1 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, 1995 Commission File Number 2-63481 ------------------------------------------------------------ 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) 3452 East Foothill Boulevard, Suite 417, Pasadena, California 91107 -------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (818) 440-1602 --------------------------- ------------------------------------------------------------------------------ Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------ ------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report: 1,471,434 shares as of July 31, 1995. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 ATHANOR GROUP, INC. Consolidated Balance Sheets (Unaudited) July 31, 1995 and October 31, 1994 (Thousands) ASSETS 1995 1994 ------- ------- Current Assets: Cash $ 112 $ 149 Trade Receivables, Less Allowance for Doubtful Accounts of $21 and $31 1,962 1,935 Notes Receivable: Net of Allowance of $534 19 20 Inventories: Raw Materials 883 861 Work in Progress 506 312 Finished Goods 1,593 1,669 ------ ------ 2,982 2,842 Prepaid Expenses 65 29 Deferred Income Tax Asset 377 377 ------ ------ Total Current Assets 5,517 5,352 Property, Plant and Equipment, at Cost 4,649 4,151 Less Accumulated Depreciation and Amortization 3,453 3,247 ------ ------ Net Property, Plant and Equipment 1,196 904 Other Assets 89 86 ------ ------ $6,802 $6,342 ====== ====== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 4 ATHANOR GROUP, INC. Consolidated Balance Sheets (Unaudited) July 31, 1995 and October 31, 1994 (Thousands) LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 ------ ------ Current Liabilities: Notes Payable $ 918 $ 920 Current Portion of Long-Term Debt 366 246 Accounts Payable 1,714 1,521 Accrued Expenses 697 799 ------ ------ Total Current Liabilities $3,695 $3,486 Long-Term Debt, Less Current Portion 1,047 851 Deferred Gain on Sale-Leaseback 49 80 Noncurrent Deferred Income Tax Liability 20 20 Stockholders' Equity: Common Stock 15 16 Additional Paid-In Capital 1,447 1,447 Retained Earnings 529 442 ------ ------ Total Stockholders' Equity 1,991 1,905 ------ ------ $6,802 $6,342 ====== ====== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 5 ATHANOR GROUP, INC. Consolidated Statements of Operations (Unaudited) Nine Months Ended July 31, (Thousands) 1995 1994 ------- ------- Net Sales $14,335 $12,645 Cost of Sales 11,812 10,562 ------- ------- Gross Profit 2,523 2,083 Selling, General & Administrative 1,804 1,562 ------- ------- Operating Profit 719 521 Other Income (Expense) Interest Income - 58 Interest Expense (202) (134) Equity in Loss of Unconsolidated Investee (69) - Miscellaneous - Net 38 49 ------- ------- Earnings Before Income Taxes and Extraordinary Credit 486 494 Income Tax Expense 200 204 ------- ------- Earnings (Loss) Before Extraordinary Credit 286 290 Extraordinary Credit - Tax Benefit of Net Operating Loss Carryforwards - 54 ------- ------- NET EARNINGS $ 286 $ 344 ======= ======= The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 6 ATHANOR GROUP, INC. Consolidated Statements of Operations - Continued (Unaudited) Nine Months Ended July 31, (Thousands) 1995 1994 ------ ------ Earnings Per Common Shares: Primary Earnings Before Extraordinary Credit $0.18 $0.18 Extraordinary Credit - 0.04 ----- ----- NET EARNINGS $0.18 $0.22 ===== ===== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 7 ATHANOR GROUP, INC. Consolidated Statements of Operations (Unaudited) Three Months Ended July 31, (Thousands) 1995 1994 ------- ------- Net Sales $4,711 $4,927 Cost of Sales 3,865 4,176 ------ ------ Gross Profit 846 751 Selling, General & Administrative 596 538 ------ ------ Operating Profit 250 213 Other Income (Expense) Interest Income - 2 Interest Expense (74) (53) Equity in Loss of Unconsolidated Investee (69) - Miscellaneous - Net 10 13 ------ ------ Earnings Before Income Taxes and Extraordinary Credit 117 175 Income Tax Expense 48 73 ------ ------ Earnings (Loss) Before Extraordinary Credit 69 102 Extraordinary Credit - Tax Benefit of Net Operating Loss Carryforwards - 18 ------ ------ NET EARNINGS $ 69 $ 120 ====== ====== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 8 ATHANOR GROUP, INC. Consolidated Statements of Operations - Continued (Unaudited) Three Months Ended July 31, (Thousands) 1995 1994 ----- ----- Earnings Per Common Shares: Primary Earnings Before Extraordinary Credit $0.04 $0.07 Extraordinary Credit - 0.01 ----- ----- NET EARNINGS $0.04 $0.08 ===== ===== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 9 ATHANOR GROUP, INC. Consolidated Statement of Stockholders' Equity (Unaudited) Nine Months Ended July 31, 1995 (Thousands) Common Stock (25,000,000 Shares Additional Retained Authorized) Paid-In Earnings Shares Par Value Capital (Deficit) Total ------ --------- --------- --------- ------ Balance at October 31, 1994 1,571 $16 $1,447 $ 442 $1,905 Repurchase of Common Stock (100) (1) (199) (200) Net Earnings for Nine Months Ended July 31, 1995 286 286 ----- --- ------ ----- ------ 1,471 $15 $1,447 $ 529 $1,991 ===== === ====== ===== ====== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 10 ATHANOR GROUP, INC. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended July 31, (Thousands) 1995 1994 ------ ------ Cash Flows From Operating Activities Net Earnings $ 286 $ 344 Adjustments to Reconcile Net Earnings to Net Cash Provided (Used) by Operating Activities: Depreciation and Amortization 206 123 Amortization of Deferred Gain on Sale and Leaseback (31) (31) (Increase) Decrease in Operating Assets: Accounts Receivable (27) (727) Inventories (140) (645) Prepaid Expenses (36) (3) Other (2) 9 Increase (Decrease) in Operating Liabilities: Accounts Payable 193 868 Accrued Liabilities (102) 7 ----- ----- Net Cash Provided (Used) by Operating Activities 347 (55) ----- ----- Cash Flows from Investing Activities: Purchase of Property and Equipment (498) (332) Investment - Common stock (200) (260) ----- ----- Net Cash Used in Investing Activities (698) (592) ----- ----- Cash Flows from Financing Activities: Net Borrowings Under Line of Credit (2) 364 Net Proceeds Long Term Debt 316 198 Issuance of Common Stock - 3 ----- ----- Net Cash Provided (Used) in Financing Activities 314 565 ----- ----- Net increase (Decrease) in Cash (37) (82) Cash at Beginning of Year 149 107 ----- ----- Cash at End of Period $ 112 $ 25 ===== ===== The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 11 ATHANOR GROUP, INC. Consolidated Statements of Cash Flows - Continued (Unaudited) Nine Months Ended July 31, (Thousands) 1995 1994 ---- ---- Supplemental Disclosures of Cash Flow Information: Interest Paid $202 $134 ==== ==== Income Taxes Paid $214 $ 87 ==== ==== Supplemental Schedule of Noncash Investing and Financing Activities: July 31, 1995 ------------- None July 31, 1994 -------------- None The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 12 Notes to Consolidated Financial Statements (Unaudited) July 31, 1995 and 1994 Note 1 ------ Primary earnings per common share are computed by using the weighted average number of common shares outstanding during the year - 1,530,775 shares in 1995 and 1,571,434 shares in 1994. Note 2 ------ In management's opinion, all adjustments necessary to a fair settlement of the results of operations for the interim periods, have been reflected. Note 3 ------ The consolidated financial statements include the accounts of Athanor Group, Inc., and its subsidiary, Alger Manufacturing Co., Inc. Significant intercompany accounts and transactions have been eliminated. Note 4 ------ During 1994, the company changed its method of accounting for deferred taxes from the deferred method under APB No. 11 to the asset and liability method now required under SFAS No. 109. 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. 13 Notes to Consolidated Financial Statements, Continued ----------------------------------------------------- Note 5 ------ The Company accounts for its investment in Core Software Technology (Core) on the equity method of accounting which requires the Company to record its shares of Core's earnings or losses. During 1995 and 1994, the Company invested an additional $69,000 and $360,000, respectively, into Core which was subsequently reduced to zero because of losses incurred by Core. At July 31, 1995 and 1994 the Company owned approximately 21.5% and 12.8% respectively. Summarized unaudited financial statements for Core for the seven months ended July 31, 1995, are as follows: Assets $1,486,000 Liabilities $2,122,000 Deficit Equity $ (636,000) Sales $ 845,000 Expenses $1,414,000 Loss $ (569,000) Note 6 ------ In April 1995 the Company consummated a transaction, whereby it agreed to acquire 100,000 shares of its common stock at $2 per share. The agreement called for 20% down, or $40,000, at the closing and the balance of $160,000 to be paid in equal annual installments of $40,000 beginning on April 1, 1996, through April 1, 1999. Interest payments on the unpaid balance are to be paid quarterly at 8%. The unpaid balance is secured by an equal amount of the company's common stock as defined in the agreement. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company's working capital at July 1995 of $1,822,000 continues to remain stable when compared to $1,866,000 at October 1994 and $1,355,000 at July 1994. The business climate in 1995 continues to pressure the Company to maintain high inventory levels for on- time deliveries. In addition, the cost of raw materials has continued to rise at a rate substantially higher than the balance of the economy. During the first nine months of 1995, raw material prices have increased by as much as 11%. The demand at the brass mills, during much of 1995, has pushed deliveries of raw material out many weeks, forcing the company to inventory more product and its customers to plan further in the future. The inventory requirements will continue to put pressure on the Company's working capital and lines of credit. The Company's credit agreement provides for a total line of credit of $3,100,000, of which $1,700,000 is for working capital, a $1,000,000 long term machinery and equipment loan, and a $400,000 line for the acquisition of additional equipment. At July 1995, the Company had approximately $782,000 available under the working capital line and $300,000 available under the equipment line as compared to $780,000 and $400,000 , respectively, at October 1994 and $968,000 and $400,000 respectively, at July 1994. The Company believes that the lines of credit are adequate to fund the working capital requirements during the balance of 1995. The Company's credit agreement has been extended, by the lender, to August 1996. The Company has purchased $498,000 of equipment through July 1995, of which $412,000 was new manufacturing equipment. The equipment included a new parts washing system for $215,000 and $198,000 of secondary operation equipment. $215,000 of the equipment was financed through a five year equipment lease, $100,000 through the Company's line of credit and the balance from cash flow. The Company does not anticipate any additional major purchases through the balance of 1995. If any additional purchases are made, the Company's current available line of credit of $300,000 is considered adequate to fund those requirements. In February 1995, the Company leased 17,000 square feet of additional manufacturing facilities in Ontario, Calif. The Company had originally anticipated expanding its Phoenix division, but the availability of additional space adjacent to its existing facility in Ontario caused the Company to rethink its options for 1995. The lease is effective March 1995 through September 1997. Improvements to the additional facilities of approximately $50,000 were expended in March and April of 1995. The Company plans on using the facilities for warehousing, assembling and secondary operations. 15 In April 1995 the company entered into an agreement whereby it agreed to acquire 100,000 shares of its common stock for $2 per share of $200,000. The agreement called for 20% down or $40,000 at the closing and the balance to be paid in equal annual installments of $40,000 beginning in April 1996 through April 1999. Interest payments on the unpaid balance are to be paid quarterly at 8.5% The note is secured by an equal number of shares of the Company's stock, in direct relationship to the unpaid balance, at $2 per share. Each year as a payment is made, the amount of stock held as security is reduced accordingly. The Company retains all voting rights to the stock held as security as long as the Company is not in default on the agreement. RESULTS OF OPERATIONS --------------------- Sales for the nine months ended July 1995 show an increase of 13% over 1994. However, sales for the quarter ended July 1995 reflect a 4% decline from 1994. While sales for the current year have shown a consistent strength as the economy remained healthy, the Company had seen signs of a slowdown over a period of three to four months. In addition, 1995 sales increases are partially attributed to the substantial raw material increases which started in late 1994 and have continued during 1995. 1995 raw material price increases have been as high as 11% in some materials. While the Company's backlog remains very strong at $5,452,000 at July 1995, as compared to $4,419,000 at October 1994 and $5,359,000 at July 1994, the Company has experienced a slowdown in certain departments. The backlog also reflects the effects of longer term contracts, as extended material deliveries have forced the Company and its customers to plan further in the future. While the Company does not anticipate a major change in business for the balance of the current fiscal year, the signs of a weakening economy are more prevalent than in the last few years. The Company's operating profits for the nine months and three months ended July 1995 of $719,000 and $250,000 reflect a slight improvement over 1994. Net income of $286,000 and $69,000 for the nine months and three months ended 1995 as compared to $344,000 and $120,000 for the 1994 reflect higher interest costs as well as higher effective tax rates, for the current year. The Company utilized the balance of its tax loss and credit carryforwards in 1994. Current periods will therefore reflect full tax rates for both financial reporting as well as cash payments required for tax returns. 16 PART II - OTHER INFORMATION 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. 17 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 18, 1995 By /s/ Duane L. Femrite -------------------- -------------------------------------- Duane L. Femrite President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Director