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 March 31, 1996
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
or organization) (I. R. S. Employer ID no.)
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 April
30, 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
March 31, September 30,
1996 1995
(Unaudited)
Current assets:
Cash $ 517 $ 850
Accounts receivable 5,053 4,998
Inventories 1,550 1,073
Other current assets 1,268 1,213
-------- ---------
Total current assets 8,388 8,134
Investments in joint ventures 1,279 1,268
Property and equipment 11,277 10,789
Loans due from Multi-Arc Inc. management 1,000 1,000
Other assets 2,107 2,434
-------- -------
$ 24,051 $23,625
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings, including
current portion of long-term debt $ 1,198 $ 1,206
Current portion of debt due
shareholders 7,364 1,250
Accounts payable 1,983 1,606
Other accrued expenses 4,940 5,106
--------- ---------
Total current liabilities 15,485 9,168
Long-term debt 8,036 7,886
Debt due shareholders 0 6,364
Other deferred income 1,227 1,430
Convertible subordinated debentures 3,335 3,335
Minority interest in Multi-Arc Inc. 632 540
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 (38,038) (38,472)
Less 40,637 common shares held
in treasury, at cost (5,661) (5,661)
--------- ---------
Total shareholders' equity
(deficit) (4,664) (5,098)
--------- ---------
$ 24,051 $ 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 Six Months
Ended Ended
March 31, March 31,
1996 1995 1996 1995
Operating revenues:
Trade sales $7,550 $8,284 $15,011 $14,721
Royalties and commissions 121 120 199 190
Equity in net income of
foreign joint ventures 30 0 60 0
------ ------ ------- -------
7,701 8,404 15,270 14,911
Operating costs and expenses:
Cost of revenues 3,722 4,320 7,493 7,551
Depreciation expense 503 469 1,040 978
Selling, general, and
administrative expenses 2,861 2,546 5,619 5,036
------ ------ ------- -------
7,086 7,335 14,152 13,565
------ ------ ------- -------
Income from operations 615 1,069 1,118 1,346
Other income (expense):
Minority interest in net income
of Multi-Arc Inc. (48) (19) (88) (28)
Gain from initial public offering
of Multi-Arc India Ltd. 0 0 0 85
Investment and other income, net 42 14 92 18
Interest expense (452) (452) (917) (890)
------- ------- ------- -------
(458) (457) (913) (815)
------- ------- ------- -------
Income from continuing operations
before income taxes 157 612 205 531
Provision for income taxes (3) (17) (9) (17)
Income from continuing operations 154 595 196 514
Income (loss) from discontinued
operations 238 101 238 (10)
------- ------- ------- -------
Net income $ 392 $ 696 $ 434 $ 504
====== ====== ====== ======
Income (loss) per common share:
Income from continuing
operations $ .47 $1.80 $ .60 $1.56
Income (loss) from discontinued
operations .72 .31 .72 (.03)
----- ----- ------ ------
Net income $1.19 $2.11 $1.32 $1.53
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
<PAGE>
ANDAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited and in thousands of dollars)
Six Months Ended
March 31,
1996 1995
Cash provided by operating activities:
Income from continuing operations
before income taxes $ 205 $ 531
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Depreciation 1,040 978
Minority interest in net income of
Multi-Arc Inc. 88 28
Amortization of patents, trademarks,
and license rights 81 93
Deferred income accrued 62 0
Amortization of deferred income (145) (41)
Equity in net (income) of
foreign joint ventures (60) 0
Gain from initial public offering of
Multi-Arc India Ltd. 0 (85)
Cash provided (used) by
discontinued operations 79 (23)
Income taxes paid (10) (83)
Other, net 12 (12)
Change in operating assets and liabilities:
(Increase) in accounts receivable (57) (88)
(Increase) in inventories (477) (393)
(Increase) in other current assets (119) (280)
Increase (decrease) in accounts payable
and accrued liabilities 299 (407)
Net cash provided by operating
activities 998 218
Cash flows from financing activities:
Proceeds from long-term debt 750 1,200
Loans to Multi-Arc management 0 (1,000)
Proceeds from sale of common stock in
and debentures of Multi-Arc Inc. 279 1,000
Deferred financing costs 0 (59)
Reductions of long-term debt (850) (950)
Decrease in debt due within one year (8) (75)
Net cash provided by financing activities 171 116
Cash flows from investing activities:
Gross additions to property and equipment (1,591) (897)
Reductions of (investment in) joint ventures 49 (176)
Other, net 40 44
Net cash (used) by investing activities (1,502) (1,029)
(Decrease) in cash (333) (695)
Cash at beginning of period 850 1,143
Cash at end of period $ 517 $ 448
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 significant source of cash flow 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 Union National 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 for fiscal 1996,
after which no further payments are permitted. Andal could raise additional
cash by making sales of the remaining stock it owns of Integrated Brands
Inc., as market conditions permit (approximately $420,000 at the current
market value) and, in fiscal 1996, the Company 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 $1.2
million for operating expenses, $400,000 for interest expense, and $1 million
for principal payments on shareholder debt. In addition, the Company may
also require cash to make payments to creditors who have yet to make payment
demands. 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, 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) Prior to May 8, 1996 the Company, through a wholly-owned subsidiary, UBC
Virginia Corp. ("UBC Corp."), had owned an option (the "Option") to purchase
a parcel of real estate (the "Property") located on 61st Street and First
Avenue in New York City, which Option had been carried on the books of the
Company at nil value for many years. UBC Corp. was merged into the Company
in March 1996, after which time the Option became directly owned by the
Company.
In 1990, the Option was pledged as security for a $5 million loan,
hereafter referred to as the "Option Loan," made to the Company 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 "Option Lenders").
As of March 31, 1996, the principal balance of the Option Loan, after
adjustment for a restructuring which occurred in 1992, was $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 Option granted the Company the right to purchase the Property for
approximately $3 million in cash and was exercisable only after the death of
the later to die of two of the principals of the corporation that granted the
Option. Such death occurred in 1995. The Company did not have the cash
required to exercise the Option, and it could not raise it through borrowing
from unrelated parties or through the sale of assets other than the Option.
However, under the terms of the Option Loan, the Company was obligated to
exercise the Option. Accordingly, the Option was exercised in October 1995;
and the Company purchased the Property on May 8, 1996. In order to make the
purchase, on May 7, 1996, the Company borrowed $3.3 million (the "Demand Loan")
from the Option Lenders evidenced by a demand note and secured by a mortgage
on the Property. The Demand Loan bears interest at 10% per annum. The Demand
Loan specifies that if the Property is sold to a third party, the Option Lenders
will be entitled to the first $1 million of the net proceeds from such sale of
the Property in excess of $9 million. Thereafter, the Company and the Option
Lenders will share equally in the net proceeds from such sale in excess of $10
million.
The Company's failure to pay the purchase price for the Property would have
resulted in an event of default under the Option Loan, which would have given
the Option Lenders the right to exercise the Option on the Company's behalf and
to declare the Option Loan immediately due and payable, including all sums
advanced by the Option Lenders in exercising the Option. In addition, the
Option Lenders would have had all of the remedies available to them under
applicable law for secured lenders, including, without limitation, the public or
private sale of the Property acquired by exercise of the Option.
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 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 were
not able to identify a buyer. The Company's attempts to sell the Option did not
result in any bona fide offer from a third party to purchase the Option.
Once it was learned that the Option had become exercisable, the Option
Lenders expressed an interest in acquiring the Property in satisfaction of the
amount outstanding on the Option Loan. In that event, the Company would no
longer have been obligated with respect to the $3 million purchase price
obligation due on the 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 Lenders (Messrs. Flood and Glickman) authorized the officers of the Company
to engage an independent appraiser to conduct an appraisal of the Property,
following which such Board members would seek to negotiate a transaction with
the Option Lenders taking into account, in addition to the appraisal, all
material circumstances relating to the 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 would 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 Property was between $9.9 million and $11.9 million (before deducting the $3
million that would have to be paid to exercise the Option), depending on the
ultimate cost of complying with zoning restrictions and other costs that would
be incurred in the development of the 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.
On March 4, 1996, at a special meeting of the Board of Directors of the
Company appropriate officers of the Company were authorized and empowered to
engage in negotiations with the Option Lenders to reach a definite agreement to
sell the Option to them under terms and conditions that were outlined by the
Board. Although the parties were unable to reach a definitive agreement prior
to May 8, 1996, the Company is still negotiating with affiliates of the Option
Lenders for the sale of the Property 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:
March 31, September 30,
1996 1995
(In thousands of dollars)
Raw materials and supplies $1,404 $ 820
Work-in-process 146 253
------ ------
$1,550 $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 calendar 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 $7.7 million and $15.3 million,
respectively, for the three months and six months ended March 31, 1996 were
$703,000 lower and $359,000 higher than the revenues for the comparable periods
of the prior year. Of the six month increase, $1.2 million represents growth of
9% 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 declined $867,000, as the prior year included a major systems
delivery. For the three months ended March 31, 1996, equipment sales were $1.2
million lower than the prior year.
Income from continuing operations before income taxes was $157,000 and
$205,000, respectively, for the three months and six months ended March 31, 1996
compared with $612,000 and $531,000 in the comparable periods of the prior year.
Income from operations for the six months ended March 31, 1996 declined to
$615,000 from $1.1 million in the prior year as a direct result of lower gross
profits related to the lower revenues, and higher selling, general, and
administrative costs which reflect the continuing effect of the augmentation of
Multi-Arc's field sales force and sales management personnel.
Income from continuing operations for the six months ended March 31, 1996
also included $56,000 from the recognition of deferred income related to the
collection of notes receivable from the sale of minority interest in Multi-Arc
Inc. and related interest income of $23,000 (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 six months ended March 31, 1996 increased over the
prior year principally due to higher levels of debt.
Income from discontinued operations for the three and six months ended
March 31, 1996 reflects $97,000 from collection of a note from Salem Tube, Inc.
and $151,000 from settlements of old real estate claims offset by certain legal
expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 1996, cash decreased by $333,000,
principally because of cash used by investing activities of $1.5 million.
Financing activities provided cash of $171,000 and operating activities provided
$1 million.
Cash used by investing activities represents capital expenditures of $1.6
million, offset by $49,000 of dividends received from the Company's investment
in Multi-Arc India Ltd. Cash provided by financing activities reflects $750,000
of new debt borrowed by Multi-Arc under its revolving credit facility to finance
working capital needs and $279,000 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 six months, the Company repaid $600,000 of long term debt. Cash
provided by operating activities reflects the high level of non-cash
depreciation and amortization charges and an increase in current payables and
accrued liabilities to partly finance higher inventory levels in anticipation of
equipment construction demands.
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 Union
National 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 $1.2
million for operating expenses, $400,000 for interest expense, and $1 million
for principal payments on shareholder debt. In addition, the Company may also
require cash to make payments to creditors who have yet to make payment demands.
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,
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.
<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
March 31, 1996.
<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: May 14, 1996 By: /s/ Michael S. Huber
Michael S. Huber
Senior Vice President,
Chief Financial Officer,
and Treasurer
DATE: May 14, 1996 By: /s/ Walter N. Kreil, Jr.
Walter N. Kreil, Jr.
Vice President,
Chief Accounting Officer,
and Controller
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<ALLOWANCES> 100
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0
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