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 JANUARY 31, 2002 COMMISSION FILE NUMBER 046831 40
------------------------------------------------------------------------------
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 January 31, 2002.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND OCTOBER 31, 2001
(THOUSANDS)
ASSETS
2002 2001
---- ----
(Unaudited) (Audited)
Current assets:
Cash $ 402 $ 427
Trade receivables, net of allowances 2,510 2,775
Other receivables 232 216
Inventories:
Raw materials 405 420
Work in progress 419 593
Finished goods 2,127 2,001
-------------- -------------
2,951 3,014
Income tax receivable 138 0
Prepaid expenses 113 82
Deferred income tax asset 337 337
-------------- -------------
Total current assets 6,683 6,851
Property, plant and equipment, at cost 6,315 6,396
Less accumulated depreciation and amortization 5,074 5,065
-------------- -------------
Net property, plant and equipment 1,241 1,331
Investments, at cost 250 221
Other assets 95 68
-------------- -------------
$ 8,269 $ 8,471
============== =============
The accompanying notes are an integral part of these statements.
ATHANOR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2002 AND OCTOBER 31, 2001
(THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
2002 2001
---- ----
(Unaudited) (Audited)
Current liabilities:
Notes payable $ 1,500 $ 926
Current portion of long-term debt 254 296
Accounts payable 1,194 1,588
Accrued expenses 532 561
------------------- ----------------
Total current liabilities 3,480 3,371
Long-term debt, less current portion 729 783
Noncurrent deferred income tax liability 106 106
Stockholders' equity:
Common stock 7 7
Additional paid-in capital 879 879
Retained earnings 3,068 3,325
------------------- ----------------
Total stockholders' equity 3,954 4,211
------------------- ----------------
$ 8,269 $ 8,471
=================== ================
The accompanying notes are an integral part of these statements.
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
2002 2001
---- ----
Product sales, net $ 3,718 $ 4,787
Scrap sales 584 768
Cost of sales 4,019 4,844
---------------- ----------------
Gross profit 283 711
Selling, general & administrative 650 687
---------------- ----------------
Operating profit (loss) (367) 24
Other income (expense)
Interest expense (28) (59)
Recoveries of advances to unconsolidated investee 0 89
Miscellaneous 0 6
---------------- ----------------
Earnings (loss) before income taxes (395) 60
Income tax expense (recovery) (138) 24
---------------- ----------------
Net earnings (loss) $ (257) $ 36
================ ================
Net earnings (loss) per common share:
Basic and diluted $ (0.37) $ 0.05
================ ================
The accompanying notes are an integral part of these statements.
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED JANUARY, 2002
(THOUSANDS)
COMMON STOCK
(25,000,000 SHARES ADDITIONAL
AUTHORIZED) PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------ --------- ------- -------- -----
Balance at
October 31, 2001 696 $ 7 $ 879 $ 3,325 $ 4,211
Net Loss for
three months ended
January 31, 2002 (257) (257)
------------ -------- --------- ----------- ------------
Balance at
January 31, 2002 696 $ 7 $ 879 $ 3,068 $ 3,954
============ ======== ========= =========== ============
The accompanying notes are an integral part of these statements.
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
(THOUSANDS)
2002 2001
---- ----
Cash flows from operating activities
Net earnings (loss) $ (257) $ 36
Adjustments to reconcile net earnings (loss) to net cash
provided (used) in operating activities:
Recoveries of advances to unconsolidated
investee 0 (89)
Depreciation and amortization 103 101
Loss on disposal of fixed assets 11 0
Change in operating assets and liabilities:
Accounts receivable 265 134
Inventories 63 146
Income taxes receivable (138) 0
Prepaid expenses and other assets (31) (45)
Other (27) 1
Accounts payable (394) (424)
Accrued liabilities (29) (181)
----------- ------------
Net cash used in operating activities (434) (321)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (24) 0
Issuance of notes receivable to related parties (16) 0
Purchase of additional shares in investees (29) 0
Repayment of advances from unconsolidated
investee 0 89
----------- ------------
Net cash provided (used) in investing activities (69) 89
----------- ------------
ATHANOR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED JANUARY 31,
(THOUSANDS)
2002 2001
---- ----
Cash flows from financing activities:
Net of borrowings (repayments) under line of credit 574 323
Repayments of long-term debt (96) (105)
---------------- ----------------
Net cash provided in financing activities 478 218
---------------- ----------------
Net (decrease) in cash (25) (14)
Cash at beginning of year 427 162
---------------- ----------------
Cash at end of period $ 402 $ 148
================ ================
Supplemental disclosures of cash flow information:
Interest paid $ 28 $ 59
Income taxes paid 0 121
================ ================
The accompanying notes are an integral part of these statements
Notes to Consolidated Financial Statements
(Unaudited)
January 31, 2002 and 2001
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
- ------
Basic net earnings (loss) per share represents net earnings (loss) available to
common stockholders divided by the weighted average shares outstanding excluding
all common stock equivalents. Diluted net earnings (loss) per share reflects the
dilutive effects of all common stock equivalents.
The components of basic and diluted net earnings (loss) per share were as
follows:
THREE MONTHS ENDED 1/31
-----------------------
2002 2001
---- ----
------------ ----------------
Weighted average outstanding
shares of common stock - basic 696,036 696,036
Dilutive effect of employee stock options
0 0
------------- ----------------
Common stock and common
stock equivalents - diluted 696,036 696,036
============= ================
NOTE 4
- ------
There were 102,250 options to purchase common stock outstanding as of January
31, 2002 of which 98,250 were exercisable. There were 98,000 options to purchase
common stock outstanding as of January 31, 2001, of which 69,500 were
exercisable.
NOTE 5
- ------
The Company accounts for its investments in nonmarketable securities of
minority-owned companies on the cost method. The carrying value of all such
investments is $250,000 and $216,000 at January 31, 2002 and 2001, respectively.
NOTE 6
- ------
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 7
- ------
The Company is currently in default on one of the "Financial Tests" required
under the terms of the Agreement. The lending institution has agreed to waive
the default through July 31, 2002.
NOTE 8
- ------
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.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the year beginning
after December 15, 2001, and plans to adopt its provisions for the quarter
ending January 31, 2003. Management does not expect the adoption of Statement
144 for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under Statement
144 is largely unchanged from Statement 121. The provisions of the Statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's working capital decreased by $277,000, or (8%), during the first
three months of Fiscal 2002. The major component changes in working capital were
a decrease in accounts receivable of $265,000 (10%), increase in other
receivable (income tax) of $138,000, decrease in accounts payable of $394,000
(25%) and an increase in notes payable (line of credit) of $574,000 (62%). The
decrease in working capital has been a direct reflection of the current economic
recession, with declining sales and operating losses. The Company has continued
to maintain a conservative approach on spending during the first quarter of
fiscal 2002 as it evaluates the uncertainty of this business climate.
The Company increased short and long-term debt by $478,000. The majority of this
increase was a utilization of the Company's working capital line of credit to
fund payments on accounts payable and to fund losses incurred during the first
quarter of fiscal 2002. In August 2001, the Company completed a $4,700,000 Loan
Agreement (the Agreement), with a new lending institution, for working capital,
long term financing and a new equipment line of credit. The Agreement provides
for a working capital line of credit of $3,000,000, a term loan of $1,000,000
(payable over 60 months) and a new equipment line of credit for $700,000. The
Agreement is collateralized by substantially all of the assets of Alger, expires
on March 31, 2003, and is guaranteed by the Company. Interest on borrowings
under the working capital line of credit are payable at prime or LIBOR plus
2.25%, interest on the term loan is payable at prime. At January 31, 2002, the
Company had approximately $1,347,000, based upon borrowing base limitations,
available under the working capital line and $700,000 available under the
equipment line as compared to $1,923,000 and $700,000, respectively, at October
31, 2001 and $989,000 and $550,000, respectively, at January 31, 2001.
Management believes the Company's credit agreement is adequate to fund the
working capital requirements and anticipated equipment purchases in fiscal 2002.
The Company is currently in default on one of the "Financial Tests" required
under the terms of the Agreement. The lending institution has agreed to waive
the default through July 31, 2002.
With sales declining and losses increasing during the first quarter of fiscal
2002, the Company continued on the course of making only strategic and necessary
equipment purchases. During the first quarter of 2002 the Company purchased
$24,000 of new equipment. The Company currently does not anticipate making any
major equipment purchases during the balance of the fiscal year. The Company
will continue the process of evaluating the need for additional equipment and
major repairs for the balance of fiscal 2002. In December 2001, the Company
decided to close its Glendale, Arizona facility after evaluating the effects of
the slowing economy and the change in customer requirements and demands. The
facility closing leaves the Company with excess equipment that can be
incorporated into the Ontario facility or sold/traded for equipment to meet
specific needs. Considering the state of the economy, the Company will move very
cautiously before making these decisions. The Company has estimated that it will
cost approximately $100,000 in fiscal 2002, to close the Arizona facility,
including relocation of all the equipment, severance pay for employees and
management and required repairs on the leased property. As of January 31, 2002
the Company has paid approximately $39,000, written off assets of approximately
$11,000 and accrued $50,000 for the entire projected balance of $100,000 for the
Arizona closing.
During 2002, the Company used $48,000 of cash from its line of credit to loan
$19,000 to Healthcove.com bringing the total to $184,000 and increase its
Limited Partnership interest in California South Pacific Investors (CSPI) by
$29,000, for a total investment of $250,000. Healthcove.com is a healthcare
discount club that gives underinsured users buying power for prescription drugs,
prescription eyeglasses, hearing and dental care and a healthcare credit card.
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. Both are development stage companies with little or
no revenue. While the Company feels that the investments have excellent
potential, the Company will closely monitor additional cash investments based on
their status, the availability of funds and the economy. The investment has been
accounted for under the cost method.
RESULTS OF OPERATIONS
- ---------------------
Fiscal 2001 showed a fairly steady decline in the economy and the Company's
sales, profits and backlog. The Company had seen signs of a continuing erosion
in business activity in the latter part of the fourth quarter of fiscal 2001 as
customers cancelled orders and delayed shipments. The full effect of the current
economic recession seemed to hit in the first quarter of fiscal 2002 with parts
sales decreasing 22% and sales of scrap decreasing 24% from fiscal 2001. Sales
of scrap show a larger percentage decrease due to a reduction in raw material
prices during the last fiscal year. Some of the raw materials used by the
Company to produce parts, experienced price reductions during fiscal 2001 of up
to 16%. In addition, scrap sales associated with those materials experienced
price reductions of 13%. While sales were declining during the first quarter of
fiscal 2002, the Company's backlog has not continued the decline experienced
during the last quarter of fiscal 2001. The Company experienced some order
cancellations, late in the year, as customers struggled with the declining
economy and the uncertainty associated with the aftermath of September 11. The
Company's backlog at January 31, 2002 was $6,997,000 compared to $7,077,000 at
October 31, 2001 and $10,222,000 at January 31, 2001. It is difficult at this
juncture to determine the extent and length of the current economic recession
and the effect it will have on the Company's market. While the stabilization 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 loss for the three months ended January 31, 2002 of
$367,000 as compared to an operating profit of $24,000 for 2001 and the
reduction in the gross profit margin to 7% in 2002 from 13 % in 2001 are a
direct reflection of the overall 23% decrease in sales during the first quarter
of fiscal 2002. In addition, the majority of the decrease in sales occurred
during the months of November and December 2001 when sales were off 29% compared
to fiscal 2001. December is typically a slow month for shipments due to the
closing of our facility over the holidays, however this years sales were
exceptionally soft as the full effect of the recession and economic slowdown
took its toll.
During fiscal 2001, Core Software Technology ("Core") repaid $89,465 of
principal and interest. The result was a profit of $89,465 from the recovery of
loans made to Core that had been fully reserved in previous years.
Interest expense decreased 53% in the first quarter of fiscal 2002 as compared
to 2001. The main contributing factors are the prime rate reductions during the
last year, reduced borrowing for capital expenditures and reduced borrowing on
the working capital line of credit. Due to decreased sales and a slowing
economy, the Company made a concerted effort to reduce inventory thereby
increasing cash flow and reducing the need for borrowing under its working
capital line. In addition, the Company has made only limited capital
expenditures in the last several 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
--------------------------------
(a) None
(b) No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATHANOR GROUP, INC.
Date By /S/ DUANE L. FEMRITE
----------------------- ----------------------------------
Duane L. Femrite
President, Chief Executive Officer,
Chief Financial Officer, and Director