount
losses may exceed amounts accrued at this time as a result of these
factors.
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:
1,471,377 shares in 1996, 1,471,434 shares in 1995 and 1,571,434
shares in 1994.
As of October 31, 1996, the Company had no outstanding common stock
options or warrants.
NOTE I - STOCKHOLDERS' EQUITY
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.
During 1995, the Company repurchased 100,000 shares of its common
stock for $2.00 per share.
During 1996, the Company repurchased approximately 80 shares of
common stock for $1.50 per share.
NOTE J - MAJOR CUSTOMER
For the year ended October 31, 1996, the Company had no customers
which accounted for more than ten percent (10%) of net sales.
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, the Company had one customer
which accounted for approximately thirteen percent (13%) of net
sales.
<PAGE> 32
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
NOTE K - EMPLOYEE BENEFIT PLAN
The Company and its subsidiaries have a 401(k) plan covering
substantially all 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 $75,000, $72,000 and $61,000 for the years
ended October 1996, 1995 and 1994, respectively.
NOTE L - RELATED PARTY TRANSACTIONS
The Company is currently the single largest stockholder of Core
owning 3,132,570 shares of Core's capital stock which represents
approximately 28.0% 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.
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 Core into equity in Core common stock.
In addition, the Company received a repayment of the balance of its
loans from Core. During 1996 and 1995, the Company advanced an
additional $149,739 and $123,500, respectively, to Core, which,
under the equity method, has been written off. Accordingly at
October 31, 1996 and 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. In 1993, the Company
recorded a $534,062 provision for losses relating to the notes
receivable from IDC. In 1994, the Company converted $100,000 of its
then outstanding loans receivable from IDC in a foreclosure
proceeding on IDC assets. During 1995, the Company wrote off the
remaining balance of the loans receivable from IDC.
In 1991, IDC transferred substantially all of its assets and
technology to Core, subject to the Company's security interest. In
addition, in 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 1993 and became effective in 1994. The
Plan provides for IDC to receive payment under a distribution
agreement with Core, and the Company will receive
<PAGE> 33
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
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
December 1996, the Company has the right to foreclosure on the
assets of Core. The Company has neither exercised nor waived its
right to foreclosure.
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. From November 1993 through March 1995, the chief
operating/chief financial officer was 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. During
1996, the loan was increased to $40,000 in exchange for additional
security. The note bears interest at 10% and is due March 1997.
<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, 1996.
DIRECTOR/OFFICER INFORMATION
<TABLE>
<CAPTION>
Principal Director
Name Occupation Age Since
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Gregory J. Edwards Director 52 1990
Duane L. Femrite President, Chief Executive Officer, 51 1985
Chief Financial Officer
of the Company
William H. Harris, Jr. Director 52 1986
Richard A. Krause Vice President of the Company 61 1992
President, Alger Manufacturing
Company, Inc.
Robert W. Miller Chairman of the Board, 54 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
<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.
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.
<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, 1996.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Name and Principal
Position Year Salary Bonus Other (1)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
Duane L. Femrite 1996 $133,308 $ 44,000 $ 2,162
President, Chief Executive 1995 129,038 10,000 3,826
Officer and Chief Financial 1994 125,000 24,000 3,124
Officer
Richard A. Krause 1996 $145,308 $ 52,328 $ 3,750
Vice President and 1995 141,673 41,066 4,748
President of Alger 1994 125,000 48,283 3,732
Manufacturing Co., Inc.
Robert W. Miller 1996 $136,498 $ 44,000 $ 1,432
Chairman of the Board 1995 125,000 10,000 1,250
Corporate Secretary 1994 125,000 24,000 1,250
</TABLE>
(Footnotes)
(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,
1997, for an additional year.
<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 1996.
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, 1996, 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.
<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 189,544 12.9%
Stock 921 E. California Ave.
Ontario, California 91761
Common William H. Harris, Jr. (2) 51,050 3.5%
Stock 302 Las Palmaritas
Phoenix, Arizona 85021
Common Richard A. Krause 256,983 17.5%
Stock 921 E. California Ave.
Ontario, California 91761
Common Robert W. Miller (1) 164,752 11.2%
Stock 921 E. California Ave.
Ontario, California 91761
Common All Officers and Directors 673,082 45.8%
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, 1996. There was 1,468,934 shares of Common Stock
outstanding on December 31, 1996.
None of the officers or directors of the Company has options to acquire
any shares of Common Stock of the Company. Messrs. Femrite, Krause and Miller
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.
<PAGE> 39
- -----------------------------
(Footnotes)
(1) Does not include 24,000 shares of Common Stock owned by Mr. Miller's
father as to which Mr. Miller disclaims beneficial ownership.
(2) 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
The Company is currently the single largest shareholder of Core
Software Technology, a California corporation ("Core"), owning 3,132,570 shares
of the issued and outstanding common stock of Core, representing approximately
27.8% 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 3,132,570 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 1997.
Core failed to meet this minimum pretax income requirement in 1994, 1995 and
1996, and there can be no assurance that Core will meet this pretax income
requirement in the future. If such minimum pretax income requirements are not
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 access requirements of
an international public policy movement to maximize the benefits of existing
scientific and geographic information and analysis tools.
The Company has also provided a portion of the working capital
requirements of Core during fiscal 1996, in the form of a series of loans to
Core in the aggregate principal amount of $149,739. 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.
<PAGE> 40
During fiscal 1996, the Company reduced the loans to zero because of losses
incurred by Core.
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 Image Data Corporation ("IDC"), Core's predecessor, 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. 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 1995 and 1996, all director fees payable to Mr. Miller and Mr.
Femrite from Core was deferred.
Mr. Miller has entered into a consulting agreement with Core, effective
January 1, 1995, wherein Mr. Miller has agreed to provide services to Core
relating to financial, investor, capital raising and general business matters
arising out of Core's on-going restructuring, recapitalization and financing
efforts. In exchange for Mr. Miller's services, Core has agreed to pay Mr.
Miller a fixed fee of $50,000 for the calendar year 1995 and $5,000 per month
commencing January 1, 1996. Mr. Miller has assigned the right to receive said
fees to R & D Financial a California general partnership of which Messrs. Miller
and Femrite are the general partners. None of the foregoing amounts has been
paid. All amounts due pursuant to the consulting agreement will be paid, if at
all, only from proceeds raised in any major refinancing of Core or profits, if
any, generated in connection with Core's future business operations.
Mr. Miller was to have received $4,000 per month from IDC with respect
to his services rendered to IDC in accordance with IDC's confirmed Plan of
Reorganization, 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 additional 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.
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 $36,000 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. In connection with
Core's previous acquisition of the assets of IDC, Core agreed to indemnify and
hold Mr. Miller harmless from and against any liabilities relating to or arising
out of IDC's business, including, without limitation, taxes and penalties owed
by IDC to the IRS. Mr. Miller is seeking indemnification against Core arising
out of the IRS Notice of Levy against Mr. Miller for taxes and penalties
purportedly owed to the IRS by IDC.
<PAGE> 41
On September 7, 1995, the Company made a loan to Mr. Miller in the
principal amount of $25,000. During 1996 the loan was increased to $40,000. 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 in March 1997.
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
<PAGE> 42
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 1/24/97 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/ 1/24/97
- ------------------------------------------------------ --------
Gregory J. Edwards, Director Date
/s/ 1/24/97
- ------------------------------------------------------ --------
Duane L. Femrite, President, Chief Executive Officer, Date
Chief Financial Officer and Director
/s/ 1/24/97
- ------------------------------------------------------ --------
William H. Harris, Jr., Director Date
/s/ 1/24/97
- ------------------------------------------------------ --------
Richard A. Krause, Vice President and Director Date
/s/ 1/24/97
- ------------------------------------------------------ --------
Robert W. Miller, Chairman of the Board, Corporate Date
Secretary, and Director
<PAGE> 43
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.
<PAGE> 44
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.
10.18 Standard Industrial Lease - Gross. Manufacturing property
located in Glendale, Arizona, between Alger and Kachina
Industrial Properties, filed January 29, 1997
10.19 Fifth amendment to Loan and Security Agreement dated July 10,
1996, by and between Sanwa Business Credit and Alger.
<PAGE> 45
10.20 Secured Promissory Note dated September 9, 1996, by and
between Athanor Group, Inc. and Robert W. Miller.
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.
<PAGE> 1
Exhibit 10.19
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Fifth Amendment to Loan and Security Agreement ("Fifth Amendment")
is made as of July 10, 1996 by and between Sanwa Business Credit Corporation as
Lender ("Lender") and Alger Manufacturing Company, Inc. as Borrower
("Borrower").
WHEREAS, Lender and Borrower entered into a certain Loan and Security
Agreement dated as of January 19, 1990, and Amendment to Loan and Security
Agreement dated as of February 10, 1992, a Second Amendment to Loan and
Security Agreement dated as of July 13, 1994 and a Fourth Amendment to Loan and
Security Agreement dated as of August 3, 1995 (collectively the "Agreement")
pursuant to which Lender is making certain loans and advances to Borrower upon
the terms and conditions set forth in the Agreement; and
WHEREAS, Borrower has requested certain modifications and amendments to
the Agreement and Lender has agreed to such modifications and amendments as set
forth in this Fifth Amendment;
NOW, THEREFORE, in consideration of the terms and conditions contained
herein and of any loans and advances now or hereafter made to or for the
benefit of Borrower by Lender, the parties hereto agree to the following
amendments and modifications to the Agreement, which shall be effective as of
the date of this Fifth Amendment.
1. Total Facility. Section 2.1(a) is amended in its entirety to
read as follows:
"(a) A revolving line of credit consisting of advances
against Eligible Accounts and Eligible Inventory ("Revolving Loan") in an
aggregate principal amount not to exceed, at any time outstanding, the lesser of
(i) two million two hundred thousand dollars ($2,200,000) or (ii) the
outstanding amount of Collateral Availability. As used in this Agreement,
"Collateral Availability" shall mean and, at any particular time and from time
to time, be equal to, the sum of (x) up to eighty-five percent (85%) of the net
amount (after deduction of such reserves as Lender deems proper and necessary)
of Eligible Accounts plus (y) up to forty percent (40%) of the aggregate value
of Eligible Inventory (determined on the basis of the lower of
first-in/first-out cost or market value, both net of such reserves as Lender
deems proper and necessary; provided, that Collateral Availability as to
Eligible Inventory shall not at any time exceed six hundred thousand dollars
($600,000). The Revolving Loan shall be repayable on demand and as provided in
Section 4.2;".
2. Total Facility. Section 2.1(b) is amended in its entirety to
read as follows:
"(b) A term loan ("Term Loan") in an aggregate principal
amount not to exceed nine hundred thousand dollars ($900,000) to be evidenced
by a Second Amended and Restated Installment Note in form and substance
satisfactory to Lender; and".
<PAGE> 2
Exhibit 10.19
3. Interest Rate. Section 2.3 is amended by deleting the first
sentence of such Section and substituting the following in its place:
"Unless otherwise provided in a writing evidencing such
Liabilities, Borrower shall pay Lender interest on the outstanding principal
balance of the Liabilities under the Revolving Loan at the rate of one and
one-fourth percent (1 1/4%) above the Prime Rate and interest on the
outstanding principal balance of all other Liabilities including the
Liabilities under the Term Loan and the Acquisition Term Loan, at the rate of
one and one-half percent (1 1/2%) above the Prime Rate.
4. Term of Agreement, Liquidated Damages, Prepayment. Section 2.4
is amended in its entirety to read as follows:
"2.4 Term of Agreement; Liquidated Damages; Prepayment. This
Agreement shall be renewed and extended to and through August 31, 1997 and shall
be automatically renewed thereafter for successive periods of one year ("Renewal
Term") unless terminated as provided below. Either party shall have the right to
terminate this Agreement at the end of the August 31, 1997 Renewal Term or at
the end of any subsequent Renewal Term by giving the other party at least sixty
(60) days prior written notice of such termination. In the event Borrower gives
notice of termination and the Total Facility is not paid in full at the end of
the sixty (60) days notice period, upon the request of Borrower, but in Lender's
sole discretion, Lender can continue to make advances under the Revolving Loan
and renew such term for an additional year. In the event Lender does not agree
to continue to make loans and advances and renew the term for an additional
year, all Liabilities shall be immediately due and payable. This Agreement may
also be terminated by Lender upon the occurrence of a Default. Upon the
effective date of any termination, all Liabilities (including the Term Note and
the Acquisition Note) shall become immediately due and payable without
presentment, notice or demand. Notwithstanding any termination, until all the
Liabilities have been fully and finally paid and satisfied, Lender shall be
entitled to retain its security interest in the Collateral, Borrower shall
continue to remit collections of Accounts and proceeds of Collateral as provided
in this Agreement, and Lender shall retain all of its rights and remedies under
this Agreement. During the remaining term of this Agreement or any Renewal Term,
Borrower may, at its option, upon not less than thirty (30) days prior written
notice to Lender specifying the date of prepayment, terminate this Agreement and
shall prepay all of the Liabilities hereunder (including the Term Note and the
Acquisition Note). In addition to the requirement of prepaying all of the
Liabilities, Borrower shall also pay to Lender, for loss of the bargain and not
as a penalty, as liquidated damages and as compensation for the costs of Lender
being prepared to make funds available to Borrower under this Agreement, an
amount (the "Prepayment Fee") equal to fifty percent (50%) of the average
monthly interest charges and Credit Availability Charges during the elapsed
portion of the remaining term to and through August 31, 1997 or any subsequent
Renewal Term, as the case may be, multiplied by the number of full or partial
months remaining between the date of such termination and August 31, 1997 or any
subsequent Renewal Term, as the case may be; provided, however, Borrower can
prepay, in whole but not in part, the Liabilities and terminate this Agreement
without payment of a Prepayment Fee, if such prepayment is the result of
<PAGE> 3
Borrower refinancing the Liabilities through Sanwa Bank California and such
prepayment occurs on or before August 30, 1997."
5. Affirmative Covenants. Section 10.1(a)(i) is amended in its
entirety to read as follows:
"(i) a ratio of indebtedness (as determined in accordance with
generally accepted accounting principles) to Tangible Net Worth of not more
than 3.5:1,"
6. Affirmative Covenants. Section 10.1(a)(iii) is amended in its
entirety to read as follows:
"(iii) Tangible Net Worth at least equal to $1,750,000, and".
7. Term Loan Restrictions and Term Loan Use Purposes.
(a) The Term Loan shall be evidenced by a Second Amended
and Restated Installment Note in a form acceptable to Lender. Any reference to
"Term Loan" or "Installment Note" or "Term Note" in the Agreement shall refer
to the Term Loan made pursuant to the terms of this Fifth Amendment and the
Second Amended and Restated Installment Note.
(b) The Term Loan shall provide a nonreusable line of
credit availability to Borrower, the proceeds of the Term Loan shall be used as
follows:
(i) $599,999.92 shall constitute the present existing unpaid
balance owing as of the date hereof, under the existing Term Loan and shall not
constitute a novation with respect to such existing unpaid balance; and
(ii) The remaining availability shall be used by Borrower
for the purchase of additional equipment and other working capital purposes,
subject to the provisions of the Agreement.
(c) Borrower has retained Max Rouse & Sons to update its
1992 appraisal. A copy of the updated appraisal shall be provided to Lender as
soon as possible, but in any event by no later than July 31, 1996. The updated
appraisal shall be acceptable to Lender in all respects. Without limiting the
generality of the foregoing, to the extent the then outstanding principal amount
of the Term Loan exceeds eighty-five percent of the auction liquidation value
set forth in the updated appraisal, Borrower shall, within 15 days, prepay,
without premium or penalty, the Term Loan by the amount of such excess. Any
such prepayment will be applied to principal payments in the inverse order from
which they are ordinarily due. Failure to timely provide the required updated
appraisal or to timely make any prepayment required pursuant to the terms of
this subscription shall constitute a Default under the Agreement.
8. Exhibit A. Exhibit A to the Agreement is hereby deleted in its
entirety and Exhibit A attached hereto and by this reference incorporated
herein is substituted in its place.
<PAGE> 4
9. Renewal Fee. In connection herewith, and upon execution of this
Fifth Amendment, Borrower shall pay to Lender a renewal fee in the amount of
$6,250. Such fee shall be fully earned and nonrefundable upon its receipt by
Lender.
10. Documentation Fee. Upon execution of this Fifth Amendment,
Borrower shall pay to Lender a documentation fee equal to $1,000 in connection
with the documentation of this Fifth Amendment. Such fee shall be in addition
to all other fees payable by Borrower hereunder.
11. Representations and Warranties. Borrower represents and warrants
as follows:
(a) Each of the representations and warranties contained in the
Agreement is hereby reaffirmed as of the date hereof, each as if set forth
herein;
(b) The execution, delivery and performance of this Fifth
Amendment are within Borrowers' powers, have been duly authorized by all
necessary action, have received all necessary approvals and do not contravene
any law or any contractual restrictions binding on Borrower;
(c) This Fifth Amendment is a legal, valid and binding obligation
of Borrower, enforceable against Borrower in accordance with its terms; and
(d) No event has occurred and is continuing, or would result from
this Fifth Amendment, which constitutes a Default or Event of Default under the
Agreement, as amended and modified hereby;
12. Conditions Precedent. The effectiveness of this Fifth Amendment
is conditioned upon the satisfaction by Borrower of each of the following
conditions, or their waiver in writing by Lender:
(a) This Fifth Amendment shall have been executed by all
the signatories hereto (including, but not limited to, those signatories
acknowledging and consenting to this Fifth Amendment and reaffirming
their respective instruments, documents and agreements with Lender
related to the Agreement) and delivered to Lender;
(b) The Second Amended and Restated Term Note in the
form of amended Exhibit A to the Agreement attached hereto shall have
been executed and delivered by Borrower to Lender;
(c) Borrower shall execute and deliver to Lender and
cause to be executed and delivered to Lender, from time to time, such
instruments, documents and agreements as Lender may request with respect
to the subject matter of this Fifth Amendment and the Agreement as
amended hereby; and
<PAGE> 5
(d) Borrower shall have paid to Lender the Renewal Fee and the
Documentation Fee, each of which is fully earned as of the date hereof
and is nonrefundable.
13. Expenses. Borrower agrees to pay all charges, costs, expenses
and reasonable attorneys' fees incurred by Lender in connection with the
negotiation, documentation and preparation of this Fifth Amendment and any
other documents in connection herewith and in carrying out and enforcing the
terms of this Fifth Amendment.
14. No Waiver. Lender is not waiving any rights under the
agreement or any Ancillary Agreements and, except as expressly stated herein or
as previously modified in a writing signed by Lender, all of the terms,
covenants and conditions of the Agreement and the Ancillary Agreements shall
remain unmodified and in full force and effect.
15. Incorporation. This Fifth Amendment shall be part of the
Agreement, the terms of which are incorporated herein, and a breach of any
representation, warranty or covenant contained herein or in the Agreement or
the failure to observe or comply with any term or agreement contained herein,
shall constitute a Default under the Agreement and Lender shall be entitled to
exercise all rights and remedies that it may have under the Agreement,
Ancillary Agreements and applicable law. Capitalized terms used herein and not
otherwise defined shall have the same meaning as provided in this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as of the date first above written.
ALGER MANUFACTURING COMPANY, INC.
By:
------------------------------------
Its: Chairman and CEO
-----------------------------------
By:
------------------------------------
Its: Vice President
-----------------------------------
SANWA BUSINESS CREDIT CORPORATION
By:
------------------------------------
Its: First Vice President
-----------------------------------
<PAGE> 1
Exhibit 10.20
SECURITY PROMISSORY NOTE
$40,000 September 9, 1996
Los Angeles, California
FOR VALUE RECEIVED, the undersigned, Robert W. Miller, an individual
(the "Maker"), promises to pay the sum of Forty Thousand Dollars ($40,000) 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 March 7, 1997. Payee shall advance any
amounts requested to be advanced by Maker under this Note on demand.
This Note is secured pursuant to the terms of a certain Pledge Agreement
of September 7, 1995 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF
EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 115
<SECURITIES> 0
<RECEIVABLES> 2,483
<ALLOWANCES> 12
<INVENTORY> 3,175
<CURRENT-ASSETS> 6,097
<PP&E> 4,815
<DEPRECIATION> 3,638
<TOTAL-ASSETS> 7,365
<CURRENT-LIABILITIES> 3,706
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 2,482
<TOTAL-LIABILITY-AND-EQUITY> 7,365
<SALES> 23,744
<TOTAL-REVENUES> 23,744
<CGS> 19,911
<TOTAL-COSTS> 22,566
<OTHER-EXPENSES> 92
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280
<INCOME-PRETAX> 806
<INCOME-TAX> 277
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
