SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED APRIL 30, 2001 COMMISSION FILE NUMBER 046831 40 0 --------------------------------------------------------------- ATHANOR GROUP, INC. --------------------- (Exact name of registrant as specified in its chapter) CALIFORNIA 95-2026100 - ------------------------------- ------------------------------------- (State or other jurisdiction (IRS Employer Identification No.) incorporation of organization) 921 EAST CALIFORNIA AVENUE, ONTARIO, CALIFORNIA 91761 ------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (909) 467-1205 ------------------------------ Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------- ----------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report: 696,036 shares as of April 30, 2001. PART I - FINANCIAL INFORMATION Item 1. Financial Statements ATHANOR GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) APRIL 30, 2001 AND OCTOBER 31, 2000 (THOUSANDS) ASSETS ------ 2001 2000 ---- ---- Current Assets: Cash $ 364 $ 162 Trade Receivables, Net of Allowances 2,989 2,838 Other Receivables 140 151 Inventories: Raw Materials 546 711 Work in Progress 513 732 Finished Goods 2,292 2,122 ------ ------ 3,351 3,565 Prepaid Expenses 76 74 Deferred Income Tax Asset 350 350 ------ ------ Total Current Assets 7,270 7,140 Property, Plant and Equipment, at Cost 6,285 6,035 Less Accumulated Depreciation and Amortization 4,868 4,658 ------ ------ Net Property, Plant and Equipment 1,417 1,377 Investments, at Cost 201 386 Other Assets 111 113 ------ ------ $8,999 $9,016 ====== ====== The accompanying notes are an integral part of these statements -2- ATHANOR GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) APRIL 30, 2001 AND OCTOBER 31, 2000 (THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ 2001 2000 ---- ---- Current Liabilities: Notes Payable $1,878 $1,600 Current Portion of Long-Term Debt 658 342 Accounts Payable 1,572 1,718 Accrued Expenses 592 1,018 ------ ------ Total Current Liabilities 4,700 4,678 Long-Term Debt, Less Current Portion 9 81 Noncurrent Deferred Income Tax Liability 131 131 Stockholders' Equity: Common Stock 7 7 Additional Paid-In Capital 879 879 Retained Earnings 3,273 3,240 ------ ------ Total Stockholders' Equity 4,159 4,126 ------ ------ $8,999 $9,016 ====== ====== The accompanying notes are an integral part of these statements -3- ATHANOR GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED APRIL 30, (THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 ---- ---- Net Sales $ 11,489 $ 12,247 Cost of Sales 9,785 10,297 -------- -------- Gross Profit 1,704 1,950 Selling, General & Administrative 1,397 1,492 -------- -------- Operating Profit 307 458 Other Income (Expense) Interest Expense (113) (115) Impairment Charge (239) 0 Recoveries of Advances of Unconsolidated Investee 89 305 Miscellaneous - Net 11 9 -------- -------- Earnings Before Income Taxes 55 657 Income Tax Expense 22 206 -------- -------- NET EARNINGS $ 33 $ 451 ======== ======== Net Earnings Per Common Share: Basic and Diluted $ 0.05 $ 0.65 ======== ======== The accompanying notes are an integral part of these statements -4- ATHANOR GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED APRIL 30, (THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 ---- ---- Net Sales $ 5,934 $ 6,494 Cost of Sales 4,941 5,408 ------- ------- Gross Profit 993 1,086 Selling, General & Administrative 710 811 ------- ------- Operating Profit 283 275 Other Income (Expense) Interest Expense (54) (61) Impairment Charge (239) 0 Recoveries of Advances to Unconsolidated Investee 0 181 Miscellaneous - Net 5 1 ------- ------- Earnings (Loss) Before Income Taxes (5) 396 Income Tax Expense (Benefit) (2) 137 ------- ------- NET EARNINGS (LOSS) $ (3) $ 259 ======= ======= Net Earnings Per Common Share: Basic and Diluted $ 0.00 $ 0.37 ======= ======= The accompanying notes are an integral part of these statements -5- ATHANOR GROUP, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) SIX MONTHS ENDED APRIL, 2001 (THOUSANDS) COMMON STOCK (25,000,000 SHARES ADDITIONAL AUTHORIZED) PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ------- -------- ----- Balance at October 31, 2000 696 $ 7 $ 879 $3,240 $4,126 Net Earnings for Six Months Ended April 30, 2001 -- -- -- 33 33 ------ ------ ------ ------ ------ Balance at April 30, 2001 696 $ 7 $ 879 $3,273 $4,159 ====== ====== ====== ====== ====== The accompanying notes are an integral part of these statements -6- ATHANOR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 2001 2000 ---- ---- Cash Flows From Operating Activities Net Earnings $ 33 $ 451 Adjustments to Reconcile Net Earnings to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 210 199 Impairment Charge 239 0 (Increase) Decrease in Operating Assets: Accounts Receivable (151) (264) Inventories 214 (161) Prepaid Expenses (2) 38 Other (41) 13 Increase (Decrease) in Operating Liabilities: Accounts Payable (146) 506 Accrued Liabilities (426) (85) ----- ----- Net Cash Provided (Used) by Operating Activities (70) 697 ----- ----- Cash Flows from Investing Activities: Issuance of Note Receivable 0 (100) Purchase of Property and Equipment (250) (327) ----- ----- Net Cash Used in Investing Activities (250) (427) ----- ----- Cash Flows from Financing Activities: Net Borrowings Under Line of Credit 278 381 Repurchase of Stock 0 (12) Fractional Share Dividends 0 (147) Borrowings of Long Term Debt 405 0 Payments of Long Term Debt (161) (212) ----- ----- Net Cash Provided by Financing Activities 522 10 ----- ----- Net Increase in Cash 202 280 Cash at Beginning of Year 162 616 ----- ----- Cash at End of Period $ 364 $ 896 ===== ===== The accompanying notes are an integral part of these statements -7- ATHANOR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 2001 2000 ---- ---- Supplemental Disclosures of Cash Flow Information: Interest Paid $113 $115 ==== ==== Income Taxes Paid $171 $304 ==== ==== The accompanying notes are an integral part of these statements -8- Notes to Consolidated Financial Statements (Unaudited) April 30, 2001 and 2000 NOTE 1 In management's opinion, all adjustments necessary to a fair settlement of the results of operations for the interim periods, have been reflected. NOTE 2 The consolidated financial statements include the accounts of Athanor Group, Inc., and its subsidiary, Alger Manufacturing Co., Inc. Significant inter-company accounts and transactions have been eliminated. NOTE 3 Earnings per common share, basic and diluted, have been adjusted retroactively to reflect the stock splits (see note 9). 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: 2001 2000 ---- ---- -------------------------------------------- Weighted average outstanding shares -------------------------------------------- of common stock - basic 696,036 699,502 -------------------------------------------- Dilutive effect of employee stock options 0 2,483 -------------------------------------------- -------------------------------------------- ---------- ---------- Common stock and common stock -------------------------------------------- equivalents - diluted 696,036 701,985 -------------------------------------------- ========== ========== NOTE 4 The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, net operating loss carryforwards and credit carryforwards are included as deferred tax assets. A valuation allowance against deferred tax assets is recorded if necessary. All deferred tax amounts are measured using enacted tax rated expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax rates are recognized in income in the period that includes the enactment date. NOTE 5 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. -9- NOTE 6 The Company accounts for its investments in minority-owned companies on the cost method. The carrying value of all such investments, as of April 30 2001, is $201,000. In the second quarter of fiscal 2001, the Company wrote off its investment in Fluid Light Technologies (FLT), in the amount of $239,000. FLT has been unable to secure the additional financing it needed to complete its business plan. FLT has closed its offices and is attempting to sell its technology. The current market for financing of start up companies has become extremely difficult, especially with all the failures of Internet related businesses. NOTE 7 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. NOTE 8 The Company had made outstanding loans, in previous years, in the principal amount of $685,622 to Core Software Technology (Core). As of October 31, 2000, the total amount outstanding from Core was $356,523, which was fully reserved. In November 2000 Core made a final payment of $89,465. In accordance with the terms of the Forbearance Agreement between Core and the Company, the balance of the outstanding loans of $274,248 was converted into common stock of Core at $3 per share or 91,416 shares. NOTE 9 Effective January 31, 2000, the Board of Directors declared two stock splits that had been authorized by the shareholders through a Consent Statement in January 2000. A one for eight hundred reverse stock split followed by a four hundred for one stock split. The net effect of these two splits is a 1 for 2 reverse stock split, except for the provisions for payment for fractional shares. Fractional shares resulting from the reverse split were not issued, but were paid in cash based on $2.51 per share (as determined before the two splits). The Company paid a total of $147,168 to fund the fractional shares. The effects of the stock splits have been recorded retroactively in the consolidated financial statements. NOTE 10 The Company has 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. Effective January 31, 2000 the Plan has been adjusted to reflect the stock splits (see Note 9). The Plan authorized grants of options to purchase up to 110,170 shares of authorized but unissued common stock. The Company has granted 98,000 stock options for shares of AGI. Stock options were granted with an exercise price equal to the stock's fair market value at the date of grant ($3.32 at May 8, 1998 and December 11, 1998, adjusted to reflect the stock splits). All stock options vest and become fully exercisable as shown below: -10- 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 98,000 options to purchase common stock outstanding as of April 30, 2001 of which 69,500 were exercisable. There were 98,000 options to purchase common stock outstanding as of April 30, 2000, of which 44,500 were exercisable. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased by $108,000, or (4%), during the first six months of Fiscal 2001. The major component changes in working capital were an increase in accounts receivable of $151,000 (5%), reduction in inventory of $214,000 (6%) a reduction in accounts payable of $146,000 (8%) an increase in the working capital line of credit of $278,000 (17%) and a reduction of accrued liabilities of $426,000 (42%). The Company continued to maintain a conservative approach on spending during the second quarter of fiscal 2001 due to the uncertainty of the economic climate. This cautious spending program and the improved operating profit in the second quarter, accounted for the vast majority of the increase in working capital. The Company increased short and long-term debt by $244,000. This increase included new equipment loans of $405,000 and payments of $161,000. The increase in debt included an equipment loan of $200,000, whereby the Company utilized its equipment line of credit to finance equipment originally purchased in fiscal 2000 with operating capital. 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. The equipment line terminated on April 30, 2001. At April 2001, the Company had approximately $1,122,000 available under the working capital line and $0 available under the equipment line as compared to $1,400,000 and $550,000, respectively, at October 31, 2000 and $1,021,000 and $550,000, respectively, at January 2000. The Company's working capital line of credit terminates in August 2001. The Company has been notified by its lender that it does not intend to extend the Company's line of credit. The Company has therefore classified all debt associated with its lines of credit as current debt. While the Company has confidence that it will be able to replace its current lender, there are no assurances that the Company will be successful or that the terms and conditions will be as favorable as with the current lender. -11- The Company purchased $250,000 of new equipment during the first six months of 2001. The Company financed $205,000 of the equipment purchased and also utilized the equipment line of credit to finance $200,000 of equipment originally purchased in fiscal 2000. The Company anticipates acquiring an additional $200,000 to $300,000 of equipment during the balance of the fiscal year. While the first six months of fiscal 2001 has shown declining sales, the increase in the backlog as of April 2001 coupled with the addition of some new customers, has given rise to the need for additional equipment to satisfy those specific requirements. The Company is in the process of re-evaluating the need for additional equipment and major repairs for the balance of fiscal 2001. RESULTS OF OPERATIONS Sales for the first six months and three months ended April 2001 have decreased 6% and 9% respectively from 2000. The Company had seen signs of a decrease in business activity in the latter parts of the fourth quarter of fiscal 2000 as customers delayed shipments and pushed orders out. The decrease in sales for the first six months of 2001 seems to be a continuation of the slowdown that the Company experienced in the last months of fiscal 2000. The current business climate is somewhat difficult to define as sales lag, yet the Company's backlog has increased to $10,109,000 at April 2001 compared to $8,946,000 at October 2000. The best analysis is that customers have not cancelled orders, but have only deferred shipment dates and the Company has been able to attract new business. In addition, a substantial portion of the new business is long-term contracts. In the normal course of business, some backlog orders are inevitably cancelled or the time of delivery changes. There is no assurance that the total backlog will result in completed sales. However, the Company has not experienced significant cancellations in its recent past. It is difficult at this juncture to determine the state of the economy and the Company's market. While the continued strength of the Company's backlog is a positive sign, decreasing sales and customers continually delaying production and shipment of orders, lead us to believe the current weakness in the economy will continue for at least the next quarter. The Company's operating profit for the six months and three months ended April 2001 of $307,000 and $283,000 respectively, as compared to $458,000 and $275,000 for 2000, are a direct reflection of the decrease in sales during 2001. The difference is partially tied to the decrease in sales and partially associated with additional costs incurred by the Company in servicing customers change order requirements. Splitting orders, delaying shipments and making multiple changes to accommodate the many customer requests during the first quarter of 2001 was very costly. Yet it is a service we deem necessary to keep our customers loyal in these ever changing economic times. During the second quarter of fiscal 2001, even with lower sales, the Company was better prepared to deal with the varying customer change orders and delays and was therefore able to reduce the costs associated with those changes. In the second quarter of fiscal 2001, the Company wrote off its investment in Fluid Light Technologies (FLT), in the amount of $239,000. FLT has been unable to secure the additional financing it needed to complete its business plan. FLT has closed its offices and is attempting to sell its technology. The current market for financing of start up companies has become extremely difficult, especially with all the failures of Internet related businesses. During fiscal 2001, the Company had a profit of $89,465 (before tax) from the recovery of loans, made to Core Software, which had been fully reserved in previous years. -12- FORWARD-LOOKING STATEMENTS Except for historical facts, this Report contains forward-looking statements concerning the Company's business outlook and plans, future cash requirements and capital expenditure requirements made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on certain assumptions and outcomes are subject to risks and uncertainties. The forward-looking statements are, therefore, subject to change at any time. Actual results could differ materially from expected results expressed in any such forward-looking statements based on numerous factors, including the level of customer demand, the cost and availability of raw materials, changes in the competitive environment, the Company's ability to achieve cost reductions and efficiencies, the Company's ability to attract and retain skilled employees and other uncertainties detailed from time to time in the Company's Securities and Exchange Commission Filings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- (a) The annual meeting of registrant was held April 30, 2001. (b) At the annual meeting, the following individuals were elected to the Board of Directors: Gregory J. Edwards Duane L. Femrite Richard A. Krause Robert W. Miller Earl L. Yager Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) None (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. -13- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATHANOR GROUP, INC. Date JUNE 13, 2001 By /S/ DUANE L. FEMRITE ----------------------- -------------------------------------- Duane L. Femrite President, Co-Chief Executive Officer, Chief Financial Officer, and Director -14-