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, 1999 Commission File Number 2-63481
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Athanor Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its chapter)
California 95-2026100
- ------------------------------- ---------------------------------
(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
------------------------------
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
----- -----
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:
1,458,854 shares as of July 31, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 1999 AND OCTOBER 31, 1998
(Thousands)
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
Current Assets:
<S> <C> <C>
Cash $ 100 $ 236
Trade Receivables, Less Allowance
for Doubtful Accounts of $20,000
and $12,000 2,917 2,369
Notes Receivable:
Net of Allowance of $534,062 at July 31, 1999 48 0
and October 31, 1998
Inventories:
Raw Materials 640 690
Work in Progress 716 438
Finished Goods 2,062 2,290
------ ------
3,418 3,418
Prepaid Expenses 108 67
Deferred Income Tax Asset 204 204
------ ------
Total Current Assets 6,795 6,294
Property, Plant and Equipment, at Cost 5,700 5,476
Less Accumulated Depreciation and
Amortization 4,204 3,932
------ ------
Net Property, Plant and Equipment 1,496 1,544
Other Assets 343 388
------ ------
$8,634 $8,226
====== ======
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-2-
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 1999 AND OCTOBER 31, 1998
(THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
---- ----
Current Liabilities:
<S> <C> <C>
Notes Payable $1,592 $1,273
Current Portion of Long-Term Debt 467 546
Accounts Payable 1,603 1,477
Accrued Expenses 725 716
------ ------
Total Current Liabilities 4,387 4,012
Long-Term Debt, Less Current Portion 488 680
Noncurrent Deferred Income Tax Liability 130 130
Stockholders' Equity:
Common Stock 15 15
Additional Paid-In Capital 1,447 1,447
Retained Earnings 2,167 1,942
------ ------
Total Stockholders' Equity 3,629 3,404
------ ------
$8,634 $8,226
====== ======
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-3-
<PAGE>
ATHANOR GROUP, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended July 31,
(Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 15,517 $ 18,287
Cost of Sales 13,085 15,356
-------- --------
Gross Profit 2,432 2,931
Selling, General & Administrative 1,884 2,008
-------- --------
Operating Profit 548 923
Other Income (Expense)
Interest Expense (184) (241)
Miscellaneous - Net 18 15
-------- --------
Earnings Before Income Taxes 382 697
Income Tax Expense 157 285
-------- --------
NET EARNINGS $ 225 $ 412
======== ========
Net Earnings Per Common Share:
Basic and Diluted $ 0.15 $ 0.28
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-4-
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 5,689 $ 5,578
Cost of Sales 4,520 4,673
------- -------
Gross Profit 1,169 905
Selling, General & Administrative 680 663
------- -------
Operating Profit 489 242
Other Income (Expense)
Interest Expense (64) (77)
Miscellaneous - Net 0 (1)
------- -------
Earnings Before Income Taxes 425 164
Income Tax Expense 172 66
------- -------
NET EARNINGS $ 253 $ 98
======= =======
Net Earnings Per Common Share:
Basic and Diluted $ 0.17 $ 0.07
======= =======
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-5-
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED JULY 31, 1999
(THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
(25,000,000 Shares Additional
Authorized) Paid-In Retained
Shares Par Value Capital Earnings Total
------ --------- ------- -------- -----
Balance at
<S> <C> <C> <C> <C> <C>
October 31, 1998 1,459 $ 15 $1,447 $1,942 $3,404
Net Earnings for
Nine Months Ended
July 31, 1999 225 225
------ ------ ------ ------ ------
1,459 $ 15 $1,447 $2,167 $3,629
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-6-
<PAGE>
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash Flows From Operating Activities
<S> <C> <C>
Net Earnings $ 225 $ 412
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 299 333
(Increase) Decrease in Operating Assets:
Accounts Receivable (548) 190
Inventories 0 159
Prepaid Expenses (41) (6)
Other (3) (80)
Increase (Decrease) in Operating Liabilities:
Accounts Payable 126 (147)
Accrued Liabilities 9 134
----- -----
Net Cash Provided by Operating Activities 67 995
----- -----
Cash Flows from Investing Activities:
Purchase of Property and Equipment (251) (81)
Investment / Advances In Unconsolidated Investee 0 (35)
----- -----
Net Cash Used in Investing Activities (251) (116)
----- -----
Cash Flows from Financing Activities:
Net Borrowings (Repayment) Under Line of Credit 319 (338)
Repurchase of stock 0 (13)
Net Payments of Long Term Debt (271) (412)
----- -----
Net Cash Provided (Used) in Financing Activities 48 (763)
----- -----
Net increase (decrease) in Cash (136) 116
Cash at Beginning of Year 236 138
----- -----
Cash at End of Period $ 100 $ 254
===== =====
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 184 $ 241
===== =====
Income Taxes Paid $ 23 $ 114
===== =====
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
-7-
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
July 31, 1999 and 1998
Note 1
- ------
In management's opinion, all adjustments necessary for a fair presentation of
the results of operations for the interim periods, have been reflected.
Note 2
- ------
The consolidated financial statements include the accounts of Athanor Group,
Inc. (Company), and its subsidiary, Alger Manufacturing Co., Inc. (Alger).
Significant inter-company accounts and transactions have been eliminated.
Note 3
- ------
Basic and diluted earnings per common share are computed by dividing net
earnings by the weighted average number of common shares outstanding during each
period. The weighted average number of shares outstanding during the nine months
and three months ended July 31, 1999 and 1998 was 1,458,854 and 1,462,854,
respectively.
As of July 31, 1999, there were 196,000 options to acquire shares of common
stock with a weighted average exercise price of $1.66 that could potentially
dilute basic earnings per share in the future, but which were not included in
the computation of diluted earnings per share for the nine and three months
periods ended July 31, 1999 as their effect would be anti-dilutive for those
periods.
Note 4
- ------
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
- ------
In 1997, the Financial Accounting Standards Board (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. There is no difference
between net earnings and comprehensive income for the Company.
-8-
<PAGE>
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 operates in one
segment of the precision-machined parts industry.
Note 6
- ------
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 $35,000 due to Core's accumulated losses. 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 1999 and 1998 the Company owned approximately 13.6% and
18.3% respectively of the issued and outstanding common stock of Core.
Note 7
- ------
In April 1997, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant stock options to officers,
directors and key employees. The Plan authorized grants of options to purchase
up to 220,340 shares of authorized but unissued common stock. In December 1998,
the Company granted 35,000 stock options for shares of Athanor. Stock options
were granted with an exercise price equal to the stock's fair market value at
the date of grant ($1.66 at December 11, 1998). All stock options vest and
become fully exercisable as shown below:
6 months after granting 20%
after one year 20%
after two years 30%
after three years 30%
===================
Thus, after three years of service, the options become fully vested. However,
options are exercisable six months after they are granted and remain exercisable
for eight years after the date of issuance.
There were 196,000 options to purchase common stock outstanding as of July 31,
1999, of which 75,000 were exercisable. There were 205,000 options to purchase
stock as of July 31, 1998, none of which were exercisable.
-9-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FORWARD-LOOKING STATEMENTS
- --------------------------
Except for historical facts, this Report contains forward-looking
statements concerning the Company's business outlook and plans, future cash
requirements and capital expenditure requirements made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These statements are based on certain assumptions and outcomes are subject to
risks and uncertainties. The forward-looking statements are, therefore, subject
to change at any time. Actual results could differ materially from expected
results expressed in any such forward-looking statements based on numerous
factors, including the level of customer demand, the cost and availability of
raw materials, changes in the competitive environment, the Company's ability to
achieve cost reductions and efficiencies, the Company's ability to attract and
retain skilled employees and other uncertainties detailed from time to time in
the Company's Securities and Exchange Commission Filings.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital, which had steadily declined during the first two
fiscal quarters of 1999, has improved during the third quarter. The increase is
primarily associated with the increase in sales and profits for the third
quarter of 1999. During the first six months of 1999 as the Company's working
capital was declining, the Company was able to offset the negative effects with
more favorable terms from some of its major suppliers. These extended terms were
granted for a limited time. During the third quarter of 1999 the Company was
able to bring the extended payment terms, with these suppliers, back to normal
payment terms.
In July 1999 the Company completed an amendment to its credit agreement, which
extended the agreement to August 2002 and increased the total line availability
to $4,233,333; $3,000,000 for working capital, a $483,333 long-term machinery
and equipment loan, and a $750,000 line for the acquisition of additional
equipment. At July 1999, the Company had approximately $1,408,000 available
under the working capital line and $550,000 available under the equipment line
as compared to $1,185,000 and $650,000, respectively, at October 1998 and
$1,558,000 and $650,000, respectively, at July 1998. The Company believes the
lines of credit will be adequate to fund the working capital requirements and
anticipated equipment purchases in fiscal 1999.
The Company expended $251,000 on new equipment during the first nine months of
1999. The Company financed the equipment through a $100,000 utilization of its
equipment line of credit, with the balance coming from cash flow. In addition,
the Company has ordered approximately $125,000 of additional equipment for
delivery in the fourth quarter of fiscal 1999. The Company`s current equipment
line of credit is expected to be adequate to fund the planned equipment
purchases.
-10-
<PAGE>
RESULTS OF OPERATIONS
Sales for the first nine months ended July 1999 decreased 15% as compared to
1998, while sales for the three months ended July 1999 increased 2% from 1998.
The Company had seen a gradual slow-down in its business the last six months of
fiscal 1998 as customers delayed shipment on existing orders and the Company's
backlog had slipped. The accelerated decline in sales for the first six months
of 1999 of 23% seemed to be a continuation of the slowdown the Company
experienced in the last half of 1998. There are some signs that the slowdown has
reached a bottom as the Company's sales and backlog, for the three months ended
July 1999, have shown a steady increase. The backlog has improved to $7,583,000
at July 1999 compared to $6,986,000 at October 1998 and $7,310,000 at July 1998.
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. However, the
increased sales and backlog are signs that the market for the Company's services
may be improving. The Company will be proceeding cautiously until we see signs
of a stronger economy.
The Company's operating profit for the nine months and three months ended July
1999 of $548,000 and $489,000 respectively, as compared to $923,000 and $242,000
for 1998, are a direct reflection of the decline in sales during the first six
months1999 and the subsequent improvement during the third quarter of fiscal
1999. During the last half of 1998 the Company had continually evaluated the
overhead additions of previous years in an attempt to streamline operations
where appropriate, especially in light of the current economic climate. The
improvement in profits for the third quarter of 1999 can partially be attributed
to this ongoing evaluation and the benefits it has created. This evaluation is
continuing, even as the climate for the Company's services have improved.
During 1998 and early 1999 Alger devoted substantial financial and manpower
resources toward the completion of an ISO 9002 Certification. ISO 9000 is an
international quality standard. While the ISO 9002 Certification is being
required by many of Alger's current customers, it is expected to enhance Alger's
appeal to potential new customers. The process started in early fiscal 1998 and
was completed in February 1999 when Alger's Ontario, California facility passed
its certifying audit. Alger received its ISO 9002 Certificate in March 1999. In
August 1999 Alger's Glendale, Arizona facility passed its certifying audit.
YEAR 2000 COMPUTER REQUIREMENTS
- -------------------------------
During fiscal 1997, the Company established an enterprise-wide program
to address its Year 2000 issues. The Year 2000 effort, which includes the
implementation of previously planned business critical systems and specific Year
2000 projects, is on track to be completed before the year 2000. All
applications that were previously not Year 2000 compliant have been replaced by
new systems. The costs of new systems have been recorded as an asset and
amortized. The portion of the costs associated with making the remaining
applications, not covered by new systems, Year 2000 compliant is not considered
to be material. Accordingly, the Company does not expect the Year 2000 effort to
have a material impact on its results of operations, liquidity or financial
condition. In addition, the Company has not deferred any other projects that
will have a material impact on its results of operations, liquidity or financial
condition.
INFORMATION TECHNOLOGY ("IT") SYSTEMS
-------------------------------------
In conjunction with the establishment of its enterprise-wide Year 2000
program, the Company began converting its computer information systems to a new
enterprise system, which is Year 2000 compliant. As of October 31, 1998, all
implementations are complete.
-11-
<PAGE>
NON-IT SYSTEMS
--------------
Non-IT Systems may contain date sensitive, embedded technology
requiring Year 2000 upgrades. Examples of this technology include security
equipment such as access and alarm systems, as well as facilities equipment such
as telephone and heating and air conditioning units.
As the Company is a product manufacturer, the "embedded chip" issue
relates to equipment used by the Company and hence, primarily to the Company's
manufacturing facilities. Facilities and equipment inventories and assessments
are in progress. However, the majority of the Company's machinery is manually
operated, and therefore is less affected by Year 2000 issues.
The Company is also addressing the readiness of its critical suppliers
and customers. All principal material and service suppliers and critical
customers have been contacted to determine their level of readiness. The Company
has a planned follow-up to determine their progress. In certain areas where the
Company relies on products supplied by manufacturers for systems provided to its
customers, the Company is seeking standard Year 2000 warranties that, to the
extent assignable, may be transferred to customers.
COSTS
-----
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's results of
operations, liquidity and financial condition. The estimated total cost of the
Year 2000 effort is approximately $36,000. The total amount expended through
July 1999 was approximately $28,000. The estimated future cost of completing the
Year 2000 effort is estimated to be approximately $8,000.
RISKS AND CONTINGENCY PLANNING
------------------------------
The Company has identified and assessed its areas of risk related to
the Year 2000 problem. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party suppliers, the
Company is unable to determine at this time whether the consequences of the Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
The Year 2000 effort is expected to significantly reduce the Company's
level of uncertainty about the Year 2000 problem and, in particular, about the
Year 2000 compliance and readiness of its critical suppliers and customers. The
Company believes that, with the implementation of its new computer systems and
upgrades and completion of the Year 2000 specific projects as scheduled, the
possibility of significant interruptions of normal operations should be reduced.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
-12-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Financial Data Schedule, July 31, 1999
(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 1, 1999 By /s/ Duane L. Femrite
------------------ ------------------------------
Duane L. Femrite
President, Co-Chief Executive Officer,
Chief Financial Officer, and Director
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE COMPANY'S CONSOLIDATED STATEMENTS OF EARNINGS AND
CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 2,937
<ALLOWANCES> 20
<INVENTORY> 3,418
<CURRENT-ASSETS> 6,795
<PP&E> 5,700
<DEPRECIATION> 4,204
<TOTAL-ASSETS> 8,634
<CURRENT-LIABILITIES> 4,387
<BONDS> 0
<COMMON> 15
0
0
<OTHER-SE> 3,614
<TOTAL-LIABILITY-AND-EQUITY> 8,634
<SALES> 15,517
<TOTAL-REVENUES> 15,517
<CGS> 13,085
<TOTAL-COSTS> 14,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184
<INCOME-PRETAX> 382
<INCOME-TAX> 157
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
