-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EXAAsIQm3lnj+qKadPt5gZ95zP6C3WmS1MyD5yC2y7RIgbOPE9GkP/5cH3ANoH9y WoAzEl0Dw2tr9EVuSi3tbA== 0000944209-99-000084.txt : 19990129 0000944209-99-000084.hdr.sgml : 19990129 ACCESSION NUMBER: 0000944209-99-000084 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATHANOR GROUP INC CENTRAL INDEX KEY: 0000278314 STANDARD INDUSTRIAL CLASSIFICATION: SCREW MACHINE PRODUCTS [3451] IRS NUMBER: 952026100 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 002-63481 FILM NUMBER: 99514927 BUSINESS ADDRESS: STREET 1: 3452 E FOOTHILL BLVD STE 417 CITY: PASADENA STATE: CA ZIP: 91107 BUSINESS PHONE: 818-440-1602 MAIL ADDRESS: STREET 2: 921 E CALIFORNIA AVE CITY: ONTARIO STATE: CA ZIP: 91016 FORMER COMPANY: FORMER CONFORMED NAME: ALGERAN INC DATE OF NAME CHANGE: 19861015 10KSB40 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-KSB X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange - ----- Act of 1934 for the fiscal year ended October 31, 1998, or Transition Report pursuant to Section 13 or 15(d) of the Securities - ----- Exchange Act of 1934. Commission file number 2-63481 ---------------------------------------------------------- ATHANOR GROUP, INC. - -------------------------------------------------------------------------------- (Name of small business issuer as specified in its charter) CALIFORNIA 95-2026100 - ------------------------------- --------------------- (State or other jurisdiction of (IRS Employer ID No.) incorporation or organization) 921 East California Avenue, Ontario, California 91761 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) The Company's telephone number, including area code (909) 467-1205 ----------------------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value - -------------------------------------------------------------------------------- (Title of Class) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. / X / ----- Issuer's revenues for its most recent fiscal year were $23,635,679. The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 1998 amounted to $1,736,877. The registrant had 1,458,854 shares of common stock outstanding as of December 31, 1998. Part I Item 1. DESCRIPTION OF BUSINESS ATHANOR GROUP, INC. ("the Company") was incorporated under the laws of the State of California in 1958, under the name ALGERAN, INC. BUSINESS DEVELOPMENT - -------------------- SUBSIDIARY CORPORATION Since its inception in 1958, and since 1986 through its wholly-owned subsidiary, ALGER MANUFACTURING COMPANY, INC., a California corporation ("Alger"), the Company has been engaged in the manufacture of screw machine products (nonproprietary metal components) produced in large quantities to customer specifications. THE SCREW MACHINE PRODUCTS INDUSTRY IN GENERAL - ---------------------------------------------- It is estimated that there are in excess of 1600 manufacturing companies making screw machine products in the Untied States. Screw machine products usually are component parts for use in machines, appliances, automobiles, and similar durable goods; they also have a wide variety of uses in individual, industrial, military, and consumer products. These parts must be manufactured strictly to customer's specifications and must be of precise dimensions, demanding close individual control during production. The Company does not own the designs for any of the products produced for customers. Historically, the screw machine products industry has been extremely sensitive to downturns in the general economy In meeting customer orders, the Company manufactures a wide range of products. Before placing an order, a customer provides the Company with detailed drawings and specifications for a specific product. Based upon these drawings and specifications, the Company prepares a quote to manufacture the product. Once the customer agrees to this quote, manufacturing of the product is scheduled. Quality control inspections are made throughout the manufacturing process. Emphasis is placed on quality in design. This supports the Company's program of defect prevention rather than defect detection. This approach has resulted in significantly lower costs through the reduction of scrap and associated indirect labor. Upon completion of the manufacturing process, a final inspection is made to determine whether the product conforms to the customer's specifications. If the product fails to conform to the customer's specifications, the Company will correct the problem at its own expense. Many of the Company's customers are increasingly competing in the global market. The Company, in its continuing effort to maintain a partner like working relationship with these customers, has pursued a world class quality program based on the internationally recognized ISO 9000 standard. This not only supports the strategic direction of the Company's customer base, but also enhances the Company's appeal to potential new customers. The projected completion of the process and certification for this International Quality Standard will be completed in early 1999. The Company is currently using an outside consultant to assist in the design and implementation of the requirements to meet this quality standard. Additionally, in today's competitive marketplace, customers are requiring the Company to comply with a variety of delivery demands. These include "Just in Time" (JIT), Kan-Ban and "Ship to Stock" requirements. The Company's ability to adapt to the varying demands of its customers allows the Company to remain a leader in its industry. In October 1997, the Company went on-line with a new fully integrated software system, which has the ability to purchase and schedule materials in conjunction with the manufacturing process. The company expended substantial resources and time in an effort to make sure the new system would meet all its current and anticipated future requirements. This new system will give the Company an effective tool to control in-house inventories and to provide on time deliveries to its customers. All of the Company's business consists of the production of component parts of proprietary products for other companies. A number of these companies have the capacity to perform this work themselves, but purchase these components from the Company for competitive reasons. Should these companies decide in the future to do this work themselves, the business of the Company could be adversely affected. An additional benefit of the new manufacturing software system is the ability to generate backlog figures in various forms. In the past, the Company's system was designed to only generate unproduced backlog amounts. As of October 31, 1998, the Company's total backlog amounted to approximately $6,986,000 (compared to $3,607,000 of unproduced backlog) of anticipated gross sales from projects on which customers have authorized work to commence during the fiscal year 1998. In the normal course of business, some backlog orders are inevitably cancelled or the time of delivery is changed. 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. The Company's unproduced backlog, as of October 31, for the past three years was as follows: 1997 - $4,957,000, 1996 -$6,184,000, 1995 - $6,134,000. MACHINERY Of central importance to the screw machine product manufacturer is the automatic screw machine. Most of the Company's machines are cam and gear operated, which is extremely efficient for "High Speed - High Volume Production". The Company, in essence, is in the business of selling machine time, the capabilities of its machines to produce parts and the skill of its personnel in preparing and operating its machines. The automatic screw machine is a very complex piece of machinery that requires highly skilled machinists to set up and operate. Because the Company specializes in high volume production, it must operate the fastest machines that will produce a part within the customers' specifications. The Company feels that the combination of its engineering capabilities, its experience and its well-maintained equipment, meet these requirements. All of the machinery utilized by the Company is in good working order and adequate for the current needs of the Company and its customers. RAW MATERIALS AND SUPPLIES Screw machine products can be made from many materials, including various grades of steel (carbon, alloy, or stainless), most brasses and bronzes, aluminum, precious metals, and machinable plastics. The Company specializes in manufacturing products primarily with brass, as well as carbon steel, aluminum, and stainless steel. Materials used by the Company are either purchased from mills, material distributors, or supplied by the customer. Although the Company is not presently faced with any shortages of materials, shortages of certain materials have occurred in the past and may occur in the future. Future shortages of materials would have an adverse affect on the Company's business. The Company orders materials specifically for the jobs it is currently manufacturing and, therefore, does not keep excess materials on hand. The Company usually has sufficient materials in stock to continue operations for approximately one month. All of the metals purchased by the Company, for customer jobs, either become product or are reclaimed, to be used in another process. The reclamation of scrap material is very important in the manufacturing of screw machine products. The value received from the sale of scrap is an essential element in the pricing and profitability of each job. All reclaimed scrap is either sold back to the mills or sold to a scrap dealer. In the case of brass, the scrap is sold back to the supplying mill at a price established by the mill. Aluminum and stainless scrap is sold to various scrap dealers at a price established by the market demand. Both the cost of the material and the anticipated return on the sale of scrap are considered in preparing a quote for a particular job. The Company's principal suppliers are: Chase Brass and Copper Company, Cerro Metal Products, Bralco Metals, Joseph T. Ryerson and Son, Inc., and Carpenter Technology. The Company does not use, and has not used, solvents in the process for the cleaning of parts for many years. In 1987, the Company purchased its first soap and water parts cleaner. The evolution of soap and water parts cleaning has been slow in coming. The Company purchased its third generation soap and water parts cleaner in 1997. The new parts cleaner is a major improvement in getting product cleaner and adds a new dimension in the reclamation of cutting oils and the soap used in the cleaning process. EMPLOYEES The Company and its subsidiaries employed, on a full-time basis, one hundred and sixty (160) persons on October 31, 1998, of which twelve (12) were general and administrative, three (3) were in marketing and sales, and one hundred and forty-five (145) were production personnel. The Company believes that it has good relations with its employees, none of whom is covered by a collective bargaining agreement. The ability of the Company to retain and attract skilled personnel, especially skilled machinists, is of primary importance to the Company's operations. Qualified machinists are generally in short supply in the industry, and, therefore, in great demand. The Company has been able to attract and retain a staff of skilled machinists and support staff by offering compensation packages comparable with larger companies. In addition, the Company conducts formal training programs, whereby selected unskilled personnel are given the opportunity to learn the machinist trade. The Company also conducts other regular training programs for its skilled and unskilled employees. ENVIRONMENTAL During 1992, perchloroethylene contamination was found in the ground soil below the Alger manufacturing facility. The Company completed initial soil testing in 1992 subsequently did additional testing during 1993. The appropriate local agencies were notified of the results of the Preliminary Environmental Site Investigations. The Company is currently awaiting direction from such agencies. Until a plan of remediation has been structured and approved by the appropriate agencies, the cost to remediate the contamination can only be estimated. As of October 31, 1996 and 1997, a provision of $265,262, had been accrued for the estimated costs of this remediation. During 1998 the Company hired an environmental engineer to start the process of further investigation of the site. The company has advanced $20,000 during fiscal 1998 for the initial stages of this investigation, leaving a provision of $245,622 as of October 1998. It is anticipated that sometime in the near future a more comprehensive analysis will be completed and a plan of remediation will be approved. It is estimated that the costs associated with the remediation will be expended over a two to four year period. Although the matter has not been fully investigated, the Company believes that its insurance may recover a portion of the remediation cost; however, the Company has not recognized any potential recovery in its financial statements. SALES PRACTICES Historically, the majority of the company's customer base is located in the western United States. However, in the last few years the Company has continued to expand outside of its traditional territory. Sales in the Midwest and Southern portion of the United States have shown steady growth. Sales in the Southern California region are handled by the Company's sales department, while the balance of the country is handled through manufacturers' representatives. The Company currently uses seven (7) manufacturers' representatives located throughout the Western, Midwest, and Southern regions of the United States. The geographical distribution of the Company's sales during the fiscal years ended October 31, 1998, 1997, and 1996 was as follows: Dollar Amount of Total Sales (000's) ------------------------------------
1998 1997 1996 ------- ------- ------- California $ 6,328 $ 6,483 $ 5,389 Other Western States 4,194 3,954 4,431 All Others 9,030 9,713 7,458 Scrap 4,084 4,729 4,725 ------- ------- ------- $23,636 $24,879 $23,744 ------- ------- -------
Percentage of Total Sales -------------------------
1998 1997 1996 ------- ------- ------- California 27% 26% 30% Other Western States 18 16 19 All Others 38 39 31 Scrap 17 19 20 --- --- --- 100% 100% 100%
Export sales have never been, nor are they anticipated to be, a significant part of the Company's business. During the fiscal years ended October 31, 1998, 1997, and 1996, foreign sales represented less than one-half of one per cent of total sales. The Company believes that its sales effort outside of its local sales territories, specifically Southern California and recently Arizona, is unique to the screw machine industry, since generally screw machine companies are localized in their sales and operations. The addition of qualified manufacturers' representatives is, and has been for many years, an integral part of the Company's strategy for continued growth outside of these traditional sales territories. The Company uses many methods to advertise its capabilities including sales brochures, directory advertising, and trade shows. The Company also uses a sales video, the latest vehicle for visual communication. The video has proven to be an excellent sales tool to communicate the Company's capabilities. A prospective customer, as well as existing customers, have the opportunity to see the inside workings of the Company's manufacturing facilities and to generate a sense of confidence in the Company's ability to produce a product to the customer's required specifications and quantities. Alger has established a home page on the World Wide Web. Alger capabilities can be viewed using http://www.alger1.com. CUSTOMERS The Company manufactures parts for a variety of customers. During 1998 there was one customer, from multiple divisions, which accounted for approximately 10.1% of the Company's consolidated revenues. The Company does not believe that the loss of this customer would have a material adverse effect on its overall operations. The products associated with this customer require substantial outside processing and the actual utilization on the Company's facilities required for this customer is substantially less than 10%. During 1998, less than 1% of the Company's business was government related. Item 2. DESCRIPTION OF PROPERTY PROPERTIES The Company and its subsidiary, Alger, lease office and manufacturing space in Ontario, California, and in Glendale, Arizona. Alger leases three manufacturing facilities: 35,600 square feet and 17,000 square feet in Ontario on leases ending September 2002, and 15,700 square feet in Glendale, Arizona on a lease ending October 2001. The Company leases the above properties at rates ranging from $.28 triple net to $.38 gross per square foot. The Company believes that its manufacturing facilities are adequate for the current operations. The Company uses office space at the Ontario facility to house its corporate office. In management's opinion, all of the Company's interests in its leased properties are adequately covered by insurance. Item 3. LEGAL PROCEEDINGS Not Applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Part II Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company is currently quoted on the OTC Bulletin Board system and can be located on The Bulletin Board using the symbol "ATHR". The following chart lists the stock price range from the Company's market makers, as published by the National Quotation Bureau. These over-the-counter market quotations reflect the inter-dealer prices without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions. Market Information ------------------
12/31/98 9/30/98 6/30/98 3/31/98 -------- ------- ------- ------- Ask 3 19/32 3 1/4 2 7/8 2 3/8 Bid 1 21/32 1 21/32 1 13/16 1 3/4 12/31/97 9/30/97 6/30/97 3/31/97 -------- ------- ------- ------- Ask 3 1/8 3 3/8 2 7/8 2 7/8 Bid 2 1/4 2 5/8 2 3/8 2 3/16 12/31/96 9/30/96 6/30/96 3/31/96 -------- ------- ------- ------- Ask 3 3 1/2 3 3/8 1 3/4 Bid 1 7/8 2 1/8 2 3/4 1 3/8
As of December 31, 1998, the approximate number of shareholders of record of common shares was 253. No dividends were declared during the fiscal year ended October 31, 1998, on the Company's common stock. The Company does not plan to pay dividends on its common stock in the foreseeable future and anticipates that any future earnings will be retained to support the Company's business. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The following table summarizes the changes in working capital for the fiscal years 1998, 1997, and 1996 (Thousands of Dollars).
1998 1997 1996 ------ ------ ------ Current Assets $6,294 $6,600 $6,097 Current Liabilities $4,013 $4,373 $3,706 Working Capital $2,281 $2,227 $2,391
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, AS COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1997 The Company's working capital as of October 1998 remained fairly constant as compared to 1997. While 1998 started out to be a very good year with sales and profit increases, the business climate started to deteriorate in the second quarter and continued during the last half of the year. With sales and backlog declining, the Company decided not to make any new major equipment purchases that were not absolutely necessary, until there was a clearer picture of where the economy was headed. As such, the Company only purchased $93,000 of equipment in 1998 as compared to $1,214,000 in 1997. In addition, the Company has approximately $170,000 of additional equipment on order for delivery in late 1998 and early 1999. In August 1998 the Company completed an amendment to its credit agreement extending the agreement to August 31, 1999. The amended credit agreement maintained the Company's working capital line of $2,600,000. The amended agreement provided for a new term loan not to exceed $483,333. In addition, the amended agreement continued a new equipment line to $750,000 (with a balance available of $650,000) for the purchase of additional equipment. The equipment line must be used in increments of a minimum of $100,000 and shall not exceed 85% of the purchase price of equipment. At October 31, 1998, the Company had approximately $1,185,000 available under the working capital line and $650,000 available under the new equipment line as compared to $1,235,000 and $650,000 respectively in 1997. The Company believes that the amended agreement is adequate to fund the Company's working capital requirements during fiscal year 1999 and anticipated equipment purchases. During 1998 the Company made additional loans to Core Software Technology (Core) in the amount of $35,000. The total outstanding loans to date are $685,622. During 1997 Core repaid $225,116 of the loans and accrued interest. Core has been able to find other sources of financing to meet its working capital requirements, although it has yet to generate sufficient revenues and profits to cover its overhead. The outstanding balance, except for the $35,000 advanced in 1998, has been fully reserved in prior years pursuant to the equity method of accounting. (See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.) FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997, AS COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1996 The Company's liquidity showed a small decrease between fiscal 1997 and 1996. However, accounts receivable and inventory increased by $500,000 or approximately 9% over 1996. In a year when sales only increased by approximately 5%, such large increases put a substantial burden on working capital. Such increases, especially in inventory, were the continuation of the increasing customer requirements in a very competitive business environment. It is the Company's opinion that the ability to meet these requirements sets it apart from many of its competitors. The Company funded the increases in current assets through its working capital line of credit as well as an increase in accounts payable. In July 1997 the Company completed an amendment to its credit agreement, extending the agreement to August 31, 1998. The amended credit agreement increased the Company's working capital line to $2,600,000. The Company's long- term equipment loan of $900,000 with a balance owing of $650,000 as of October 1997 remained intact. The net effect of the amended credit agreement was to increase available financing by approximately $400,000. In addition, the amended agreement increased a new equipment line to $750,000 (with a balance available of $650,000) for the purchase of additional equipment. The equipment line must be used in increments of a minimum of $100,000 and shall not exceed 85% of the purchase price of equipment. At October 31, 1997, the Company had approximately $1,235,000 available under the working capital line and $650,000 available under the new equipment line as compared to $1,260,000 and $300,000 respectively in 1996. The Company purchased $1,214,000 of manufacturing and computer equipment as well as leasehold improvements during 1997. These purchases included a new parts washing system which cost $384,000. The purchases also included approximately $225,000 of equipment and leasehold improvements for the new Glendale Arizona facility. The Company financed $744,000 of the equipment purchases through five- year leases, with the balance, approximately $470,000, coming from working capital. RESULTS OF OPERATIONS - --------------------- The following table summarizes the results of operations for the fiscal years 1998, 1997, and 1996 (Thousands of Dollars):
1998 1997 1996 ------- ------- ------- Sales $23,636 $24,879 $23,744 Cost of Sales $19,855 $21,189 $19,911 Operating Profit $ 1,063 $ 998 $ 1,178 Net Earnings $ 455 $ 483 $ 529
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998, COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1997 Sales for 1998 declined 5% as compared to 1997. However, sales for 1998 were volatile, as the first quarter sales showed a 28% increase to a 21% decline in sales the third quarter as compared to 1997. The Company's backlog seemed to follow right along as it increased to $9,014,000 at the end of the first quarter and ended at $6,986,000 as of October 1998 as compared to $8,075,000 at October 1997. The decline in sales and backlog was gradual and consistent during the last half of fiscal 1998. There is no one factor other than a general slowdown in business across the Company's customer base. The Company was expecting, but not sure to what extend sales would be affected by the economic problems in Asia and Europe, as we are not always sure to what extent the component parts we produce go into products for export. Based on the current backlog, sales for the first quarter of fiscal 1999 are expected to be substantially lower than in fiscal 1998. It is difficult at this time to determine how long the current slowdown will continue. The Company's operating profits increased 6.5% and the cost of sales declined by 1% as compared to 1997. Considering the decline in sales during fiscal 1998, the Company stressed cost cutting and deferral of optional repairs and maintenance. In addition, some raw materials declined as the market across the country became more competitive and an oversupply of material existed. The effect of such a decline in the cost of raw materials is to increase the gross profit percent and reduce cost of sales as a percent of sales. 1997 also absorbed the non-capitalized costs of building out the new facility in Arizona, which amounted to approximately $40,000. Interest expense decreased 10% in 1998 as compared to 1997. This decrease was due to lower sales and a reduction in financing costs associated with the accounts receivable line of financing. FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997, COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1996 While sales for the fiscal year 1997 improved by approximately 5%, operating profits declined by approximately 15% as compared to 1996. The main reasons for this decline were related to the non-capital costs associated with building out a new facility in Glendale, Arizona and added overhead associated with the general growth of the company. During 1997 the company moved its Arizona manufacturing into a new and larger facility. While the move had been planned for almost a year, the non- capitalized costs associated with the move, of approximately $40,000, were all absorbed in 1997. This included the cost associated with closing down and clean up of the old facility. The new facility took approximately four months to become fully operational. The cost of sales increased in excess of 1% over 1996. During the past few years the Company had concentrated its equipment purchases in the larger diameter equipment. 1997 was no exception as the majority of new machines acquired were large diameter. This equipment has historically generated sales with a higher percentage of material, thereby increasing the overall cost of such sales. Also, during 1997 the Company added a substantial number of employees, increasing the employee base to 152 as compared to 132 at the end of 1996. Part of the increase in employees was to improve the Company's technical capabilities and part was to meet increasing customer requirements for special handling, packaging etc. While some of the additional labor associated with special customer requirements is built into customer contracts, the majority of the overhead added during 1997 was absorbed by the Company. The Company's effective tax rate for 1997 increased to 42% from 34% in 1996. Approximately 5.2% of this change is associated with an increase in the effective state tax rate due to the California Manufacturers Investment Credit. While this credit was available to the Company in both 1997 and 1996, the Company received a larger benefit in 1996. The Company's total backlog of $8,075,000 ($4,957,000 of unproduced backlog) has declined as compared to $6,184,000 of unproduced backlog at 1996. This drop in backlog all occurred during the final quarter of fiscal 1997. During 1997 the Company received $225,116, as partial repayment, of its loans to Core that had previously been written off. EFFECTS OF INFLATION - --------------------- Inflation for the fiscal years ended 1998, 1997 and 1996 were minimal and had no effect on the Company's operations. In the past, the Company has not normally committed to long-term fixed price contracts. However, the current business climate, with customers placing longer-term contracts, has required the Company to commit to longer term fixed price contracts. If material price increases are unusually high, the Company has been able to request and usually get a price adjustment. However, the abnormally large increases in the cost of raw materials tends to skew the percentages when making cost comparisons between periods. The company is unable to predict if raw materials will experience similar increases as has taken place in previous years. If similar increases do occur in the future, the Company does not believe such increases would have a material effect on its operations. YEAR 2000 COMPUTER REQUIREMENTS - ------------------------------- During fiscal 1997, the Company established an enterprise-wide program to address its Year 2000 issues. The Year 2000 effort, which includes the implementation of previously planned business critical systems and specific Year 2000 projects, is on track to be completed before the year 2000. All applications that were previously not Year 2000 compliant have been replaced by new systems. The costs of new systems have been recorded as an asset and amortized. The portion of the costs associated with making the remaining applications, not covered by new systems, Year 2000 compliant is not considered to be material. Accordingly, the Company does not expect the Year 2000 effort to have a material impact on its results of operations, liquidity or financial condition. In addition, the Company has not deferred any other projects that will have a material impact on its results of operations, liquidity or financial condition. INFORMATION TECHNOLOGY ("IT") SYSTEMS ------------------------------------- In conjunction with the establishment of its enterprise-wide Year 2000 program, the Company began converting its computer information systems to a new enterprise system, which is Year 2000 compliant. As of October 31, 1998, all implementations are complete. NON-IT SYSTEMS -------------- Non-IT Systems may contain date sensitive, embedded technology requiring Year 2000 upgrades. Examples of this technology include security equipment such as access and alarm systems, as well as facilities equipment such as telephone and heating and air conditioning units. As the Company is a product manufacturer, the "embedded chip" issue relates to equipment used by the Company and hence, primarily to the Company's manufacturing facilities. Facilities and equipment inventories and assessments are in progress. However, the majority of the Company's machinery is manually operated, and therefore is less affected by Year 2000 issues. The Company is also addressing the readiness of its critical suppliers and customers. All principal material and service suppliers and critical customers have been contacted to determine their level of readiness. The Company has a planned follow up to determine their progress. In certain areas where the Company relies on products supplied by manufacturers for systems provided to its customers, the Company is seeking standard Year 2000 warranties that, to the extent assignable, may be transferred to customers. COSTS ----- The total cost associated with required modifications to become Year 2000 compliant is not expected to be material to the Company's results of operations, liquidity and financial condition. The estimated total cost of the Year 2000 effort is approximately $36,000. The total amount expended through October 1998, was approximately $13,000. The estimated future cost of completing the Year 2000 effort is estimated to be approximately $23,000. RISKS AND CONTINGENCY PLANNING ------------------------------ The Company has identified and assessed its areas of risk related to the Year 2000 problem. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers, the Company is unable to determine at this time whether the consequences of the Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 effort is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its critical suppliers and customers. The Company believes that, with the implementation of its new computer systems and upgrades and completion of the Year 2000 specific projects as scheduled, the possibility of significant interruptions of normal operations should be reduced. Item 7. FINANCIAL STATEMENTS
TITLE PAGE - -------------------------------------------------------------------------------- Independent Auditor's Report......................................... 14 Consolidated Balance Sheets at October 31, 1998, and 1997........................................ 15 Consolidated Statements of Earnings for each of the three years ended October 31, 1998, 1997, and 1996... 17 Consolidated Statements of Stockholders' Equity for each of the three years ended October 31, 1998 1997, and 1996.... 18 Consolidated Statements of Cash Flows for each of the three years ended October 31, 1998, 1997 and 1996.... 19 Notes to Consolidated Financial Statements........................... 21
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Financial Statements October 31, 1998 and 1997 (With Independent Auditors' Report Thereon) Independent Auditors' Report The Board of Directors and Stockholders Athanor Group, Inc.: We have audited the accompanying consolidated balance sheets of Athanor Group, Inc. and subsidiary as of October 31, 1998 and 1997 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended October 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Athanor Group, Inc. and subsidiary as of October 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1998 in conformity with generally accounting principles. /s/ KPMG Peat Marwick LLP Los Angeles, California December 17, 1998 ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Balance Sheets October 31, 1998 and 1997 - --------------------------------------------------------------------------------
Assets 1998 1997 ---------- ---------- Current assets: Cash $ 236,320 137,993 Accounts receivable, net of allowance for doubtful accounts of $8,467 and $13,712 at October 31, 1998 and 1997 (notes C and D) 2,368,775 2,683,318 Other receivables 29,344 99,463 Income tax receivable -- 16,749 Inventories (notes C and D): Raw materials 689,553 637,076 Work in process 438,308 596,783 Finished goods 2,290,331 2,236,895 ---------- ---------- 3,418,192 3,470,754 ---------- ---------- Prepaid expenses 37,275 18,470 Deferred income tax assets (note E) 204,319 173,342 ---------- ---------- Total current assets 6,294,225 6,600,089 Property, plant and equipment, net (notes B and F) 1,543,895 1,840,467 Other assets (including related party receivable of $40,000) 387,732 178,545 ---------- ---------- $8,225,852 8,619,101 ========== =========
See accompanying notes to consolidated financial statements. ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Balance Sheets October 31, 1998 and 1997 - --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1998 1997 ---------- --------- Current liabilities: Note payable (note C) $1,273,034 1,365,497 Current portion of long-term debt (note D) 546,085 594,685 Accounts payable 1,476,713 1,717,838 Accrued liabilities: Salaries, wages and other compensation 261,685 252,392 Income tax payable 47,065 -- Other 408,128 443,040 ---------- --------- Total current liabilities 4,012,710 4,373,452 ---------- --------- Long-term debt, less current portion (note D) 679,512 1,193,494 Noncurrent deferred income tax liability (note E) 129,782 80,441 Stockholders' equity: Redeemable, convertible preferred stock, $3 stated value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued and outstanding 1,458,854 shares in 1998 and 1,467,934 shares in 1997 14,588 14,679 Additional paid-in capital 1,447,391 1,447,391 Retained earnings 1,941,869 1,509,644 ---------- --------- Total stockholders' equity 3,403,848 2,971,714 Commitments (notes C, D and G) ---------- --------- $8,225,852 8,619,101 ========== =========
See accompanying notes to consolidated financial statements. ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Statements of Earnings Years ended October 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
1998 1997 1996 ----------- ---------- ---------- Net sales (note H) $23,635,679 24,879,039 23,744,232 Cost of sales 19,855,347 21,189,044 19,910,869 ----------- ---------- ---------- Gross profit 3,780,332 3,689,995 3,833,363 Selling, general and administrative expenses 2,717,631 2,692,247 2,655,621 ----------- ---------- ---------- Operating profit 1,062,701 997,748 1,177,742 Other income (expense): Interest expense (299,484) (333,677) (279,779) Recoveries (write-offs) of advances to unconsolidated investee -- 225,116 (149,739) Other, net 10,655 (57,616) 58,197 ----------- ---------- ---------- Earnings before income taxes 773,872 831,571 806,421 Income tax expense (note E) 319,163 348,504 277,183 ----------- ---------- ---------- Net earnings $ 454,709 483,067 529,238 =========== ========== ========== Net income per common share (note A): Basic $ .31 .33 .36 =========== ========== ========== Diluted $ .31 .33 .36 =========== ========== ==========
See accompanying notes to consolidated financial statements. ATHANOR GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended October 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
Preferred stock Common stock Additional Retained ------------------- ------------------- paid-in earnings Shares Amount Shares Amount capital (deficit) Total ------ ------ ------ ------ ---------- --------- ----- Balance at October 31, 1995 -- $ -- 1,471,434 $14,714 1,447,391 506,175 1,968,280 Repurchase and retirement of common stock (note G) -- -- (80) (1) -- (120) (121) Net earnings for the year -- -- -- -- -- 529,238 529,238 ------ ------ --------- ------- --------- --------- --------- Balance at October 31, 1996 -- -- 1,471,354 14,713 1,447,391 1,035,293 2,497,397 Repurchase and retirement of common stock (note G) -- -- (3,420) (34) -- (8,716) (8,750) Net earnings for the year -- -- -- -- -- 483,067 483,067 ------ ------ --------- ------- --------- --------- --------- Balance at October 31, 1997 -- -- 1,467,934 14,679 1,447,391 1,509,644 2,971,714 Repurchase and retirement of common stock (note G) -- -- (9,080) (91) -- (22,484) (22,575) Net earnings for the year -- -- -- -- -- 454,709 454,709 ------ ------ --------- ------- --------- --------- --------- Balance at October 31, 1998 -- $ -- 1,458,854 $14,588 1,447,391 1,941,869 3,403,848 ====== ====== ========= ======= ========= ========= =========
See accompanying notes to consolidated financial statements. ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended October 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
Increase (Decrease) in Cash 1998 1997 1996 --------- -------- -------- Cash flows from operating activities: Net earnings $ 454,709 483,067 529,238 Adjustments to reconcile net earnings to net cash provided by operating activities: (Recoveries) write-offs of advances to unconsolidated investee -- (225,116) 149,739 Depreciation and amortization 389,724 360,272 283,877 Loss on disposal of fixed asset -- 71,421 -- Amortization of deferred gain on sale and leaseback -- -- (39,257) Provision for deferred income taxes -- 101,705 (58,732) (Increase) decrease in operating assets: Accounts receivable 314,543 (214,708) (226,229) Inventories 52,562 (296,023) (202,462) Prepaid expenses and other assets (227,992) (32,060) (6,106) Income taxes receivable 18,364 (16,749) -- Increase (decrease) in operating liabilities: Accounts payable (241,125) 274,179 (94,317) Accrued liabilities (25,618) (84,186) 174,601 Income taxes payable 63,814 (122,769) 122,769 --------- -------- -------- Net cash provided by operating activities 798,981 299,033 633,121 --------- -------- -------- Cash flows from investing activities: Purchase of property and equipment (93,152) (470,607) (81,631) Proceeds from sales of property and equipment -- 119,498 -- Issuance of note receivable -- (96,963) -- Issuance of note receivable - related party -- -- (15,000) Repayment from (advances to) unconsolidated investee -- 225,116 (149,739) --------- -------- -------- Net cash used in investing activities (93,152) (222,956) (246,370) --------- -------- --------
(Continued) ATHANOR GROUP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended October 31, 1998, 1997 and 1996 - --------------------------------------------------------------------------------
1998 1997 1996 --------- -------- -------- Cash flows from financing activities: Net borrowings (repayments) under line of credit $ (92,463) 425,740 (237,406) Proceeds from long-term debt -- -- 267,334 Repayments of long-term debt (562,583) (470,550) (363,464) Collections on notes receivable 70,119 -- -- Repurchase of stock (22,575) (8,750) (121) --------- ------- -------- Net cash used in financing activities (607,502) (53,560) (333,657) --------- ------- -------- Net increase in cash 98,327 22,517 53,094 Cash at beginning of year 137,993 115,476 62,382 --------- ------- -------- Cash at end of year $ 236,320 137,993 115,476 ========= ======= ======== Supplemental disclosures of cash flow information: Interest paid $ 299,484 333,677 283,040 Income taxes paid 224,296 386,317 113,646 ========= ======= ========
Supplemental schedule of noncash investing and financing activities: 1997 The Company purchased $743,601 of machinery and equipment under capital lease obligations. 1996 The Company purchased $271,155 of machinery and equipment under a capital lease obligation. See accompanying notes to consolidated financial statements. ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements October 31, 1998 and 1997 - -------------------------------------------------------------------------------- Note A - Summary of Accounting Policies Athanor Group, Inc. (Athanor or the Company) is principally in the business of manufacturing and marketing screw machine products through its wholly owned subsidiary. All of the Company's business consists of the production of component parts of proprietary products for other companies. The Company has production and distribution facilities in California and Arizona. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows: 1. Principles of Consolidation The consolidated financial statements include the accounts of Athanor and its wholly owned subsidiary, Alger Manufacturing Co., Inc. (Alger). Significant intercompany accounts and transactions have been eliminated. 2. Inventories Inventories are stated at the lower of cost, based on the first-in, first-out method, or market. 3. Property, Plant and Equipment 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 resultant 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 their estimated service lives using the straight-line method. Depreciation is based on estimated useful lives of assets, which are as follows: Machinery and equipment 5 to 7 years Leasehold improvements 2 to 5 years
Leasehold improvements are depreciated over the lesser of their useful lives or lease term. 4. Income Taxes 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 rates expected to apply to taxable income in the years in which ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- 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. 5. Investments The Company accounts for its investment in Core Software Technology (Core), an affiliated company, on the equity method which requires the Company to record its share of Core's earnings or losses. The investment in Core has been reduced to $35,000 due to Core's accumulated losses. During 1996, the Company advanced $149,739 to Core, which was subsequently written off. In 1997, Core repaid $225,116 of previously written off advances. At October 31, 1997 and 1996, the Company owned 28% of Core's common stock. The Company's investment in Core was reduced to 16.9% as of October 31, 1998 (see Note J). 6. Earnings per Share The Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share," in March 1997 and effective for fiscal years ending after December 15, 1997. The Company adopted SFAS 128 in 1998. SFAS 128 introduces and requires the presentation of "Basic" earnings per share which represents net earnings available to common stockholders divided by the weighted average shares outstanding excluding all common stock equivalents. A dual presentation of "Diluted" earnings per share, reflecting the dilutive effects of all common stock equivalents, is also required. The Diluted presentation is similar to the former presentation of fully diluted earnings per share. The components of basic and diluted earnings per share were as follows:
1998 1997 1996 ---------- --------- --------- Net income $ 454,709 483,067 529,238 ========== ========= ========= Average outstanding shares of common stock 1,464,914 1,468,872 1,471,394 Dilutive effect of employee stock options 22,308 -- -- ---------- --------- --------- Common stock and common stock equivalents 1,487,222 1,468,872 1,471,394 ========== ========= ========= Earnings per share: Basic $ .31 .33 .36 Diluted .31 .33 .36 ========== ========= =========
ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- 7. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 8. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company accounts for long-lived assets in accordance with provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. 9. Reclassifications Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation. 10. Stock Option Plans The Company applies the intrinsic value based-method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of the grant only if the current market price of the underlying stock exceeded the exercise price. The Company has elected to measure compensation cost prescribed by APB Opinion No. 25, and to make pro forma disclosures of net earnings and earnings per share as if the fair value method prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, had been applied. (See note I). 11. New Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS 130 is effective for periods beginning after December 15, 1997. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management does not anticipate that the adoption of the above statements will have a material impact on the Company's financial statements. Note B - Property, Plant and Equipment A summary of property, plant and equipment by classification follows:
1998 1997 ---------- --------- Machinery and equipment $5,392,387 5,541,002 Leasehold improvements 84,042 84,042 ---------- --------- 5,476,429 5,625,044 Less accumulated depreciation and amortization 3,932,534 3,784,577 ---------- --------- $1,543,895 1,840,467 ========== =========
Note C - Note Payable Alger has a $3,833,333 credit agreement with a lending institution for working capital and other business financing needs. The credit agreement is collateralized by substantially all of the assets of Alger. Under the line of credit, Alger may borrow amounts up to $2,600,000 based on eligible accounts receivable and inventories, as defined. Interest on drawings on this line of credit is payable at the prime rate (8.0% at October 31, 1998), plus 1.0%. The line of credit expires in August 1999. The amount outstanding was $1,273,034 and $1,365,497 at October 31, 1998 and 1997, respectively. The amount available under the line of credit was approximately $1,185,000 and $1,235,000 at October 31, 1998 and 1997, respectively. The agreement also provides for a term loan not to exceed $483,333, of which $449,999 was outstanding at October 31, 1998. In addition, the agreement provides for an equipment line of up to $750,000, of which $100,000 has been drawn, $36,654 was outstanding and $650,000 was available at October 31, 1998. Borrowings on both the term loan and equipment line are included as notes payable in long-term debt in the accompanying consolidated balance sheets (see note D). The Company has guaranteed borrowings outstanding under this credit agreement on behalf of Alger. ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- Note D - Long-Term Debt Long-term debt consisted of the following:
1998 1997 ---------- --------- Note payable to an individual bearing interest at 8.5%, payable in yearly installments of $40,000, with interest payable quarterly, due April 1999. $ 40,000 80,000 Notes payable to a lending institution at the prime rate plus 1.0%, payable in monthly installments of $16,667, plus interest, due July 1999, collateralized by substantially all assets of Alger 486,653 760,378 Notes payable to others at rates ranging from 10.0% to 12.9%, payable in monthly installments of $1,133, including interest, due through May 1999, collateralized by equipment and automobiles 6,867 19,081 Capital lease obligations (see note F) 692,077 928,720 ---------- --------- 1,225,597 1,788,179 Less current portion 546,085 594,685 ---------- --------- $ 679,512 1,193,494 ========== =========
A schedule of aggregate, annual principal payments on long-term debt as of October 31, 1998 is as follows: 1999 $ 546,085 2000 371,921 2001 210,062 2002 97,529 ---------- $1,225,597 ==========
ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- Note E - Income Taxes Income tax expense (benefit) consists of the following:
Federal State Total ------- ----- ----- 1998: Current $235,079 65,721 300,800 Deferred 12,967 5,396 18,363 -------- ------ ------- $248,046 71,117 319,163 ======== ====== ======= 1997: Current $199,271 47,528 246,799 Deferred 85,370 16,335 101,705 -------- ------ ------- $284,641 63,863 348,504 ======== ====== ======= 1996: Current $303,425 32,490 335,915 Deferred (51,440) (7,292) (58,732) -------- ------ ------- $251,985 25,198 277,183 ======== ====== =======
The difference between the Federal income tax rate and the effective income tax rate on net earnings is as follows:
1998 1997 1996 ------------------- ------------------- ------------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ Statutory U.S. Federal tax rate 34.0% $263,116 34.0% $282,734 34.0% $274,183 State income taxes, net of Federal benefit 6.1 47,206 6.1 50,726 6.1 48,788 Benefit due to state tax credits (.4) (3,000) (1.2) (10,000) (6.7) (54,123) Change in valuation allowance (3.2) (24,681) -- -- -- -- Other 4.7 36,522 3.0 25,044 1.0 8,335 ---- -------- ---- -------- ---- -------- 41.2% $319,163 41.9% $348,504 34.4% $277,183 ==== ======== ==== ======== ==== ========
ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability at October 31, 1998 and 1997 is as follows:
1998 1997 -------- ------- Deferred tax assets: Bad debt reserves $ 3,400 5,400 Equity in loss of unconsolidated investee 164,004 163,997 Contamination reserve 98,448 106,471 Other 58,467 42,155 -------- ------- Total gross deferred tax assets 324,319 318,023 Valuation allowance 120,000 144,681 -------- ------- Net deferred tax assets $204,319 173,342 ======== ======= Deferred tax liabilities - accelerated depreciation on fixed assets $129,782 80,441 ======== =======
Included as a deferred tax asset is the deferred tax benefit associated with the Company's 1994 equity loss in an unconsolidated investment. Because of uncertainties surrounding the realizability of this deferred tax benefit, the Company has established a valuation allowance. Future equity earnings in this unconsolidated investment, if any, will reduce this valuation allowance accordingly. The Company believes its remaining deferred tax assets to be realizable based on historical and projected taxable income levels. Note F - Commitments and Contingencies The Company leases machinery under capital lease agreements. The carrying value of these assets, included in machinery and equipment, at October 31, 1998 and 1997 is as follows:
1998 1997 ---------- --------- Asset $1,117,000 1,091,000 Less accumulated depreciation 262,000 117,000 ---------- --------- $ 855,000 974,000 ========== =========
The Company leases three premises which are accounted for as operating leases. Real estate taxes, insurance and other taxes are the obligations of the Company. ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- The following is a schedule of future minimum rental commitments under capital leases and noncancelable operating leases as of October 31, 1998:
Capital leases Operating leases Total -------------- ---------------- ----- Year ending October 31: 1999 $260,815 302,111 562,926 2000 238,430 308,539 546,969 2001 194,437 309,688 504,125 2002 100,225 206,540 306,765 -------- ---------- --------- Minimum lease payments 793,907 $1,126,878 1,920,785 ========== ========= Less amount representing interest and taxes 101,830 -------- Present value of future capital lease payments $692,077 ========
Rental expense for operating leases was approximately $294,000 in 1998, $297,000 in 1997 and $254,000 in 1996. As of October 31, 1998 and 1997, the Company has accrued $245,000 and $265,000, respectively, relating to the estimated cost to remediate perchloroethylene contamination in the subsurface soil below Alger. The aggregate undiscounted amount has been accrued since it represents management's best estimate of the cost, but the payments are not considered to be fixed and reliably determinable. The estimate of costs and their timing of payment could change as a result of (1) changes to the remediation plan required by the State Environmental Agency, (2) changes in technology available to treat the site, (3) unforeseen circumstances existing at the site and (4) differences between actual inflation rates and rates assumed in preparing the estimate. It is not possible to estimate the amount; losses may exceed amounts accrued at this time as a result of these factors. Note G - Stockholders' Equity During 1996, the Company repurchased and retired 80 shares of common stock for $1.50 per share. During 1997, the Company repurchased and retired 3,420 shares of common stock for approximately $2.50 per share. During 1998, the Company repurchased and retired 9,080 shares of common stock for approximately $2.50 per share. ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- Note H - Major Customer For the years ended October 31, 1998, the Company had one customer which accounted for more than ten percent (10%) of net sales. Receivables from this customer as of October 31, 1998 amounted to $177,744. For the years ended October 31, 1997 and 1996, the Company had no customers who accounted for more than 10% of net sales. Note I - Employee Benefit Plans The Company and its subsidiary have a 401(k) plan covering substantially all employees. Employees may contribute up to 15 percent (15%) of their wages subject to IRS limitations. The Company will match 100 percent (100%) of the employees' contribution not exceeding 1 percent (1%) of their wages plus 50 percent (50%) of the employees' remaining contribution up to 4 percent (4%). The Company may also make discretionary contributions to the plan that are allocated to each employee based upon their pro rata compensation to all compensation. The Company's contributions under the plan amounted to approximately $97,000, $80,000 and $75,000 for the years ended October 1998, 1997 and 1996, respectively. In April 1997, the Company 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. The Plan authorized grants of options to purchase up to 220,340 shares of authorized but unissued common stock. In May 1998, the Company granted 170,000 stock options for shares of Athanor. Stock options were granted with an exercise price equal to the stock's fair market value at the date of grant ($1.66 at May 8, 1998). 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 170,000 options to purchase common stock outstanding as of October 31, 1998, of which none were exercisable. No options were outstanding at October 31, 1997. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined consistent with SFAS Statement No. 123, the Company's net earnings and earnings per share for fiscal 1998 would have been reduced to the pro forma amounts indicated below: ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- Pro forma net earnings $431,052 Pro forma earnings per share: Basic .29 Diluted .27 ========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998: expected volatility of 102%; risk-free interest rate of 5.6%; assumed dividend yield of 0; and expected life of 7 years. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Note J - Related Party Transactions The Company is currently the single largest shareholder of Core Software Technology, a California corporation (Core), owning 462,567 shares of the issued and outstanding common stock of Core, which represents approximately seventeen percent (16.9%) of the total issued and outstanding shares of Core's capital stock at October 31, 1998. The Company has provided a portion of the working capital requirements of Core during previous years in the form of a series of loans to Core. As of October 31, 1998, the total amount outstanding from Core is $83,000. Interest accrues on this loan at a rate of 8% and the loan is payable on demand. The Company has elected to reserve $48,000 of this balance due to Core's accumulated losses. Mr. Miller served as Secretary and a Director of Core until April 1998, when he resigned. Mr. Miller has a beneficial ownership interest in 8,813 additional shares of the common stock of Core as well as options to purchase 4,180 shares of the common stock of Core at exercise prices ranging from $5.50 to $8.25 per share. Mr. Femrite has a beneficial ownership interest in 33,347 additional shares of the common stock of Core as well as options to purchase 3,697 shares of the common stock of Core at $5.50 per share. In September 1995, the Company loaned $25,000 to Mr. Miller in exchange for a secured promissory note. During 1996, the loan was increased to $40,000 in exchange for additional security. The note bears interest at 10% and is secured by 25,000 shares of the Company owned by Mr. Miller. The loan was renewed as of December 11, 1998 in the form of a new loan for $57,415, which includes $17,415 of accrued interest and additional advances and which is due in December 1999. Over the past two years, the Company made investments of $146,000, as a Limited Partner, in California South Pacific Investors (CSPI). Duane Femrite is a General Partner in CSPI. ATHANOR GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) October 31, 1998 and 1997 - -------------------------------------------------------------------------------- During 1998, the Company made a $100,000 loan to Fluid Light Technologies, Inc. (FLT). This loan was converted to 208,200 shares of stock representing an ownership interest of 3.6% upon FLT's private placement in July 1998. Mr. Miller is a Director of FLT. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth information with respect to the directors and executive officers of Registrant as of December 31, 1998. Director/Officer Information ----------------------------
Principal Director Name Occupation Age Since ---- ---------- --------- -------- Gregory J. Edwards Director 54 1990 Duane L. Femrite President, Chief Executive Officer, 53 1985 Chief Financial Officer of the Company Edmund R. Knauf, Jr. Director 56 1997 Richard A. Krause Vice President of the Company 63 1992 President, Alger Manufacturing Company, Inc. Robert W. Miller Chairman of the Board, 56 1976 Secretary of the Company
Listed Below are descriptions of the business experience for at least the past five years for each director and officer listed in the preceding table. Unless otherwise described below, none of the following persons (i) is related in any way, or (ii) has been involved in certain legal proceedings in the past five years. GREGORY J. EDWARDS Chairman and Chief Executive Officer of CASS Holdings, L.L.C. ("CASS") since January 1993. CASS owns several manufacturing and service companies: CASS Polymers, Inc. (a subsidiary of CASS) owns Ad-Tech Plastic Systems Corp., a producer of polymer systems for the aerospace, automotive, construction and marine industries and owns Milamar Coatings, L.L.C., a producer of epoxy coating products used in the industrial and commercial seamless floor coating business; CASS Services, L.L.C., a government contractor involved with surface preparation and re-coating for U.S. Naval ships and portable landing mats; CASS Financial, L. L. C., an equipment leasing company. Between July 1991 and January 1993, Mr. Edwards was self-employed as a financial consultant and investor. Previously, he was an investment banker with Stephens, Inc. of Little Rock, Arkansas from mid-1990 to July 1991. DUANE L. FEMRITE President, Chief Executive Officer of the Company since April 1995, Chief Operating Officer from January 1987 to April 1995, and Chief Financial Officer since December 1982. Secretary of the Company from October 1984 to April 1995 and Director of the Company since December 1985. Director of Core Software Technology from November 1993 to March 1995. Mr. Femrite is a Certified Public Accountant. EDMUND R. KNAUF, JR. Currently self-employed as a consultant and investor. From 1972 to August 1997 worked in various positions for Ametek Inc, a global manufacturer of electrical and electronic products engineered for niche markets, including Vice President of Business Development for the Filtration Group from April 1996 to August 1997 and as Corporate Vice President and General Manager of several Ametek Divisions from 1990 to 1996. RICHARD A. KRAUSE Director and Vice President of the Company since December 1992. President and Chief Operating Officer of Alger Manufacturing Company, Inc. since 1987. ROBERT W. MILLER Chairman of the Board since 1976. Chief Executive Officer of the Company from 1976 to April 1995. Corporate Secretary since April 1995. Director of Core Software Technology from September 1991 to April 1998. Director of OneCard International since 1988 and elected Chairman and Chief Executive Officer of this company in September 1992. Item 10. EXECUTIVE COMPENSATION The following table sets forth all plan and non-plan compensation awarded to, earned by, or paid to the Company's three most highly compensated executive officers, each of whose annual salary and bonus was in excess of $100,000 and the Company's Chief Executive Officer regardless of compensation level, for services to the Company during the three fiscal years ended October 31, 1998. Annual Compensation -------------------
Name and Principal Position Year Salary Bonus Other (1) -------------------------------------------------------------------- Duane L. Femrite 1998 $149,615 25,000 4,000 President, Chief Executive 1997 144,192 25,000 2,949 Officer and Chief Financial 1996 133,308 44,000 2,162 Officer Richard A. Krause 1998 $161,615 44,985 3,329 Vice President and 1997 156,423 35,063 3,750 President of Alger 1996 145,308 52,328 3,750 Manufacturing Co., Inc. Robert W. Miller 1998 $150,066 25,000 1,600 Chairman of the Board 1997 144,270 25,000 1,500 Corporate Secretary 1996 136,498 44,000 1,432
(Footnotes) (1) Other compensation includes contributions made to the Company's 401-K Plan. Does not include use of automobile paid for by the Company. EMPLOYMENT AGREEMENTS - --------------------- Effective January 1, 1991, the Company entered into written employment agreements with Robert W. Miller, as Chairman of the Board and Chief Executive Officer, and Duane L. Femrite, as President, Chief Operating Officer, Chief Financial Officer, and Secretary of the Company. Effective January 1, 1993, Alger entered into a written agreement with Richard A. Krause as President and Chief Operating Officer. Each of the employment agreements is identical as to its terms except for the description of the duties that each employee is to provide. Each agreement is for an initial term of five (5) years, renewable automatically for additional one (1) year periods unless either the employee, the Company, or Alger wishes to terminate it. The employment agreements for Robert W. Miller, Duane L. Femrite and Richard A. Krause were automatically renewed on January 1, 1999, for an additional year. The agreements provide that the salaries of the employees shall be determined by the Board of Directors but may not be less than the salary paid in the preceding year. Each employee shall be entitled to the use of an automobile at the Company's expense and shall be entitled to all benefits and perquisites available to the Company's other employees. If the agreement terminates because of the death of the employee, then the employee's heirs and/or successors shall continue to receive the employee's salary, monthly, for a period of twelve (12) months. If the agreement should terminate for any reason other than cause or death of the employee, including, without limitation, employee's voluntary termination, the Company shall pay the employee a lump sum payment equal to employee's then monthly salary multiplied by the number of years during which the employee was employed by the Company, or Alger, as the case may be, prorated for any partial year of employment. Payment is limited to twenty-four (24) years of employment. The agreements permit the employee to engage in other employment or business opportunities provided that such outside activities do not interfere with employee carrying out his duties to the Company, are not competitive with the Company, and do not result in employee breaching any of his fiduciary obligations to the Company or its shareholders. COMPENSATION OF DIRECTORS Outside Directors are to receive an annual honorarium of $5,000 per year and $600 per meeting attended. The Board has a Nominating Committee that is charged with the responsibility of nominating a slate of candidates to serve as directors of the Company. Outside directors on the Compensation Committee, Audit Committee, and Nominating Committee receive $100 for each meeting attended when such committee meetings are held on a day that the full Board does not meet. The Audit Committee, Nominating Committee, and Compensation Committee met once in 1998. STOCK OPTION PLAN The Company's 1997 Stock Option Plan (the "1997 Plan"), was set up to attract, reward and retain the best available officers, directors, employees and consultants for the Company and to promote the success of the Company's business. The following discussion is intended only as a summary of the material provisions of the 1997 Plan. The 1997 Plan provides only for grants of "non-qualified stock options" which are not qualified for treatment under Section 422 of the Internal Revenue Code of 1986, as amended. A total of 220,340 shares of Common Stock have been reserved for issuance under the 1997 Plan upon the exercise of stock options which may be granted to employees, officers, directors and consultants of the Company. Because the officers, directors, employees and consultants of the Company who may participate in the 1997 Plan and the amount of their options will be determined by the Board of Directors or its committee in its discretion, it is not possible to state the names or positions of, or the number of options that may be granted to, the Company's officers, directors, employees and consultants. As of the date hereof, options under the 1997 Plan have been granted as set forth in the chart below. No person may receive options under the 1997 Plan for more than 30,000 shares in any one fiscal year. The Board of Directors may administer the 1997 Plan or the administration of the 1997 Plan may be delegated to a Committee of the Board of Directors (the "Committee"). In addition to determining who will be granted options, the Board or Committee will have the authority and discretion to determine when options will be granted and the number of options to be granted. The Board or Committee also may determine the time or times when each option becomes exercisable, the duration of the exercise period for options and the form or forms of the instruments evidencing options granted under the 1997 Plan, and is empowered to make all other determinations deemed necessary or advisable for the administration of the 1997 Plan. The term of each option granted under the 1997 Plan will be established by the Board or Committee at the time of the grant. An option granted under the 1997 Plan may be exercised at such times and under such conditions as determined by the Board or Committee. Except as otherwise provided by the Board or Committee at the time an option is granted, no option granted under the 1997 Plan is transferable other than at death, and each option is exercisable during the life of the optionee only by the optionee. In the event of the death of a person who has received an option, the option generally may be exercised by a person who acquired the option by bequest or inheritance to the extent that such option was exercisable at the date of death. The exercise price may not be less than the fair market value of the Common Stock on the date of grant. The consideration to be paid upon exercise of an option, including the method of payment, will be determined by the Board or Committee and may consist entirely of cash, check, shares of Common Stock, such other consideration and method of payment permitted by applicable law or any combination of such methods of payment as permitted by the Board or Committee. The Board or Committee has the authority to reset the price of any stock option after the original grant and before exercise. In the event of stock dividends, splits, and similar capital changes, the 1997 Plan provides for appropriate adjustments in the number of shares available for option and the number and option prices of shares subject to outstanding options. In the event of a proposed sale of all or substantially all of the assets of the Company, or a merger of the Company with and into another corporation, outstanding options shall be assumed or equivalent options shall be substituted by such successor corporation, unless the Board or Committee provides all option holders with the right to immediately exercise all of their options, whether vested or unvested. In the event of a proposed dissolution or liquidation of the Company, outstanding options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board or Committee. In such a situation, the Board or Committee is authorized to give option holders the right to immediately exercise all of their options, whether vested or unvested. The 1997 Plan will continue in effect until April 1, 2007, unless earlier terminated by the Board of Directors, but such termination will not affect the terms of any options outstanding at that time. The Board of Directors may amend, terminate or suspend the 1997 Plan at any time. Amendments to the 1997 Plan must be approved by shareholders if required by applicable tax, securities or other law or regulation. The issuance of shares of Common Stock upon the exercise of options may be subject to registration with the Securities and Exchange Commission on the shares reserved by the Company under the 1997 Plan. Option/SAR Grants in Last Fiscal Year
(a) (b) (c) (d) (e) Name Number of % of Exercise Ex-Date Securities Total or **/ Underlying Options/SARs Base Options/SARs Granted Price Granted to Employees */ In FY98 ---- ------------ ------------ -------- ------- Richard Krause 30,000 18% $1.66 May 7, 2006 Duane Femrite 30,000 18% $1.66 May 7, 2006 Robert Miller 30,000 18% $1.66 May 7, 2006 Gregory Edwards 15,000 9% $1.66 May 7, 2006 Edmund Knauf 10,000 6% $1.66 May 7, 2006
*/ Equals the closing market price for the underlying security on the date of the grant of options. **/ The date of grant for each of the foregoing options was May 8, 1998. No option could be exercised, in whole or in part, during the first six (6) months from the date of grant. Thereafter, 20% of each of the options was exercisable on November 7, 1998; 20% is exercisable on May 7, 1999; 30% is exercisable on May 7, 2000; and 30% is exercisable on May 7, 2001. In addition to the forgoing grants, 55,000 stock option grants were issued to non-director, non-executive employees of Alger during the fiscal year 1998. None of the foregoing option grants were exercised during the fiscal year ended October 1998. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 1998, information concerning: (a) beneficial ownership of voting securities of the Company by persons who are known by the Company to own beneficially more than five percent (5%) of the Company's Common Stock; (b) beneficial ownership of voting securities of the Company by each director, nominee for director, and by all directors and officers as a group; and (c) the percentage of the total votes held by each person or group described in subparagraphs (a) and (b) immediately above. Certain Beneficial Owners and Management ----------------------------------------
Amount and Percentage of Beneficial Ownership ------------------------- Title Name and Address of Number of Percent of of Class Beneficial Owner Shares Class -------- ------------------- --------- ---------- Common Gregory J. Edwards 16,000 1.1% Stock 2208 Faircloud Lane Edmond, Oklahoma 73034 Common Duane L. Femrite 189,544 13.0% Stock 921 East California Avenue Ontario, California 91761 Common Edmund R. Knauf, Jr. 79,680 5.5% Stock 1516 North 2nd Street Sheboygan, Wisconsin 53081 Common Richard A. Krause (2) 256,983 17.6% Stock 921 East California Avenue Ontario, California 91761 Common Robert W. Miller (1) 164,752 11.3% Stock 921 East California Avenue Ontario, California 91761 Common All Officers and Directors 706,959 48.5% Stock as a Group (5 persons)
_____________________________________________ (Footnotes on next page) All shares are owned either directly or beneficially by the owner named in the table except as otherwise indicted in a footnote below. Percentages of class are based on the number of shares of Common Stock outstanding on December 31, 1998. There were 1,458,854 shares of Common Stock outstanding on December 31, 1998. None of the officers or directors of the Company, except as noted in Item 10 above, has options to acquire any shares of Common Stock of the Company. Messrs. Femrite, Knauf, Krause and Miller are the only persons known to the Company to beneficially own more than five percent (5%) of its Common Stock. The Company knows of no contractual arrangements that may at a subsequent date result in a change in control of the Company. _____________________________ (Footnotes) (1) Does not include 24,000 shares of Common Stock owned by Mr. Miller's father as to which Mr. Miller disclaims beneficial ownership. (2) Includes 256,983 shares of Common Stock owned by The Krause Family Irrevocable Trust. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is currently the single largest shareholder of Core Software Technology, a California corporation ("Core"), owning 462,567 shares of the issued and outstanding common stock of Core, representing approximately 16.9% of the issued and outstanding shares of Core's capital stock (assuming the options to purchase additional shares of the capital stock of Core owned by the Company and others are not exercised). Core is the developer and marketer of an on-line geospatial (image, cartographic, & demographic) information indexing and distribution system and service, known as ImageNet. Core develops and distributes proprietary client- server and application software but primarily uses its software products as a delivery vehicle for ImageNet services. Through the global implementation of ImageNet, Core seeks to control the channel for distribution of geospatial information products worldwide. As a single source access vehicle for such information, the value and utility of ImageNet is a function of content. Core is attempting to build a worldwide, on-line database and distribution infrastructure consisting of commercial and public data providers, existing international distributors, satellite ground receiving stations, and value added companies. ImageNet addresses the information access requirements of an international public policy movement to maximize the benefits of existing scientific and geographic information and analysis tools. The Company has made outstanding loans in the principal amount of $685,622 to Core through October 31, 1998. All but $35,000 of the outstanding balance, which was advanced during 1998, plus accrued interest of approximately $29,000 through October 31, 1998, has been reserved. Mr. Miller entered into a consulting agreement with Core and assigned the consulting fees to R & D Financial (R&D), a California general partnership of which Messrs. Miller and Femrite are the general partners. The consulting agreement began on January 1, 1995, wherein Mr. Miller agreed to provide services to Core relating to financial, investor, capital raising, litigation and general business matters arising out of Core's on-going restructuring, recapitalization and financing efforts. As of December 31, 1998, Core owes $42,745 to R & D in connection with said consulting agreement. No fees were paid by Core to R&D during 1998. Mr. Miller served as Secretary and a Director of Core until April 1998, when he resigned. Mr. Miller has a beneficial ownership interest in 8,813 additional shares of the common stock of Core as well as options to purchase 4,180 shares of the common stock of Core at exercise prices ranging from $5.50 to $8.25 per share. Mr. Femrite has a beneficial ownership interest in 33,347 additional shares of the common stock of Core as well as options to purchase 3,697 shares of the common stock of Core at $5.50 per share. The above beneficial stock ownership takes into account stock that was previously owned by R&D. Mr. Miller was to have received $4,000 per month from Image Data Corporation (IDC), the previous parent of Core, with respect to his services rendered to IDC in accordance with IDC's confirmed Plan of Reorganization, but has received no compensation to date. IDC has no sources of revenue other than a small receivable from Core. The likelihood that Mr. Miller will receive any appreciable amount of the compensation is remote. During 1998, the Company made a $100,000 loan to Fluid Light Technologies, Inc. (FLT). FLT is in the business of developing, manufacturing and marketing systems to control the motion or flow of light through neon glass tubes. FLT is a developmental stage company and has no revenues or earnings. This loan was converted to 208,200 shares of common stock representing an ownership interest of approximately 3.6% upon FLT's Private Placement in July 1998. Mr. Miller is a director of FLT. Over the last few years, the Company has made investments totaling $146,000, as a limited partner, in California South Pacific Investors (CSPI) a California Limited Partnership. 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. Mr. Femrite is one of five General Partners in CSPI. In January 1996 the Internal Revenue Service ("IRS") served Mr. Miller with a Notice of Federal Tax Lien with respect to approximately $400,000 in taxes and penalties purportedly owed by IDC. In connection therewith, the IRS has collected approximately $29,000 from Mr. Miller and currently collects $500 per month. In connection with Core's previous acquisition of the assets of IDC, Core agreed to indemnify and hold Mr. Miller harmless from and against any liabilities relating to or arising out of IDC's business, including taxes and penalties owed by IDC to the IRS. In connection with such indemnity, Core reimbursed Mr. Miller in the approximate amount of $23,000 during 1997. Mr. Miller anticipates that any additional funds collected by the IRS, in conjunction with such levy, will ultimately be reimbursed by Core. The Company has made loans to Mr. Miller, in previous years, in the principal amount of $40,000. The loan was renewed as of October 1997 on the condition that Mr. Miller make a principal reduction plus accrued interest or assign an interest in certain cash distributions from R&D. Mr. Miller did not make the required payments and the Company decided not to accept the assignment of potential cash distributions from R&D. During 1998 the Company decided to renew the original note plus accrued interest and made additional advances of $8,375. The total outstanding loan to Mr. Miller in the amount of $57,415 is due December 11, 1999. The Company received an additional 10,000 shares of the Company's common stock, for a total of 35,000 shares as collateral. Part IV EXHIBITS (a) See Index to Exhibits. The Exhibits therein listed and attached hereto and the Exhibits therein incorporated by reference are filed as a part of this report. (b) Reports on Form 8-K. None Signatures In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ATHANOR GROUP, INC. Date January 21, 1999 By /s/ Duane L. Femrite ---------------- ---------------------------------- Duane L. Femrite, President, Chief Executive Officer, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. /s/ Gregory J. Edwards 1/21/99 ---------------------------------------- ------- Gregory J. Edwards, Director Date /s/ Duane L. Femrite 1/21/99 ---------------------------------------- ------- Duane L. Femrite, President, Date Chief Executive Officer, Chief Financial Officer and Director /s/ Edmund R. Knauf, Jr. 1/21/99 ---------------------------------------- ------- Edmund R. Knauf, Jr., Director Date /s/ Richard A. Krause 1/21/99 ---------------------------------------- ------- Richard A. Krause, Vice President and Date Director /s/ Robert W. Miller 1/21/99 ---------------------------------------- ------- Robert W. Miller, Chairman of the Board, Date Corporate Secretary, and Director INDEX TO EXHIBITS -----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ---------- ---------------------- 3.1 Restated articles of Incorporation of the Company dated April 2, 1979, and all amendments thereto filed prior to August 25, 1989. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed on February 12, 1990. 3.2 Certificate of Amendment of Articles of Incorporation of the Company filed August 25, 1989. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed on February 12, 1990. 3.3 Certificate of Amendment of Articles of Incorporation of the Company filed August 25, 1989. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed on February 12, 1990. 3.4 Bylaws of the Company. Incorporated by reference to Registration Statement No. 2-63481, Exhibit 3(b). Amendment thereto, dated as of September 11, 1987, filed January 28, 1988. 4.0 Certificate of Determination of Preferences of Preferred Stock. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed June 9, 1987. 10.1 Standard Industrial Lease - Special Net. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed June 9, 1987. 10.2 Equipment Lease with Dover Industries Acceptance Inc., dated April 4, 1988. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed January 30, 1989. 10.3 Loan and Security Agreement, dated January 19, 1990, between Alger and Sanwa Business Credit Corporation. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed February 12, 1990. 10.4 Amendment to Loan and Security Agreement dated February 10, 1992, between Alger and Sanwa Business Credit Corporation. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed February 12, 1993 10.5 Second Amendment to Loan and Security Agreement dated July 29, 1992, between Alger and Sanwa Business Credit Corporation. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed February 12, 1993. 10.6 The Company's Guaranty of the Loan and Security Agreement, dated January 19, 1990, between Alger and Sanwa Business Credit Corporation. Incorporated by reference to the same numbered exhibit to report on Form 10-K, filed February 12, 1990.
10.7 Agreement between the Company and William A. Mitchell dated January 30, 1991. Incorporated by reference to the same numbered exhibit to report on Form 8-K, filed January 30, 1991. 10.8 Agreement between the Company and Paul Abramowitz dated May 15, 1991. Incorporated by reference to Exhibit 10.7 to report on Form 8-K, dated May 15, 1991. 10.9 Agreement between the Company and John S. Slater, Jr., Trustee of the Richert Family Trust, Dated December 15, 1991. Incorporated by reference to Exhibit 10.7 to report on Form 8-K, dated December 15, 1991. 10.10 Sublease dated September 24, 1992, for property in Phoenix, Arizona, between Alger and N.I.C.O. Machine, Inc. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 12, 1993. 10.11 Agreement for Sale of Stock dated May 31, 1993, between the Company and George A. Johnson. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 14, 1994. 10.12 Employment Agreement dated January 1, 1991, between the Company and Robert W. Miller. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 14, 1994. 10.13 Employment Agreement dated January 1, 1991, between the Alger Manufacturing Co., Inc. and Richard A. Krause. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 14, 1994. 10.14 Employment Agreement dated January 1, 1991, between the Company and Duane L. Femrite. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 14, 1994. 10.15 Third Amendment to Loan and Security Agreement dated July 13, 1994, by and between Sanwa Business Credit Corporation and Alger. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed January 29, 1995. 10.16 Loan and Security Agreement (Equipment) dated June 2, 1994, by and between Alger and Phoenixcor, Inc. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed January 29, 1995. 10.17 Secured Promissory Note and Pledge Agreement dated September 7, 1995 by and between Athanor Group, Inc. and Robert W. Miller. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed February 8, 1996. 10.18 Standard Industrial Lease - Gross. Manufacturing property located in Glendale, Arizona, between Alger and Kachina Industrial Properties. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed January 29, 1997.
10.19 Fifth Amendment to Loan and Security Agreement dated July 10, 1996, by and between Sanwa Business Credit and Alger. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed January 27, 1997. 10.20 Secured Promissory Note dated September 9, 1996, by and between Athanor Group, Inc. and Robert W. Miller. Incorporated by reference to the same numbered exhibit to report of Form 10-K, filed January 27, 1997. 10.21 Seventh amendment to Loan and Security Agreement dated July 31, 1997, by and between Sanwa Business Credit and Alger. Previously filed. 10.22 Amendment to Standard Industrial Lease - Special Net, dated May 9, 1997, by and between Algeran Investors LTD. And Alger. Previously filed. 10.23 Amendment to Standard Industrial Lease - Gross, dated August 29, 1997, by and between Raymond R. Hegwer, Trustee, Hegwer Living Trust and Alger. Previously filed. 10.24 Amendment to Loan and Security Agreement dated August 27, 1998, by and between Sanwa Business Credit and Alger. Filed herewith. 16.1 Letter from Grant Thornton to the Commission dated August 15, 1991. Incorporated by reference to the same numbered exhibit to report on Form 8-K, dated August 13, 1991. 22.0 Subsidiaries of the Company. Previously Filed.
EX-10.24 2 AMENDMENT TO LOAN & SECURITY AGREEMENT EXHIBIT 10.24 NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ---------------------------------------------- This Ninth Amendment to Loan and Security Agreement (the "Ninth Amendment") is made as of August 27, 1998 by and between Sanwa Business Credit Corporation as Lender ("Lender") and Alger Manufacturing Company, Inc. as Borrower ("Borrower"). WHEREAS, Lender and Borrower entered into a certain Loan and Security Agreement dated as of January 19, 1990, an Amendment to Loan and Security Agreement dated as of February 10, 1992, a Second Amendment to Loan and Security Agreement dated as of July 29, 1992, a Third Amendment to Loan and Security Agreement dated as of July 13, 1994, a Fourth Amendment to Loan and Security Agreement dated as of August 3, 1995, a Fifth Amendment to Loan and Security Agreement dated as of July 10, 1996, a Sixth Amendment to Loan and Security Agreement dated as of March 14, 1997, a Seventh Amendment to Loan and Security Agreement dated as of July 31, 1997 and a Eighth Amendment to Loan and Security Agreement dated as of April 15, 1998 (collectively the "Agreement") pursuant to which Lender is making certain loans and advances to Borrower upon the terms and conditions set forth in the Agreement; and WHEREAS, Borrower has requested certain modifications and amendments to the Agreement and Lender has agreed to such modifications and amendments as set forth in this Ninth Amendment; NOW, THEREFORE, in consideration of the terms and conditions contained herein and of any loans and advances now or hereafter made to or for the benefit of Borrower by Lender, the parties hereto agree to the following amendments and modifications to the Agreement, which shall be effective as of the date of this Ninth Amendment. 1. Outside Indebtedness. Section 10.2(j) is amended in its entirety to -------------------- read as follows: "Incur any Indebtedness outstanding at any time for borrowed money in excess of $1,200,000 (other than the Liabilities), except for Indebtedness which is unsecured and is to Persons who execute and deliver to Lender (in form and substance acceptable to Lender and its counsel) subordination agreements subordinating their claims against Borrower to the payment of the Liabilities;". 2. Interest Rate. Section 2.3 is amended in its entirety to read as ------------- follows: "2.3 Interest Rate. Unless otherwise provided in a writing evidencing ------------- such Liabilities, Borrower shall pay Lender interest on the outstanding principal balance of the Liabilities, including the Liabilities under the Term Note, the Revolving Loan and the Acquisition Term Loan, at the rate of one percent (1%) above the Prime Rate. If the principal amount of any of the Liabilities is not paid within seven (7) days of when due and there is not sufficient borrowing availability under the Revolving Loan to allow full payment of such past due amount, the rate of interest on said amount shall increase to three and three-fourths percent (3 3/4%) above the Prime Rate and be payable on demand. It is further agreed that if all Liabilities, including Liabilities under the Term Note and the Acquisition Term Loan, are not fully paid within seven (7) days of the termination of this Agreement or an acceleration of the Liabilities by Lender, the rate of interest on such amounts shall increase to three and three-fourths percent (3 3/4%) above the Prime Rate until fully paid. Interest shall be computed on the basis of a year of 360 days and actual days elapsed and shall be payable as provided in Section 4.2. In no contingency or event whatsoever shall the rate or amount of interest paid by Borrower under this Agreement or any of the Ancillary Agreements exceed the maximum amount permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder or under any Ancillary Agreement in excess of the maximum amount permitted by such law, (i) Lender shall apply such excess to any unpaid principal owed by Borrower to Lender or, if the amount of such excess exceeds the unpaid balance of such principal owed by Borrower to Lender or, if the amount of such excess exceeds the unpaid balance of such principal, Lender shall promptly refund such excess interest to Borrower and (ii) the provisions hereof shall be deemed amended to provide for such permissible interest rate. All sums paid, or agreed to be paid, by Borrower which are, or hereafter may be construed to be, compensation for the use, forbearance or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, spread and allocated throughout the full term of all such indebtedness until such indebtedness is paid in full." 3. Capital Expenditure Line. Section 2.1(c) is amended in its entirety to ------------------------ read as follows: "(c) A term loan facility for the purpose of enabling Borrower to purchase additional Equipment to be evidenced by a Second Amended and Restated Acquisition Installment Note in form and substance satisfactory to Lender (the "Acquisition Term Loan"), provided such Acquisition Term Loan shall be subject to all of the following terms and conditions: (i) the aggregate amount of all Acquistion Term Loan advances made by Lender to Borrower will not exceed seven hundred fifty thousand dollars ($750,000); (ii) each advance under the Acquisition Term Loan shall be used by Borrower in connection with the purchase of additional Equipment; (iii) at the time that the Lender made a given Acquisition Term Loan advance the Equipment related thereto shall be part of the Collateral and all representations, warranties and covenants of Borrower in this Agreement shall be true and correct as to the Equipment; (iv) the Acquisition Term Loan advance with respect to any given purchase of Equipment shall not exceed eighty-five percent (85%) of the invoiced purchase price of such Equipment (less all discounts, rebates, taxes, delivery charges, maintenance agreement and any other nonequipment soft costs); (v) no single Acquisition Term Loan advance shall be in an amount of less than one hundred thousand dollars ($100,000), nor shall the number of Acquisition Term Loan advances exceed four (4); and (vi) no Acquisition Term Loan advance will be made by Lender on or after April 30, 1999." 4. Term of Agreement; Liquidated Damages, Prepayment. Section 2.4 is ------------------------------------------------- amended in its entirety to read as follows: "2.4 Term of Agreement; Liquidated Damages; Prepayment. This ------------------------------------------------- Agreement shall be renewed and extended to and through August 31, 1999 and shall be automatically renewed thereafter for successive periods of one year ("Renewal Term") unless terminated as provided below. Either party shall have the right to terminate this Agreement at the end of the August 31, 1999 Renewal Term or at the end of any subsequent Renewal Term by giving the other party at least sixty (60) days prior written notice of such termination. In the event Borrower gives notice of termination and the Total Facility is not paid in full at the end of the sixty (60) days notice period, upon the request of Borrower, but in Lender's sole discretion, Lender can continue to make advances under the Revolving Loan and renew such term for an additional year. In the event Lender does not agree to continue to make loans and advances and renew the term for an additional year, all Liabilities shall be immediately due and payable. This Agreement may also be terminated by Lender upon the occurrence of a Default. Upon the effective date of any termination, all Liabilities (including the Term Note and the Acquisition Note) shall become immediately due and payable without presentment, notice or demand. Notwithstanding any termination, until all the Liabilities have been fully and finally paid and satisfied, Lender shall be entitled to retain its security interest in the Collateral, Borrower shall continue to remit collections of Accounts and proceeds of Collateral as provided in this Agreement, and Lender shall retain all of its rights and remedies under this Agreement. During the remaining term of this Agreement or any Renewal Term, Borrower may, at its option, upon not less than thirty (30) days prior written notice to Lender specifying the date of prepayment, terminate this Agreement and shall prepay all of the Liabilities hereunder (including the Term Note and the Acquisition Note). In addition to the requirement of prepaying all of the Liabilities, Borrower shall also pay to Lender, for loss of the bargain and not as a penalty, as liquidated damages and as compensation for the costs of Lender being prepared to make funds available to Borrower under this Agreement, an amount (the "Prepayment Fee") equal to fifty percent (50%) of the average monthly interest charges and Credit Availability Charges during the elapsed portion of the remaining term to and through August 31, 1999 or any subsequent Renewal Term, as the case may be, multiplied by the number of full or partial months remaining between the date of such termination and August 31, 1999 or any subsequent Renewal Term, as the case may be; provided, however, Borrower can prepay, in whole but not in part, the Liabilities and terminate this Agreement without payment of a Prepayment Fee, if such prepayment is the result of Borrower refinancing the Liabilities through Sanwa Bank California and such prepayment occurs on or before August 31, 1999." 5. Total Facility. Section 2.1(b) is amended in its entirety to read as -------------- follows: "(b) A term loan ("Term Loan") in an aggregate principal amount not to exceed four hundred eighty three thousand, three hundred thirty three dollars and twenty five cents ($483,333.25) to be evidenced by a Third Amended and Restated Installment Note in form and substance satisfactory to Lender, and" 6. Affirmative Covenants. Section 10.1(a) is amended in its entirety to --------------------- read as follows: "(a) At all times hereafter, maintain (i) a ratio of indebtedness (as determined in accordance with generally accepted accounting principles) to Tangible Net Worth of not more than 3.5:1; (ii) a ratio of Current Assets to Current Liabilities of not less than 1:1; (iii) Tangible Net Worth at least equal to $2,500,000; (iv) income before taxes from continuing operations before extraordinary items of not less than $500,000 per annum; 7. Representations and Warranties. Borrower represents and warrants as ------------------------------ follows: (a) Each of the representations and warranties contained in the Agreement is hereby reaffirmed as of the date hereof, each as if set forth herein; (b) The execution, delivery and performance of this Ninth Amendment are within Borrowers' powers, have been duly authorized by all necessary action, have received all necessary approvals and do not contravene any law or any contractual restrictions binding on Borrower; (c) This Ninth Amendment is a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms; and (d) No event has occurred and is continuing, or would result from this Ninth Amendment, which constitutes a Default or Event of Default under the Agreement, as amended and modified hereby; 8. Conditions Precedent. The effectiveness of this Ninth Amendment is -------------------- conditioned upon the satisfaction by Borrower of each of the following conditions, or their waiver in writing by Lender: (a) This Ninth Amendment shall have been executed by all the signatories hereto (including, but not limited to, those signatories acknowledging and consenting to this Ninth Amendment and reaffirming their respective instruments, documents and agreements with Lender related to the Agreement) and delivered to Lender; and (b) Borrower shall execute and deliver to Lender and cause to be executed and delivered to Lender, from time to time, such instruments, documents and agreements as Lender may request with respect to the subject matter of this Ninth Amendment and the Agreement as amended hereby; and (c) Borrower shall have paid to Lender a documentation fee in the amount of One Thousand Dollars, ($1,000.00), which shall be fully earned as of the date hereof and is nonrefundable; 9. Expenses. Borrower agrees to pay all charges, costs, expenses and -------- reasonable attorneys' fees incurred by Lender in connection with the negotiation, documentation and preparation of this Ninth Amendment and any other documents in connection herewith and in carrying out and enforcing the terms of this Ninth Amendment. 10. No Waiver. Lender is not waiving any rights under the agreement or --------- any Ancillary Agreements and, except as expressly stated herein or as previously modified in a writing signed by Lender, all of the terms, covenants and conditions of the Agreement and the Ancillary Agreements shall remain unmodified an in full force and effect. 11. Incorporation. This Ninth Amendment shall be part of the Agreement, ------------- the terms of which are incorporated herein, and a breach of any representation, warranty or covenant contained herein or in the Agreement or the failure to observe or comply with any term or agreement contained herein, shall constitute a Default under the Agreement and Lender shall be entitled to exercise all rights and remedies that it may have under the Agreement, Ancillary Agreements and applicable law. Capitalized terms used herein and not otherwise defined shall have the same meaning as provided in the Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Ninth Amendment as of the date first above written. ALGER MANUFACTURING COMPANY, INC. By: /s/ Duane L. Femrite ------------------------------------ Its: Chairman & Chief Executive Officer ----------------------------------- By: /s/ R. W. Miller ------------------------------------ Its: Vice President ----------------------------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1998 AND 1997, AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS OCT-31-1998 NOV-01-1997 OCT-31-1998 236 0 2,377 8 3,418 6,294 5,451 3,911 8,226 4,013 0 0 0 15 3,389 8,226 23,636 23,636 19,855 22,573 0 0 299 774 319 0 0 0 0 319 .31 .31
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