<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 April 30, 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.
- -----------------------------------------------------------------------------
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 April 30, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ATHANOR GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
April 30, 1999 and October 31, 1998
(Thousands)
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash $ 365 $ 236
Trade Receivables, Less Allowance
for Doubtful Accounts of $15,000
and $12,000 2,617 2,369
Notes Receivable:
Net of Allowance of $534,062 48 0
Inventories:
Raw Materials 618 690
Work in Progress 524 438
Finished Goods 2,322 2,290
--------- ----------
3,464 3,418
Prepaid Expenses 88 67
Deferred Income Tax Asset 204 204
--------- ----------
Total Current Assets 6,786 6,294
Property, Plant and Equipment, at Cost 5,681 5,476
Less Accumulated Depreciation and
Amortization 4,105 3,932
--------- ----------
Net Property, Plant and Equipment 1,576 1,544
Other Assets 327 388
--------- ----------
$ 8,689 $ 8,226
========= ==========
</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)
April 30, 1999 and October 31, 1998
(Thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1999 1998
---- ----
<S> <C> <C>
Current Liabilities:
Notes Payable $ 1,476 $ 1,273
Current Portion of Long-Term Debt 468 546
Accounts Payable 2,107 1,477
Accrued Expenses 543 716
--------- ----------
Total Current Liabilities 4,594 4,012
Long-Term Debt, Less Current Portion 589 680
Noncurrent Deferred Income Tax Liability 130 130
Stockholders' Equity:
Common Stock 15 15
Additional Paid-In Capital 1,447 1,447
Retained Earnings 1,914 1,942
--------- ----------
Total Stockholders' Equity 3,376 3,404
--------- ----------
$ 8,689 $ 8,226
========= ==========
</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)
Six Months Ended April 30,
(Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 9,828 $ 12,709
Cost of Sales 8,565 10,683
--------- ----------
Gross Profit 1,263 2,026
Selling, General & Administrative 1,204 1,345
--------- ----------
Operating Profit 59 681
Other Income (Expense)
Interest Expense (120) (164)
Miscellaneous - Net 18 16
--------- ----------
Earnings (Loss) Before Income Taxes (43) 533
Income Tax Expense (Benefit) (15) 219
--------- ----------
NET EARNINGS (LOSS) $ (28) $ 314
========= ==========
Earnings (Loss) Per Common Shares:
Basic and Diluted $ (0.02) $ 0.21
========= ==========
</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 April 30,
(Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 5,405 $ 6,144
Cost of Sales 4,512 5,077
--------- ----------
Gross Profit 893 1,067
Selling, General & Administrative 626 701
--------- ----------
Operating Profit 267 366
Other Income (Expense)
Interest Expense (61) (71)
Miscellaneous - Net 0 1
--------- ----------
Earnings Before Income Taxes 206 296
Income Tax Expense 72 122
--------- ----------
NET EARNINGS $ 134 $ 174
========= ==========
Earnings Per Common Shares:
Basic and Diluted $ 0.09 $ 0.12
========= ==========
</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)
Six Months Ended April 30, 1999
(Thousands)
<TABLE>
<CAPTION>
Common Stock
(25,000,000 Shares Additional
Authorized) Paid-In Retained
Shares Par Value Capital Earnings Total
------ --------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
October 31, 1998 1,463 $ 15 $ 1,447 $ 1,942 $ 3,404
Net Earnings for
Six Months Ended
April 30, 1999 (28) (28)
------------- ------------ ------------- ------------ --------
1,463 $ 15 $ 1,447 $ 1,914 $ 3,376
============= ============ ============= ============ ========
</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)
Six Months Ended April 30,
(Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Earnings (Loss) $ (28) $ 314
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 200 223
(Increase) Decrease in Operating Assets:
Accounts Receivable (248) 14
Inventories (46) 118
Prepaid Expenses (20) 13
Other 12 (30)
Increase (Decrease) in Operating Liabilities:
Accounts Payable 630 20
Accrued Liabilities (173) 10
--------- ----------
Net Cash Provided by Operating Activities 327 682
--------- ----------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (233) (76)
Investment / Advances In Unconsolidated Investee 0 (35)
Short Term Loan 0 (50)
--------- ----------
Net Cash Used In Investing Activities (233) (161)
--------- ----------
Cash Flows from Financing Activities:
Net Borrowings (Repayment) Under Line of Credit 203 260
Repurchase of stock 0 (13)
Net Payments of Long Term Debt (168) (280)
--------- ----------
Net Cash Provided (Used) in Financing Activities 35 (33)
--------- ----------
Net increase in Cash 129 488
Cash at Beginning of Year 236 138
--------- ----------
Cash at End of Period $ 365 $ 626
========= ==========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 120 $ 164
========= ==========
Income Taxes Paid $ 23 $ 114
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements
SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
April 30, 1999 and 1998
Note 1
- ------
In management's opinion, all adjustments necessary to a fair settlement of the
results of operations for the interim periods, have been reflected.
Note 2
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The consolidated financial statements include the accounts of Athanor Group,
Inc., and its subsidiary, Alger Manufacturing Co., Inc. Significant inter-
company accounts and transactions have been eliminated.
Note 3
- ------
Basic and diluted earnings (loss) per common share are computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
each period. The weighted average number of shares outstanding during the six
months and three months ended April 30, 1999 and 1998 was 1,458,854 and
1,462,854, respectively.
As of April 30, 1999, there were 205,000 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 six and three months
periods ended April 30, 1999 as their effect was anti-dilutive for those
periods.
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
- ------
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. There is no difference between net income and comprehensive income for the
Company.
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
<PAGE>
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 screw machine 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 April 1999 and 1998 the Company owned approximately
16.2% and 18.3% respectively of the issued and outstanding common stock of Core.
Note 7
- ------
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.
As of April 30, 1999, the Company has made all required payments and has no
further obligations under this transaction.
Note 8
- ------
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 205,000 options to purchase common stock outstanding as of April 30,
1999, of which 34,000 were exercisable. No options were outstanding at April
30, 1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 at April 1999 of $2,192,000 has declined slightly
when compared to $2,282,000 at October 1998 and $2,405,000 at April 1998. The
reduction is primarily associated with a decline in sales for the first six
months combined with the lower operating profit. The company has been able to
offset the negative effects of a decline in sales and profits with more
favorable terms from some of its major suppliers. These extended payment terms
are for a short period of time and the Company will need to improve its payment
schedule during the balance of fiscal 1999.
The Company's credit agreement provides for a total line of credit of
$3,833,333, of which $2,600,000 is for working capital, $483,333 long term
machinery and equipment loan, and $750,000 line for the acquisition of
additional equipment. At April 1999, the Company had approximately $1,124,000
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 $975,000 and $750,000, respectively, at April 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's
credit agreement terminates in August 1999 unless extended in writing by the
lender. The Company has no reason to believe that the lender will not extend
the line of credit. However, there can be no assurance the Company will be able
to extend the agreement.
The Company expended $233,000 on new equipment during the first three 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. As the second
quarter of fiscal 1999 has shown an improvement in both sales and backlog, the
Company has planned for additional equipment purchases of approximately $250,000
for the balance of the year. The Company`s current equipment line of credit is
expected to be adequate to fund the planned equipment purchases.
RESULTS OF OPERATIONS
- ---------------------
Sales for the first six months and three months ended April 1999 have decreased
23% and 12% respectively 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
<PAGE>
backlog had slipped. The accelerated decline in sales for the first quarter of
1999 of 33% 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 April
1999, have shown a steady increase. The backlog has improved to $7,924,000 at
April 1999 compared to $6,986,000 at October 1998 and $8,636,000 at the end of
the first quarter of 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 six months and three months ended April
1999 of $59,000 and $267,000 respectively, as compared to $681,000 and $366,000
for 1998, are a direct reflection of the decline in sales during 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. This
evaluation is continuing, even as the climate for the Company's services have
improved.
During 1998 and early 1999 the Company 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 the Company's current customers, it is expected to enhance
the Company's appeal to potential new customers. The process started in early
fiscal 1998 and was completed in February 1999 when the company passed its
certifying audit. The Company received its ISO 9002 Certificate in March 1999.
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.
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
<PAGE>
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 April 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.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The annual meeting of registrant was held May 6, 1999.
(b) At the annual meeting, the following individuals were elected to
the Board of Directors:
Gregory J. Edwards
Duane L. Femrite
Edmund R. Knauf, Jr.
Richard A. Krause
Robert W. Miller
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 June 9, 1999 By /s/ Duane L. Femrite
------------ --------------------
Duane L. Femrite
President, Co-Chief Executive 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> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 2,632
<ALLOWANCES> 15
<INVENTORY> 3,464
<CURRENT-ASSETS> 6,786
<PP&E> 5,681
<DEPRECIATION> 4,105
<TOTAL-ASSETS> 8,689
<CURRENT-LIABILITIES> 4,594
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 3,361
<TOTAL-LIABILITY-AND-EQUITY> 8,689
<SALES> 9,828
<TOTAL-REVENUES> 9,828
<CGS> 8,565
<TOTAL-COSTS> 9,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120
<INCOME-PRETAX> (43)
<INCOME-TAX> (15)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
