<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
---
Act of 1934 for the fiscal year ended October 31, 1997, or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934.
Commission file number 2-63481
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ATHANOR GROUP, INC.
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(Name of small business issuer as specified in its charter)
CALIFORNIA 95-2026100
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(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
921 East California Avenue, Ontario, California 91761
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(Address of Principal Executive Offices)
The Company's telephone number, including area code (909) 467-1205
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
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 or 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 $ 24,879,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1997 amounted to $ 2,185,843.
The registrant had 1,467,854 shares of common stock outstanding as of December
31, 1997.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
ATHANOR GROUP, INC. ("the Company") was incorporated under the laws of
the State of California in 1958, under the name ALGERAN, INC.
BUSINESS DEVELOPMENT
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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 Untied States. Screw machine products
usually are component parts for use in machines, appliances, automobiles, and
similar durable goods; they also have a wide variety of uses in individual,
industrial, military, and consumer products. These parts must be manufactured
strictly to customer's specifications and must be of precise dimensions,
demanding close individual control during production. The Company does not own
the designs for any of the products produced for customers. Historically, the
screw machine products industry has been extremely sensitive to downturns in the
general economy. In January 1996, the industry's trade association, National
Screw Machine Products Association (NSMPA), officially changed its name to
Precision Machined Products Association (PMPA). The name change was made to
better reflect the industry today, the current technology and the varying
equipment used by the association members.
In meeting customer orders, the Company manufactures a wide range of
products. Before placing an order, a customer provides the Company with
detailed drawings and specifications for a specific product. Based upon these
drawings and specifications, the Company prepares a quote to manufacture the
product. Once the customer agrees to this quote, manufacturing of the product
is scheduled. Quality control inspections are made throughout the manufacturing
process. Emphasis is placed on quality in design. This supports the Company's
program of defect prevention rather than defect detection. 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. The Company is
currently pursuing ISO 9002 Certification. The projected
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completion of the process and certification for this International Quality
Standard is expected to be late 1998. The Company is currently using an outside
consultant to assist in the design and implementation of the requirements to
meet this quality standard.
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 October 1997, the Company went on-line with a new
fully integrated software system, which has the ability to purchase and schedule
materials in conjunction with the manufacturing process. The company expended
substantial resources and time in an effort to make sure the new system would
meet all its current and anticipated future requirements. This new system will
give the Company an effective tool to control in-house inventories and to
provide on time deliveries to its customers.
All of the Company's business consists of the production of component
parts of proprietary products for other companies. A number of these companies
have the capacity to perform this work themselves, but for what appears to be
business reasons decline to do so. Should these companies decide in the future
to do this work themselves, the business of the Company could be adversely
affected.
An additional benefit of the new manufacturing software system is the
ability to generate backlog figures in various forms. In the past, the
Company's system was designed to only generate unproduced backlog amounts. As
of October 31, 1997, the Company's total backlog amounted to approximately
$8,075,000 (compared to $4,957,000 of unproduced backlog) of anticipated gross
sales from projects on which customers have authorized work to commence during
the fiscal year 1998. In the normal course of business, some backlog orders are
inevitably cancelled or the time of delivery is changed. There is no assurance
that the total backlog will result in completed sales. However, the company has
not experienced significant cancellations in its recent past. The Company's
unproduced backlog, as of October 31, for the past three years was as follows:
1996 -$6,184,000, 1995 - $6,134,000, 1994 - $4,419,000.
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, 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 1997 the Company has continued to expand its second operation
equipment. This 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
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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.
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, Joseph T. Ryerson and Son, Inc. and Carpenter
Technology.
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 purchased its third generation soap and
water parts cleaner in 1997. The new parts cleaner is 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 sixty-six (166) persons on October 31, 1997, of which eleven (11)
were general and administrative, three (3) were in marketing and sales, and one
hundred and fifty-two (152) 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
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Company also conducts other regular training programs for its skilled and
unskilled employees.
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 as
of October 31, 1996 and 1997. 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, 1997, 1996, and 1995 was as follows:
<TABLE>
<CAPTION>
Dollar Amount of Total Sales (000's)
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1997 1996 1995
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<S> <C> <C> <C>
California $ 6,483 $ 7,130 $ 5,389
Other Western States 3,954 4,431 4,314
All Others 9,713 7,458 6,047
Scrap 4,729 4,725 3,682
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$24,879 $23,744 $19,432
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</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Sales
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1997 1996 1995
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<S> <C> <C> <C>
California 26% 30% 28%
Other Western States 16 19 22
All Others 39 31 31
Scrap 19 20 19
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100% 100% 100%
</TABLE>
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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, 1997, 1996, and 1995, 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. During 1997, Alger
Manufacturing established a home page on the World Wide Web. Alger capabilities
can be viewed using http://www.alger1.com.
CUSTOMERS
The Company manufactures parts for a variety of customers. During
1997 there were no customers that accounted for 10% or more of the Company's
consolidated revenue.
During 1997, less than 1% of the Company's business was government
related.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company and its subsidiary, Alger, lease office and manufacturing
space in Ontario, California, and in Glendale, Arizona. Alger leases three
manufacturing facilities: 35,600 square feet and 17,000 square feet in Ontario
on leases ending September 2002, and 15,700 square feet in Glendale, Arizona on
a lease ending October 2001. The Company leases the above properties at rates
ranging from $.28 triple net to $.38 gross per square foot. The Company
believes that 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is currently quoted on the OTC Bulletin Board 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, markdown, or commissions and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Market Information
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12/31/97 9/30/97 6/30/97 3/31/97
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<S> <C> <C> <C> <C>
Ask 3 1/8 3 3/8 2 7/8 2 7/8
Bid 2 1/4 2 5/8 2 3/8 2 3/16
</TABLE>
<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
</TABLE>
<TABLE>
<CAPTION>
12/31/95 9/30/95 6/30/95 3/31/95
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<S> <C> <C> <C> <C>
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
</TABLE>
As of December 31, 1997, the approximate number of shareholders of record
of common shares was 277.
No dividends were declared during the fiscal year ended October 31, 1997,
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
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The following table summarizes the changes in working capital for the
fiscal years 1997, 1996, and 1995 (Thousands of Dollars).
<TABLE>
<CAPTION>
1997 1996 1995
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<S> <C> <C> <C>
Current Assets $6,640 $6,097 $5,352
Current Liabilities $4,373 $3,706 $3,686
Working Capital $2,267 $2,391 $1,846
</TABLE>
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FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997, AS COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1996
The Company's liquidity showed a small decrease between fiscal 1997 and
1996. However, accounts receivable and inventory increased by $500,000 or
approximately 9% over 1996. In a year when sales only increased by
approximately 5%, such large increases put a substantial burden on working
capital. Such increases, especially in inventory, are the continuation of the
increasing customer requirements in this very competitive business environment.
It is the Company's opinion that the ability to meet these requirements sets it
apart from many of its competitors. The Company funded the increases in current
assets through its working capital line of credit as well as an increase in
accounts payable.
In July 1997 the Company completed an amendment to its credit agreement,
extending the agreement to August 31, 1998. The amended credit agreement
increased the Company's working capital line to $2,600,000. The Company's long-
term equipment loan of $900,000 with a balance owing of $650,000 as of October
1997 remains intact. The net effect of the amended credit agreement was to
increase available financing by approximately $400,000. In addition, the
amended agreement increased a new equipment line to $750,000 (with a balance
available of $650,000) for the purchase of additional equipment. The equipment
line must be used in increments of a minimum of $100,000 and shall not exceed
85% of the purchase price of equipment. At October 31, 1997, the Company had
approximately $1,235,000 available under the working capital line and $650,000
available under the new equipment line as compared to $1,260,000 and $300,000
respectively in 1996. The company believes that the amended agreement is
adequate to fund the Company's working capital requirements during fiscal year
1998 and anticipated equipment purchases in fiscal year 1998.
The Company purchased $1,214,000 of manufacturing and computer
equipment as well as leasehold improvements during 1997. These purchases
included a new parts washing system which cost $384,000. The new washing system
was specially designed for Alger's unique requirements and is expected to
alleviate a capacity problem the Company has been experiencing with the increase
in sales over the last few years. The purchases also included approximately
$225,000 of equipment and leasehold improvements for the new Glendale Arizona
facility. The Company financed $744,000 of the equipment purchases through five-
year leases, with the balance, approximately $470,000, coming from working
capital. The company does not have plans for any major equipment purchases or
facility expansion in 1998. The Company considers its equipment line of credit
to be adequate to fund any equipment purchases in 1998.
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.
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
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balance coming from cash flow. The company had available $300,000 of its
equipment line remaining for additional equipment purchases during 1997.
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 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.
RESULTS OF OPERATIONS
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The following table summarizes the results of operations for the
fiscal years 1997, 1996, and 1995 (Thousands of Dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $24,879 $23,744 $19,432
Cost of Sales $21,189 $19,911 $16,130
Operating Profit $ 998 $ 1,178 $ 869
Net Earnings $ 483 $ 529 $ 264
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997, COMPARED TO THE FISCAL YEAR
ENDED OCTOBER 31, 1996
While sales for the fiscal year 1997 improved by approximately 5%,
operating profits declined by approximately 15% as compared to 1996. The main
reasons for this decline are related to the non-capital costs associated with
building out a new facility in Glendale, Arizona and added overhead associated
with the general growth of the company.
During 1997 the company moved its Arizona manufacturing into a new and
larger facility. While the move had been planned for almost a year, the non-
capitalized costs associated with the move, of approximately $40,000, were all
absorbed in 1997. This included the cost associated with closing down and clean
up of the old facility. The new facility took approximately four months to
become fully operational and will give the Company the ability to expand and
meet additional customer needs as they arise.
The cost of sales increased in excess of 1% over 1996. During the
past few years the Company has concentrated its equipment purchases in the
larger diameter equipment. 1997 was no exception as the majority of new
machines acquired were large diameter. This equipment has historically
generated sales with a higher percentage of material, thereby increasing the
overall cost of such sales. Also during 1997, the Company added a substantial
number of employees, increasing the employee base to 152 as compared to 132 at
the end of 1996. Part of the increase in employees was to improve the Company's
technical capabilities and part was to meet increasing customer requirements for
special handling, packaging etc. While some of the additional labor associated
with special customer requirements is built into
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customer contracts, the majority of the overhead added during 1997 was absorbed
by the Company. The Company does feel that the additional technical capabilities
it has added will help it to remain competitive and be able to meet the ever-
increasing customer requirements.
The Company's effective tax rate for 1997 increased to 42% from 34% in
1996. Approximately 5.2% of this change is associated with an increase in the
effective state tax rate due to the California Manufacturers Investment Credit.
While this credit was available to the Company in both 1997 and 1996, the
Company received a larger benefit in 1996.
The Company's total backlog of $8,075,000 ($4,957,000 of unproduced
backlog) has declined as compared to $6,184,000 of unproduced backlog at 1996.
This drop in backlog all occurred during the final quarter of fiscal 1997. It
is difficult to determine if this is a short-term decline or it is an indication
of a softening of the market. While the total backlog still remains fairly
strong, it is an area of concern that the Company will watch closely as it
evaluates its 1998 business decisions.
During 1997 the Company received $225,116, as partial repayment, of
its loans to Core that had previously been written off. Core has continued to
under perform from its projections; however, it has been able to put together a
program of bridge loans which has funded its current cash requirements. The
Company does not anticipate the necessity, nor will it consider any further cash
loans to Core. See Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 had concentrated the majority
of its capital equipment budget toward the larger diameter equipment as demand
for this type of work had grown. The addition of manufacturing and warehousing
facilities in 1995 had given the Company the needed space to accommodate this
sales growth; while the addition of selected manufacturing, as well as second
operation equipment in the last few years, gave the Company the ability to meet
the increased demand during 1966.
Cost of sales increased 1% over 1995. This increase was 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 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.
The Company's unproduced backlog of $6,184,000 at October 1996 was
virtually unchanged from $6,134,000 at 1995. Considering the substantial
increase in sales during
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1996, the Company's ability to maintain its backlog at high levels showed the
strength of the market during 1966.
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 was still incurring losses, the Company was
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.
EFFECTS OF INFLATION
- ---------------------
Inflation for the fiscal years ended 1997 and 1996 were minimal and
had no effect on the Company's operations.
During 1995 the Company experienced substantial increases in the cost
of some raw materials, approximately 9%. All 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 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 that took place in 1995. If similar increases do
occur in the future, the Company does not believe such increases would have a
material effect on its operations.
YEAR 2000 COMPUTER REQUIREMENTS
- -------------------------------
During 1997 the Company reviewed the Year 2000 issue, the result of
computer programs being written using two digits rather than four to define the
applicable year. The Company's new manufacturing software program, installed in
1997, was specifically designed to deal with the Year 2000 issue. The Company's
other main system for accounting was updated during 1997, by the developer,
whereby it allows the user to alter the dating function so that numbers greater
than an assigned number correspond to the current century and numbers less than
an assigned number correspond to the next century. Both of the systems have
been tested and function properly. The Company also has some minor systems that
will be reviewed during 1998. The cost of changing these systems is not
considered to be material or time consuming. The Company anticipates having all
systems compliant by the end of 1998.
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ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TITLE PAGE
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<S> <C>
Independent Auditor's Report...............................................
Consolidated Balance Sheets
at October 31, 1997, and 1996..............................................
Consolidated Statements of Earnings
for each of the three years ended October 31, 1997, 1996, and 1995.........
Consolidated Statements of Stockholders' Equity
for each of the three years ended October 31, 1997, 1996, and 1995.........
Consolidated Statements of Cash Flows
for each of the three years ended October 31, 1997, 1996, and 1995.........
Notes to Consolidated Financial Statements.................................
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
ATHANOR GROUP, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
October 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
December 16, 1997
12
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
-------------------- --------------------
<S> <C> <C>
Current assets:
Cash $ 137,993 115,476
Accounts receivable, net of allowance for doubtful accounts of
$13,712 and $11,785 at October 31, 1997 and 1996 2,683,318 2,468,610
Note receivable related parties (note L) 40,000 40,000
Other receivables 99,463 2,500
Income tax receivable 16,749 --
Inventories:
Raw materials 637,076 871,774
Work in process 596,783 505,569
Finished goods 2,236,895 1,797,388
-------------------- --------------------
3,470,754 3,174,731
-------------------- --------------------
Prepaid expenses 18,470 34,935
Deferred income tax asset (note E) 173,342 261,179
-------------------- --------------------
Total current assets 6,640,089 6,097,431
Property, plant and equipment, net (note B) 1,840,467 1,177,450
Other assets 138,545 90,020
-------------------- --------------------
$ 8,619,101 7,364,901
===================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
-------------------- --------------------
<S> <C> <C>
Current liabilities:
Note payable (note C) $ 1,365,497 939,757
Current portion of long-term debt (note D) 594,685 419,901
Accounts payable 1,717,838 1,443,659
Accrued liabilities:
Salaries, wages and other compensation 252,392 402,077
Income tax payable -- 122,769
Other 443,040 377,540
-------------------- --------------------
Total current liabilities 4,373,452 3,705,703
-------------------- --------------------
Long-term debt, less current portion (note D) 1,193,494 1,095,228
Noncurrent deferred income tax liability (note E) 80,441 66,573
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 1,467,934 shares in 1997 and 1,471,354
shares in 1996 14,679 14,713
Additional paid-in capital 1,447,391 1,447,391
Retained earnings 1,509,644 1,035,293
-------------------- --------------------
Total stockholders' equity 2,971,714 2,497,397
Commitments (notes C, D and G) $ 8,619,101 7,364,901
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales $ 24,879,039 23,744,232 19,432,094
Cost of sales 21,189,044 19,910,869 16,130,070
-------------------- -------------------- --------------------
Gross profit 3,689,995 3,833,363 3,302,024
Selling, general and administrative expenses 2,692,247 2,655,621 2,433,298
-------------------- -------------------- --------------------
Operating profit 997,748 1,177,742 868,726
Other income (expense):
Interest expense (333,677) (279,779) (281,434)
Recoveries (write-offs) of advances to
unconsolidated investee 225,116 (149,739) (123,500)
Other, net (57,616) 58,197 20,859
-------------------- -------------------- --------------------
Earnings before income taxes 831,571 806,421 484,651
Income tax expense (note E) 348,504 277,183 220,900
-------------------- -------------------- --------------------
Net earnings $ 483,067 529,238 263,751
==================== ==================== ====================
Earnings per common share-primary and fully
diluted - net earnings $ .33 .36 .18
==================== ==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years ended October 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------------
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, 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
Retirement of common stock (note I) -- -- (3,420) (34) -- (8,716) (8,750)
Net earnings for the year -- -- -- -- -- 483,067 483,067
---------- -------- --------- ---------- ----------- --------- ------------
Balance at October 31, 1997 $ -- -- 1,467,934 14,679 1,447,391 1,509,644 2,971,714
---------- -------- --------- ---------- ----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended October 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 483,067 529,238 263,751
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Recoveries) write-offs of advances to
unconsolidated investee (225,116) 149,739 123,500
Depreciation and amortization 360,272 283,877 250,944
Loss on disposal of fixed asset 71,421 -- 21,460
Amortization of deferred gain on sale and leaseback -- (39,257) (41,305)
Provision for deferred income taxes 101,705 (58,732) 220,900
Increase in operating assets:
Accounts receivable (214,708) (226,229) (309,502)
Inventories (296,023) (202,462) (130,578)
Prepaid expenses and other assets (32,060) (6,106) (3,092)
Income taxes receivable (16,749) -- --
Increase (decrease) in operating liabilities:
Accounts payable 274,179 (94,317) 16,701
Accrued liabilities (84,186) 174,601 (193,496)
Income taxes payable (122,769) 122,769 --
------------------ ------------------ ------------------
Net cash provided by operating activities 299,033 633,121 219,283
------------------ ------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment (470,607) (81,631) (517,318)
Proceeds from sales of property and equipment 119,498 -- 39,885
Issuance of note receivable - related party -- (15,000) (25,000)
Issuance of note receivable (96,963) -- --
Write-off of note receivable - related party -- -- 19,500
Repayment from (advances to) unconsolidated investee 225,116 (149,739) (123,500)
------------------ ------------------ ------------------
Net cash used in investing activities (222,956) (246,370) (606,433)
------------------ ------------------ ------------------
</TABLE>
(Continued)
17
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
Years ended October 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) under line of credit $ 425,740 (237,406) 257,235
Proceeds from long-term debt -- 267,334 312,083
Repayments of long-term debt (470,550) (363,464) (268,971)
Repurchase of stock (8,750) (121) --
------------------ ------------------ ------------------
Net cash provided by (used in) financing
activities (53,560) (333,657) 300,347
------------------ ------------------ ------------------
Net increase (decrease) in cash 22,517 53,094 (86,803)
Cash at beginning of year 115,476 62,382 149,185
------------------ ------------------ ------------------
Cash at end of year $ 137,993 115,476 62,382
================== ================== ==================
Supplemental disclosures of cash flow information:
Interest paid $ 333,677 283,040 278,952
Income taxes paid 386,317 113,646 254,635
================== ================== ==================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
1997
The Company purchased $743,601 of machinery and equipment under capital
lease obligations.
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.
See accompanying notes to consolidated financial statements.
18
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
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.
Asummary 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 5 to 7 years
Leasehold improvements 5 to 9 years
Leasehold improvements are depreciated over the lesser of their
useful lives or lease term.
4. Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. In addition, net operating loss carryforwards and credit
carryforwards are included as deferred tax assets. A valuation
allowance against deferred tax assets is recorded if necessary. All
deferred tax amounts are measured using enacted tax rates expected
to apply to taxable income in
19
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
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. The investment in Core has been
reduced to zero due to Core's accumulated losses. During 1996 and
1995, the Company advanced $149,739 and $123,500, respectively, to
Core which were subsequently written off. In 1997, Core repaid
$225,116 of previously written off advances. At October 31, 1997 and
1996, the Company owned 28.0% of Core's common stock. The Company's
investment in Core was reduced to 19.8% subsequent to October 31,
1997 (see Note L).
6. Earnings per Share
Earnings per share is based on the weighted average of common shares
outstanding during each year.
During 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." Such statement, which is
effective for reporting period ending after December 15, 1997,
alters the current method for calculating primary and fully diluted
earnings per share. Management does not anticipate that the adoption
of SFAS No. 128 will have a material impact on the Company's
earnings per share calculation.
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 available 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
20
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
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 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 1996 and 1995
financial statements to conform to the 1997 presentation.
11. New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements.
SFAS 130 is effective for fiscal years beginning after December 15,
1997.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes standards for
public business enterprises to report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 also
requires that the enterprise report descriptive information about
the way that the operating segments were determined and the products
and services provided by the operating segments. SFAS 131 is
effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not
be applied to interim financial statements in the initial year of
its application, but comparative information for interim periods in
the initial year of application is to be reported in financial
statements for interim periods in the second year of application.
Management has not determined the impact of the above statements.
21
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
Note B - Property, Plant and Equipment
A summary of property, plant and equipment by classification
follows:
<TABLE>
<CAPTION>
October 31
-----------------------
1997 1996
----------- ---------
<S> <C> <C>
Machinery and equipment $5,541,002 4,738,016
Leasehold improvements 84,042 77,278
---------- ----------
5,625,044 4,815,294
Less accumulated depreciation
and amortization 3,784,577 3,637,844
---------- ----------
$1,840,467 1,177,450
========== ==========
</TABLE>
Note C - Note Payable
Alger has a $4,250,000 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. Under the line of credit, Alger may borrow amounts up to
$2,600,000 based on eligible accounts receivable and inventories, as
defined. Interest on drawings on this line of credit is payable at
the prime rate (8.75% at October 31, 1997), plus 1.25%. The line of
credit expires in August 1998. The amount outstanding was $1,365,497
and $939,757 at October 31, 1997 and 1996, respectively. The amount
available under the line of credit was approximately $1,235,000 and
$1,260,000 at October 31, 1997 and 1996, respectively. The agreement
also provides for a term loan not to exceed $900,000, of which
$649,999 was outstanding at October 31, 1997. In addition, the
agreement provides for an equipment line of up to $750,000, of which
$100,000 has been drawn, $53,324 was outstanding, and $650,000 was
available at October 31, 1997. Borrowings on both the term loan and
equipment line are included as notes payable 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.
22
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
Note D - Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Note payable to an individual at 8.5%, payable in yearly
installments of $40,000, with interest payable
quarterly, due April 1999 (see note L) $ 80,000 120,000
Notes payable to a lending institution at the prime rate
plus 1.25%, payable in monthly installments of $18,334
plus interest, due July 1999, collateralized by
substantially all assets of Alger 760,378 923,328
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 19,081 119,596
Capital lease obligations (see note G) 928,720 352,205
---------- ----------
1,788,179 1,515,129
Less current portion 594,685 419,901
---------- ----------
$1,193,494 1,095,228
========== ==========
</TABLE>
A schedule of aggregate, annual principal payments on long-term debt
as of October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Year ending
October 31 Amount
------------------- -----------------
<S> <C>
1998 $ 594,685
1999 770,978
2000 200,833
2001 178,462
2002 43,221
-----------------
$ 1,788,179
=================
</TABLE>
23
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
Note E - Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Federal State Total
------------------ ----------------- ------------------
<S> <C> <C> <C>
1997:
Current $ 199,271 47,528 246,799
Deferred 85,370 16,335 101,705
------------------ ----------------- ------------------
$ 284,641 63,863 348,504
================== ================= ==================
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>
1997 1996 1995
------------------- ------------------- ------------------
Percent Amount Percent Amount Percent Amount
--------- --------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. Federal tax
rate 34.0% $ 282,734 34.0% $ 274,183 34.0% $ 164,781
State income taxes, net of
Federal benefit 6.1 50,726 6.1 48,788 6.1 29,297
Benefit due to state tax
credits (1.2) (10,000) (6.7) (54,123) -- --
Other 3.0 25,044 1.0 8,335 5.4 26,822
---- --------- ---- --------- ---- ---------
41.9% $ 348,504 34.4% $ 277,183 45.5% $ 220,900
==== ========= ==== ========= ==== =========
</TABLE>
24
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liability at October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 5,400 4,730
Equity in loss of unconsolidated investee 163,997 254,354
Contamination reserve 106,471 106,471
Other 42,155 40,305
-------- --------
Total gross deferred tax assets 318,023 405,860
Valuation allowance 144,681 144,681
-------- --------
Net deferred tax assets $173,342 261,179
======== ========
Deferred tax liabilities - accelerated depreciation on
fixed assets $ 80,441 66,573
======== ========
</TABLE>
Included as a deferred tax asset is the deferred tax benefit
associated with the Company's 1994 equity loss in an unconsolidated
investment. Because of uncertainties surrounding the realizability
of this deferred tax benefit, the Company established a valuation
allowance in 1994 by an amount equal to this deferred tax asset.
Future equity earnings in this unconsolidated investment, if any,
will reduce this valuation allowance accordingly. The Company
believes its remaining deferred tax assets to be realizable based on
historical and projected taxable income levels.
Note F - Sale and Leaseback
In September 1986, the Company sold for $750,000 its manufacturing
facility in Ontario, California. The proceeds from the sale of the
facilities were used, in part, to satisfy the secured claim against
the property.
The facilities were leased back (note G) to the Company's wholly
owned subsidiary, Alger Manufacturing Co., Inc. A gain of
approximately $411,000 was deferred and amortized over the life of
the lease through 1996. Amortization on the deferred gain of $39,257
and $41,304 has been recorded as other income for the years ended
October 31, 1996 and 1995, 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, 1997 and 1996 is as follows:
25
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cost $1,091,000 515,000
Less accumulated depreciation 117,000 71,000
---------- ----------
$ 974,000 444,000
========== ==========
</TABLE>
The Company leases three premises which are accounted for as
operating leases. Real estate taxes, insurance and other taxes are
the obligations of the Company.
The following is a schedule of future minimum rental commitments
under capital leases and noncancelable operating leases as of
October 31, 1997:
<TABLE>
<CAPTION>
Capital leases Operating
leases Total
----------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ending October 31:
1998 $ 288,999 293,551 582,550
1999 288,999 293,927 582,926
2000 233,342 300,355 533,697
2001 194,437 301,504 495,941
2002 100,225 206,540 306,765
----------------- ------------- -----------
Minimum lease payments 1,106,002 $1,395,877 2,501,879
============= ===========
Less amount representing
interest and taxes 177,282
-----------------
Present value of future
capital lease payments $ 928,720
=================
</TABLE>
Rental expense for operating leases was approximately $297,000 in
1997, $254,000 in 1996 and $230,000 in 1995.
As of October 31, 1997 and 1996, the Company has accrued $265,000
relating to the estimated cost to remediate perchloroethylene
contamination in the subsurface soil below Alger.
26
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
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:
1,468,872 shares in 1997, 1,471,377 shares in 1996 and 1,471,434
shares in 1995.
As of October 31, 1997, the Company had no outstanding common stock
options or warrants.
Note I - Stockholders' Equity
During 1995, the Company repurchased and retired 100,000 shares of
its common stock for $2.00 per share.
During 1996, the Company repurchased and retired 80 shares of common
stock for $1.50 per share.
During 1997, the Company repurchased and retired 3,420 shares of
common stock for approximately $2.50 per share.
Note J - Major Customer
For the years ended October 31, 1997 and 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.
Note K - Employee Benefit Plans
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
employees' 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 $80,000, $75,000 and $72,000 for the years
ended October 1997, 1996 and 1995, respectively.
27
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
In April 1997, the Company adopted a stock option plan (Plan)
pursuant to which the Company's Board of Directors may grant stock
options to officers, directors and key employees. The Plan
authorizes grants of options to purchase up to 220,340 shares of
authorized but unissued common stock. Stock options are granted with
an exercise price equal to the stock's fair market value at the date
of grant. All stock options vest and become fully exercisable at the
discretion of the Board of Directors. As of October 31, 1997 no
options to purchase shares of the Company had been granted by the
Board of Directors.
Note L - Related Party Transactions
The Company is currently the single largest shareholder of Core
Software Technology, a California corporation (Core), owning 569,558
shares (after a 1 for 5.5 reverse stock split effective prior to
October 31, 1997) of the issued and outstanding common stock of Core
representing approximately twenty-eight percent (28%) of the issued
and outstanding shares of Core's capital stock at October 31, 1997.
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. The escrowed
shares were to be released from escrow if Core met certain minimum
pretax income requirements in 1997. Core failed to meet the
requirement effective December 31, 1997 and all shares held in the
escrow account were canceled and returned to Core and the Company
has no further rights with respect to those shares. Subsequent to
the cancellation of the escrow shares, the Company's holdings in
Core were reduced to 399,845 shares and representing 19.8 of the
issued and outstanding shares of Core's capital stock.
The Company has also provided a portion of the working capital
requirements of Core during previous years, in the form of a series
of loans to Core. The Company has made loans in the principal amount
of $647,622 to Core and Image Data Corporation (IDC), the previous
parent of Core, through October 31, 1997, net of $225,116 repaid in
1997. The outstanding balance, plus accrued interest of $156,905
through October 31, 1997, has been fully reserved in prior years
pursuant to the equity method of accounting.
Robert W. Miller, the Chairman of the Board of the Company, has
served on the Board of Directors of Core since its formation and has
served as an officer from time to time and is currently the
Secretary of Core. 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 $1,000 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 directors of Core. Mr.
Miller and Mr. Femrite have assigned the right to receive said fees
to R & D Financial (R & D), a California general partnership of
which Messrs. Miller and Femrite are the general partners. During
1997, R & D received $8,500 in Director fees from Core.
Mr. Miller has entered into a consulting agreement with Core and
assigned the consulting fees to R&D, 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 fee of $50,000 for the calendar year
1995 and $5,000 per month commencing January 1, 1998. Mr. Miller has
assigned the right to receive said fees to R & D. 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 has allowed Core to use his personal credit card for
travel and other business related expenses. In connection with the
use of his credit card during 1996 and 1997, Core incurred and paid
charges on Mr. Miller's card totaling $128,000. In 1997 Core paid
Mr. Miller a fee of approximately $18,000 for the use of his credit
card.
During 1997 Core reimbursed Mr. Miller approximately $23,000 in
connection with certain tax liens related to IDC.
Mr. Femrite and Mr. Miller have a beneficial ownership interest in
11,969 shares of the common stock of Core owned by R & D. Mr. Miller
has a beneficial ownership interest in 8,813 additional shares of
the common stock of Core as well as options to purchase 4,180 shares
of the common stock of Core at exercise prices ranging from $5.50 to
$8.25 per share. Mr. Femrite has a beneficial ownership interest in
7,363 additional shares of the common stock of Core as well as
options to purchase 3,697 shares of the common stock of Core at
$5.50 per share. The above beneficial stock ownership represents
ownership interests after the 1 for 5.5 reverse stock split in 1997.
In September 1995, the Company loaned $25,000 to Mr. Miller 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 secured by 25,000 shares of the
Company, owned by Mr. Miller. The loan was renewed as of October 31,
1997 on the condition that Mr. Miller makes a $5,000 principal
reduction by January 31, 1998 and pays all current interest through
October 31, 1997 and is due on April 30, 1998.
28
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
October 31, 1997 and 1996
- --------------------------------------------------------------------------------
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, 1997.
<TABLE>
<CAPTION>
Director/Officer Information
----------------------------
Principal Director
Name Occupation Age Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gregory J. Edwards Director 53 1990
Duane L. Femrite President, Chief Executive Officer,
Chief Financial Officer of the Company 52 1985
William H. Harris, Jr Director 53 1986
Richard A. Krause Vice President of the Company 62 1992
President, Alger Manufacturing
Company, Inc.
Robert W. Miller Chairman of the Board, 55 1976
Secretary of the Company
</TABLE>
29
<PAGE>
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 Holdings,
L.L.C. ("CASS") since January 1993. CASS owns several
manufacturing and service companies: Milamar Coatings,
L.L.C., a producer of epoxy coating products used in the
industrial and commercial seamless floor coating business;
Berry Manufacturing and Equipment, L.L.C., a manufacturer
of equipment for the maintenance and marking of pavement
services, specializing in designing and manufacturing
joint/crack sealers and thermoplastic melting equipment:
CASS Services, L.L.C., a government contractor involved
with surface preparation and re-coating for U.S. Naval
ships and portable landing mats: and CASS Financial, L. L.
C., an equipment leasing company. Between July 1991 and
January 1993, Mr. Edwards was self-employed as a financial
consultant and investor. Previously, he was an investment
banker with 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, Associate Vice President with Dean Witter Reynolds, Inc.
JR. 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.
30
<PAGE>
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 and currently serving as Secretary.
Director of OneCard International since 1988 and elected
Chairman and Chief Executive Officer of this company in
September 1992.
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, 1997.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Principal
Position Year Salary Bonus Other (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duane L. Femrite 1997 $144,192 25,000 2,949
President, Chief Executive 1996 133,308 44,000 2,162
Officer and Chief Financial 1995 129,038 10,000 3,826
Officer
Richard A. Krause 1997 $156,423 35,063 3,750
Vice President and 1996 145,308 52,328 3,750
President of Alger 1995 141,673 41,066 4,748
Manufacturing Co., Inc.
Robert W. Miller 1997 $144,270 25,000 1,500
Chairman of the Board 1996 136,498 44,000 1,432
Corporate Secretary 1995 125,000 10,000 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
31
<PAGE>
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 is
identical as to its terms except for the description of the duties
that 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, Duane L. Femrite and
Richard A. Krause were automatically renewed on January 1, 1998, for
an additional year.
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. The Board has a Nominating Committee that
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 that the full Board does not meet. The
Audit Committee, Nominating Committee, and Compensation Committee
met once in 1997.
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.
STOCK OPTION PLAN
The Company's shareholders approved the Company's 1997 Stock
Option Plan (the "1997 Plan"), on April 11,1997. The purposes of the
1997 Plan are to attract, reward and retain the best available
officers, directors, employees and consultants for the Company and
to promote the
32
<PAGE>
success of the Company's business. The following discussion is
intended only as a summary of the material provisions of the 1997
Plan
The 1997 Plan provides only for grants of "non-qualified stock
options" which are not qualified for treatment under Section 422 of
the Internal Revenue Code of 1986, as amended. A total of 220,340
shares of Common Stock have been reserved for issuance under the
1997 Plan upon the exercise of stock options which may be granted to
employees, officers, directors and consultants of the Company.
Because the officers, directors, employees and consultants of the
Company who may participate in the 1997 Plan and the amount of their
options will be determined by the Board of Directors or its
committee in its discretion, it is not possible to state the names
or positions of, or the number of options that may be granted to,
the Company's officers, directors, employees and consultants. As of
the date hereof, no options under the 1997 Plan have been granted.
No person may receive options under the 1997 Plan for more than
30,000 shares in any one fiscal year.
The Board of Directors may administer the 1997 Plan or the
administration of the 1997 Plan may be delegated to a Committee of
the Board of Directors (the "Committee"). In addition to determining
who will be granted options, the Board or Committee will have the
authority and discretion to determine when options will be granted
and the number of options to be granted. The Board or Committee also
may determine the time or times when each option becomes
exercisable, the duration of the exercise period for options and the
form or forms of the instruments evidencing options granted under
the 1997 Plan, and is empowered to make all other determinations
deemed necessary or advisable for the administration of the 1997
Plan.
The term of each option granted under the 1997 Plan will be
established by the Board or Committee at the time of the grant. An
option granted under the 1997 Plan may be exercised at such times
and under such conditions as determined by the Board or Committee.
Except as otherwise provided by the Board or Committee at the time
an option is granted, no option granted under the 1997 Plan is
transferable other than at death, and each option is exercisable
during the life of the optionee only by the optionee. In the event
of the death of a person who has received an option, the option
generally may be exercised by a person who acquired the option by
bequest or inheritance to the extent that such option was
exercisable at the date of death.
The exercise price may not be less than the fair market value
of the Common Stock on the date of grant. The consideration to be
paid upon exercise of an option, including the method of payment,
will be determined by the Board or Committee and may consist
entirely of cash, check, shares of Common Stock, such other
consideration and method of payment permitted by applicable law or
any combination of such methods of payment as permitted by the Board
or Committee. The Board or Committee has the authority to reset the
price of any stock option after the original grant and before
exercise. In the event of stock dividends, splits, and similar
capital changes, the 1997 Plan provides for appropriate adjustments
in the number of shares available for option and the number and
option prices of shares subject to outstanding options.
In the event of a proposed sale of all or substantially all
of the assets of the Company, or a merger of the Company with and
into another corporation, outstanding options shall be assumed or
equivalent options shall be substituted by such successor
corporation, unless the Board or Committee provides all option
holders with the right to immediately exercise all of their options,
whether vested or unvested. In the event of a proposed dissolution
or liquidation of the Company, outstanding options will terminate
immediately prior to the consummation of such proposed action,
unless otherwise provided by the Board or Committee. In such a
situation, the Board or
33
<PAGE>
or Committee is authorized to give option holders the right to
immediately exercise all of their options, whether vested or
unvested.
The 1997 Plan will continue in effect until April 1, 2007,
unless earlier terminated by the Board of Directors, but such
termination will not affect the terms of any options outstanding at
that time. The Board of Directors may amend, terminate or suspend
the 1997 Plan at any time. Amendments to the 1997 Plan must be
approved by shareholders if required by applicable tax, securities
or other law or regulation.
The issuance of shares of Common Stock upon the exercise of
options may be subject to registration with the Securities and
Exchange Commission on the shares reserved by the Company under the
1997 Plan.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 31, 1997, 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.
<TABLE>
<CAPTION>
Certain Beneficial Owners and Management
----------------------------------------
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 2208 Faircloud Lane
Edmund, Oklahoma 73034
Common Duane L. Femrite 189,544 12.9%
Stock 921 East California Avenue
Ontario, California 91761
Common William H. Harris, Jr. (2) 51,050 3.5%
Stock 302 West Las Palmaritas Avenue
Phoenix, Arizona 85021
Common Richard A. Krause 256,983 17.5%
Stock 921 East California Avenue
Ontario, California 91761
Common Robert W. Miller (1) 164,752 11.2%
Stock 921 East California Avenue
Ontario, California 91761
Common All Officers and Directors 673,082 45.8%
Stock as a Group (5 persons)
</TABLE>
- ---------------------------------------
(Footnotes on next page)
34
<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, 1997. There were 1,467,854 shares
of Common Stock outstanding on December 31, 1997.
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 that may at a
subsequent date result in a change in control of the Company.
- -----------------------------
(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 399,845 shares of
the issued and outstanding common stock of Core (after a 1 for 5.5 reverse stock
split in 1997 and the loss of escrowed shares discussed below) representing
approximately 19.8% 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 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. The escrowed shares were to be released
from escrow if Core met certain minimum pretax income requirements in 1997. Core
failed to meet the requirement and all shares held in the escrow account were
canceled and returned to Core and the Company has 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.
35
<PAGE>
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 previous years, in the form of a series of loans to
Core. The Company has made loans in the principal amount of $647,622 to Core and
Image Data Corporation ("IDC"), the previous parent of Core, through October 31,
1997, net of $225,116 repaid in 1997. The outstanding balance, plus accrued
interest of $156,905 through October 31, 1997, has been fully reserved in prior
years pursuant to the equity method of accounting.
Robert W. Miller, the Chairman of the Board of the Company, has
served on the Board of Directors of Core since its formation and has served as
an officer from time to time. He is currently the Secretary of Core. Mr. Miller
has served as a director of IDC since 1988. Until July 1992, Mr. Miller was the
Chief Operating Officer of IDC and 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 directors of Core. Mr. Miller and Mr. Femrite
have assigned the right to receive said fees to R & D Financial (R & D), a
California general partnership of which Messrs. Miller and Femrite are the
general partners. During 1997 R & D received $8,500 in Director fees from Core.
Mr. Miller has allowed Core to use his personal credit card for
travel and other business related expenses. In connection with the use of his
credit card during 1996 and 1997, Core incurred and paid charges on Mr. Miller's
card totaling $128,000. In 1997 Core paid Mr. Miller a fee of approximately
$18,000 for the use of his credit card.
Mr. Miller entered into a consulting agreement with Core and
assigned the consulting fees to R & D. The consulting agreement began on January
1, 1995, wherein Mr. Miller agreed to provide services to Core relating to
financial, investor, capital raising, litigation 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 fee of $50,000 for the calendar year 1995 and $5,000 per month
commencing January 1, 1996. During 1997, R & D received approximately $17,000 in
consulting fees from Core. As of December 31, 1997, Core owes $153,000 to R & D
in connection with said consulting agreement.
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
36
<PAGE>
April 1993, but has received no compensation to date. Mr. Miller may
receive a portion of the compensation in 1998.
Mr. Femrite and Mr. Miller have a beneficial ownership interest in
11,969 shares of the common stock of Core owned by R & D. Mr. Miller has a
beneficial ownership interest in 8,813 additional shares of the common stock of
Core as well as options to purchase 4,180 shares of the common stock of Core at
exercise prices ranging from $5.50 to $8.25 per share. Mr. Femrite has a
beneficial ownership interest in 7,363 additional shares of the common stock of
Core as well as options to purchase 3,697 shares of the common stock of Core at
$5.50 per share. The above beneficial stock ownership takes into account the 1
for 5.5 reverse stock split of Core's common stock in 1997.
In January 1996 the Internal Revenue Service ("IRS") served Mr.
Miller with a Notice of Federal Tax Lien with respect to approximately $400,000
in taxes and penalties purportedly owed by IDC. In connection therewith, the IRS
has collected approximately $23,000 from Mr. Miller and currently collects $500
per month from Mr. Miller. 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
taxes and penalties owed by IDC to the IRS. In connection with such indemnity,
Core reimbursed Mr. Miller in the approximate amount of $23,000 during 1997. Mr.
Miller anticipates that any additional funds collected by the IRS, in
conjunction with such levy, will be reimbursed by Core.
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 the Company, owned by Mr. Miller. The loan was renewed as
of October 31, 1997 on the condition that Mr. Miller makes a $5,000 principal
reduction by January 31, 1998 and pays all current interest through October 31,
1997. If payment is not made by the designated date, Mr. Miller has agreed to
assign to the Company all of his right, title and interest in and to any cash
distributions (net of applicable income tax liability) to which he is entitled
from R & D until all principal and interest, on the loan, has been paid in full.
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
37
<PAGE>
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 1/26/98 By /s/ Duane L. Femrite
------------------------------- ----------------------------------
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/ Gregory J. Edwards 1/14/98
- ---------------------------- -------
Gregory J. Edwards, Director Date
/s/ Duane L. Femrite 1/14/98
- ----------------------------------------------------- -------
Duane L. Femrite, President, Chief Executive Officer, Date
Chief Financial Officer and Director
/s/ William H. Harris 1/14/98
- -------------------------------- -------
William H. Harris, Jr., Director Date
/s/ Richard A. Krause 1/14/98
- ---------------------------------------------- -------
Richard A. Krause, Vice President and Director Date
/s/ Robert W. Miller 1/14/98
- -------------------------------------------------- -------
Robert W. Miller, Chairman of the Board, Corporate Date
Secretary, and Director
38
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
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. Incorporated by reference to the same numbered exhibit
to report on Form 10-K, filed February 12, 1990.
</TABLE>
39
<PAGE>
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. Incorporated 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.
10.20* Secured Promissory Note dated September 9, 1996, by and between
Athanor Group, Inc. and Robert W. Miller.
40
<PAGE>
<TABLE>
<C> <S>
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.
</TABLE>
* Previously Filed
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS OF ATHANOR GROUP, INC. FOR THE YEAR ENDED OCTOBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 138
<SECURITIES> 0
<RECEIVABLES> 2,695
<ALLOWANCES> 12
<INVENTORY> 3,471
<CURRENT-ASSETS> 6,640
<PP&E> 5,625
<DEPRECIATION> 3,785
<TOTAL-ASSETS> 8,619
<CURRENT-LIABILITIES> 4,373
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 2,957
<TOTAL-LIABILITY-AND-EQUITY> 8,619
<SALES> 24,879
<TOTAL-REVENUES> 24,879
<CGS> 21,189
<TOTAL-COSTS> 23,881
<OTHER-EXPENSES> 58
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 832
<INCOME-TAX> 349
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 483
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
