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, 1999, 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
- ------------------------------- ----------------------
(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) (Zip Code)
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 $21,869,346.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 1999 amounted to $2,308,318.
The registrant had 1,458,854 shares of common stock outstanding as of December
31, 1999.
(Effective January 31, 2000, registrant's board of directors and shareholders
approved a 1 for 800 reverse split of registrant's shares of common stock;
immediately thereafter, the board of directors and shareholders approved a 400
for 1 forward split of registrant's shares of common stock. The net effect of
the foregoing stock splits resulted in a 1 for 2 reverse stock split of
registrant's shares of common stock. Accordingly, as of January 31, 2000,
registrant will have approximately 709,200 shares of common stock outstanding.)
<PAGE>
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 CORPORATION
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 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 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
Certificate in March 1999. In August 1999, Alger's Glendale, Arizona facility
passed its certifying audit.
2
<PAGE>
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 has continued since the initial installation to expend substantial
resources and time in an effort to make sure the new system would meet all its
current and anticipated future requirements, including the goals and objectives
of the Company as set forth in its ISO 9002 Quality Manual. These goals and
objectives, which are continuously monitored, include profitability, inventory
levels, backlog, quality, delivery and work environment.
An additional benefit of the 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, 1999, the Company's total backlog amounted to approximately $8,434,000
(compared to $5,207,000 of unproduced backlog) of anticipated gross sales from
projects on which customers have authorized work to commence during the fiscal
year 1999. 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:
1998 - $3,607,000, 1997 - $4,957,000, 1996 -$6,184,000.
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 purchase these components
from the Company for competitive reasons. Should these companies decide in the
future to do this work themselves, the business of the Company could be
adversely affected.
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. In the last few years, as the market for machined
components has continued to change, the Company has added CNC Vertical Machining
Centers and Single Spindle CNC Lathes. While these machines do not account for a
major part of the Company's manufacturing capabilities, they are a foray into
the type of machine the Company feels will be needed to stay competitive and
keep pace with the increasing requirements from customers.
The Company feels that the combination of its engineering capabilities, its
experience and its well-maintained equipment, meet the requirements of today's
customers. 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.
3
<PAGE>
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 since 1987 when it purchased its first soap and water
parts cleaner. While the evolution of soap and water parts cleaning has been
slow in coming, the Company has continued its pursuit of improvements in getting
product cleaner with soap and water processes, including 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 fifty-nine (159) persons on October 31, 1999, of which twelve (13)
were general and administrative, three (3) were in marketing and sales, and one
hundred and forty-five (143) were production personnel.
The Company believes that it has good relations with its employees,
none of whom is covered by a collective bargaining agreement. The ability of the
Company to retain and attract skilled personnel, especially skilled machinists,
is of primary importance to the Company's operations. Qualified machinists are
generally in short supply in the industry, and, therefore, in great demand. The
Company has been able to attract and retain a staff of skilled machinists and
support staff by offering compensation packages comparable with larger
companies. In addition, the Company conducts formal training programs, whereby
selected unskilled personnel are given the opportunity to learn the machinist
trade. The Company also conducts other regular training programs for its skilled
and unskilled employees.
4
<PAGE>
ENVIRONMENTAL
During 1992, perchloroethylene contamination was found in the ground
soil below the Alger manufacturing facility. During 1998 the Company hired an
environmental engineer to start the process of further investigation of the
site. The company expended $20,000 during fiscal 1998 for the initial stages of
this investigation, leaving a provision of $245,622 as of October 1998. During
1999 additional testing was performed. The additional testing has shown that the
contamination is deeper and in higher concentrations than originally projected.
Due to the additional testing, an additional provision of $200,000 was
added in 1999. The total estimated provision has been increased to $465,622,
less $49,707 expended to date, leaving a balance of $415,915 as of October 31,
1999. The total cost estimate, provided by an independent engineering firm, for
designing and permitting of the remediation system, its installation, operation
and maintenance for two years, demobilization of equipment, and preparation of
closure report was estimated at $371,000 to $555,000 depending on additional
testing requirements from the local agencies, if any. It is estimated that the
costs associated with the remediation will be expended over a two-year period.
The cost estimate is based on the use of one vapor extraction system with two
wells to effectively remediate the entire plume in addition to all impacted
soils within an eighty-foot radius of each well and to two hundred feet below
grade surface. The appropriate local agencies were notified of the results of
the Environmental Site Investigation, which was conducted in September 1999. The
Company is currently awaiting 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.
Although the matter has not been fully investigated, the Company
believes that its insurance may cover a portion of the remediation cost;
however, the Company has not reflected any potential recovery in its accrual of
the estimated cost 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, 1999, 1998, and 1997was as follows:
<TABLE>
<CAPTION>
DOLLAR AMOUNT OF TOTAL SALES (000'S)
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
California $ 5,979 $ 6,328 $ 6,483
Other Western States 3,363 4,194 3,954
All Others 9,310 9,030 9,713
Scrap 3,217 4,084 4,729
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$21,869 $23,636 $24,879
======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL SALES
-------------------------
1999 1997 1996
---- ---- ----
<S> <C> <C> <C>
California 27% 26% 30%
Other Western States 15 16 19
All Others 43 39 31
Scrap 15 19 20
--- --- ---
100% 100% 100%
</TABLE>
Export sales have never been, nor are they anticipated to be, a
significant part of the Company's business. During the fiscal years ended
October 31, 1999, 1998, and 1997, 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 Arizona, 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. Alger has 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 1999
there was one customer, from multiple divisions, which accounted for
approximately 11.8% of the Company's consolidated sales. The Company does not
believe that the loss of this customer would have a material adverse effect on
its overall operations. The products associated with this customer require
substantial outside processing and the actual utilization on the Company's
facilities required for this customer is substantially less than 10%.
During 1999, 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 uses office space at the Ontario facility to house its corporate office.
6
<PAGE>
In management's opinion, all of the Company's interests in its leased
properties are adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
------------------
12/31/99 9/30/99 6/30/99 3/31/99
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Ask 3 1/4 3 15/32 3 11/16 2 1/8
Bid 2 7/8 2 1/32 1 7/8 1 1/2
12/31/98 9/30/98 6/30/98 3/31/98
-------- ------- ------- -------
Ask 3 19/32 3 1/4 2 7/8 2 3/8
Bid 1 21/32 1 21/32 1 13/16 1 3/4
12/31/97 9/30/97 6/30/97 3/31/97
-------- ------- ------- -------
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>
As of December 31, 1999, the approximate number of shareholders of
record of common shares was 171.
No dividends were declared during the fiscal year ended October 31,
1999, 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.
7
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
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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 following table summarizes the changes in working capital for the
fiscal years 1999, 1998, and 1997 (Thousands of Dollars).
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current Assets $ 6,822 $ 6,294 $ 6,600
Current Liabilities $ 4,718 $ 4,013 $ 4,373
Working Capital $ 2,104 $ 2,281 $ 2,227
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999, AS COMPARED TO THE
FISCAL YEAR ENDED OCTOBER 31, 1998
For the year ended October 1999, working capital decreased $177,000 or
approximately 8%. The Company's decline in sales and profits for the year is the
main reasons for such decrease. Major component changes were an increase in cash
of $380,000, increase in accounts receivable of $406,000 (18%), decrease in
inventory of $335,000 (10%), increase in accounts payable of $258,000 (18%) and
an increase in the accounts receivable/inventory line of credit of $325,000
(25%). While the majority of changes reflect the decrease in sales and profits
for fiscal 1999, the increase in accounts receivable is reflective of the
positive turnaround in the last six months of the year. This is especially the
case in the fourth quarter of 1999 as sales increased 19% as compared to 1998.
Fiscal 1999 started out with declining sales and generating losses. The
Company continued on its course from 1998 of not making any major equipment
purchases that were not absolutely necessary, until there was a clearer picture
of where the economy was headed. As such, the Company only purchased $298,000 of
equipment in 1999 and $93,000 in 1998 as compared to $1,214,000 in 1997. The
Company financed the purchases with cash from operations and the utilization of
$100,000 of its equipment line of credit. In addition, the Company has ordered
approximately $125,000 of equipment for delivery in the first quarter of 2000.
Since the last six months of fiscal 1999 showed a substantial improvement in
sales, the Company is in the process of re-evaluating the need for additional
equipment and major repairs in fiscal 2000.
8
<PAGE>
The Company reduced short and long-term debt by $375,000 with cash
provided from operations and utilization of the accounts receivable line of
credit. In July 1999, the Company completed an amendment to its credit
agreement, which extended the agreement to August 2001 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. The equipment line must be used in increments of a
minimum of $100,000 and shall not exceed 100% of the purchase price of
equipment. At October 1999, the Company had approximately $1,355,000 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. The
Company believes the lines of credit will be adequate to fund the working
capital requirements and anticipated equipment purchases in fiscal 2000.
During 1999, the Company used $100,000 of cash provided from operations
and its line of credit to make an additional investment of $100,000 in Fluid
Light Technologies, Inc. (FLT), bringing its total investment to $200,000. FLT
is in the business of developing, manufacturing and marketing systems to control
the motion or flow of light through neon glass tubes. FLT is a developmental
stage company and has no revenues or earnings. FLT anticipates shipping its
first product in January 2000. The Company has always considered other
investment opportunities as a way to increase shareholder value. While the
Company feels that this investment has tremendous potential, the Company has
made no commitments beyond the investment already made.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, AS COMPARED TO THE
FISCAL YEAR ENDED OCTOBER 31, 1997
The Company's working capital as of October 1998 remained fairly
constant as compared to 1997. Major component changes were a decrease in
accounts receivable of $314,543 (12%), a decrease in inventory of $52,562 (2%)
and a decrease in accounts payable of $241,125 (14%). The decrease in accounts
receivable, inventory and accounts payable, coincide with a decrease in sales
the last quarter of fiscal 1998.
While 1998 started out to be a very good year with sales and profit
increases, the business climate started to deteriorate in the second quarter and
continued during the last half of the year. With sales and backlog declining,
the Company decided not to make any new major equipment purchases that were not
absolutely necessary, until there was a clearer picture of where the economy was
headed. As such, the Company only purchased $93,000 of equipment in 1998 as
compared to $1,214,000 in 1997. In addition, the Company had approximately
$170,000 of additional equipment on order for delivery in late 1998 and early
1999.
During 1998 the Company was able to reduce its short term and long-term
debt by $655,046 with cash provided from operations. In August 1998 the Company
completed an amendment to its credit agreement extending the agreement to August
31, 1999. The amended credit agreement maintained the Company's working capital
line of $2,600,000. The amended agreement provided for a new term loan not to
exceed $483,333. In addition, the amended agreement continued a new equipment
line to $750,000 (with a balance available of $650,000) for the purchase of
9
<PAGE>
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, 1998, the Company had approximately $1,185,000 available under the
working capital line and $650,000 available under the new equipment line as
compared to $1,235,000 and $650,000 respectively in 1997.
The Company used $150,000 of cash provided from operations to make
investments in two companies, Fluid Light Technologies and California South
Pacific Investors. The total investment, as of October 31, 1998, in these
companies was $246,000.
During 1998 the Company made additional loans to Core Software
Technology (Core) in the amount of $35,000. The total outstanding loans were
$685,622. During 1997 Core repaid $225,116 of the loans and accrued interest.
The outstanding balance, except for the $35,000 advanced in 1998, had been fully
reserved in prior years pursuant to the equity method of accounting. (See
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.)
RESULTS OF OPERATIONS
- ---------------------
The following table summarizes the results of operations for the fiscal
years 1999, 1998, and 1997 (Thousands of Dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales $21,869 $23,636 $24,879
Cost of Sales $18,587 $19,855 $21,189
Operating Profit $ 644 $ 1,063 $ 998
Net Earnings $ 45 $ 455 $ 483
</TABLE>
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999, COMPARED TO THE
FISCAL YEAR ENDED OCTOBER 31, 1998
The decline in sales, which started in the middle of fiscal 1998,
continued for the first six months of fiscal 1999. The second half of 1999 was
just the opposite as sales continued to rebound. The net result for the fiscal
year 1999 was a decline in sales of 7.5% as compared to 1998 and an increase of
19% in the fourth quarter as compared to 1998. The Company's backlog followed
suit as it started the year at $6,986,000 and ended at $8,434,000 at October
1999. There was a leveling out of sales and backlog throughout much of the year,
with the Company not sure to what extent sales would continue to be affected by
the economic problems in other parts of the world. The fourth quarter of 1999
was a turning point as sales and backlog continued to increase along with the
demand from customers to quote new products.
The Company's operating profits for 1999 decreased to $644,000, a 39%
drop from 1998. The 7.5% decline in sales for fiscal 1999 was the main reason
for the decline in profits. As sales go, so go profits. The Company's operating
profit for the first six months of 1999 was $59,000 as compared to $681,000 for
1998; the last six months of 1999 the operating profit was $585,000 as compared
to $382,000 for 1998.
10
<PAGE>
During 1999 the Company initiated additional testing with regard to its
environmental contamination at the Ontario facility. The results required the
Company to accrue an additional reserve of $200,000, bringing the total reserve
to $465,622, less $49,707 expended to date, leaving a balance of $415,915 as of
October 31, 1999. The total cost estimate, provided by an independent
engineering firm, for designing and permitting of the remediation system, its
installation, operation and maintenance for two years, demobilization of
equipment, and preparation of closure report was estimated at $371,000 to
$555,000 depending on additional testing requirements from the local agencies,
if any. It is estimated that the costs associated with the remediation will be
expended over a two-year period. The appropriate local agencies were notified of
the results of the Environmental Site Investigation. The Company is currently
awaiting 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.
Interest expense decreased 10% in 1999 as compared to 1998. The
decrease was due to lower sales and a reduction in financing costs associated
with the accounts receivable/inventory line of credit.
The effective tax rate for 1999 increased to 77% from 42% in 1998. The
major component of the increase was 22.5% from prior year under estimates of
tax.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, COMPARED TO THE
FISCAL YEAR ENDED OCTOBER 31, 1997
Sales for 1998 declined 5% as compared to 1997. However, sales for 1998
were volatile, as the first quarter sales showed a 28% increase to a 21% decline
in sales the third quarter as compared to 1997. The Company's backlog seemed to
follow right along as it increased to $9,014,000 at the end of the first quarter
and ended at $6,986,000 as of October 1998 as compared to $8,075,000 at October
1997. The decline in sales and backlog was gradual and consistent during the
last half of fiscal 1998. There is no one factor other than a general slowdown
in business across the Company's customer base. The Company was expecting, but
not sure to what extent sales would be affected by the economic problems in Asia
and Europe as we are not always sure to what extent the component parts we
produce go into products for export.
The Company's operating profits increased 6.5% and the cost of sales
declined by 1% as compared to 1997. Considering the decline in sales during
fiscal 1998, the Company stressed cost cutting and deferral of optional repairs
and maintenance. In addition, some raw materials declined as the market across
the country became more competitive and an oversupply of material existed. The
effect of such a decline in the cost of raw materials is to increase the gross
profit percent and reduce cost of sales as a percent of sales. 1997 also
absorbed the non-capitalized costs of building out the new facility in Arizona,
which amounted to approximately $40,000.
Interest expense decreased 10% in 1998 as compared to 1997. This
decrease was due to lower sales and a reduction in financing costs associated
with the accounts receivable line of financing.
11
<PAGE>
EFFECTS OF INFLATION
- --------------------
Inflation for the fiscal years ended 1999, 1998 and 1997 were minimal
and had no effect on the Company's operations.
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. 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 has taken place in previous years. 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 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, has been completed. 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 was not material. Accordingly, the Year 2000 effort did not
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, 1999, 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 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
were completed in September 1999 and updated as needed. However, the majority of
the Company's machinery is manually operated, and therefore is less affected by
Year 2000 issues.
12
<PAGE>
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. All of the
Companies major suppliers have confirmed that they are Y2K compliant. 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 was not material to the Company's results of operations,
liquidity and financial condition. The total cost of the Year 2000 effort was
approximately $36,000, and has all been expended as of October 1999.
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 7. FINANCIAL STATEMENTS
TITLE PAGE
- --------------------------------------------------------------------------------
Independent Auditor's Report.................................................16
Consolidated Balance Sheets
at October 31, 1999 and 1998.................................................17
Consolidated Statements of Earnings
for each of the three years ended October 31, 1999, 1998 and 1997............19
Consolidated Statements of Stockholders' Equity
for each of the three years ended October 31, 1999, 1998 and 1997............20
Consolidated Statements of Cash Flows
for each of the three years ended October 31, 1999, 1998 and 1997............21
Notes to Consolidated Financial Statements ..................................23
13
<PAGE>
ITEM 7A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's $4,233,333 Loan and Security Agreement has interest
payable at a rate of one percent (1%) above the Prime Rate. Changes in interest
rates which dramatically increase the interest rate on the credit agreement
would make it more costly to borrow proceeds under that agreement and may impede
the Company's growth strategies if management determines that the costs
associated with borrowing funds are too high to implement these strategies.
The Company does not hold derivative investments and does not earn
foreign-source income. All of the Company's net sales are realized in dollars
and almost all of the revenues are from customers in the United States.
Therefore, the Company does not believe that it has any significant direct
foreign currency exchange risk.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
ATHANOR GROUP, INC.
AND SUBSIDIARY
Consolidated Financial Statements
October 31, 1999 and 1998
(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 subsidiary as of October 31, 1999 and 1998 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, 1999. 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 subsidiary as of October 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1999 in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
- --------------
Los Angeles, California
December 10, 1999
15
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
October 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ------
Current assets:
<S> <C> <C>
Cash $ 616,178 236,320
Accounts receivable, net of allowance for
doubtful accounts of $19,500 and $8,467
at October 31, 1999 and 1998 (notes 3
and 4) 2,774,982 2,368,775
Other receivables 7,100 29,344
Inventories (notes 3 and 4):
Raw materials 487,382 689,553
Work in process 404,211 438,308
Finished goods 2,191,204 2,290,331
---------- ----------
3,082,797 3,418,192
---------- ----------
Prepaid expenses 81,574 37,275
Deferred income tax assets (note 5) 259,137 204,319
---------- ----------
Total current assets 6,821,768 6,294,225
Property, plant and equipment, net (notes 2 and 6) 1,418,308 1,543,895
Other assets (including related party receivable
of $48,375 and $40,000) 489,100 387,732
---------- ----------
$8,729,176 8,225,852
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Balance Sheets (Continued)
October 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Note payable (note 3) $1,598,358 1,273,034
Current portion of long-term debt (note 4) 426,853 546,085
Accounts payable 1,734,730 1,476,713
Accrued liabilities:
Salaries, wages and other compensation 219,086 261,685
Income tax payable 149,379 47,065
Other 589,458 408,128
---------- ----------
Total current liabilities 4,717,864 4,012,710
---------- ----------
Long-term debt, less current portion (note 4) 423,919 679,512
Deferred income tax liability (note 5) 138,584 129,782
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 1,458,854 shares in 1999 and 1998 14,588 14,588
Additional paid-in capital 1,447,391 1,447,391
Retained earnings 1,986,830 1,941,869
---------- ----------
Total stockholders' equity 3,448,809 3,403,848
Commitments (notes 4 and 6)
---------- ----------
$8,729,176 8,225,852
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (note 8) $ 21,869,346 23,635,679 24,879,039
Cost of sales 18,586,560 19,855,347 21,189,044
------------ ------------ ------------
Gross profit 3,282,786 3,780,332 3,689,995
Selling, general and administrative expenses 2,638,939 2,717,631 2,692,247
------------ ------------ ------------
Earnings from operations 643,847 1,062,701 997,748
Other income (expense):
Interest expense (269,154) (299,484) (333,677)
Recoveries of advances to unconsolidated
investee -- -- 225,116
Environmental remediation (note 6) (200,000) -- --
Other, net 16,750 10,655 (57,616)
------------ ------------ ------------
Earnings before income taxes 191,443 773,872 831,571
Income taxes (note 5) 146,482 319,163 348,504
------------ ------------ ------------
Net earnings $ 44,961 454,709 483,067
============ ============ ============
Net income per common share (note 1):
Basic $ .03 .31 .33
============ ============ ============
Diluted $ .03 .31 .33
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
-----------------------
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996 1,471,354 $ 14,713 1,447,391 1,035,293 2,497,397
Repurchase and retirement of common stock
(note 7) (3,420) (34) -- (8,716) (8,750)
Net earnings -- -- -- 483,067 483,067
---------- ---------- ---------- ---------- ----------
Balance at October 31, 1997 1,467,934 14,679 1,447,391 1,509,644 2,971,714
Repurchase and retirement of common stock
(note 7) (9,080) (91) -- (22,484) (22,575)
Net earnings -- -- -- 454,709 454,709
---------- ---------- ---------- ---------- ----------
Balance at October 31, 1998 1,458,854 14,588 1,447,391 1,941,869 3,403,848
Net earnings -- -- -- 44,961 44,961
---------- ---------- ---------- ---------- ----------
Balance at October 31, 1999 1,458,854 $ 14,588 1,447,391 1,986,830 3,448,809
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 44,961 454,709 483,067
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Recoveries of advances to unconsolidated
investee -- -- (225,116)
Depreciation and amortization 400,246 389,724 360,272
Gain on disposal of fixed assets 8,000 -- 71,421
Provision for deferred income taxes (46,016) -- 101,705
(Increase) decrease in operating assets:
Accounts receivable (406,207) 314,543 (214,708)
Inventories 335,395 52,562 (296,023)
Prepaid expenses and other assets (145,669) (227,992) (32,060)
Income taxes receivable -- 18,364 (16,749)
Increase (decrease) in operating liabilities:
Accounts payable 258,017 (241,125) 274,179
Accrued liabilities 138,731 (25,618) (84,186)
Income taxes payable 102,314 63,814 (122,769)
--------- --------- ---------
Net cash provided by operating
activities 689,772 798,981 299,033
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment (297,573) (93,152) (470,607)
Proceeds from sales of property and equipment 14,916 -- 119,498
Collections on notes receivable 22,244 70,119 --
Issuance of note receivable -- -- (96,963)
Repayment of advances to unconsolidated
investee -- -- 225,116
--------- --------- ---------
Net cash used in investing
activities (260,413) (23,033) (222,956)
--------- --------- ---------
</TABLE>
20
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
Cash flows from financing activities:
<S> <C> <C> <C>
Net borrowings (repayments) under line of
credit $ 325,324 (92,463) 425,740
Repayments of long-term debt (374,825) (562,583) (470,550)
Repurchase of common stock -- (22,575) (8,750)
--------- --------- ---------
Net cash used in financing
activities (49,501) (677,621) (53,560)
--------- --------- ---------
Net increase in cash 379,858 98,327 22,517
Cash at beginning of year 236,320 137,993 115,476
--------- --------- ---------
Cash at end of year $ 616,178 236,320 137,993
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 269,154 299,484 333,677
Income taxes paid 90,723 224,296 386,317
========= ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
1997 - the Company purchased $743,601 of machinery and equipment under
capital lease obligations.
See accompanying notes to consolidated financial statements.
21
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(1) SUMMARY OF ACCOUNTING POLICIES
Athanor Group, Inc. (Athanor or the Company) is principally in the
business of manufacturing and marketing screw machine products
through its wholly owned subsidiary. All of the Company's business
consists of the production of component parts of proprietary
products for other companies. The Company has production and
distribution facilities in California and Arizona.
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying
consolidated financial statements follows:
(a) REVENUE RECOGNITION
The Company recognizes revenue upon shipment. Provisions for returns
are provided at time of sale.
(b) 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.
(c) INVENTORIES
Inventories, which are comprised primarily of raw materials, direct
labor and overhead, are stated at the lower of cost, based on the
first-in, first-out method, or market.
(d) 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 gains or losses are included
in other income.
Depreciation and amortization are provided for in amounts sufficient
to relate the cost of depreciable assets to operations over the
following estimated service lives using the straight-line method:
Machinery and equipment 5 to 7 years
Leasehold improvements 2 to 5 years
Leasehold improvements are amortized over the lesser of their useful
lives or lease term.
(e) 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 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.
(f) INVESTMENTS
The Company accounts for its investments in minority-owned companies
on the cost method. The carrying value of all such investments is
$381,000. The carrying value of the investment in Core Software
Technology (Core), an affiliated company, at October 31, 1999 is
$35,000, which is net of an allowance of $48,000 for uncollectable
amounts (see note 10).
22
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(g) EARNINGS PER SHARE
Basic earnings per share represents net earnings available to common
stockholders divided by the weighted average shares outstanding
excluding all common stock equivalents. Diluted earnings per share
reflects the dilutive effects of all common stock equivalents.
The components of basic and diluted earnings per share were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 44,961 454,709 483,067
========== ========== ==========
Weighted average outstanding shares of
common stock - basic 1,458,854 1,464,914 1,468,872
Dilutive effect of employee stock options
1,228 22,308 --
---------- ---------- ----------
Common stock and common stock
equivalents - diluted $1,460,082 1,487,222 1,468,872
========== ========== ==========
Earnings per share:
Basic $ .03 .31 .33
Diluted .03 .31 .33
========== ========== ==========
</TABLE>
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenues and expenses, 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.
(i) IMPAIRMENT OF LONG-LIVED ASSETS
AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future undiscounted 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.
23
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(j) STOCK OPTION PLANS
The Company applies the intrinsic value method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its
fixed plan stock options. As such, compensation expense would be
recorded on the date of the grant only if the current market price
of the underlying stock exceeded the exercise price. The Company has
elected to measure compensation cost prescribed by APB Opinion No.
25, and to make pro forma disclosures of net earnings and earnings
per share as if the fair value method prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, had been applied.
(k) SEGMENTS
The Company has received the disclosure requirements under Financial
Accounting Standard No. 131, dealing with segments and has
determined it operates in a single segment.
(2) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment $5,626,691 5,392,387
Leasehold improvements 84,042 84,042
---------- ----------
5,710,733 5,476,429
Less accumulated depreciation
and amortization 4,292,425 3,932,534
---------- ----------
$1,418,308 1,543,895
========== ==========
</TABLE>
(3) NOTE PAYABLE
The Company has a $4,233,333 credit agreement (the 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 the Company. The Agreement provides for a working
capital line of credit, a term loan and a new equipment line of
credit. Under the working capital line of credit, the Company may
borrow amounts up to $3,000,000 based on eligible accounts
receivable and inventories, as defined. Interest on drawings on the
line of credit is payable at the prime rate (8.25% at October 31,
1999) plus 1.0%. The line of credit expires in August 2001. At
October 31, 1999, $1,598,358 was outstanding and approximately
$1,355,000 was available. The Agreement also provides for a term
loan not to exceed $483,333, of which $249,998 was outstanding at
October 31, 1999.
The $750,000 new equipment line of credit expires April 30, 2001.
Under this line of credit, the Company has borrowed $200,000, of
which $125,264 was outstanding at October 31, 1999. Borrowings on
both the term loan and new equipment line of credit are included in
long-term debt in the accompanying balance sheet (see note 4). AGI
has guaranteed borrowings outstanding under this credit agreement.
As of October 31, 1999, available borrowings under this agreement
aggregated $550,000.
24
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(4) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes payable to a lending institution at the prime rate plus 1.0%,
payable in monthly installments of $18,745, plus interest, due April
2001, collateralized by substantially all assets of Alger (see
note 3) $ 375,262 486,653
Notes payable to others at rates ranging from 10.0% to 12.9%, payable in
monthly installments of $1,133, including interest, repaid in
May 1999, collateralized by equipment and automobiles -- 6,867
Note payable to an individual bearing interest at 8.5%, payable in yearly
installments of $40,000, with interest payable quarterly,
repaid in April 1999 $ -- 40,000
Capital lease obligations (see note 6) 475,510 692,077
---------- ----------
850,772 1,225,597
Less current portion 426,853 546,085
---------- ----------
$ 423,919 679,512
========== ==========
</TABLE>
A schedule of aggregate, annual principal payments on long-term debt
as of October 31, 1999 is as follows:
2000 $ 426,853
2001 326,388
2002 97,531
---------
$ 850,772
=========
25
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(5) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------- ---------- ---------
1999:
<S> <C> <C> <C>
Current $ 112,497 36,883 149,380
Deferred (37,617) (8,399) (46,016)
Adjustment for understatement of prior taxes
43,118 -- 43,118
--------- ----------- --------
$ 117,998 28,484 146,482
========= =========== ========
1998:
Current $ 235,079 65,721 300,800
Deferred 12,967 5,396 18,363
--------- ----------- --------
$ 248,046 71,117 319,163
========= =========== ========
1997:
Current $ 199,271 47,528 246,799
Deferred 85,370 16,335 101,705
--------- ----------- --------
$ 284,641 63,863 348,504
========= =========== ========
</TABLE>
The difference between the federal income tax rate and the effective
income tax rate on net earnings is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ----------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Statutory U.S. federal
tax rate 34.0% $ 65,091 34.0% $263,116 34.0% $282,734
State income taxes,
net of federal
benefit 6.1 11,678 6.1 47,206 6.1 50,726
Benefit due to state
tax credits -- -- (.4) (3,000) (1.2) (10,000)
Change in valuation
allowance -- -- (3.2) (24,681) -- --
Current year impact of
prior year
estimates 22.5 43,118 -- -- -- --
Other 13.9 26,595 4.7 36,522 3.0 25,044
---- ------ ---- -------- ---- --------
76.5% $146,482 41.2% $319,163 41.9% $348,504
==== ======== ==== ======== ==== ========
</TABLE>
26
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liability at October 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
Deferred tax assets:
<S> <C> <C>
Bad debt reserves $ 7,834 3,400
Equity in loss of unconsolidated investee 164,005 164,004
Contamination reserve 166,948 98,448
Other 40,350 58,467
--------- --------
Total gross deferred tax assets 379,137 324,319
Valuation allowance 120,000 120,000
--------- --------
Net deferred tax assets $ 259,137 204,319
========= ========
Deferred tax liabilities - accelerated depreciation on
fixed assets $ 138,584 129,782
========= ========
</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 has established a
valuation allowance. 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.
(6) 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, 1999 and 1998 is as follows:
1999 1998
---------- ----------
Asset $1,116,635 1,117,000
Less accumulated depreciation 435,676 262,000
---------- ----------
$ 680,959 855,000
========== ==========
The Company leases three premises which are accounted for as
operating leases. Real estate taxes, insurance and other taxes are
the obligations of the Company.
The following is a schedule of future minimum rental commitments
under capital leases and noncancelable operating leases as of
October 31, 1999:
27
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
--------- --------- ---------
Year ending October 31:
<S> <C> <C> <C> <C>
2000 $238,430 315,200 553,630
2001 194,437 325,620 518,057
2002 100,225 220,472 320,697
2003 -- 6,010 6,010
-------- -------- ---------
Minimum lease payments 533,092 $865,302 1,392,384
======== =========
Less amount representing interest and
taxes 57,582
--------
Present value of future capital
lease payments $475,510
========
</TABLE>
Rental expense for operating leases was approximately $270,000 in
1999, $294,000 in 1998 and $297,000 in 1997.
As of October 31, 1999 and 1998, the Company has accrued $416,000
and $245,000, respectively, relating to the estimated cost to
remediate perchloroethylene contamination in the subsurface soil
below Alger.
The aggregate undiscounted amount has been accrued since it
represents management's best estimate of the cost, but the payments
are not considered to be fixed and reliably determinable. The
estimate of costs and their timing of payment could change as a
result of (1) changes to the remediation plan required by the State
Environmental Agency, (2) changes in technology available to treat
the site, (3) unforeseen circumstances existing at the site and (4)
differences between actual inflation rates and rates assumed in
preparing the estimate. It is not possible to estimate the amount;
losses may exceed amounts accrued at this time as a result of these
factors.
(7) STOCKHOLDERS' EQUITY
During 1998 and 1997, the Company repurchased and retired 9,080 and
3,420 shares of common stock for approximately $2.50 and $3.00 per
share, respectively.
(8) MAJOR CUSTOMER
For the years ended October 31, 1999 and 1998, the Company had one
customer which accounted for more than ten percent (10%) of net
sales. Receivables from this customer as of October 31, 1999 and
1998 amounted to $293,162 and $177,744, respectively. For the year
ended October 31, 1997, the Company had no customers who accounted
for more than 10% of net sales.
(9) EMPLOYEE BENEFIT PLANS
The Company and its subsidiary 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
28
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
may also make discretionary contributions to the plan that are
allocated to each employee based upon their pro rata compensation to
all compensation. The Company's contributions under the plan
amounted to approximately $112,000, $97,000 and $80,000 for the
years ended October 1999, 1998 and 1997, respectively.
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 May and December of 1998,
the Company granted 170,000 and 35,000 stock options, respectively,
for shares of Athanor. Stock options were granted with an exercise
price equal to the stock's fair market value at the dates of grant
($1.66 at May 8, 1998 and 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 and 170,000 options to purchase common stock
outstanding as of October 31, 1999 and 1998, respectively. At
October 31, 1999, 82,000 options were exercisable.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans. Had compensation
cost for the Company's two stock-based compensation plans been
determined consistent with SFAS Statement No. 123, the Company's net
earnings and earnings per share for fiscal 1999 would have been
reduced to the pro forma amounts indicated below:
Pro forma net earnings $ 2,535
Pro forma earnings per share:
Basic .00
Diluted .00
=========
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in fiscal
1998: expected volatility of 102%; risk-free interest rate of 5.6%;
assumed dividend yield of 0; and expected life of seven years.
Assumptions used for grants in fiscal year 1999 are as follows:
expected volatility of 64%; risk-free interest rate of 4.57%;
assumed dividend yield of 0; and expected life of seven years.
29
<PAGE>
ATHANOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
(10) RELATED PARTY TRANSACTIONS
The Company currently has stock holdings in Core Software
Technology, a California corporation (Core), owning 462,567 shares
of the issued and outstanding common stock of Core, which represents
approximately thirteen percent (13.2%) of the total issued and
outstanding shares of Core's capital stock at October 31, 1999.
The Company has provided a portion of the working capital
requirements of Core during previous years in the form of a series
of loans to Core. As of October 31, 1999, the total amount
outstanding from Core is $83,000. Interest accrues on this loan at a
rate of 8% and the loan is payable on demand. The Company has
elected to reserve $48,000 of this balance due to Core's accumulated
losses.
Mr. Miller served as Secretary and a Director of Core from September
1991 to April 1998 and a Director from May 1999 to the present. Mr.
Miller has a beneficial ownership interest in 8,813 additional
shares of the common stock of Core, as well as options and warrants
to purchase 54,310 shares of the common stock of exercise prices
ranging from $3.00 to $8.25 a share. Mr. Femrite has a beneficial
ownership interest in 33,347 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.
Mr. Miller entered into a consulting agreement with Core and
assigned the consulting fees to R&D Financial (R&D), a California
general partnership of which Messrs. Miller and Femrite are the
general partners. The consulting agreement began on January 1, 1995
and ended July 31, 1998, 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. As
of October 31, 1999, Core owes $140,745 to R&D in connection with
said consulting agreement. No fees were paid by Core to R&D during
1999.
The Company has made investments to date totaling $146,000 as a
Limited Partner in California South Pacific Investors (CSPI). Duane
Femrite is a General Partner in CSPI.
During 1998, the Company made a $100,000 investment in Fluid Light
Technologies, Inc. (FLT). In 1999, the Company made an additional
investment of $100,000. FLT is a development stage company and has
no revenues or earnings. The Company owns 512,597 shares of
Preferred Stock representing an ownership interest of 5.8%. Mr.
Miller is a Director of FLT.
30
<PAGE>
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
Image Data Corporation (IDC), the predecessor company to Core. In
connection therewith, the IRS has collected approximately $36,000
from Mr. Miller and currently collects $500 per month. 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 and $12,000 in 1999. Mr. Miller anticipates that
any additional funds collected by the IRS, in conjunction with such
levy, may ultimately be reimbursed by Core.
The Company has made loans to Mr. Miller, in previous years, in the
principal amount of $40,000. During 1998, the Company decided to
renew the original note plus accrued interest and made additional
advances of $8,375. The total outstanding loan to Mr. Miller in the
amount of $62,512 is due January 28, 2000. The Company received an
additional 10,000 shares of the Company's common stock, for a total
of 35,000 shares as collateral.
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, 1999.
DIRECTOR/OFFICER INFORMATION
Principal Director
Name Occupation Age Since
- --------------------------------------------------------------------------------
Gregory J. Edwards Director 55 1990
Duane L. Femrite President, Co-Chief Executive 54 1985
Officer, Chief Financial Officer
of the Company
Edmund R. Knauf, Jr. Director 57 1997
Richard A. Krause Vice President of the Company, 64 1992
President, Alger Manufacturing
Company, Inc.
Robert W. Miller Chairman of the Board, Co-Chief 57 1976
Executive Officer, Secretary of
The Company
<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.
31
<PAGE>
GREGORY J. EDWARDS Chairman and Chief Executive Officer of CASS Holdings,
L.L.C. ("CASS") since January 1993. CASS owns several
manufacturing and service companies: CASS Polymers, Inc. (a
subsidiary of CASS) owns Ad-Tech Plastic Systems Corp., a
producer of polymer systems for the aerospace, automotive,
construction and marine industries and owns Milamar
Coatings, L.L.C., a producer of epoxy coating products used
in the industrial and commercial seamless floor coating
business; CASS Services, L.L.C., a government contractor
involved with surface preparation and re-coating for U.S.
Naval ships and portable landing mats; 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, Co-Chief Executive Officer of the Company since
May 1999, Chief Executive Officer from April 1995 to May
1999, and Chief Financial Officer since December 1982.
Director of the Company since December 1985. Mr. Femrite is
a Certified Public Accountant.
EDMUND R. KNAUF, JR. Currently self-employed as a consultant and
investor. From 1972 to August 1997 worked in various
positions for Ametek Inc, a global manufacturer of
electrical and electronic products engineered for niche
markets, including Vice President of Business Development
for the Filtration Group from April 1996 to August 1997 and
as Corporate Vice President and General Manager of several
Ametek Divisions from 1990 to 1996.
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, Co-Chief Executive
Officer from May 1999 to present, Corporate Secretary since
April 1995. Director of Core Software Technology from
September 1991 to April 1998 and September 1999 to present.
32
<PAGE>
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 three most highly compensated
executive officers, each of whose annual salary and bonus was in excess of
$100,000 and the Company's Chief Executive Officer regardless of compensation
level, for services to the Company during the three fiscal years ended October
31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION
COMPENSATION AWARDS
NAME AND PRINCIPAL SECURITIES ALL
POSITION YEAR SALARY BONUS UNDERLYING OPTIONS OTHER(1)
- -------------------------------------------------------------------------------------------
$ $ # $
<S> <C> <C> <C> <C> <C>
Duane L. Femrite 1999 157,243 15,000 7,500 4,000
President, Co-Chief 1998 149,615 25,000 30,000 4,000
Executive Officer and 1997 144,192 25,000 -- 2,949
Chief Financial Officer
Richard A. Krause 1999 169,243 24,244 20,000 4,000
Vice President and 1998 161,615 44,985 30,000 3,329
President of Alger 1997 156,423 35,063 -- 3,750
Manufacturing Co., Inc.
Robert W. Miller 1999 157,578 15,000 7,500 1,600
Chairman of the Board 1998 150,066 25,000 30,000 1,600
Co-Chief Executive Officer 1997 144,270 25,000 -- 1,500
Corporate Secretary
<FN>
(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.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
- ---------------------
Effective January 1, 1991, the Company entered into written employment
agreements with Robert W. Miller, as Chairman of the Board and Chief Executive
Officer, and Duane L. Femrite, as President, Chief Operating Officer, Chief
Financial Officer, and Secretary of the Company. Effective January 1, 1993,
Alger entered into a written agreement with Richard A. Krause as President and
Chief Operating Officer. Each of the employment agreements 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, 2000, for an additional year.
33
<PAGE>
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 an annual honorarium of $5,000 per
year and $600 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 $100 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
1999.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "1997 Plan"), was set up to
attract, reward and retain the best available officers, directors, employees and
consultants for the Company and to promote the 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, options under the 1997 Plan have been
granted as set forth in the chart below. No person may receive options under the
1997 Plan for more than 30,000 shares in any one fiscal year.
34
<PAGE>
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 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.
35
<PAGE>
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
(A) (B) (C) (D) (E)
NAME NUMBER OF % OF EXERCISE EX-DATE
SECURITIES TOTAL OR **/
UNDERLYING OPTIONS/SARS BASE
OPTIONS/SARS GRANTED PRICE
GRANTED TO EMPLOYEES */
IN FY98
- ---------------- ------------ ------------- ----------- -----------------
<S> <C> <C> <C> <C>
Duane Femrite 7,500 21% $1.66 December 10, 2006
Richard Krause 20,000 58% $1.66 December 10, 2006
Robert Miller 7,500 21% $1.66 December 10, 2006
<FN>
*/ Equals the closing market price for the underlying security on the date of
the grant of options.
**/ The date of grant for each of the foregoing options was December 10, 1998.
No option could be exercised, in whole or in part, during the first six (6)
months from the date of grant. Thereafter, 20% of each of the options was
exercisable on June 10, 1999; 20% was exercisable on December 10, 1999; 30% is
exercisable on December 10, 2000; and 30% is exercisable on December 10, 2001.
</FN>
</TABLE>
None of the foregoing option grants was exercised during the fiscal
year ended October 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and
value of exercised and unexercised options held by the following executive
officers on October 31, 1999. None of these executive officers exercised options
to purchase common stock during fiscal year 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT AT FISCAL YEAR END
ACQUIRED ON VALUE FISCAL YEAR END(#) ($)(1)
--------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISED EXERCISABLE UNEXERCISED
---- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Duane L. Femrite 0 $0 13,500 24,000 4,995 8,880
Richard A. Krause 0 $0 16,000 34,000 5,920 12,580
Robert W. Miller 0 $0 13,500 24,000 4,995 8,880
<FN>
(1) These amounts represent the difference between the exercise price of the
in-the-money options and the market price of registrant's common stock on
October 31, 1999. The closing bid price of registrant's common stock on
that day on the OTC Bulletin Board was $2.03. Options are in-the-money if
the market value of the shares covered by the option is greater than the
option exercise price.
36
<PAGE>
(2) Future exercisability is subject to a number of factors.
See Stock Option Plan.
</FN>
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1999, 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 (3) 22,000 1.5%
Stock 2208 Faircloud Lane
Edmond, Oklahoma 73034
Common Duane L. Femrite (3) 204,544 13.9%
Stock 921 East California Avenue
Ontario, California 91761
Common Edmund R. Knauf, Jr. (3) 83,680 5.7%
Stock 1516 North 2nd Street
Sheboygan, Wisconsin 53081
Common Richard A. Krause (2) (3) 276,983 18.7%
Stock 921 East California Avenue
Ontario, California 91761
Common Robert W. Miller (1) (3) 179,752 12.2%
Stock 921 East California Avenue
Ontario, California 91761
Common All Officers and Directors 766,959 50.5%
Stock as a Group (5 persons) (3)
</TABLE>
- -------------------------------------
(Footnotes on next page)
All shares are owned either directly or beneficially by the owner named
in the table except as otherwise indicted in a footnote below.
37
<PAGE>
Percentages of class are based on the number of shares of Common Stock
outstanding on December 31, 1999. There were 1,458,854 shares of Common Stock
outstanding on December 31, 1999.
None of the officers or directors of the Company, except as noted in
Item 10 above, has options to acquire any shares of Common Stock of the Company.
Messrs. Femrite, Knauf, 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 256,983 shares of Common Stock owned by The Krause Family
Irrevocable Trust.
(3) Includes shares of common stock that can be acquired by exercise of vested
and exercisable stock options within 60 days of December 31, 1999, as
follows: Gregory J. Edwards - 6,000 shares, Duane L. Femrite - 15,000
shares, Edmund R. Knauf, Jr. - 4,000 shares, Richard A. Krause - 20,000
shares, Robert W. Miller - 15,000 shares; all Officers and Directors as a
group - 60,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a shareholder of Core Software Technology, a California
corporation ("Core"), owning 462,567 shares of the issued and outstanding common
stock of Core, representing approximately 13.2% 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). The Company also has 297,827 options and warrants at $3 per share to
purchase additional shares of common stock of Core, representing approximately
3.2% of the outstanding options and warrants.
Core is the developer and marketer of an on-line geospatial (image,
cartographic, & demographic) information indexing and distribution system and
service, known as ImageNet. Core develops and distributes proprietary
client-server and application software but primarily uses its software products
as a delivery vehicle for ImageNet services. Through the global implementation
of ImageNet, Core seeks to control the channel for distribution of geospatial
information products worldwide. As a single source access vehicle for such
information, the value and utility of ImageNet is a function of content.
Core is attempting to build a worldwide, on-line database and
distribution infrastructure consisting of commercial and public data providers,
existing international distributors, satellite ground receiving stations, and
value added companies. ImageNet addresses the information access requirements of
an international public policy movement to maximize the benefits of existing
scientific and geographic information and analysis tools.
38
<PAGE>
The Company has made outstanding loans in the principal amount of
$685,622 to Core through October 31, 1999. All but $35,000 of the outstanding
balance has been reserved. During November and December 1999 Core repaid
$163,288 of the outstanding loans.
Mr. Miller entered into a consulting agreement with Core and assigned
the consulting fees to R&D Financial (R&D), a California general partnership of
which Messrs. Miller and Femrite are the general partners. The consulting
agreement began on January 1, 1995 and ended July 31, 1998, 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. As of October 31, 1999,
Core owes $140,745 to R&D in connection with said consulting agreement. No fees
were paid by Core to R&D during 1999.
Mr. Miller served as Secretary and Director of Core from September 1991
to April 1998 and Director from May 1999 to present. Mr. Miller has assigned the
right to receive any fees as a Director of Core to R &D. During 1999 R&D
received no Director fees from Core. Mr. Miller has a beneficial ownership
interest in 8,813 shares of the common stock of Core as well as options and
warrants to purchase 54,310 shares of the common stock of Core at exercise
prices ranging from $3 to $8.25 per share. Mr. Femrite has a beneficial
ownership interest in 33,347 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 stock that
was previously owned by R&D.
During 1999, the Company invested an additional $100,000 in Fluid Light
Technologies, Inc. (FLT), bringing its total investment to $200,000. FLT is in
the business of developing, manufacturing and marketing systems to control the
motion or flow of light through neon glass tubes. FLT is a developmental stage
company and has no revenues or earnings. The Company owns 512,597 shares of
Preferred Stock representing an ownership interest of approximately 5.8% after
the closing of FLT's Private Placement in October 1999. Mr. Miller is a director
of FLT.
Prior to 1999 the Company made investments totaling $146,000, as a
limited partner, in California South Pacific Investors (CSPI) a California
Limited Partnership. CSPI, through its wholly owned companies, has developed and
patented biochemical product-identifying barcodes for detecting harmful
bacterial pathogens in meats, poultry and dairy products. Mr. Femrite is one of
five General Partners in CSPI. Messrs. Femrite, Knauf, Krause and Miller are
Limited Partners in CSPI.
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 Image Data Corp.(IDC), the predecessor
company to Core. In connection therewith, the IRS has collected approximately
$36,000 from Mr. Miller and currently collects $500 per month. In connection
with Core's 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
amounts of $23,000 during 1997 and $12,000 in 1999. Mr. Miller anticipates that
any additional funds collected by the IRS, in conjunction with such levy, may
ultimately be reimbursed by Core.
39
<PAGE>
The company has made loans to Mr. Miller beginning in 1995. The current loan
outstanding, including principal and interest, as of October 31, 1999, is
$62,512.27. That note is due on January 28, 2000. The Board anticipates
extending this loan pursuant to terms and conditions that have not yet been
agreed to between Mr. Miller and the Company. The loan bears interest at the
rate of 10% per annum and is secured by 35,000 shares of common stock of the
registrant owned by Mr. Miller.
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
40
<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 JANUARY 28, 2000 By /S/ DUANE L. FEMRITE
---------------- ------------------------
Duane L. Femrite, President,
Co-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 1/28/00
- ---------------------- -------
Gregory J. Edwards, Director Date
/S/ DUANE L. FEMRITE 1/28/00
- ---------------------- -------
Duane L. Femrite, President, Co-Chief Executive Date
Officer, Chief Financial Officer and Director
/S/EDMUND R. KNAUF, JR. 1/28/00
- ----------------------- -------
Edmund R. Knauf, Jr., Director Date
/S/ RICHARD A. KRAUSE 1/28/00
- --------------------- -------
Richard A. Krause, Vice President and Director Date
/S/ ROBERT W. MILLER 1/28/00
- -------------------- -------
Robert W. Miller, Chairman of the Board, Date
Co-Chief Executive Officer, Corporate
Secretary, and Director
41
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- ----------------------
3.1 Restated articles of Incorporation of the Company dated April 2,
1979, and all amendments thereto filed prior to August 25, 1989.
Incorporated by reference to the same numbered exhibit to report on
Form 10-K, filed on February 12, 1990.
3.2 Certificate of Amendment of Articles of Incorporation of the Company
filed August 25, 1989. Incorporated by reference to the same
numbered exhibit to report on Form 10-K, filed on February 12, 1990.
3.3 Certificate of Amendment of Articles of Incorporation of the Company
filed August 25, 1989. Incorporated by reference to the same
numbered exhibit to report on Form 10-K, filed on February 12, 1990.
3.4 Bylaws of the Company. Incorporated by reference to Registration
Statement No. 2-63481, Exhibit 3(b). Amendment thereto, dated as of
September 11, 1987, filed January 28, 1988.
4.0 Certificate of Determination of Preferences of Preferred Stock.
Incorporated by reference to the same numbered exhibit to report on
Form 10-K, filed June 9, 1987.
10.1 Standard Industrial Lease - Special Net. Incorporated by reference
to the same numbered exhibit to report on Form 10-K, filed June 9,
1987.
10.2 Equipment Lease with Dover Industries Acceptance Inc., dated April
4, 1988. Incorporated by reference to the same numbered exhibit to
report on Form 10-K, filed January 30, 1989.
10.3 Loan and Security Agreement, dated January 19, 1990, between Alger
and Sanwa Business Credit Corporation. Incorporated by reference to
the same numbered exhibit to report on Form 10-K, filed February 12,
1990.
10.4 Amendment to Loan and Security Agreement dated February 10, 1992,
between Alger and Sanwa Business Credit Corporation. Incorporated by
reference to the same numbered exhibit to report on Form 10-K, filed
February 12, 1993
10.5 Second Amendment to Loan and Security Agreement dated July 29, 1992,
between Alger and Sanwa Business Credit Corporation. Incorporated by
reference to the same numbered exhibit to report on Form 10-K, filed
February 12, 1993.
10.6 The Company's Guaranty of the Loan and Security Agreement, dated
January 19, 1990, between Alger and Sanwa Business Credit
Corporation. Incorporated by reference to the same numbered exhibit
to report on Form 10-K, filed February 12, 1990.
42
<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.
Incorporated by reference to the same numbered exhibit to report of
Form 10-K, filed January 29, 1995.
10.16 Loan and Security Agreement (Equipment) dated June 2, 1994, by and
between Alger and Phoenixcor, Inc. Incorporated by reference to the
same numbered exhibit to report of Form 10-K, filed January 29,
1995.
10.17 Secured Promissory Note and Pledge Agreement dated September 7, 1995
by and between Athanor Group, Inc. and Robert W. Miller.
Incorporated by reference to the same numbered exhibit to report of
Form 10-K, filed February 8, 1996.
10.18 Standard Industrial Lease - Gross. Manufacturing property located in
Glendale, Arizona, between Alger and Kachina Industrial Properties.
Incorporated by reference to the same numbered exhibit to report of
Form 10-K, filed January 29, 1997.
43
<PAGE>
10.19 Fifth amendment to Loan and Security Agreement dated July 10, 1996,
by and between Sanwa Business Credit and Alger. Incorporated by
reference to the same numbered exhibit to report of Form 10-K, filed
January 27, 1997.
10.20 Secured Promissory Note dated September 9, 1996, by and between
Athanor Group, Inc. and Robert W. Miller. Incorporated by reference
to the same numbered exhibit to report of Form 10-K, filed January
27, 1997.
10.21 Seventh amendment to Loan and Security Agreement dated July 31,
1997, by and between Sanwa Business Credit and Alger. Incorporated
by reference to the same numbered exhibit to report of Form 10-K,
filed January 28, 1998.
10.22 Amendment to Standard Industrial Lease - Special Net, dated May 9,
1997, by and between Algeran Investors LTD. and Alger. Incorporated
by reference to the same numbered exhibit to report of Form 10-K,
filed January 28, 1998.
10.23 Amendment to Standard Industrial Lease - Gross, dated August 29,
1997, by and between Raymond R. Hegwer, Trustee, Hegwer Living Trust
and Alger. Incorporated by reference to the same numbered exhibit to
report of Form 10-K, filed January 28, 1998.
10.24 Ninth amendment to Loan and Security Agreement dated August 29,
1997, by and between Sanwa Business Credit and Alger. Filed January
28, 1998.
10.25 Tenth amendment to Loan and Security Agreement dated July 8, 1999,
by and between Fleet Business Credit Corporation (previously Sanwa
Business Credit) and Alger. Filed herewith.
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. Previously Filed.
44
TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Tenth Amendment to Loan and Security Agreement ("Tenth Amendment")
is made as of this 8th day of July, 1999 by and between Fleet Business Credit
Corporation, successor to Sanwa Business Credit Corporation as Lender ("Lender")
and Alger Manufacturing Company, Inc. as Borrower ("Borrower") in reference to
that certain Loan and Security Agreement dated as of January 19, 1990, as
amended, between Lender and Borrower (the "Agreement") pursuant to which Lender
is making certain loans and advances to Borrower upon the terms and conditions
set forth in the Agreement. Capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Agreement. Borrower has
requested certain modifications to the Agreement and Lender has agreed to the
such modifications on the terms and conditions set forth below.
NOW THEREFORE, the parties hereto do hereby agree as follows:
1. Section 2.1(a) of the Agreement is hereby amended by deleting the
dollar amount of $2,600,000 in subsection (i) thereof and replacing the dollar
amount with "Three Million Dollars ($3,000,000)".
2. Section 2.4 of the Agreement is hereby amended by deleting the first
sentence thereof and replacing that with the following:
"This Agreement shall be in effect until August 31, 2001 (the "Initial
Term") and shall be automatically renewed thereafter for successive
periods of one year (the "Renewal Term") unless terminated as provided
below."
3. Reference is further made to that certain Ninth Amendment to Loan
and Security Agreement dated as of August 27, 1998 ("Ninth Amendment"). The
Ninth Amendment references that certain Capital Expenditure Line in Section 3
thereof. Subsection (vi) of Section 3 to the Ninth Amendment provides that "no
Acquisition Term Loan advance will be made by Lender on or after April 30,
1999." The reference to "April 30, 1999" in that subsection is hereby deleted
and replaced by April 30, 2001. Additionally, Subsection (iv) of Section 3 is
amended by replacing "85%" with "100%."
4. In addition to all other fees and charges, Borrower agrees to pay on
the date hereof an amendment fee of $10,000, which fee shall be fully earned as
of the date hereof and nonrefundable.
5. Borrower agrees to pay all charges, costs, expenses and reasonable
attorneys' fees incurred by Lender in connection with the negotiation,
documentation and preparation of this Tenth Amendment and any other documents in
connection therewith.
6. Lender is not waiving any rights under the Agreement or any
Ancillary Agreements and, except as expressly stated herein or as previously
modified in a writing signed by Lender, all of the terms, convenants and
conditions of the Agreement and the Ancillary Agreements remain in full force
and effect.
This Tenth Amendment shall be part of the Agreement, the terms of which
are incorporated herein except as modified hereby, and a breach of any
representation, warranty or covenant contained herein shall constitute a Default
under the Agreement.
ALGER MANUFACTURING COMPANY, INC.
By: /s/ DUANE FEMRITE
------------------
Its: C.E.O.
By: /s/ RICHARD KRAUSE
------------------
Its: President
FLEET BUSINESS CREDIT CORPORATION
By: /s/ MARK NEWLUN
---------------
Its:
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