-----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, L31hRouQR8aBtj+zmtxTLJB/LqrR2VapQcBm/auwYWyjmrTflmEjNDHvLuX3BWwI 4Q5oQqLPLJOOw7lUh9N1Qw== 0000950148-97-000198.txt : 19970128 0000950148-97-000198.hdr.sgml : 19970128 ACCESSION NUMBER: 0000950148-97-000198 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970127 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 002-63481 FILM NUMBER: 97511626 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: 3452 E. FOOTHILL BLVD SUITE 417 CITY: PASADENA STATE: CA ZIP: 91107 FORMER COMPANY: FORMER CONFORMED NAME: ALGERAN INC DATE OF NAME CHANGE: 19861015 10KSB40 1 FORM 10-KSB-405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB X Annual Report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934 for the fiscal year ---- ended October 31, or ___Transition Report pursuant to Section 13 of 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 of 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 $23,744,232. The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 1996 amounted to $2.091,682. The registrant had 1,468,934 shares of common stock outstanding as of December 31, 1996. 2 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 CORPORATIONS 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 United 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 January 1996, the industry's trade association, National Screw Machine Products Association (NSMPA), officially changed its name to Precision Machined Products Association (PMPA). The name change was made to better reflect the industry today, the current technology and the varying equipment used by the association members. 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. While the 3 Company has designed its internal quality standards to meet ISO 9002 standards, the Company has not been certified. 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 late 1996, the Company purchased a new fully integrated software system, which has the ability to purchase and schedule materials in conjunction with the manufacturing process. The new system will give the Company an effective tool to control in-house inventories and to provide on time deliveries to its customers. The Company has hired outside consultants to assist in the implementation of the new system, which is scheduled to be completed by late 1997. 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 for what appears to be business reasons decline to do so. Should these companies decide in the future to do this work themselves, the business of the Company could be adversely affected. As of October 31, 1996, the Company's unproduced backlog amounted to approximately $6,184,000 of anticipated gross sales from projects on which customers have authorized work to commence during the fiscal year 1997. The backlog is expected to be completed within the 1997 fiscal year, as the Company believes that all these orders are firm. The Company's gross backlog, as of October 31, for the past three years was as follows: 1995 - $6,134,000, 1994 - $4,419,000; 1993 - $3,240,000. 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, as well as 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. During 1996 the Company has continued to expand its second operation Horizontal and Vertical CNC equipment. The CNC equipment will allow the Company to perform a larger percent of the secondary operations required on customers products. In the past, many of these operations have been sent to outside job shops. The ability to perform these operations in-house will afford the Company better control over its work-in-process inventory as well as better control over the high quality standards required in today's business climate. 4 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, and Joseph T. Ryerson and Son, Inc. 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 has recently purchased (for delivery in mid-1997) its third generation soap and water parts cleaner. The new parts cleaner will be 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 forty-six (146) persons on October 31, 1996, of which eleven (11) were general and administrative, three (3) were in marketing and sales, and one hundred and thirty-two (132) 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. 5 ENVIRONMENTAL During 1992, perchloroethylene contamination was found in the ground soil below the Alger manufacturing facility. The Company completed initial soil testing in 1992 and has subsequently done additional testing during 1993. The appropriate local agencies have been notified of the results of the Preliminary Environmental Site Investigations. The Company is currently awaiting a response and 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, 1992, a provision of $200,000 was recorded to Other Income (Expense) for the estimated costs of this remediation. During 1993 the provision was increased by an additional $50,000, bringing the total provision to $250,000 as of October 31, 1993, 1994 and 1995. In 1996 the provision was increased by $15,262, a reimbursement of certain expenses by one of the Company's insurance carriers, to a total of $265,262. 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, 1996, 1995, and 1994 was as follows: Dollar Amount of Total Sales (000's)
1996 1995 1994 ---- ---- ---- California $ 7,130 $ 5,389 $ 4,445 Other Western States 4,431 4,314 3,285 All Others 7,458 6,047 6,797 Scrap 4,725 3,682 3,144 ------- ------- ------- $23,744 $19,432 $17,671
6 Percentage of Total Sales
1996 1995 1994 ---- ---- ---- California 30% 28% 25% Other Western States 19 22 19 All Others 31 31 38 Scrap 20 19 18 --- --- --- 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, 1996, 1995, and 1994, 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 Phoenix, 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. CUSTOMERS The Company manufactures parts for a variety of customers. During 1996 there were no customers that accounted for 10% or more of the Company's consolidated revenue. During 1996, none of the Company's business was government related. 7 ITEM 2. DESCRIPTION OF PROPERTY PROPERTIES The Company and its subsidiary, Alger, lease office and manufacturing space in Ontario, California, and in Phoenix, Arizona. Alger leases three manufacturing facilities: 35,600 square feet and 17,000 square feet in Ontario on leases ending in September 1997, and 5,842 square feet in Phoenix, Arizona. Effective November 1, 1996, the Company signed a five year lease on new facilities in Glendale, Arizona to replace the existing Phoenix facility. The new facility is 15,700 square feet and became operational in December 1996. The Company believes that with the addition of the new facility in Arizona, its manufacturing facilities are adequate for the current operations. The Company built office space at the Ontario facility to house its corporate office in 1996. 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 8 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company is currently a part of the NASDAQ 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, mark-down, or commissions and may not necessarily represent actual transactions. Market Information ------------------
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 12/31/95 9/30/95 6/30/95 3/31/95 -------- ------- ------- ------- Ask 1 13/16 1 1/2 1 3/4 1 3/8 Bid 1 3/8 1 5/16 1 5/16 1 1/4 12/31/94 9/30/94 6/30/94 3/31/94 -------- ------- ------- ------- Ask 1 3/8 1 3/8 1 13/16 Bid 1 1/4 1 3/16 5/8 5/8
As of December 31, 1996, the approximate number of shareholders of record of common shares was 318. No dividends were declared during the fiscal year ended October 31, 1996, 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. 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the changes in working capital for the fiscal years 1996, 1995, and 1994 (Thousands of Dollars). 1996 1995 1994 ---- ---- ---- Current Assets $6,097 $ 5,532 $ 5,352 Current Liabilities $3,706 $ 3,686 $ 3,486 Working Capital $2,391 $ 1,846 $ 1,866 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, AS COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1995 The Company's working capital improved by approximately $545,000 during 1996. Approximately $300,000 of the increase was associated with a restructuring of the Company's long term debt under its credit agreement, with the balance coming from operations. The increase allowed the Company to finance the current growth in sales, as accounts receivable and inventory increased by $529,000. The planned expansion of the Phoenix division did not materialize during 1996. However, as of November 1, 1996 the Company signed a new five year lease on a 15,700 square foot facility. The new facility became operational in December 1996. The Company plans on expending approximately $300,000 - $400,000 on improvements and equipment for this facility during 1997. The larger facility will allow for planned expansion over the next few years as well as provide the division with a better equipped, autonomous working environment. During 1996 the Company purchased $353,000 of manufacturing and computer equipment. Approximately $271,000 of the purchases was financed with two new leases, the balance coming from cash flow. The Company is currently planning on capital expenditures for 1997 to be approximately $1,000,000 - $1,200,000, including the Arizona division. The 1997 capital expenditures for the Ontario facility, includes approximately $400,000 for a new "third generation" soap and water parts cleaner (delivery in mid-1997), with the balance of $300,000 - $400,000 for additional manufacturing and second operation equipment. This large capital expenditure forecast will require the Company to obtain new financing and get amendments approved to its credit agreement. The Company does not anticipate any difficulties obtaining the financing or the credit agreement amendments. However, if such financing or amendments are not obtained or are obtained for lower amounts, the Company does not feel it will have a major impact on its operations for 1997, although it will slow down the Company's plans for expansion and growth. In July 1996 the Company completed an amendment to its credit agreement, extending the agreement to August 13, 1997. The amended credit agreement increased the Company's working capital line to $2,200,000 and renewed the long term equipment loan for $900,000 with a balance owing of $850,000 as of October 1996. The net effect of the amended credit agreement was to increase available financing by approximately $500,000. In addition, the 10 amended agreement continued a new equipment line of $400,000 (with a balance available of $300,000) for the purchase of additional equipment. The equipment line must be used in increments of a minimum of $100,000 and shall not exceed 75% of the purchase price of equipment. At October 31, 1996, the Company had approximately $1,260,000 available under the working capital line and $300,000 available under the new equipment line as compared to $823,000 and $300,000 respectively in 1995. Management believes the amended agreement is adequate to fund the Company's working capital requirements and expansion in Arizona, other than the Company's major capital expenditure noted above, during fiscal year 1996. FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, AS COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1994 The Company's working capital as of October 1995 remained fairly constant with 1994, even though during 1995 the company expanded its manufacturing facilities and increased sales. The increase in accounts receivable and inventory of approximately $340,000 were financed using the Company's line of credit and from cash flow. The Company expanded its Ontario manufacturing facilities during fiscal 1995 with the lease of a 17,000 square foot facility. The original lease is for thirty-seven months with an option for an additional five years. The Company has expended approximately $200,000 on improvements and equipment in this expansion. $100,000 of the cost was financed using the Company's equipment line of credit with the balance coming from cash flow. This does not include the lease cost and the time and labor associated with getting the facility up and running. The Company used the additional space for warehousing, assembly and secondary operations. The additional space has also given the Company the room to expand its secondary operation department, with the addition of CNC equipment, as well as other necessary equipment allowing the Company to perform substantially more of the required secondary operations in house. In turn, the Company will have greater control over its inventory, costs, and delivery schedules. The Company purchased $460,000 of manufacturing and computer equipment during 1995. This included a new $215,000 parts washing system. The Company financed the equipment additions with a new five year lease on the parts washer and utilization of $100,000 of its equipment line of credit, with the balance coming from cash flow. The Company has available the remaining new equipment line of credit of $300,000 for additional equipment purchases in 1996. In April 1995 the Company entered into an agreement whereby it agreed to acquire 100,000 shares of its common stock for $2 per share or $200,000. The agreement called for $40,000 at closing and the balance to be paid in equal annual installments of $40,000 beginning in April 1996 through April 1999. Interest payments on the unpaid balance are to be paid quarterly at 8.5%. The note is secured by an equal number of shares of the Company's stock, in direct relationship to the unpaid balance, at $2 per share. Each year as a payment is made, the amount of stock held as security is reduced accordingly. The Company retains all voting rights to the stock held as security as long as the Company is not in default on the agreement. In August 1995 the Company completed an amendment to its credit agreement, extending the agreement to August 13, 1996. The amended credit agreement increased the 11 Company's working capital line to $2,000,000 and retained the long term equipment loan of $1,000,000, with a balance owing of $783,000 as of October 1995. The net effect of the amended credit agreement was to increase available financing by approximately $300,000. In addition, the amended agreement continued a new equipment line of $400,000 (with a balance available of $300,000) for the purchase of additional equipment. The equipment line must be used in increments of a minimum of $100,000 and shall not exceed 75% of the purchase price of equipment. At October 31, 1995, the Company had approximately $823,000 available under the working capital line and $300,000 available under the new equipment line as compared to $780,000 and $400,000 respectively in 1994. Management believes the amended agreement is adequate to fund the Company's working capital requirement during fiscal year 1996 and anticipated equipment purchases in fiscal year 1996. RESULTS OF OPERATIONS The following table summarizes the results of operations for the fiscal years 1996, 1995, and 1994 (Thousands of Dollars):
1996 1995 1994 ---- ---- ---- Sales $23,744 $19,432 $17,671 Cost of Sales $19,911 $16,130 $14,633 Operating Profit $ 1,178 $ 869 $ 885 Net Earnings $ 529 $ 264 $ 557
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1995 1996 proved to be a continuation of the sales growth that started in 1995, with a 22% increase over 1995. The sales increase was universal in all of the Company's departments, but most significant in its larger diameter equipment. During the last few years, the Company has concentrated the majority of its capital equipment budget toward the larger diameter equipment as demand for this type of work has grown and continues to grow. The addition of manufacturing and warehousing facilities in 1995 has given the Company the needed space to accommodate this sales growth. The addition of selected manufacturing, as well as second operation equipment in the last few years, has given the Company the ability to meet the current demand for its services. Cost of sales increased 1% over 1995. This increase is largely due to the higher percentage of material associated with larger diameter equipment sales. Since the majority of sales growth during 1996 was associated with the larger diameter equipment, this increase was anticipated. While total selling, general and administrative (S,G&A) cost has decreased as a percent of total sales, S,G&A costs increased by approximately $222,000 over 1995. The majority of this increase, approximately $120,000, related to an increase in commissions paid to the Company's manufacturers representatives and was directly related to the increase in sales. The Company's effective tax rate for 1996 decreased to 34% from 45% in 1995. Approximately 6.7% of this change is associated with a reduction in the effective state tax rate due to the California Manufacturers Investment Credit, which was available to the Company in 1996. The Company's operating profit increased 36% over 1995. This increase is directly related to the current increase in sales. 12 The Company's unproduced backlog of $6,184,000 at October 1996 is virtually unchanged from $6,134,000 at 1995. Considering the substantial increase in sales during 1996, the Company's ability to maintain its backlog at high levels, has been very encouraging. In addition, the backlog levels during the year have not experienced the normal fluctuations we are used to seeing. This would appear to be an indication that the current business climate is healthy and the demand for the Company's services will remain strong into the beginning of 1997. The Company continued to add to its investment in Core during 1996 with additional loans of $149,739. See Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Since Core is still incurring losses, the Company is required under the equity method of accounting to include its proportionate share of the net loss. The Company's fiscal 1996 results of operations include a loss associated with its additional investment in Core of $149,739, compared to $123,500 for 1995. FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995, COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31, 1994 While sales for 1995 show a 10% increase over 1994, the operating profits are similar to 1994. The main reasons for this stagnation in operating profits are the higher cost of raw material, a larger percent of sales outside of Southern California, and the addition of operating facilities in 1995. Raw material price increases for the last two years have totaled 31% for the higher quantity usage materials. While the majority of price increases are passed on to customers as new orders are quoted, the substantial increases have a negative effect on profit percentages. For 1995 the cost of raw material associated with sales increased from 43% to 45%. While the impact of these higher material costs has been partially offset by spreading certain fixed costs over higher sales, the net effect of a large portion of the sales increase is a pass-through of costs. The cost associated with the addition of 17,000 square feet of manufacturing and warehousing facilities was absorbed in fiscal 1995. The Company felt that the additional costs associated with this facility would be more than covered with lower outside processing costs and more efficient inventory control. The additional lease cost, along with the labor and overhead associated with setting up the facility before the facility became functional, were absorbed in 1995. During 1995 the Company continued the expansion of its sales territory with the addition of new manufacturers representatives. As sales to territories outside Southern California and Phoenix have become a larger portion of the Company's total sales, direct costs associated with these sales, specifically freight and commissions, have also continued to rise as a percent of sales. While the Company feels that the expansion of its sales territory is necessary for continued growth, there is always a learning curve and costs associated with such expansion. The Company's unproduced backlog of approximately $6,134,000 at October 1995 as compared to $4,419,000 is an indication of the Company's success in expanding its sales territory. While sales for fiscal 1995 were originally projected to be similar to, or even slightly 13 lower than 1994, the Company's customer base maintained a constant demand for its services and, along with the addition of new customers, pushed sales and backlog to new records. The Company's investment in Core continued to under perform from its projections in fiscal 1995. While the Company had originally decided not to invest any additional funds through equity or loans, the conditions seemed to warrant the investment and risk associated therewith. The Company invested a total of $123,500 through loans to Core in fiscal 1995. The Company is required to account for its investment in Core using the equity method of accounting. Under the equity method the Company is required to include its proportionate share of the net loss reported by the investee (Core) for the periods subsequent to acquisition. Accordingly, the Company's fiscal 1995 results of operations include a loss associated with its investment in Core, using the equity method, of $123,500. EFFECTS OF INFLATION Inflation for the fiscal year ended 1996 was minimal and had no effect on the Company's operations. During 1995 and 1994 the Company experienced substantial increases in the cost of some raw materials, approximately 9% and 22% respectively. All of the price increases for 1995 took place during the Company's first quarter. The cause of such increases appeared to be associated with the economic recovery the country was experiencing and the resulting increase being passed on by mills and distributors flush with orders. 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. The effect of these material increases on the operating profit during 1995 and 1994 was minimal, as the majority of the increases were passed on to customers as new orders were quoted. 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 those which took place in 1995 and 1994. If similar increases do occur in the future, the Company does not believe such increases would have a material effect on its operations. 14 ITEM 7. FINANCIAL STATEMENTS TITLE PAGE - ---------------------------------------------------------------------------- Independent Auditor's Report................................................ Consolidated Balance Sheets at October 31, 1996, and 1995............................................... Consolidated Statements of Earnings for each of the three years ended October 31, 1996, 1995, and 1994.......... Consolidated Statements of Stockholders' Equity for each of the three years ended October 31, 1996, 1995, and 1994......... Consolidated Statements of Cash Flows for each of the three years ended October 31, 1996, 1995, and 1994......... Notes to Consolidated Financial Statements ................................. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 ATHANOR GROUP, INC. AND SUBSIDIARIES Consolidated Financial Statements October 31, 1996 and 1995 (With Independent Auditors' Report Thereon) 16 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 subsidiaries as of October 31, 1996 and 1995 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, 1996. 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 subsidiaries as of October 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1996 in conformity with generally accepted accounting principles. Los Angeles, California December 13, 1996 17 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
ASSETS 1996 1995 ---------- ---------- Current assets: Cash $ 115,476 62,382 Accounts receivable, net of allowance for doubtful accounts of $11,785 at October 31, 1996 and 1995 2,471,110 2,145,381 Note receivable - related parties (note L) 40,000 25,000 Income tax receivable -- 99,500 Inventories: Raw materials 871,774 835,152 Work in process 505,569 519,363 Finished goods 1,797,388 1,617,754 ---------- ---------- 3,174,731 2,972,269 ---------- ---------- Prepaid expenses 34,935 36,141 Deferred income tax asset (note E) 261,179 191,298 ---------- ---------- Total current assets 6,097,431 5,531,971 Property, plant and equipment, net (note B) 1,177,450 1,108,541 Other assets 90,020 82,708 ---------- ---------- $7,364,901 6,723,220 ========== ==========
See accompanying notes to consolidated financial statements. 18 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ---------- ---------- Current liabilities: Note payable (note C) $ 939,757 1,177,163 Current portion of long-term debt (note D) 419,901 365,961 Accounts payable 1,443,659 1,537,976 Accrued liabilities: Salaries, wages and other compensation 402,077 275,770 Income tax payable 122,769 -- Other 377,540 329,246 ---------- ---------- Total current liabilities 3,705,703 3,686,116 ---------- ---------- Long-term debt, less current portion (note D) 1,095,228 974,143 Deferred gain on sale and leaseback (note F) -- 39,257 Noncurrent deferred income tax liability (note E) 66,573 55,424 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 1,471,354 shares in 1996 and 1,471,434 shares in 1995 14,713 14,714 Additional paid-in capital 1,447,391 1,447,391 Retained earnings 1,035,293 506,175 ---------- ---------- Total stockholders' equity 2,497,397 1,968,280 Commitments (notes C, D and G) ---------- ---------- $7,364,901 6,723,220 ========== ==========
See accompanying notes to consolidated financial statements. 19 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1996 1995 1994 ------------ ------------ ------------ Net sales $ 23,744,232 19,432,094 17,670,680 Cost of sales 19,910,869 16,130,070 14,633,034 ------------ ------------ ------------ Gross profit 3,833,363 3,302,024 3,037,646 Selling, general and administrative expenses 2,655,621 2,433,298 2,152,960 ------------ ------------ ------------ Operating profit 1,177,742 868,726 884,686 Other income (expense): Interest expense (279,779) (281,434) (141,124) Equity in loss of unconsolidated investee (149,739) (123,500) (360,458) Miscellaneous, net 58,197 20,859 58,883 ------------ ------------ ------------ Earnings before income taxes and cumulative effect of change in accounting for deferred income taxes 806,421 484,651 441,987 Income tax expense (note E) 277,183 220,900 344,275 ------------ ------------ ------------ Earnings before cumulative effect of change in accounting for deferred income taxes 529,238 263,751 97,712 Cumulative effect of change in accounting for deferred income taxes (note E) -- -- 478,683 ------------ ------------ ------------ Net earnings $ 529,238 263,751 576,395 ============ ============ ============
(Continued) 20 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED) YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1996 1995 1994 ------- ------- ------- Earnings per common share: Primary and fully diluted: Earnings before cumulative effect of change in accounting for deferred income taxes $ .36 .18 .06 Cumulative effect of change in accounting for deferred income taxes -- -- .31 ------- ------- ------- Net earnings $ .36 .18 .37 ======= ======= =======
See accompanying notes to consolidated financial statements. 21 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED --------------------- ------------------------ PAID-IN EARNINGS SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL -------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at October 31, 1993 -- $ -- 1,567,100 $ 15,671 1,444,184 (134,971) 1,324,884 Issuance of common stock -- -- 4,334 43 3,207 -- 3,250 Net earnings for the year -- -- -- -- -- 576,395 576,395 -------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at October 31, 1994 -- -- 1,571,434 15,714 1,447,391 441,424 1,904,529 Retirement of common stock (note I) -- -- (100,000) (1,000) -- (199,000) (200,000) Net earnings for the year -- -- -- -- -- 263,751 263,751 -------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at October 31, 1995 -- -- 1,471,434 14,714 1,447,391 506,175 1,968,280 Retirement of common stock (note I) -- -- (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 ======== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 22 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net earnings $ 529,238 263,751 576,395 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Cumulative effect of change in accounting for deferred income taxes -- -- (478,683) Equity in loss of unconsolidated investee 149,739 123,500 360,458 Depreciation and amortization 283,877 250,944 237,928 Loss on disposal of fixed asset -- 21,460 5,683 Amortization of deferred gain on sale and leaseback (39,257) (41,305) (41,304) Provision for deferred income taxes (58,732) 220,900 160,046 (Increase) decrease in operating assets: Accounts receivable (226,229) (309,502) (664,821) Inventories (202,462) (130,578) (646,078) Prepaid expenses 1,206 (6,734) 3,744 Other assets (7,312) 3,642 3,916 Increase (decrease) in operating liabilities: Accounts payable (94,317) 16,701 282,823 Accrued liabilities 174,601 (193,496) 195,126 Income taxes payable 122,769 -- -- --------- --------- --------- Net cash provided by (used in) operating activities 633,121 219,283 (4,767) --------- --------- --------- Cash flows from investing activities: Purchase of property and equipment (81,631) (517,318) (236,933) Proceeds from sales of property and equipment -- 39,885 10,044 Note receivable - related party (15,000) (25,000) 198,672 Write-off of note receivable - related party -- 19,500 -- Investment/advances in unconsolidated investee (149,739) (123,500) (260,458) --------- --------- --------- Net cash used in investing activities (246,370) (606,433) (288,675) --------- --------- --------- (Continued)
23 ATHANOR GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1996 1995 1994 --------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) under line of credit $(237,406) 257,235 284,416 Repayments of note payable -- -- (15,834) Proceeds from long-term debt 267,334 312,083 336,546 Repayments of long-term debt (363,464) (268,971) (269,373) Repurchase of stock (121) -- -- --------- --------- --------- Net cash provided by (used in) financing activities (333,657) 300,347 335,755 --------- --------- --------- Net increase (decrease) in cash 53,094 (86,803) 42,313 Cash at beginning of year 62,382 149,185 106,872 --------- --------- --------- Cash at end of year $ 115,476 62,382 149,185 ========= ========= ========= Supplemental disclosures of cash flow information: Interest paid $ 283,040 278,952 175,509 ========= ========= ========= Income taxes paid $ 113,646 254,635 103,000 ========= ========= =========
Supplemental schedule of noncash investing and financing activities: 1996 The Company purchased $271,155 of machinery and equipment under a capital lease obligation. 1995 The Company purchased $206,826 of machinery and equipment under a capital lease obligation. 1994 The Company purchased $157,854 of machinery and equipment under a capital lease obligation. The Company issued 4,334 shares valued at $3.250 of common stock to a director for payment of director fees. The Company increased its investment in CORE by $100,000 through reduction of related party notes receivable. See accompanying notes to consolidated financial statements. 24 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- 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. 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 operations. 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 4 to 7 years Leasehold improvements 5 to 9 years 4. INCOME TAXES During 1994, the Company changed its method of accounting for deferred taxes from the deferred method under APB No. 11 to the asset and liability method now required under SFAS No. 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, net operating loss carryforwards and credit carryforwards are included as deferred tax assets. A valuation allowance against deferred tax assets is recorded if 25 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- necessary. All deferred tax amounts are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Changes in tax rates are recognized in income in the period that includes the enactment date. 5. INVESTMENT The Company accounts for its investment in Core Software Technology (Core) on the equity method which requires the Company to record its share of Core's earnings or losses. During 1996 and 1995, the Company invested $149,739 and $123,500, respectively, into Core which was subsequently reduced to zero because of losses incurred by Core. At October 31, 1996 and 1995, the Company owned 28.0% and 21.5% of Core's common stock, respectively. 6. EARNINGS PER SHARE Earnings per share is based on the weighted average of common shares outstanding during each year. 7. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, trade accounts receivable, note receivable related party, notes payable to banks, trade accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The fair value of the Company's debt instruments is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. 8. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities 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. 9. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. 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 net 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 26 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- 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. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or liquidity. 10. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. NOTE B - PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment by classification follows:
OCTOBER 31 ---------------------------- 1996 1995 ---------- ---------- Machinery and equipment $4,738,016 4,378,968 Leasehold improvements 77,278 77,278 ---------- ---------- 4,815,294 4,456,246 Less accumulated depreciation and amortization 3,637,844 3,347,705 ---------- ---------- $1,177,450 1,108,541 ========== ==========
NOTE C - NOTE PAYABLE Alger has a $3,500,000 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 (a wholly owned subsidiary). Under the line of credit, the subsidiary may borrow amounts up to $2,200,000 based on eligible accounts receivable and inventories, as defined. Interest on drawings on this line of credit is payable at the prime rate (8.25% at October 31, 1996), plus 1.25%. The line of credit expires in August 1997. The amount outstanding was $939,757 and $1,177,163 at October 31, 1996 and 1995, respectively. The amount available under the line of credit was approximately $1,260,000 and $823,000 at October 31, 1996 and 1995, respectively. The agreement also provides for a term loan not to exceed $900,000, of which $850,000 was outstanding at October 31, 1996. In addition, the agreement provides for an equipment line of up to $400,000, of which $73,000 has been drawn and $300,000 was available at October 31, 1996. Borrowings on both the term loan and equipment line are included 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. 27 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- NOTE D - LONG-TERM DEBT Long-term debt consisted of the following:
1996 1995 ---------- ---------- Notepayable to an individual at an annual rate of 8.5%, payable in yearly installments of $40,000, with interest payable quarterly, due April 1999 (see note L) $ 120,000 160,000 Notes payable to a lending institution at the prime rate (8.25% at October 31, 1996) plus 1.25%, payable in monthly installments of $18,334 plus interest, due July 1999, collateralized by substantially all assets of Alger 923,328 843,332 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 119,596 40,110 Capital lease obligations (see note G) 352,205 296,662 ---------- ---------- 1,515,129 1,340,104 Less current portion 419,901 365,961 ---------- ---------- $1,095,228 974,143 ========== ==========
A schedule of aggregate, annual principal payments on long-term debt as of October 31, 1996 is as follows:
YEAR ENDING OCTOBER 31 AMOUNT ----------- -------- 1997 $419,901 1998 401,620 1999 620,076 2000 54,388 2001 19,144 ---------- $1,515,129 ==========
28 NOTE E - INCOME TAXES During 1994, the Company changed its method of accounting for deferred taxes from the deferred method under APB No. 11 to the asset and liability method now required under SFAS No. 109. The cumulative effect of this change in accounting method was to establish a $478,683 net deferred tax asset as of the beginning of the fiscal year (November 1, 1993) and record a corresponding increase to net income. Income tax expense (benefit) for 1996 and 1995 consists of the following:
FEDERAL STATE TOTAL --------- --------- --------- 1996: Current $ 303,425 32,490 335,915 Deferred (51,440) (7,292) (58,732) --------- --------- --------- $ 251,985 25,198 277,183 ========= ========= ========= 1995: Current $ -- -- -- Deferred 189,628 31,272 220,900 --------- --------- --------- $ 189,628 31,272 220,900 ========= ========= =========
The difference between the Federal and income tax rate and the effective income tax rate on net earnings is as follows:
1996 1995 1994 ----------------------- ------------------------ -------------------- Statutory U.S. Federal tax rate 34.0% $ 274,183 34.0% $ 164,781 34.0% $ 150,276 State income taxes, net of Federal benefit 6.1 48,788 6.1 29,297 6.1 26,961 (Decrease) increase in valuation allowance -- -- -- -- 32.7 144,681 Benefit due to state tax credits (6.7) (54,123) -- -- -- -- Other 1.0 8,335 5.4 26,822 5.1 22,357 ------------ ------------ ------------ ------------ ----------- ----------- 34.4% $ 277,183 45.5% $ 220,900 77.9% $ 344,275 ============ ============ ============ ============ =========== ===========
29 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liability at October 31, 1996 and 1995 is as follows:
1996 1995 -------- -------- Deferred tax assets: Bad debt reserves $ 4,730 4,730 Equity in loss of unconsolidated investee 254,354 194,251 Contamination reserve 106,471 100,345 Other 40,305 36,653 -------- -------- Total gross deferred tax asset 405,860 335,979 Valuation allowance 144,681 144,681 -------- -------- Net deferred tax asset $261,179 191,298 ======== ======== Deferred tax liabilities: Accelerated depreciation on fixed assets $ 66,573 71,181 Deferred gain on sale and leaseback -- (15,757) -------- -------- Net deferred tax liability $ 66,573 55,424 ======== ========
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 established a valuation allowance in 1994 by an amount equal to this deferred tax asset. 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 - SALE AND LEASEBACK In September 1986, the Company sold for $750,000 its manufacturing facility in Ontario, California. The proceeds from the sale of the facilities were used, in part, to satisfy the secured claim against the property. 30 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- The facilities were leased back (note G) to the Company's wholly owned subsidiary, Alger Manufacturing Co., Inc. A gain of approximately $411,000 was deferred and is being amortized over the life of the lease. Amortization on the deferred gain of $39,257, $41,304 and $41,304 has been recorded as other income for the years ended October 31, 1996, 1995 and 1994, respectively. NOTE G - 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, 1996 and 1995 is as follows: 1996 1995 -------- -------- Cost $515,000 241,000 Less accumulated depreciation 71,000 26,000 -------- -------- $444,000 215,000 ======== ======== 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. The following is a schedule of future minimum rental commitments under capital leases and noncancelable operating leases as of October 31, 1996:
CAPITAL OPERATING LEASES LEASES TOTAL -------- -------- -------- Year ending October 31: 1997 $114,214 236,746 350,960 1998 114,214 88,535 202,749 1999 114,214 12,526 126,740 2000 58,558 7,640 66,198 2001 19,660 -- 19,660 -------- -------- -------- Minimum lease payments 420,860 $345,447 766,307 ======== ======== Less amount representing interest and taxes 68,655 -------- Present value of future capital lease payments $352,205 ========
31 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- Rental expense for operating leases was approximately $254,000 in 1996, $230,000 in 1995 and $170,000 in 1994. As of October 31, 1996 and 1995, the Company has accrued $265,000 and $250,000, 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 H - EARNINGS PER SHARE Primary earnings per common share are computed by using the weighted average number of common shares outstanding during the year: 1,471,377 shares in 1996, 1,471,434 shares in 1995 and 1,571,434 shares in 1994. As of October 31, 1996, the Company had no outstanding common stock options or warrants. NOTE I - STOCKHOLDERS' EQUITY During 1994, the Company issued 4,334 shares of common stock to an individual as payment for 1993 director's fees at $.75 per share which was equal to the fair market value. During 1995, the Company repurchased 100,000 shares of its common stock for $2.00 per share. During 1996, the Company repurchased approximately 80 shares of common stock for $1.50 per share. NOTE J - MAJOR CUSTOMER For the year ended October 31, 1996, the Company had no customers which accounted for more than ten percent (10%) of net sales. For the year ended October 31, 1995, the Company had one customer which accounted for approximately thirteen percent (13%) of net sales. For the years ended October 31, 1994, the Company had one customer which accounted for approximately thirteen percent (13%) of net sales. 32 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- NOTE K - EMPLOYEE BENEFIT PLAN The Company and its subsidiaries 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 employee's 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 his pro rata compensation to all compensation. The Company's contributions under the plan amounted to approximately $75,000, $72,000 and $61,000 for the years ended October 1996, 1995 and 1994, respectively. NOTE L - RELATED PARTY TRANSACTIONS The Company is currently the single largest stockholder of Core owning 3,132,570 shares of Core's capital stock which represents approximately 28.0% of the issued and outstanding shares of Core's capital stock. The Company acquired the majority of its shares in Core through a series of purchases and conversions of existing indebtedness into equity during the Company's previous two fiscal years. In addition, 858,863 of the shares of Core owned by the Company were acquired by the Company for an aggregate purchase price of $100,000, in the form of a reduction of its then outstanding loans to Image Data Corporation (IDC) by $100,000, in a foreclosure sale of such shares held in October 1994. The shares of Core acquired by the Company in the foreclosure sale were shares owned by IDC which shares had been pledged by IDC to the Company to secure certain indebtedness of IDC to the Company. During 1994, in conjunction with a private placement of Core's common stock, the Company exercised options to acquire 260,000 shares of the common stock of Core at $1.00 per share, converting $260,000 of the loans made to Core into equity in Core common stock. In addition, the Company received a repayment of the balance of its loans from Core. During 1996 and 1995, the Company advanced an additional $149,739 and $123,500, respectively, to Core, which, under the equity method, has been written off. Accordingly at October 31, 1996 and 1995, the Company has no outstanding loans receivable from Core. During 1991 and 1992, the Company loaned IDC a total of $653,500, secured by a senior lien on the assets of IDC. In 1993, the Company recorded a $534,062 provision for losses relating to the notes receivable from IDC. In 1994, the Company converted $100,000 of its then outstanding loans receivable from IDC in a foreclosure proceeding on IDC assets. During 1995, the Company wrote off the remaining balance of the loans receivable from IDC. In 1991, IDC transferred substantially all of its assets and technology to Core, subject to the Company's security interest. In addition, in 1992, IDC filed a petition for relief under Chapter 11 of the Federal bankruptcy laws. IDC's plan of reorganization (Plan) was confirmed by the court in 1993 and became effective in 1994. The Plan provides for IDC to receive payment under a distribution agreement with Core, and the Company will receive 33 ATHANOR GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- approximately fifty percent (50%) of the amounts received by IDC until the principal balance plus accrued interest is repaid. The distribution agreement has been extended through December 31, 1997. If the Company has not been repaid principal and interest in full by December 1996, the Company has the right to foreclosure on the assets of Core. The Company has neither exercised nor waived its right to foreclosure. The Chairman of the Board of the Company also serves as the chief executive officer of IDC. He is currently the only employee of IDC and his primary function is the implementation of IDC's plan of reorganization. Until July 1992, he served as chief operating officer of IDC. He has also been a director of Core since September 1991. From November 1993 through March 1995, the chief operating/chief financial officer was a director of Core. In September 1995, the Company loaned $25,000 to the Chairman of the Board of Directors 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 due March 1997. 34 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, 1996. DIRECTOR/OFFICER INFORMATION
Principal Director Name Occupation Age Since - -------------------------------------------------------------------------------------------------------------- Gregory J. Edwards Director 52 1990 Duane L. Femrite President, Chief Executive Officer, 51 1985 Chief Financial Officer of the Company William H. Harris, Jr. Director 52 1986 Richard A. Krause Vice President of the Company 61 1992 President, Alger Manufacturing Company, Inc. Robert W. Miller Chairman of the Board, 54 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 President and Chief Executive Officer of CASS Corp. ("CASS") since January 1993. CASS owns several manufacturing companies: Nelco Mfg. Corp., a manufacturer of portable shotblasting equipment; Milamar Coatings, Inc., a producer of epoxy coating products used in the industrial and commercial seamless floor coating business; Berry Corp., a manufacturer of equipment for the maintenance and marking of pavement services, specializing in designing and manufacturing joint/crack sealers and thermoplastic melting equipment; and Government Services Division ( formerly known as R. T. Nelson Painting Service, Inc.) a government contractor involved with surface preparation and re-coating for U.S. Naval ships and portable landing mats. Between July 1991 and January 1993, Mr. Edwards was self-employed as a financial consultant and investor. Previously, he was an investment banker with 35 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. Chairman of the Board and Chief Executive Officer of Alger since September 1986 and October 1987 respectively. Director of Core Software Technology from November 1993 to March 1995. Mr. Femrite is a Certified Public Accountant. WILLIAM H. HARRIS, JR. Account executive with Dean Witter Reynolds, Inc. in Phoenix, Arizona since October 1992. President of Sun Rental and Sales, Inc. a construction equipment sales and rental company located in Yuma, Arizona from July 1978 to September 1992. 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 and Vice President of Alger since 1986. Director of Image Data Corporation since 1988 and Chief Operating Officer from May 1990 to July 1992. Elected Chief Executive Officer of Image Data Corporation on January 7, 1993. Director of Core Software Technology since September 1991. Director of OneCard International since 1988 and elected Chairman and Chief Executive Officer of this company in September 1992. In March 1992 Image Data Corporation filed a bankruptcy petition. Its Plan of Reorganization was confirmed in April 1993 and became effective in 1994. 36 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 four most highly compensated executive officers, each of whose annual salary and bonus was in excess of $100,000 and to the Company's Chief Executive Officer regardless of compensation level, for services to the Company during the three fiscal years ended October 31, 1996. ANNUAL COMPENSATION
Name and Principal Position Year Salary Bonus Other (1) - ---------------------------------------------------------------------------------- Duane L. Femrite 1996 $133,308 $ 44,000 $ 2,162 President, Chief Executive 1995 129,038 10,000 3,826 Officer and Chief Financial 1994 125,000 24,000 3,124 Officer Richard A. Krause 1996 $145,308 $ 52,328 $ 3,750 Vice President and 1995 141,673 41,066 4,748 President of Alger 1994 125,000 48,283 3,732 Manufacturing Co., Inc. Robert W. Miller 1996 $136,498 $ 44,000 $ 1,432 Chairman of the Board 1995 125,000 10,000 1,250 Corporate Secretary 1994 125,000 24,000 1,250
(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 are identical as to their terms except for the description of the duties which 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 and Duane L. Femrite were automatically renewed on January 1, 1997, for an additional year. 37 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 fees of $300 per month and $500 per meeting attended. In 1994 the Board established a Nominating Committee, which Committee 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 $50 for each meeting attended when such committee meetings are held on a day which the full Board does not meet. The Audit Committee, Nominating Committee, and Compensation Committee met once in 1996. Non-employee directors of Alger receive directors' fees for serving as directors and for meetings attended. Certain directors of the Company are also directors of Alger. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 1996, 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. 38 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 11,000 .7% Stock 3109 Rolling Stone Road Oklahoma City, Oklahoma 73120 Common Duane L. Femrite 189,544 12.9% Stock 921 E. California Ave. Ontario, California 91761 Common William H. Harris, Jr. (2) 51,050 3.5% Stock 302 Las Palmaritas Phoenix, Arizona 85021 Common Richard A. Krause 256,983 17.5% Stock 921 E. California Ave. Ontario, California 91761 Common Robert W. Miller (1) 164,752 11.2% Stock 921 E. California Ave. Ontario, California 91761 Common All Officers and Directors 673,082 45.8% 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, 1996. There was 1,468,934 shares of Common Stock outstanding on December 31, 1996. None of the officers or directors of the Company has options to acquire any shares of Common Stock of the Company. Messrs. Femrite, 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 which may at a subsequent date result in a change in control of the Company. 39 - ----------------------------- (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 41,050 shares of Common Stock owned by The Harris Family Irrevocable Trust. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LOANS AND INVESTMENTS IN CORE SOFTWARE TECHNOLOGY The Company is currently the single largest shareholder of Core Software Technology, a California corporation ("Core"), owning 3,132,570 shares of the issued and outstanding common stock of Core, representing approximately 27.8% 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). As a condition to a closing of a private placement of the common stock of Core for gross proceeds to Core of $4,705,000 which closing occurred during April and May 1994 (the "Core Private Placement"), the original shareholders of Core agreed to deposit certain shares of the common stock of Core owned by them into escrow. Accordingly, an aggregate of 1,426,150 of the 3,132,570 shares of the common stock of Core owned by the Company are currently held in an escrow account. All of the escrowed shares will be released from escrow if Core meets a certain minimum pretax income requirement in 1997. Core failed to meet this minimum pretax income requirement in 1994, 1995 and 1996, and there can be no assurance that Core will meet this pretax income requirement in the future. If such minimum pretax income requirements are not reached by April 30, 1998, all shares held in the escrow account will be canceled and returned to Core and the Company shall have no further rights with respect to those shares. 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 also provided a portion of the working capital requirements of Core during fiscal 1996, in the form of a series of loans to Core in the aggregate principal amount of $149,739. The Company accounts for its investment in Core using the equity method of accounting which requires the Company to record its share of Core's earnings or losses. 40 During fiscal 1996, the Company reduced the loans to zero because of losses incurred by Core. Robert W. Miller, the Chairman of the Board of the Company, has served on the Board of Directors of Core since its formation and on the Board of Directors of Image Data Corporation ("IDC"), Core's predecessor, since 1988. Until July 1992 Mr. Miller was the Chief Operating Officer of IDC. Mr. Miller is currently serving as Chief Executive Officer of IDC. Duane L. Femrite, the President and Chief Executive Officer of the Company, served on the Board of Directors of Core from November 1993 to March 1995. Mr. Miller as a director of Core, and Mr. Femrite during his tenure, were entitled to receive $500 per month and $1000 per board meeting attended and each committee meeting not held in conjunction with a board meeting. In addition, they were to be reimbursed for all business related expenses associated with their duties as a director of Core. During 1995 and 1996, all director fees payable to Mr. Miller and Mr. Femrite from Core was deferred. Mr. Miller has entered into a consulting agreement with Core, effective January 1, 1995, wherein Mr. Miller has agreed to provide services to Core relating to financial, investor, capital raising and general business matters arising out of Core's on-going restructuring, recapitalization and financing efforts. In exchange for Mr. Miller's services, Core has agreed to pay Mr. Miller a fixed fee of $50,000 for the calendar year 1995 and $5,000 per month commencing January 1, 1996. Mr. Miller has assigned the right to receive said fees to R & D Financial a California general partnership of which Messrs. Miller and Femrite are the general partners. None of the foregoing amounts has been paid. All amounts due pursuant to the consulting agreement will be paid, if at all, only from proceeds raised in any major refinancing of Core or profits, if any, generated in connection with Core's future business operations. Mr. Miller was to have received $4,000 per month from IDC with respect to his services rendered to IDC in accordance with IDC's confirmed Plan of Reorganization, commencing in April 1993, but has received no compensation to date. Such compensation may be paid to Mr. Miller in the future. Mr. Femrite and Mr. Miller have a beneficial ownership interest in 242,986 shares of the common stock of Core owned by R&D. In addition, R&D holds stock options entitling it to purchase an additional 122,000 shares of Core common stock at a price of $1 per share. Mr. Miller has a beneficial ownership interest in 23,929 additional shares of the common stock of Core as well as options to purchase 46,887 shares of the common stock of Core at $1 per share. The Internal Revenue Service ("IRS") has served Mr. Miller personally with a Notice of Levy with respect to approximately $400,000 in taxes and penalties purportedly owed by IDC. In connection therewith, the IRS has collected approximately $36,000 from Mr. Miller and currently collects $500 per month from Mr. Miller. Mr. Miller has advised the Company that he disputes the IRS levy and responsibility for payment of IDC's taxes. 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, without limitation, taxes and penalties owed by IDC to the IRS. Mr. Miller is seeking indemnification against Core arising out of the IRS Notice of Levy against Mr. Miller for taxes and penalties purportedly owed to the IRS by IDC. 41 On September 7, 1995, the Company made a loan to Mr. Miller in the principal amount of $25,000. During 1996 the loan was increased to $40,000. The loan bears interest at the rate of 10% per annum and is secured by 25,000 shares of the common stock of Registrant. The loan is due and payable, together with accrued interest thereon in March 1997. 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 42 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 1/24/97 By /s/ ---------------------------------- ---------------------------------- 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/ 1/24/97 - ------------------------------------------------------ -------- Gregory J. Edwards, Director Date /s/ 1/24/97 - ------------------------------------------------------ -------- Duane L. Femrite, President, Chief Executive Officer, Date Chief Financial Officer and Director /s/ 1/24/97 - ------------------------------------------------------ -------- William H. Harris, Jr., Director Date /s/ 1/24/97 - ------------------------------------------------------ -------- Richard A. Krause, Vice President and Director Date /s/ 1/24/97 - ------------------------------------------------------ -------- Robert W. Miller, Chairman of the Board, Corporate Date Secretary, and Director 43 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. 44 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. ncorporated 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. 10.16 Loan and Security Agreement (Equipment) dated June 2, 1994, by and between Alger and Phoenixcor, Inc. 10.17 Secured Promissory Note and Pledge Agreement dated September 7, 1995 by and between Athanor Group, Inc. and Robert W. Miller. Filed Herewith. 10.18 Standard Industrial Lease - Gross. Manufacturing property located in Glendale, Arizona, between Alger and Kachina Industrial Properties, 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. 45 10.20 Secured Promissory Note dated September 9, 1996, by and between Athanor Group, Inc. and Robert W. Miller. 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. EX-10.19 2 EXHIBIT 10.19 1 Exhibit 10.19 FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Fifth Amendment to Loan and Security Agreement ("Fifth Amendment") is made as of July 10, 1996 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, and Amendment to Loan and Security Agreement dated as of February 10, 1992, a Second Amendment to Loan and Security Agreement dated as of July 13, 1994 and a Fourth Amendment to Loan and Security Agreement dated as of August 3, 1995 (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 Fifth 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 Fifth Amendment. 1. Total Facility. Section 2.1(a) is amended in its entirety to read as follows: "(a) A revolving line of credit consisting of advances against Eligible Accounts and Eligible Inventory ("Revolving Loan") in an aggregate principal amount not to exceed, at any time outstanding, the lesser of (i) two million two hundred thousand dollars ($2,200,000) or (ii) the outstanding amount of Collateral Availability. As used in this Agreement, "Collateral Availability" shall mean and, at any particular time and from time to time, be equal to, the sum of (x) up to eighty-five percent (85%) of the net amount (after deduction of such reserves as Lender deems proper and necessary) of Eligible Accounts plus (y) up to forty percent (40%) of the aggregate value of Eligible Inventory (determined on the basis of the lower of first-in/first-out cost or market value, both net of such reserves as Lender deems proper and necessary; provided, that Collateral Availability as to Eligible Inventory shall not at any time exceed six hundred thousand dollars ($600,000). The Revolving Loan shall be repayable on demand and as provided in Section 4.2;". 2. 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 nine hundred thousand dollars ($900,000) to be evidenced by a Second Amended and Restated Installment Note in form and substance satisfactory to Lender; and". 2 Exhibit 10.19 3. Interest Rate. Section 2.3 is amended by deleting the first sentence of such Section and substituting the following in its place: "Unless otherwise provided in a writing evidencing such Liabilities, Borrower shall pay Lender interest on the outstanding principal balance of the Liabilities under the Revolving Loan at the rate of one and one-fourth percent (1 1/4%) above the Prime Rate and interest on the outstanding principal balance of all other Liabilities including the Liabilities under the Term Loan and the Acquisition Term Loan, at the rate of one and one-half percent (1 1/2%) above the Prime Rate. 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, 1997 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, 1997 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, 1997 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, 1997 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 3 Borrower refinancing the Liabilities through Sanwa Bank California and such prepayment occurs on or before August 30, 1997." 5. Affirmative Covenants. Section 10.1(a)(i) is amended in its entirety to read as follows: "(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," 6. Affirmative Covenants. Section 10.1(a)(iii) is amended in its entirety to read as follows: "(iii) Tangible Net Worth at least equal to $1,750,000, and". 7. Term Loan Restrictions and Term Loan Use Purposes. (a) The Term Loan shall be evidenced by a Second Amended and Restated Installment Note in a form acceptable to Lender. Any reference to "Term Loan" or "Installment Note" or "Term Note" in the Agreement shall refer to the Term Loan made pursuant to the terms of this Fifth Amendment and the Second Amended and Restated Installment Note. (b) The Term Loan shall provide a nonreusable line of credit availability to Borrower, the proceeds of the Term Loan shall be used as follows: (i) $599,999.92 shall constitute the present existing unpaid balance owing as of the date hereof, under the existing Term Loan and shall not constitute a novation with respect to such existing unpaid balance; and (ii) The remaining availability shall be used by Borrower for the purchase of additional equipment and other working capital purposes, subject to the provisions of the Agreement. (c) Borrower has retained Max Rouse & Sons to update its 1992 appraisal. A copy of the updated appraisal shall be provided to Lender as soon as possible, but in any event by no later than July 31, 1996. The updated appraisal shall be acceptable to Lender in all respects. Without limiting the generality of the foregoing, to the extent the then outstanding principal amount of the Term Loan exceeds eighty-five percent of the auction liquidation value set forth in the updated appraisal, Borrower shall, within 15 days, prepay, without premium or penalty, the Term Loan by the amount of such excess. Any such prepayment will be applied to principal payments in the inverse order from which they are ordinarily due. Failure to timely provide the required updated appraisal or to timely make any prepayment required pursuant to the terms of this subscription shall constitute a Default under the Agreement. 8. Exhibit A. Exhibit A to the Agreement is hereby deleted in its entirety and Exhibit A attached hereto and by this reference incorporated herein is substituted in its place. 4 9. Renewal Fee. In connection herewith, and upon execution of this Fifth Amendment, Borrower shall pay to Lender a renewal fee in the amount of $6,250. Such fee shall be fully earned and nonrefundable upon its receipt by Lender. 10. Documentation Fee. Upon execution of this Fifth Amendment, Borrower shall pay to Lender a documentation fee equal to $1,000 in connection with the documentation of this Fifth Amendment. Such fee shall be in addition to all other fees payable by Borrower hereunder. 11. 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 Fifth 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 Fifth 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 Fifth Amendment, which constitutes a Default or Event of Default under the Agreement, as amended and modified hereby; 12. Conditions Precedent. The effectiveness of this Fifth Amendment is conditioned upon the satisfaction by Borrower of each of the following conditions, or their waiver in writing by Lender: (a) This Fifth Amendment shall have been executed by all the signatories hereto (including, but not limited to, those signatories acknowledging and consenting to this Fifth Amendment and reaffirming their respective instruments, documents and agreements with Lender related to the Agreement) and delivered to Lender; (b) The Second Amended and Restated Term Note in the form of amended Exhibit A to the Agreement attached hereto shall have been executed and delivered by Borrower to Lender; (c) 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 Fifth Amendment and the Agreement as amended hereby; and 5 (d) Borrower shall have paid to Lender the Renewal Fee and the Documentation Fee, each of which is fully earned as of the date hereof and is nonrefundable. 13. 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 Fifth Amendment and any other documents in connection herewith and in carrying out and enforcing the terms of this Fifth Amendment. 14. 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 and in full force and effect. 15. Incorporation. This Fifth 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 this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as of the date first above written. ALGER MANUFACTURING COMPANY, INC. By: ------------------------------------ Its: Chairman and CEO ----------------------------------- By: ------------------------------------ Its: Vice President ----------------------------------- SANWA BUSINESS CREDIT CORPORATION By: ------------------------------------ Its: First Vice President ----------------------------------- EX-10.20 3 EXHIBIT 10.20 1 Exhibit 10.20 SECURITY PROMISSORY NOTE $40,000 September 9, 1996 Los Angeles, California FOR VALUE RECEIVED, the undersigned, Robert W. Miller, an individual (the "Maker"), promises to pay the sum of Forty Thousand Dollars ($40,000) or such lesser sum up to such maximum amount, as Athanor Group, Inc. ("Payee") may hereinafter advance to or for the benefit of the undersigned. Interest on any amount advanced under this Note shall be at the rate of 10% per annum until paid. The full amount of principal, plus all accrued but unpaid interest thereon, shall be due and payable on March 7, 1997. Payee shall advance any amounts requested to be advanced by Maker under this Note on demand. This Note is secured pursuant to the terms of a certain Pledge Agreement of September 7, 1995 herewith between Maker and Payee which is on file at the principal place of business of the Payor. If action be instituted on this Note, Payor promises to pay all costs of collection, including, but not limited to, such sums as the Court may fix as reasonable attorneys' fees. This Note may be prepaid, in whole or in part, at any time and from time to time, without penalty or premium. This Note has been made in, and shall be governed by the internal laws of the State of California, without giving effect to principles of conflicts of laws. IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed as of the day and year first above written. /s/ ROBERT W. MILLER ----------------------------------- Robert W. Miller EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS OCT-31-1996 NOV-01-1995 OCT-31-1996 115 0 2,483 12 3,175 6,097 4,815 3,638 7,365 3,706 0 0 0 15 2,482 7,365 23,744 23,744 19,911 22,566 92 0 280 806 277 0 0 0 0 529 .36 .36
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