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 April 30, 1996 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) 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: 1,471,354 shares as of March 31, 1996. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 ATHANOR GROUP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) APRIL 30, 1996 AND OCTOBER 31, 1995 (THOUSANDS) ASSETS 1996 1995 ---- ---- Current Assets: Cash $ 47 $ 62 Trade Receivables, Less Allowance for Doubtful Accounts of $12,000 and $12,000 2,360 2,145 Notes Receivable: Net of Allowance of $534,062 40 25 Inventories: Raw Materials 931 835 Work in Progress 452 519 Finished Goods 1,757 1,618 ---------- ---------- 3,140 2,972 Prepaid Expenses 64 136 Deferred Income Tax Asset 191 191 ---------- ---------- Total Current Assets 5,842 5,531 Property, Plant and Equipment, at Cost 4,651 4,456 Less Accumulated Depreciation and Amortization 3,501 3,347 ---------- ---------- Net Property, Plant and Equipment 1,150 1,109 Other Assets 84 83 ---------- ---------- $ 7,076 $ 6,723 ========== ========== 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) APRIL 30, 1996 AND OCTOBER 31, 1995 (THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ---- ---- Current Liabilities: Notes Payable $ 1,006 $ 1,177 Current Portion of Long-Term Debt 399 366 Accounts Payable 1,741 1,538 Accrued Expenses 679 606 ---------- ---------- Total Current Liabilities $ 3,825 $ 3,687 Long-Term Debt, Less Current Portion 878 974 Deferred Gain on Sale-Leaseback 19 39 Noncurrent Deferred Income Tax Liability 55 55 Stockholders' Equity: Common Stock 15 15 Additional Paid-In Capital 1,447 1,447 Retained Earnings 837 506 ---------- ---------- Total Stockholders' Equity 2,299 1,968 ---------- ---------- $ 7,076 $ 6,723 ========== ========== 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) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Net Sales $ 11,883 $ 9,624 Cost of Sales 9,929 7,947 ---------- ---------- Gross Profit 1,954 1,677 Selling, General & Administrative 1,207 1,208 ---------- ---------- Operating Profit 747 469 Other Income (Expense) Interest Expense (144) (128) Equity in Loss of Unconsolidated Investee (84) - Miscellaneous - Net 41 28 ---------- ---------- Earnings Before Income Taxes 560 369 Income Tax Expense 229 152 ---------- ---------- NET EARNINGS $ 331 $ 217 ========== ========== 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) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Earnings Per Common Shares: Primary and Fully Diluted $ 0.22 $ 0.14 ---------- ---------- NET EARNINGS $ 0.22 $ 0.14 ========== ========== 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 APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Net Sales $ 5,808 $ 4,962 Cost of Sales 4,876 4,111 ---------- ---------- Gross Profit 932 851 Selling, General & Administrative 608 638 ---------- ---------- Operating Profit 324 213 Other Income (Expense) Interest Expense (70) (73) Equity in Loss of Unconsolidated Investee (34) 0 Miscellaneous - Net 20 6 ---------- ---------- Earnings Before Income Taxes 240 146 Income Tax Expense 98 60 ---------- ---------- NET EARNINGS $ 142 $ 86 ========== ========== 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 APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Earnings Per Common Shares: Primary and Fully Diluted $ 0.10 $ 0.06 ---------- ---------- NET EARNINGS $ 0.10 $ 0.06 ========== ========== 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) SIX MONTHS ENDED APRIL 30, 1996 (THOUSANDS) Common Stock (25,000,000 Shares Additional Authorized) Paid-In Retained Shares Par Value Capital Earnings Total ------ --------- ------- -------- ----- Balance at October 31, 1995 1,571 $ 15 $ 1,447 $ 506 $ 1,968 Net Earnings for Six Months Ended April 30, 1996 189 189 ---------- ---------- ---------- ---------- --------- 1,571 $ 15 $ 1,447 $ 695 $ 2,157 ========== ========== ========== ========== ========= 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) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Cash Flows From Operating Activities Net Earnings $ 331 $ 217 Adjustments to Reconcile Net Earnings to Net Cash Provided (Used) by Operating Activities: Equity in Loss of Unconsolidated Investee 84 - Provision for Deferred Income Taxes - - Depreciation and Amortization 154 137 Amortization of Deferred Gain on Sale and Leaseback (20) (20) (Increase) Decrease in Operating Assets: Accounts Receivable (215) (111) Inventories (168) (35) Prepaid Expenses 72 (21) Other (16) (94) Increase (Decrease) in Operating Liabilities: Accounts Payable 203 (3) Accrued Liabilities 73 (80) ---------- ---------- Net Cash Provided (Used) by Operating Activities 498 (10) ---------- ---------- Cash Flows from Investing Activities: Purchase of Property and Equipment (195) (60) Investment / Advances In Unconsolidate Investee (84) - Short Term Loan 0 40 Investment - Common Stock 0 (200) ---------- ---------- Net Cash Used in Investing Activities (279) (220) ---------- ---------- Cash Flows from Financing Activities: Net Borrowings Under Line of Credit (171) 136 Payment of Loans Payable, Net - - Net Proceeds Long Term Debt (63) - ---------- ---------- Net Cash Provided (Used) in Financing Activities (234) 136 ---------- ---------- Net increase (Decrease) in Cash (15) (94) Cash at Beginning of Year 62 149 ---------- ---------- Cash at End of Period $ 47 $ 55 ========== ========== 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) SIX MONTHS ENDED APRIL 30, (THOUSANDS) 1996 1995 ---- ---- Supplemental Disclosures of Cash Flow Information: Interest Paid $ 144 $ 128 ========== ========== Income Taxes Paid $ 0 $ 125 ========== ========== Supplemental Schedule of Noncash Investing and Financing Activities: April 30, 1996 The Company purchased $132,000 of machinery and equipment under a capital lease obligation. April 30, 1995 The Company purchased $207,000 of machinery and equipment under a capital lease obligation. The accompanying notes are an integral part of these statements SUBJECT TO AUDITOR'S YEAR END ADJUSTMENTS 12 Notes to Consolidated Financial Statements (Unaudited) April 30, 1996 and 1995 Note 1 Primary earnings per common share are computed by using the weighted average number of common shares outstanding during the year: 1,471,354 shares in 1996 and 1,471,434 shares in 1995. 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, the Company invested an additional $123,500 into Core which was subsequently reduced to zero as of October 1995 because of losses incurred by Core. During 1996, the Company has invested an additional $84,000 into Core, which has been written off, due to expected losses at Core during the same period. In April 1996 the Company agreed to an extension of its forbearance under the Loan and Security Agreement with Core to August 15, 1996. Under the extension agreement, the Company will be granted additional common stock in Core, based on a formula using the unpaid balance of the loans, as a percent of the total loans, calculated at certain intervals. In April 1996 the Company received 206,700 shares of Core common stock. At April 30, 1996 and 1995, the Company owned approximately 23.3% and 21.5% respectively of the issued and outstanding common stock of Core. Summarized unaudited financial statements for Core, for the four months ended April 30, 1996 are as follows: Assets $ 780,000 Liabilities $ 4,050,000 Deficit Equity $ (3,270,000) Sales $ 510,000 Expenses $ 660,000 Loss $ (150,000) 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 April 1996 of $2,017,000 continues to improve when compared to $1,844,00 at October 1995 and $1,855,000 at April 1995. Current sales growth has placed additional demands on working capital as the Company maintains high inventory levels to service customers needs as well as for on-time deliveries. While this is considered a necessary requirement of growth, as well as a customer requirement, the Company is striving for ways to implement inventory controls yet service its customers on a timely basis. The Company's credit agreement provides for a total line of credit of $3,400,000, of which $2,000,000 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 April 1996, the Company had approximately $994,000 available under the working capital line and $300,000 available under the equipment line as compared to $823,000 and $300,000 respectively at October 1995 and $644,000 and $400,000 respectively at April 1995. The Company believes that the lines of credit are adequate to fund working capital requirements during the balance of 1996. The Company's credit agreement is automatically renewed in August 1996 unless terminated in writing by the lender. The Company is currently in discussions with its lender regarding the extension of its credit agreement and has no reason to believe that the line of credit will not be extended by the lender. The Company has acquired $195,000 of new equipment during 1996. $132,000 of the equipment was financed through a five year equipment lease. The Company anticipates additional equipment purchases during 1996 of $200,000 to $300,000. The Company's current equipment line of credit of $300,000 is expected be adequate to fund any additional equipment purchases. The Company has plans to expand its Phoenix division during 1996 and is currently in negotiations regarding leasing a 15,000 square foot facility for five years. The Company's current lease on its Phoenix facility ends in August 1996. The larger facility will allow for planned expansion over the next few years as well as provide the division with a better equipped, autonomous working environment. The expansion is expected to cost between $150,000 and $200,000, including equipment and leasehold improvements, over a period of six to twelve months. The Company believes it will be able to fund these costs from working capital and its equipment line of credit. RESULTS OF OPERATIONS The operating results for the first six months of 1996 have continued to show improvement as the demand for the Company's services has remained very strong. Sales for the six months and three months ended April 1996 were 24% and 17% ahead of 1995. The sales increases are a continuation of a strong business climate as well as the results of the Company's growth program. The leasing of additional facilities in 1995 has allowed for the continued expansion 15 into larger diameter machines as well as expanding our secondary operations department. These planned expansions are the basis for the Company's current growth plans. The company's operating profits for the six months and three months ended April 1996 of $747,000 and $324,000 respectively, reflect increases of 59% and 52% when compared to 1995. The increase in operating profits is a direct result of the increased sales. The Company's current backlog at April 1996 of $5,825,000, as compared to $6,134,000 at October 1995 and $5,163,0000 at April 1995, continues to demonstrate the strength in the current business climate. While the Company has experienced slight downturns in sales and backlog during 1996, the effect has always been short-term. In February 1995, the Company leased 17,000 square feet of additional manufacturing facilities in Ontario, California. The lease is effective March 1995 through September 1997. Improvements to the additional facilities cost approximately $50,000, in addition to the labor and overhead associated with setting up the facility, before the facility became functional. 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 June 12, 1996 By /s/ Duane L. Femrite ----------------- ------------------------ Duane L. Femrite President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Director