SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JULY 31, 2001 COMMISSION FILE NUMBER 046831 40 0
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ATHANOR GROUP, INC.
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(Exact name of registrant as specified in its chapter)
CALIFORNIA 95-2026100
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(State or other jurisdiction (IRS Employer Identification No.)
incorporation of organization)
921 EAST CALIFORNIA AVENUE, ONTARIO, CALIFORNIA 91761
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(Address of principal executive offices)
Registrant's telephone number, including area code (909) 467-1205
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this report:
696,036 shares as of July 31, 2001.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 2001 AND OCTOBER 31, 2000
(THOUSANDS)
ASSETS
2001 2000
---- ----
Current Assets:
Cash $ 254 $ 162
Trade receivables, net of allowances 3,068 2,838
Other receivables 150 151
Inventories:
Raw materials 541 711
Work in progress 533 732
Finished goods 1,797 2,122
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2,871 3,565
Prepaid expenses 82 74
Deferred income tax asset 350 350
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Total current assets 6,775 7,140
Property, plant and equipment, at cost 6,294 6,035
Less accumulated depreciation and amortization 4,968 4,658
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Net property, plant and equipment 1,326 1,377
Investments, at cost 216 386
Other assets 109 113
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$8,426 $9,016
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The accompanying notes are an integral part of these statements.
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ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, 2001 AND OCTOBER 31, 2000
(THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
---- ----
Current liabilities:
Notes payable $1,543 $1,600
Current portion of long-term debt 603 342
Accounts payable 1,378 1,718
Accrued expenses 557 1,018
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Total current liabilities 4,081 4,678
Long-term debt, less current portion 0 81
Deferred income tax liability 131 131
Stockholders' equity:
Common stock 7 7
Additional paid-in capital 879 879
Retained earnings 3,328 3,240
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Total stockholders' equity 4,214 4,126
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$8,426 $9,016
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The accompanying notes are an integral part of these statements.
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ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2001 2000
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Net sales $ 17,282 $ 18,423
Cost of sales 14,720 15,475
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Gross profit 2,562 2,948
Selling, general & administrative 2,114 2,229
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Operating profit 448 719
Other income (expense)
Interest expense (160) (177)
Impairment charge (239) 0
Recoveries of advances to unconsolidated investee 89 396
Miscellaneous - net 11 9
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Earnings before income taxes 149 947
Income tax expense 61 346
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Net earnings $ 88 $ 601
======== ========
Net earnings per common share:
Basic $ 0.13 $ 0.86
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Diluted $ 0.13 $ 0.85
======== ========
The accompanying notes are an integral part of these statements.
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ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JULY 31,
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2001 2000
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Net sales $ 5,793 $ 6,176
Cost of sales 4,935 5,178
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Gross profit 858 998
Selling, general & administrative 717 737
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Operating profit 141 261
Other income (expense)
Interest expense (47) (62)
Recoveries of advances to unconsolidated investee 0 91
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Earnings before income taxes 94 290
Income tax expense 39 140
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Net earnings $ 55 $ 150
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Net earnings per common share:
Basic and diluted $ 0.08 $ 0.21
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The accompanying notes are an integral part of these statements.
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ATHANOR GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED JULY, 2001
(THOUSANDS)
Common Stock
(25,000,000 Shares Additional
Authorized) Paid-In Retained
Shares Par Value Capital Earnings Total
------ --------- ------- -------- -----
Balance at
October 31, 2000 696 $ 7 $ 879 $3,240 $4,126
Net Earnings for
nine months ended
July 31, 2001 88 88
------ ------ ------ ------ ------
Balance at
July 31, 2001 696 $ 7 $ 879 $3,328 $4,214
====== ====== ====== ====== ======
The accompanying notes are an integral part of these statements.
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ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
2001 2000
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Cash flows from operating activities
Net earnings $ 88 $ 601
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 310 301
Impairment charge 239 0
Change in operating assets and liabilities:
Accounts receivable (230) 86
Inventories 694 (119)
Prepaid expenses and other assets (7) 7
Other (65) (19)
Accounts payable (340) 66
Accrued liabilities (461) (55)
Income taxes payable
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Net cash provided by operating activities 228 868
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Cash flows from investing activities:
Purchase of property and equipment (259) (334)
Issuance of notes receivable to related parties 0 (115)
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Net cash used in investing activities (259) (449)
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Cash flows from financing activities:
Net of borrowings (repayments) under line of credit (57) 38
Repurchase of common stock 0 (12)
Fractional Share Dividends 0 (155)
Borrowings of Long Term Debt 405 0
Payments of Long Term Debt (225) (320)
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Net provided by (used in) in financing activities 123 (449)
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Net increase (decrease) in cash 92 (30)
Cash at beginning of year 162 616
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Cash at end of year $ 254 $ 586
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ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CON'T.)
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
(THOUSANDS)
2001 2000
---- ----
Supplemental disclosures of cash flow information:
Interest paid $160 $177
Income taxes paid 171 381
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The accompanying notes are an integral part of these statements.
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Notes to Consolidated Financial Statements
(Unaudited)
July 31, 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 net earnings per share represents net earnings available to common
stockholders divided by the weighted average shares outstanding excluding all
common stock equivalents. Diluted net earnings per share reflects the dilutive
effects of all common stock equivalents.
The components of basic and diluted net earnings per share were as follows:
THREE MONTHS NINE MONTHS
ENDED 7/31 ENDED 7/31
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2001 2000 2001 2000
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Weighted average outstanding
shares of common stock - basic 696,036 697,703 696,036 697,703
Dilutive effect of employee stock options 0 14,574 0 9,104
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Common stock and common
stock equivalents - diluted 696,036 712,277 696,036 708,007
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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.
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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.
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 July 31, 2001, is
$216,000. 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.
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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:
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 July 31,
2001 of which 92,750 were exercisable. There were 98,000 options to purchase
common stock outstanding as of July 31, 2000, of which 64,250 were exercisable.
NOTE 11
RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued FASB Statements
No. 141, BUSINESS COMBINATIONS (Statement 141), and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (Statement 142). These statements apply to accounting for
business combinations initiated after June 30, 2001 and for the purchased
goodwill and other intangible assets that arise from business combinations or
are acquired otherwise. In August 2001, the Financial Accounting Standards Board
issued FASB Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
(Statement No. 143), which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and for
the associated asset retirement costs. Application of Statements 141, 142 and
143 are not expected to have a material effect on our financial reporting.
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 $232,000, or (9%), during the first
nine months of Fiscal 2001. The major component changes in working capital were
an increase in accounts receivable of $230,000 (8%), reduction in inventory of
$694,000 (20%) a reduction in accounts payable of $340,000 (20%), a reduction of
accrued liabilities of $461,000 (45%) and an increase in the current portion of
long term debt of $261,000 (76%). The Company continued to maintain a
conservative approach on spending during the third quarter of fiscal 2001 due to
the uncertainty of the economic climate. This cautious spending program, along
with the reduction in inventory and lower payables due to reduced sales volume
in the quarter, accounted for the vast majority of the increase in working
capital.
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The Company increased short and long-term debt by $180,000. This increase
included new equipment loans of $405,000 and payments of $225,000. 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 July 31,
2001, the Company had approximately $1,436,000 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 $1,348,000 and $550,000,
respectively, at July 31, 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. During September 2001, the Company was successful in obtaining financing
from a new lender. The new loan agreement, through March 2003, has a total line
availability of $4,700,000, $3,000,000 for working capital a $1,000,000
long-term machinery and equipment loan, and a $700,000 line for the acquisition
of additional equipment. Interest on borrowings under the new line of credit
will be payable at prime or LIBOR on the working capital line and prime on the
long-term machinery and equipment loan.
The Company purchased $259,000 of new equipment during the first nine 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 nine months of fiscal 2001 has shown declining sales, the stable
backlog 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 continuing the process of re-evaluating the need for additional
equipment and major repairs for the balance of fiscal 2001and early fiscal 2002.
RESULTS OF OPERATIONS
Sales for the first nine months and three months ended July 2001 have decreased
6% 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
nine 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
continued to remain stable at $9,512,000 at July 2001 compared to $8,946,000 at
October 2000 and $9,520,000 at July 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.
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The Company's decrease in operating profit for the nine months and three months
ended July 2001 of $448,000 and $141,000 respectively, as compared to $719,000
and $261,000 for 2000 and the reduction in the gross profit margin to 15% in
2001 from 16 % in 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 2001 has been
very costly. Yet it is a service we deem necessary to keep our customers loyal
in these ever changing economic times. During the second and third quarter of
fiscal 2001, even with lower sales, the Company has been better prepared to deal
with the varying customer change orders and delays and has therefore been 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.
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
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) None
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATHANOR GROUP, INC.
Date SEPTEMBER 11, 2001 By /S/ DUANE L. FEMRITE
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Duane L. Femrite
President, Co-Chief Executive Officer,
Chief Financial Officer, and Director
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