SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6856
ANDAL CORP.
(Exact name of registrant as specified in its charter)
New York 13-2571394
(State or other jurisdiction of incorporation (I. R. S. Employer ID no.)
or organization)
909 Third Avenue, New York, New York 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 376-5545
Not Applicable
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No
The number of shares outstanding of the registrant's common stock as of January
31, 1996 was 329,859.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANDAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
ASSETS
December 31, September 30,
1995 1995
(Unaudited)
Current assets:
Cash $ 347 $ 850
Accounts receivable 4,778 4,998
Inventories 1,369 1,073
Other current assets 1,143 1,213
----------- -------------
Total current assets 7,637 8,134
Investments in joint ventures 1,249 1,268
Property and equipment 10,844 10,789
Loans due from Multi-Arc Inc. management 1,000 1,000
Other assets 2,300 2,434
----------- -------------
$ 23,030 $ 23,625
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings, including
current portion of long-term debt $ 1,206 $ 1,206
Current portion of debt due shareholders 1,250 1,250
Accounts payable 1,560 1,606
Other accrued expenses 4,544 5,106
----------- -------------
Total current liabilities 8,560 9,168
Long-term debt 8,085 7,886
Debt due shareholders 6,114 6,364
Other deferred income 1,407 1,430
Convertible subordinated debentures 3,335 3,335
Minority interest in Multi-Arc Inc. 585 540
Shareholders' equity:
Common shares, par value $20 per share,
1,500,000 authorized and 370,496 issued 7,410 7,410
Paid-in-capital 31,625 31,625
Deficit (38,430) (38,472)
Less 40,637 common shares held in treasury,
at cost (5,661) (5,661)
--------- ---------
Total shareholders' equity (deficit) (5,056) (5,098)
--------- ---------
$ 23,030 $ 23,625
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
ANDAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands of dollars,
except per share amounts)
Three Months
Ended
December 31,
1995 1994
Operating revenues:
Trade sales $7,461 $6,437
Royalties and commissions 78 70
Equity in net income of foreign joint ventures 30 0
------- -------
7,569 6,507
Operating costs and expenses:
Cost of revenues 3,771 3,231
Depreciation expense 537 509
Selling, general, and administrative expenses 2,758 2,490
------- -------
7,066 6,230
------- -------
Income from operations 503 277
Other income (expense):
Minority interest in net income of Multi-Arc Inc. (40) (9)
Gain from initial public offering of
Multi-Arc India Ltd. 0 85
Investment and other income, net 50 4
Interest expense (465) (438)
------- -------
(455) (358)
Income (loss) from continuing ------- -------
operations before income taxes 48 (81)
Provision for income taxes (6) 0
------- -------
Income (loss) from continuing operations 42 (81)
Income (loss) from discontinued operations 0 (111)
------- -------
Net income (loss) $ 42 $ (192)
Income (loss) per common share: ====== ========
Income (loss) from continuing operations $ .13 $ (.24)
Income (loss) from discontinued operations 0 (.34)
------ --------
Net income (loss) $ .13 $ (.58)
====== ========
See accompanying notes to consolidated financial statements.
<PAGE>
ANDAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands of dollars)
Three Months Ended
December 31,
1995 1994
Cash provided by operating activities:
Income (loss) from continuing operations
before income taxes $ 48 $ (81)
Adjustments to reconcile income (loss) from
continuing operations to net cash
(used) by operating activities:
Depreciation 537 509
Minority interest in net income of
Multi-Arc Inc. 40 9
Amortization of patents, trademarks,
and license rights 41 44
Amortization of deferred income (51) (20)
Equity in net (income) of
foreign joint ventures (30) 0
Gain from initial public offering of
Multi-Arc India Ltd. 0 (85)
Cash (used) by discontinued operations (30) (93)
Income taxes paid (6) 0
Other, net 3 (6)
Change in operating assets and liabilities:
Decrease in accounts receivable 224 207
(Increase) in inventories (296) (10)
(Increase) in other current assets (98) (226)
(Decrease) in accounts payable
and accrued liabilities (578) (587)
------ -------
Net cash (used) by operating activities (196) (339)
Cash flows from financing activities:
Proceeds from long-term debt 500 1,400
Loans to Multi-Arc management 0 (1,000)
Proceeds from sale of common stock in
and debentures of Multi-Arc Inc. 238 1,000
Reductions of long-term debt (551) (310)
Decrease in debt due within one year 0 (10)
------ -------
Net cash provided by financing activities 187 1,080
Cash flows from investing activities:
Gross additions to property and equipment (592) (335)
Reductions of (investment in) joint ventures 49 (26)
Other, net 49 26
------ -------
Net cash (used) by investing activities (494) (335)
------ -------
(Decrease) increase in cash (503) 406
Cash at beginning of period 850 1,143
------ -------
Cash at end of period $ 347 $1,549
===== ======
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and include all adjustments which, in the opinion
of management, are necessary to present fairly the results for such periods.
These interim financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in Andal Corp.'s ("Andal" or the
"Company") annual report on Form 10-K for the year ended September 30, 1995.
The accompanying consolidated financial statements have been prepared on
a going concern basis which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business. The Company's
only source of cash flow, other than from the sale of capital assets, is Multi-
Arc. Pursuant to the terms of the 1994 restructuring of Multi-Arc and of Multi-
Arc's term loan and revolving credit facility with First Fidelity Bank, Multi-
Arc is not permitted to pay dividends or make loans to Andal, except that Multi-
Arc is permitted to pay cash to Andal to the extent that it utilizes any of
Andal's federal, state, and local net operating loss carry forwards for income
tax purposes. However, such payments cannot exceed $1 million per year for
fiscal 1996, after which no further payments are permitted. Andal could also
raise cash by making sales of the remaining stock it owns of Integrated Brands
Inc., as market conditions permit (approximately $385,000 at the current market
value) and, in fiscal 1996, expects to receive approximately $750,000 for the
1995 sales of Multi-Arc stock and debentures (see Note 3).
The Company's fiscal 1996 cash requirements are estimated to be $2 million
for operating cash needs, $3 million for the required exercise of the Option
described in Note 2, and $1 million for principal payments on shareholder debt.
In addition, the Company may also require cash to fund litigation costs related
to discontinued operations and/or to make payments to creditors who have yet to
make payment demands. As discussed in Note 2, the Company is currently
negotiating to restructure its indebtedness to shareholders by selling the
Option to them. Unless the Company can accomplish a restructuring of its
indebtedness to its shareholder lenders which will allow it to meet its fiscal
1996 cash needs, either through the sale of the UBC Option to them or otherwise,
there may be no alternative to the Company other than to enter into bankruptcy
proceedings. The accompanying consolidated financial statements do not include
any adjustments relating to the possible effect on the recoverability and
classification of assets or the amounts and classification of liabilities that
may be necessary should the Company be unable to continue as a going concern.
(2) The Company, through a wholly-owned subsidiary, UBC Virginia Corp. ("UBC
Corp."), owns an option (the "Option") to purchase a parcel of real estate (the
"UBC Property") located on 61st Street and First Avenue in New York City, which
Option has been carried on the books of the Company at nil value for many years.
The Option grants the Company the right to purchase the UBC Property for
approximately $3 million in cash and is exercisable only after the death of the
later to die of two of the principals of the corporation that granted the
Option. The Option expires 91 (ninety-one) days after the Company has been
given formal notice of such death by the Optionor. The Company was given formal
notice of such death on September 22, 1995. The Company does not have the $3
million of cash that is required to exercise the Option, and it does not believe
it will be able to raise such a sum through borrowings from unrelated parties or
through the sale of assets other than the Option. However, under the terms of
the loan described below, the Company is obligated to exercise the Option.
Accordingly, on October 13, 1995 the Company gave the Optionor formal notice of
its election to exercise the Option; and the parties have agreed that the
transaction must be closed on March 6, 1996.
The capital stock of UBC Corp. was pledged as security for a $5 million
loan, hereafter referred to as the "UBC Loan," made to the Company in 1990 by
Alan N. Cohen, President and a Director of the Company, Paul Milstein, who was
then a Director of the Company, and Frankhill Associates, a limited partnership
of which Andrew J. Frankel, Chairman of the Board and a Director of the Company,
is a general partner (collectively, in such capacity, the "UBC Lenders").
As of December 31, 1995, the principal balance of the loan, after
adjustment for a restructuring which occurred in 1992, is $5,571,285 which is
due and payable on the earlier of March 31, 1997, or the day after certain other
indebtedness to shareholders of the Company, including the individuals mentioned
above, has been paid in full.
The capital stock of UBC Corp. also serves as security (second lien) for
a $1,793,000 loan (hereafter referred to as the "Fleet Assignee Loan")
outstanding as of December 31, 1995 between the Company and certain of its
directors and a stockholder who was formerly a director.
The Company's failure to pay the $3 million purchase price for the UBC
Property will result in an event of default under the UBC Loan, which will give
the UBC Lenders the right to exercise the Option on the Company's behalf and to
declare the loan immediately due and payable, including all sums advanced by the
UBC Lenders in exercising the Option. In addition, the UBC Lenders will have
all of the remedies available to them under applicable law for secured lenders,
including, without limitation, the public or private sale of the UBC Property
acquired by exercise of the Option. Default under the UBC Loan will also result
in default under the Fleet Assignee Loan.
Until January 1995, the Company had been under contract to sell the option
to an unrelated real estate developer, who had contracted to purchase the option
in 1984. The developer was unable to obtain financing to consummate the
purchase; and, as a result, the Company terminated the contract. Upon
termination of the contract, the Company has attempted to sell the option to
various other parties. In addition, after the Company received the Option
Notice from the Optionor, the Company made contact with several brokers who have
not been able to identify a buyer. To date, the Company has not received a bona
fide offer from a third party for the option.
The UBC Lenders have expressed an interest in acquiring the UBC Property
in satisfaction of the amount outstanding on the UBC Loan. In that event, the
Company would no longer be obligated with respect to the $3 million purchase
price obligation due on the UBC Option exercise.
The Board of Directors of the Company met on October 5, 1995 to discuss the
difficulties entailed in the Company's exercise of the Option, including the
Company's lack of cash flow, diminished borrowing power, debt structure, and
difficulties in raising funds through a private placement of Multi-Arc's common
stock and subordinated debentures. After discussion, the Board members who are
not UBC Lenders (Messrs. Flood and Glickman) authorized the officers of the
Company to engage an independent appraiser to conduct an appraisal of the UBC
Property, following which such Board members would seek to negotiate a
transaction with the UBC Lenders taking into account, in addition to the
appraisal, all material circumstances relating to the UBC Property, including,
without limitation, the inability of the Company to raise sufficient funds
required to exercise the Option, the time constraints within which the Company
must exercise the Option, and the consequent probability that, without a sale to
a related party, the Option will expire worthless.
On November 21, 1995, the Company received a report from the independent
appraiser it had retained which concluded that the range for the market value of
the UBC Property was between $9.9 million and $11.9 million (before deducting
the $3 million that would have to be paid to exercise the UBC Option), depending
on the ultimate cost of complying with zoning restrictions and other costs that
would be incurred in the development of the UBC Property. The appraiser's
conclusion was based on a number of assumptions, including the assumption that
a sale would occur after a reasonable exposure in a competitive market under all
conditions requisite for a fair sale, with the buyer and seller acting
prudently, knowledgeably, for self-interest, and not under undue duress.
The Company is currently negotiating with the UBC Lenders for the sale of
the Option to them.
(3) In June and September 1995, Andal sold, for $1,010,000, approximately 4.9%
of the common stock of Multi-Arc to certain foreign licensees and other
investors; and Multi-Arc sold to such licensees and other investors $1,010,000
of convertible subordinated debentures (convertible into approximately 3.8% of
Multi-Arc common stock), the cash proceeds of which were remitted to Andal as a
return of capital. These debentures bear interest at 6% and are payable on
December 15, 2004. Approximately $450,000 of the common stock sold, and
$450,000 principal amount of the debentures sold are evidenced by a promissory
note which requires monthly principal payments over three years plus interest at
6% per annum. An additional $153,000 of common stock and $153,000 principal
amount of the debentures were sold on open account. The gain on these sales of
Multi-Arc common stock was $800,000, of which $452,000 was deferred and is being
recognized as the amounts are collected.
(4) Inventories are summarized as follows:
December 31, September 30,
1995 1995
(In thousands of dollars)
Raw materials and supplies $1,293 $ 820
Work-in-process 76 253
------ ------
$1,369 $1,073
====== ======
(5) Andal and its subsidiaries file a consolidated federal income tax return,
and state and local tax returns are generally filed on a combined basis.
At September 30, 1995, the Company had net operating loss carryforwards
("NOL's") for federal income tax purposes of approximately $31.5 million which
expire in varying amounts in years 1995 through 2008. In addition, the
Company's subsidiary in the United Kingdom had unrelieved corporation tax losses
of approximately $2.8 million.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has provided
a valuation allowance against net deferred tax assets because it is more likely
than not that the net deferred tax assets will not be realized.
(6) The Company is aware of certain lawsuits and claims which are pending
involving it and its subsidiaries. In the opinion of the Company's management,
these matters will not result in any material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company, through its subsidiary, Multi-Arc Inc. ("Multi-Arc"), is
engaged in surface enhancement, the business of coating materials, primarily
metals. Multi-Arc is also engaged in the design, manufacture, assembly, and
sale of proprietary coating equipment systems.
Consolidated operating revenues of $7.6 million for the three months ended
December 31, 1995 were $1.1 million higher than the revenues for the comparable
period of the prior year. Of this increase, $657,000 represents growth of 10%
in the Company's coating services business due to continued penetration of the
Company's served markets with particular strength in the United Kingdom.
Equipment sales rose $368,000, entirely as the result of a sale of equipment
into Europe.
Income (loss) from continuing operations before income taxes was $48,000
for the three months ended December 31, 1995 compared with $(81,000) in the
comparable period of the prior year. Income from operations for the three
months ended December 31, 1995 improved to $503,000 from $277,000 in the prior
year as a direct result of increased gross profits related to the higher
revenues, in part offset by higher selling, general, and administrative costs
which reflect the continuing augmentation of Multi-Arc's field sales force and
sales management personnel.
Income (loss) from continuing operations also benefitted from $28,000
related to the collection of notes receivable from the sale of minority interest
in Multi-Arc Inc. and related interest income of $22,000 (see Note 3). The
prior year included a gain of $85,000 from the initial public offering of Multi-
Arc India Ltd.
Interest expense for the three months ended December 31, 1995 increased
over the prior year principally due to higher levels of debt.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 1995, cash decreased by
$503,000, principally because of cash used by investing activities of $494,000.
Cash provided by financing activities of $187,000 was virtually offset by cash
used by operating activities of $196,000.
Cash used by investing activities represents capital expenditures of
$592,000, offset by $49,000 of dividends received from the Company's investment
in Multi-Arc India Ltd. Cash provided by financing activities reflects $500,000
of new debt borrowed by Multi-Arc under its revolving credit facility to finance
working capital needs and $238,000 received on the collection of notes related
to the Company's sale of common stock in and debentures of Multi-Arc (see Note
3). During the quarter, the Company repaid $551,000 of long term debt. Cash
used by operating activities reflects the seasonal nature of the Company's cash
flow as reflected in the large decrease in accounts payable and accrued
liabilities related in part to the timing of payrolls and bonus and profit-
sharing payments. In addition, $296,000 was used to increase inventory levels
in anticipation of equipment construction demands. The Company's cash flow from
operations continues to bear a high level of non-cash depreciation and
amortization charges.
The Company's only source of cash flow, other than from the sale of capital
assets, is Multi-Arc. Pursuant to the terms of the 1994 restructuring of Multi-
Arc and of Multi-Arc's term loan and revolving credit facility with First
Fidelity Bank, Multi-Arc is not permitted to pay dividends or make loans to
Andal, except that Multi-Arc is permitted to pay cash to Andal to the extent
that it utilizes any of Andal's federal, state, and local net operating loss
carry forwards for income tax purposes. However, such payments cannot exceed $1
million per year for fiscal 1996, after which no further payments are permitted.
Andal could also raise cash by making sales of the remaining Integrated stock it
owns, as market conditions permit; and, in fiscal 1996, Andal expects to receive
approximately $750,000 from the 1995 sales of Multi-Arc stock and debentures
(see Note 3).
The Company's fiscal 1996 cash requirements are estimated to be $2 million
for operating cash needs, $3 million for the required exercise of the UBC Option
described in Note 2, and $1 million for principal payments on shareholder debt.
In addition, the Company may also require cash to fund litigation costs related
to discontinued operations and/or to make payments to creditors who have yet to
make payment demands. As discussed in Note 2, the Company is currently
negotiating to restructure its indebtedness to shareholders by selling the UBC
Option to them. Unless the Company can accomplish a restructuring of its
indebtedness to its shareholder lenders which will allow it to meet its fiscal
1996 cash needs, either through the sale of the UBC Option to them or otherwise,
there may be no alternative to the Company other than to enter into bankruptcy
proceedings.
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORT ON FORM 8-K
Exhibit 27 Financial Data Schedule
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1995.
<PAGE>
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANDAL CORP.
DATE: February 12, 1996 By: /s/ Michael S. Huber
Michael S. Huber
Senior Vice President,
Chief Financial Officer,
and Treasurer
DATE: February 12, 1996 By: /s/ Walter N. Kreil, Jr.
Walter N. Kreil, Jr.
Vice President,
Chief Accounting Officer,
and Controller
<TABLE> <S> <C>
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<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 347
<SECURITIES> 0
<RECEIVABLES> 4872
<ALLOWANCES> 94
<INVENTORY> 1369
<CURRENT-ASSETS> 7637
<PP&E> 27211
<DEPRECIATION> 16367
<TOTAL-ASSETS> 23030
<CURRENT-LIABILITIES> 8560
<BONDS> 17534
0
0
<COMMON> 7410
<OTHER-SE> (12466)
<TOTAL-LIABILITY-AND-EQUITY> 23030
<SALES> 7461
<TOTAL-REVENUES> 7569
<CGS> 3771
<TOTAL-COSTS> 7066
<OTHER-EXPENSES> (10)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> 48
<INCOME-TAX> 6
<INCOME-CONTINUING> 42
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<EPS-PRIMARY> .13
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