<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED July 31, 1998 Commission File Number 2-63481
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Athanor Group, Inc.
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(Exact name of registrant as specified in its chapter)
California 95-2026100
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(State or other jurisdiction (IRS Employer Identification No.)
incorporation of organization)
921 East California Avenue, Ontario, California 91761
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(Address of principal executive offices)
Registrant's telephone number, including area code (909) 467-1205
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Former name, former address and former fiscal year, if changed since last
report.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report: 1,462,854
shares as of July 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 1998 AND OCTOBER 31, 1997
(THOUSANDS)
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Current Assets:
Cash $ 254 $ 138
Trade Receivables, Less Allowance
for Doubtful Accounts of $13,000
and $12,000 2,493 2,799
Notes Receivable:
Net of Allowance of $534,062 102 40
Inventories:
Raw Materials 704 637
Work in Progress 655 597
Finished Goods 1,953 2,237
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3,312 3,471
Prepaid Expenses 41 18
Deferred Income Tax Asset 174 174
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Total Current Assets 6,376 6,640
Property, Plant and Equipment, at Cost 5,706 5,625
Less Accumulated Depreciation and
Amortization 4,117 3,785
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Net Property, Plant and Equipment 1,589 1,840
Other Assets 290 139
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$ 8,255 $ 8,619
========== =============
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 1998 AND OCTOBER 31, 1997
(THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Current Liabilities:
Notes Payable $ 1,027 $ 1,365
Current Portion of Long-Term Debt 583 595
Accounts Payable 1,571 1,718
Accrued Expenses 829 695
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Total Current Liabilities $ 4,010 $ 4,373
Long-Term Debt, Less Current Portion 794 1,194
Noncurrent Deferred Income Tax Liability 80 80
Stockholders' Equity:
Common Stock 15 15
Additional Paid-In Capital 1,447 1,447
Retained Earnings 1,909 1,510
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Total Stockholders' Equity 3,371 2,972
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$ 8,255 $ 8,619
========== =============
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net Sales $ 18,287 $ 18,575
Cost of Sales 15,356 15,588
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Gross Profit 2,931 2,987
Selling, General & Administrative 2,008 2,014
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Operating Profit 923 973
Other Income (Expense)
Interest Expense (241) (231)
Equity in (Loss) Recovery of Unconsolidated Investee 0 225
Miscellaneous - Net 15 19
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Earnings Before Income Taxes 697 986
Income Tax Expense 285 401
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NET EARNINGS $ 412 $ 585
========== =============
Earnings Per Common Shares:
Basic and Diluted $ 0.28 $ 0.40
========== =============
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net Sales $ 5,578 $ 7,075
Cost of Sales 4,673 5,832
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Gross Profit 905 1,243
Selling, General & Administrative 663 710
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Operating Profit 242 533
Other Income (Expense)
Interest Expense (77) (84)
Equity in (Loss) Recovery of Unconsolidated Investee 0 180
Miscellaneous - Net (1) 2
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Earnings Before Income Taxes 164 631
Income Tax Expense 66 255
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NET EARNINGS $ 98 $ 376
========== =============
Earnings Per Common Shares:
Basic and Diluted $ 0.07 $ 0.26
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NET EARNINGS $ 0.07 $ 0.26
========== =============
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED JULY 31, 1998
(THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
(25,000,000 Shares Additional
Authorized) Paid-In Retained
Shares Par Value Capital Earnings Total
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<S> <C> <C> <C> <C> <C>
Balance at
October 31, 1997 1,468 $ 15 $ 1,447 $ 1,510 $ 2,972
Retirement Common Stock (5) (13) (13)
Net Earnings for
Nine Months Ended
July 31, 1998 412 412
---------- ------------- ----------- ------------ --------
0 $ 15 $ 1,447 $ 1,909 $ 3,371
========== ============= =========== ============ ========
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities
Net Earnings $ 412 $ 585
Adjustments to Reconcile Net Earnings to Net Cash
Provided (Used) by Operating Activities:
Equity in Loss of Unconsolidated Investee 0 (225)
Provision for Deferred Income Taxes 0 89
Depreciation and Amortization 333 236
Amortization of Def. Gain on Sale & Leaseback 0 0
(Increase) Decrease in Operating Assets:
Accounts Receivable 190 (461)
Inventories 159 (590)
Prepaid Expenses (6) 8
Other (80) (63)
Increase (Decrease) in Operating Liabilities:
Accounts Payable (147) 418
Accrued Liabilities 134 34
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Net Cash Provided (Used) by Operating Activities 995 31
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Cash Flows from Investing Activities:
Purchase of Property and Equipment (81) (1,048)
Investment / Advances In Unconsolidated Investee (35) 225
Short Term Loan 0 0
Investment - Common Stock 0
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Net Cash Used in Investing Activities (116) (823)
------------ -----------
Cash Flows from Financing Activities:
Net Borrowings (Repayment) Under Line of Credit (338) 491
Repurchase of stock (13) (8)
Net Payments Long Term Debt (412) 391
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Net Cash Provided (Used) in Financing Activities (763) 874
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Net increase (Decrease) in Cash 116 82
Cash at Beginning of Year 138 115
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Cash at End of Period $ 254 $ 197
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 241 $ 231
========== ==========
Income Taxes Paid $ 114 $ 313
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
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Notes to Consolidated Financial Statements
(Unaudited)
July 31, 1998 and 1997
Note 1
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Basic and diluted earnings per common share are computed by using the weighted
average number of common shares outstanding during each period: 1,462,854 shares
in 1998 and 1,468,934 shares in 1997.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 128. "Earnings per Share." FAS 128
specifies the computation, presentation and disclosure requirements for earnings
per share (EPS) and became effective for both interim and annual periods ending
after December 15, 1997. All prior period EPS have been restated to conform
with the provisions of FAS 128. The adoption of FAS 128 did not have a material
impact on the Company'' earnings per share calculations.
Note 2
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In management's opinion, all adjustments necessary to a fair settlement of the
results of operations for the interim periods, have been reflected.
<PAGE>
Notes to Consolidated Financial Statements, Continued
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Note 3
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The consolidated financial statements include the accounts of Athanor Group,
Inc., and its subsidiary, Alger Manufacturing Co., Inc. Significant
intercompany accounts and transactions have been eliminated.
Note 4
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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 rated expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Changes in tax rates are recognized in income in the period that
includes the enactment date.
Note 5
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In 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 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SAFS
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.
The Company has not determined the impact of the above statements.
Note 6
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In prior years, the Company has accounted for its investment in Core Software
Technology (Core) on the equity method of accounting, which requires the Company
to record its shares of Core's earnings or losses. The investment in Core has
been reduced to zero due to Core's accumulated losses. During the first nine
months of fiscal 1997, the Company had recovered $225,000 ($180,000 in the third
quarter) of investment in Core which had previously been written off. During
the first nine months of fiscal 1998, the Company has invested $35,000 of
additional funds in Core. For years beginning in fiscal 1998, the Company is
carrying its investment in Core at cost, due to its percentage reduction in
ownership interest and its continuation as the senior secured lender. At July
1998
<PAGE>
Notes to Consolidated Financial Statements, Continued
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and 1997 the Company owned approximately 18.3% and 23.5% respectively of the
issued and outstanding common stock of Core.
Note 7
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In April 1995, the Company consummated a transaction, whereby it agreed to
acquire 100,000 shares of its common stock at $2 per share. The agreement
called for 20% down, or $40,000, at the closing and the balance of $160,000 to
be paid in equal annual installments of $40,000 beginning on April 1, 1996,
through April 1, 1999. Interest payments on the unpaid balance are to be paid
quarterly at 8%. As of July 31, 1998, the Company's unpaid balance is $40,000.
The unpaid balance is secured by an equal amount of the company's common stock
as defined in the agreement.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
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The Company's working capital has continued to show a slight improvement during
fiscal 1998. During 1997 the company had an aggressive capital expenditure and
facility expansion program. The combination of these two items consumed a
substantial amount of cash. The Company completed those programs during 1997
and currently has no plans for major outlays of cash during 1998, other than
planned equipment purchases. In addition, the current slowdown in sales for the
last six months of 1998 has left the Company tentative about the economic
climate and the near term impact. The Company has decided to proceed
cautiously, invest in new equipment diligently and wait for a clearer picture of
the economy.
The Company expended $81,000 on new equipment during the first six months of
1998. In addition, the Company has ordered $100,000 of the new equipment for
delivery in September 1998. The Company anticipates ordering additional
equipment during 1998 of $200,000 to $300,000, with some deliveries in early
fiscal 1999.
The Company's credit agreement provides for a total line of credit of
$4,250,000, of which $2,600,000 is for working capital, $900,000 long term
machinery and equipment loan, and $750,000 line for the acquisition of
additional equipment. At July 1998, the Company had approximately $1,558,000
available under the working capital line and $650,000 available under the
equipment line as compared to $1,250,000 and $650,000, respectively, at October
1997 and $769,000 and $300,000, respectively, at July 1997. The Company
believes the lines of credit are adequate to fund the working capital
requirements and anticipated equipment purchases in fiscal 1998. In August 1998
the Company completed an amendment to its credit agreement which extends the
agreement to August 1999.
RESULTS OF OPERATIONS
- ---------------------
Sales for the first nine months of fiscal 1998 have decreased less than 2% from
1997. However, sales for the three months ended July 1998 are 9% lower than the
second quarter of 1998 and show a 21% decrease over the same period in 1997.
While the first quarter sales for 1998 were higher than anticipated, the second
and third quarters have been more reflective of the current business climate and
<PAGE>
demand for the Company's services. The Company has seen a gradual slow-down in
its business the last six months, as customers have delayed shipment on existing
orders and the Company's backlog has slipped. The Company's total backlog of
$7,310,000 remains fairly strong, as compared to $8,075,000 at October 1997, but
has declined from $9,014,000 at the end of the first quarter of 1998. In
addition, the backlog reflects delayed shipments as sales for the third quarter
of 1998 have declined. In the normal course of business, some backlog orders
are inevitably cancelled or the time of delivery changes. 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. It is difficult
at this juncture to determine the state of the economy and the Company's market.
At the end of April 1998 we were wondering if the slowdown was a short-term blip
or was the economy finally slowing down? We are still looking for the answer
and proceeding cautiously until we see signs of a stronger economy.
The Company's operating profits for the nine months and three months ended April
1998 of $923,000 and $242,000 respectively, reflect decreases of 5% and 55% when
compared to 1997. While sales and profits for the nine months ended 1998 and
1997 are very similar, the decline in sales the last quarter is directly related
to the reduction in profits for the quarter ended July 1998. During the first
and second quarters of 1997, the Company absorbed non-capital costs associated
with the building-out of the new Arizona facility and also added substantial
overhead as needed to deal with the ever-increasing customer demands for quality
and delivery. During 1998 the Company has continually evaluated the overhead
additions of 1997 and is streamlining operations where appropriate, especially
in light of the current economic climate.
Forward-looking statements represent the Company's current analysis of trends
and information. Actual results could be affected by a variety of factors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) None
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATHANOR GROUP, INC.
Date September 10, 1998 By /s/ Duane L. Femrite
------------------------- ---------------------------------
Duane L. Femrite
President, Chief Executive Officer,
Chief Operating Officer,
Chief Financial Officer, and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 254
<SECURITIES> 0
<RECEIVABLES> 2,591
<ALLOWANCES> 13
<INVENTORY> 3,312
<CURRENT-ASSETS> 6,376
<PP&E> 5,706
<DEPRECIATION> 4,117
<TOTAL-ASSETS> 8,255
<CURRENT-LIABILITIES> 4,010
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 3,356
<TOTAL-LIABILITY-AND-EQUITY> 8,255
<SALES> 18,287
<TOTAL-REVENUES> 18,287
<CGS> 15,356
<TOTAL-COSTS> 17,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> 697
<INCOME-TAX> 285
<INCOME-CONTINUING> 412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
