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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MayAugust 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 1-6675
THE ARLEN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2668657
------------------------ ------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
505 Eighth Avenue, New York, New York 10018
- --------------------------------------- ---------------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 736-8100
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $1 par value - 30,770,24130,770,307 shares outstanding as of July 11,October 10,
1996
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THE ARLEN CORPORATION AND SUBSIDIARIES
INDEX
================================================================================
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheetssheet -- MayAugust 31, 1996 and 1995
(unaudited) 4
Consolidated balance sheet -- February 29, 1996
(unaudited) 5
Consolidated statements of operations -- ThreeSix and
three months ended MayAugust 31, 1996 and 1995 (unaudited) 6
Consolidated statements of cash flows -- ThreeSix
months ended MayAugust 31, 1996 and 1995 (unaudited) 7-8
Notes to consolidated financial statements 9-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-12
PART II. OTHER INFORMATION 13
SIGNATURES 14
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PART I - FINANCIAL INFORMATION
Item 1
Financial Statements
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4
THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1996
($000s Omitted)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
May 31,
ASSETS
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 53 $ 11714
Note receivable - current portion,
net of unamortized discount of $95 911 -
Current assets of discontinued operations - 20,148
---------$75 960
---------
TOTAL CURRENT ASSETS 964 20,265974
PROPERTY AND EQUIPMENT, net 66 8461
OTHER ASSETS, including amounts due from
former subsidiaries (Note 3) 469 698465
NOTE RECEIVABLE, less current portion, net of
unamortized discount of $19 484 -
OTHER ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 1,966
---------$5 244
---------
TOTAL ASSETS $1,983 $23,013$1,744
========= ========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable (including $2,878 due to related
parties in 1995) $ 137 $ 2,878
Accrued interest payable (including $3 and $687 due to
related parties in 1996 and 1995) 186 838
Accrued state income taxes - 946parties) 194
Accrued expenses, fees and other (Note 4) 7,078 7,7737,232
Current portion of long-term obligations
due to related parties 299 655
Current liabilities of discontinued operations - 10,646
---------285
---------
TOTAL CURRENT LIABILITIES 7,700 23,7367,848
LONG-TERM OBLIGATIONS DUE TO RELATED PARTIES 554 1,235
LONG-TERM OBLIGATIONS FROM DISCONTINUED OPERATIONS (NOTE 2) - 251549
AMOUNTS DUE TO RELATED PARTIES 126,898 120,748
---------128,726
---------
TOTAL LIABILITIES 135,152 145,970137,123
COMMITMENTS AND CONTINGENCIES (Note 4)
CAPITAL DEFICIT (133,169) (122,957)
---------(135,379)
---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $1,983 $23,013$1,744
========= ========
See notes to consolidated financial statments.
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THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 29, 1996
($000s Omitted)
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10
Note receivable - current portion,
net of unamortized discount of $117 883
---------
TOTAL CURRENT ASSETS 893
PROPERTY AND EQUIPMENT, net 72
OTHER ASSETS, including amounts due from
former subsidiaries (Note 3) 469
NOTE RECEIVABLE, less current portion, net of
unamortized discount of $33 717
---------
TOTAL ASSETS $ 2,151
=========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable $ 137
Accrued interest payable (including $4 due to related parties) 179
Accrued expenses, fees and other (Note 4) 7,019
Current portion of long-term obligations
due to related parties 299
---------
TOTAL CURRENT LIABILITIES 7,634
LONG-TERM OBLIGATIONS DUE TO RELATED PARTIES 575
AMOUNTS DUE TO RELATED PARTIES 124,389
---------
TOTAL LIABILITIES 132,598
COMMITMENTS AND CONTINGENCIES (Note 4)
CAPITAL DEFICIT (130,447)
---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $2,151
=========
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THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s Omitted)
(UNAUDITED)
- --------------------------------------------------------------------------------
Six months ended Three months ended
MayAugust 31, August 31,
1996 1995 1996 1995
---- ---- ---- ----
GENERAL & ADMINISTRATIVE
EXPENSES (280) (260)$ (581) $ (539) $ (301) $ (279)
OTHER (EXPENSES) INCOME:
Interest expense, net (including amounts
due to related parties of $2,509$4,272 and $1,799 in
1996 and $2,449$4,898 and $2,450 in 1995) (2,586) (2,550)(4,495) (5,101) (1,909) (2,551)
Other income, net 144 595- - -
-------- -------- -------- --------- ----------
Loss from continuing operations
before discontinued operations (2,722) (2,215)(4,932) (5,640) (2,210) (2,830)
DISCONTINUED OPERATIONS:
Income from discontinued operations (Note 2) - 749
--------- ----------2,769 - 1,425
-------- -------- -------- --------
Net loss ($2,722) ($1,466)
========= ==========$(4,932) $(2,871) $(2,210) $(1,405)
======== ======== ======== ========
LOSS PER COMMON SHARE FROM
CONTINUED OPERATIONS ($0.08) ($0.08)$ (0.15) $ (0.18) $ (0.07) $ (0.09)
INCOME PER COMMON SHARE FROM
DISCONTINUED OPERATIONS (Note 2) - 0.030.09 - 0.05
-------- -------- -------- --------- ----------
LOSS PER COMMON SHARE ($0.08) ($0.05)$ (0.15) $ (0.09) $ (0.07) $ (0.04)
======== ======== ======== ========= ==========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
- --------------------------------------------------------------------------------
ThreeSix months ended
MayAugust 31,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,722)4,932) ($1,466)2,871)
--------- ---------
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 6 13011 288
Amortization on note discount (36)(70) -
Provisions for losses on accounts
receivable - (198)(457)
Increase in amounts due related parties
in exchange for interest 2,509 2,3245,040 4,735
Changes in assets and liabilities
(Increase) decrease in assets:
Accounts receivable - (886)(195)
Inventories - 367(758)
Other current assets - (141)(348)
Other assets - 4 (100)
Increase (decrease) in liabilities:
Accounts payable - (94)36
Accrued interest payable 7 11615 150
Accrued state income taxes - 9045
Accrued other liabilities 59 188213 328
--------- ---------
Total adjustments 2,545 1,9005,213 3,724
--------- ---------
Net cash (used) provided by operating activities (177) 434281 853
--------- ---------
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000's000s Omitted)
(UNAUDITED)
(Continued)
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ThreeSix months ended
MayAugust 31,
1996 1995
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in certificates of deposit - (4)(6)
Investment in capital assets - (75)(233)
Acquisition of new automotive aftermarket
business, net of cash acquired - (54)
-------- ---------
Net cash used in investing activities - (133)(293)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes receivable 241466 -
Payments on revolving credit line - (8,821)(13,424)
Proceeds from revolving credit line - 9,70213,882
Payment on amounts due to dated papers (703) -
Principal payments on short-term borrowings - (192)(455)
Principal payments on long-term borrowings (21) (121)(40) (320)
-------- ---------
Net cash provided by financing activities 220 568(277) (317)
-------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 43 8694 243
CASH AND CASH EQUIVALENTS, at
February 29, 1996 and 1995 10 1,192
LESS CASH INCLUDED IN CURRENT ASSETS
OF DISCONTINUED OPERATIONS - (1,944)(1,422)
-------- ---------
CASH AND CASH EQUIVALENTS, at
MayAugust 31, 1996 and 1995 $ 5314 $ 11713
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the threesix months ended
MayAugust 31, 1996 and 1995 for interest $ 4707 $ 110262
======= =========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(May(August 31, 1996)
================================================================================
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The
Arlen Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended MayAugust 31,
1996 are not necessarily indicative of the results that may be expected for the
fiscal year ending February 28, 1997. For further information, reference is
made to the Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended February 29, 1996.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The accompanying unaudited consolidated financial statements of the
Company have been prepared on the basis that the Company will continue as a
going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At MayAugust 31,
1996, the Company had a working capital deficiency of $6,736,000$6,874,000 and a capital
deficit of $133,169,000.$135,379,000. Currently, the Company has no operations (see Note 2)
but intends to seek new business opportunities, though there can be no
assurance that it will be successful in achieving this objective.
NOTE 2 - DISCONTINUED OPERATIONS
The operations of the Company's former operating subsidiaries, which
ceased to be owned by the Company on February 6, 1996, have been reclassified as
discontinued operations.
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THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(May(August 31, 1996)
================================================================================
NOTE 3 - OTHER ASSETS
Other assets include amounts due from former subsidiaries (see Note 2)
and certain non-negotiable promissory notes (the "Mortgage Notes") assumed by
related parties. Due to the uncertainty of the timing of the collection of
interest on the Mortgage Notes, for financial statement purposes the Company
will record interest income from the Mortgage Notes when received.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is the sponsor of a defined benefit pension plan (the
"Plan") which was frozen in 1981. The actuarial valuation of the Plan as of
March 1, 1991 (the latest Plan valuation) indicates the unfunded actuarial
accrued liability was approximately $850,000.
In July 1995, the Company received from the District Director of the
United States Internal Revenue Service (the "IRS") an examination report with
respect to the Plan. In such report, the IRS asserted that a payment of
$6,726,613 is required in order to cure the Plan's accumulated funding
deficiency for prior years and pay excise taxes and penalties arising therefrom.
Based upon discussions with the IRS following receipt of the examination report,
the Company believes that it will be able to obtain a waiver of a substantial
portion of the taxes and penalties claimed to be due and to settle the remaining
deficiency, through installment payments over a number of years, for an
aggregate amount approximating the $850,000 provision already reflected in the
Company's balance sheet (included in accrued expenses, fees and other).
Accordingly, management believes that it has adequately provided for this
liability.
NOTE 5 - LOSS PER COMMON SHARE
Loss per common share is computed by dividing the net loss, after
giving effect to dividends on preferred stock, by the weighted average number of
common shares and common share equivalents outstanding during each period.
Convertible securities that are deemed to be common share equivalents are
assumed to have been converted at the beginning of each period. The Company's
common share equivalents and convertible issues were anti-dilutive at MayAugust 31,
1996 and 1995 and, therefore, were not included in the loss per share
computations for these periods. The weighted average number of shares used to
compute per share amounts was 32,690,000 for the six and three-month periodperiods
ended MayAugust 31, 1996 and 31,690,000 for the six and three-month periodperiods
ended MayAugust 31, 1995, inclusive of Class B shares.
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Item 2
Management's Discussion and Analysis of Financial Condition and Results
of Operations
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THE ARLEN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
(May(August 31, 1996)
================================================================================
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements included in Item 1 of Part I of this Report:
LIQUIDITY AND CAPITAL RESOURCES
Prior to the disposition of the Company's former subsidiaries on
February 6, 1996, the ability of the Company to continue as a going concern was
threatened by the liquidity crises facing the Company from an unsatisfied
judgment, additional pending litigation and the rapidly-approaching July 31,
1997 maturity date of the amounts due to related parties (the "Arlen Notes").
These near-term threats to the Company's continued existence have been virtually
eliminated through the discharge of the unsatisfied judgment, the termination of
the pending litigation and the extension of the maturity date of the Arlen Notes
to December 28, 2033. Moreover, the cash flow which the Company expects to
receive from the note receivable (the "Note Receivable") reflected on the
Company's balance sheet at MayAugust 31, 1996 included in Item 1 of Part I of this
Report should enable the Company to meet its anticipated cash requirements
through the current fiscal year and into fiscal 1998.
Although the Company's balance sheet at MayAugust 31, 1996 continues to
include the Arlen Notes as substantial liabilities (accounting for
$126,898,000$128,726,000 of the Company's total liabilities of $135,152,000)$137,123,000) and although
the Arlen Notes will continue to accrue substantial interest expense which, in
the absence of significant income from new operations, will produce continuing
net losses and add to the increasing shareholders' deficit (such deficit at
MayAugust 31, 1996 being $133,169,000)$135,379,000), the extension to December 28, 2033 in the
maturity date of the Arlen Notes and the virtual elimination of the default
provisions relating thereto create the practical reality that the Arlen Notes
should not pose a threat to the continued existence of the Company for many
years.
Assuming that the Company is able to (a) satisfy or settle an
outstanding judgment for $172,000 (plus interest from 1988) which is the subject
of pending execution proceedings and (b) settle or otherwise resolve the claim
asserted by the IRS (see Note 4 of the Notes to Consolidated Financial
Statements included in Item 1 of Part I of this Report), management believes
that the most serious threat to the Company's continued existence would be its
inability to acquire new business operations or to otherwise generate cash flow
prior to its receipt of the final payments due under the Note Receivable.
RESULTS OF OPERATIONS
The Company's net losslosses for the first three monthssix and three-month periods ended
August 31, 1996, representing increases of its fiscal year
ending February 28, 1997, representing an increase of 86%71% and 57%, respectively, over the
net losslosses for the comparable periodperiods of the prior fiscal year, reflectsreflect
primarily the absence in the current quarterfiscal year of any income from the
Company's discontinued operations.
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PART II - OTHER INFORMATION
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ARLEN CORPORATION
(Registrant)
By: /s/ Allan J. Marrus
-------------------------------------
Allan J. Marrus, President
Date: July 19,October 11, 1996
By: /s/ David S. Chaiken
-------------------------------------
David S. Chaiken, Treasurer
Date: July 19,October 11, 1996
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule