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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 August 31,November 30, 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
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(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
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(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 - 30,770,307 shares outstanding as of October 10,
1996January 6,
1997
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THE ARLEN CORPORATION AND SUBSIDIARIES
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet -- August 31,November 30, 1996
(unaudited) 4
Consolidated balance sheet -- February 29, 1996
(unaudited) 5
Consolidated statements of operations -- SixNine and
three months ended August 31,November 30, 1996 and 1995 (unaudited) 6
Consolidated statements of cash flows -- SixNine
months ended August 31,November 30, 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,November 30, 1996
($000s Omitted)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1412
Note receivable, - current portion,
net of unamortized discount of $75 960$52 984
---------
TOTAL CURRENT ASSETS 974996
PROPERTY AND EQUIPMENT, net 6156
OTHER ASSETS, including amounts due from
former subsidiaries (Note 3) 465
NOTE RECEIVABLE, less current portion, net of
unamortized discount of $5 244
---------
TOTAL ASSETS $1,744$1,517
=========
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable $ 137
Accrued interest payable (including $3 due to
related parties) 194200
Accrued expenses, fees and other (Note 4) 7,2327,298
Current portion of long-term obligations (including $33
due to related parties 285parties) 283
---------
TOTAL CURRENT LIABILITIES 7,8487,918
LONG-TERM OBLIGATIONS DUE TO RELATED PARTIES 549
AMOUNTS DUE TO RELATED PARTIES 128,726130,877
---------
TOTAL LIABILITIES 137,123139,344
COMMITMENTS AND CONTINGENCIES (Note 4)
CAPITAL DEFICIT (135,379)(137,827)
---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $1,744$1,517
=========
See notes to consolidated financial statments.statements.
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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)
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SixNine months ended Three months ended
August 31, August 31,November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
GENERAL & ADMINISTRATIVE
EXPENSES $ (581)(1,039) $ (539)(810) $ (301)(459) $ (279)(271)
OTHER (EXPENSES) INCOME:
Interest expense, net (including amounts
due to related
partiesparty interest of $4,272$6,397 and
$1,799$2,125 in 1996 and $4,898$7,348 and $2,450
in 1995) (4,495) (5,101) (1,909) (2,551)(6,731) (7,649) (2,236) (2,548)
Other income, net 144390 - -247 -
-------- -------- -------- ---------
Loss from continuing operations
before discontinued operations (4,932) (5,640) (2,210) (2,830)(7,380) (8,459) (2,448) (2,819)
DISCONTINUED OPERATIONS:
Income from discontinued operations (Note 2) - 2,7692,990 - 1,425221
-------- -------- -------- --------
Net loss $(4,932) $(2,871) $(2,210) $(1,405)$(7,380) $(5,469) $(2,448) $(2,598)
======== ======== ======== ========
LOSS PER COMMON SHARE FROM
CONTINUED OPERATIONS $ (0.15)(0.23) $ (0.18)(0.27) $ (0.07) $ (0.09)
INCOME PER COMMON SHARE FROM
DISCONTINUED OPERATIONS (Note 2) - 0.09 - 0.050.01
-------- -------- -------- ---------
LOSS PER COMMON SHARE $ (0.15)(0.23) $ (0.09)(0.18) $ (0.07) $ (0.04)(0.08)
======== ======== ======== =========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
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SixNine months ended
August 31,
November 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,932)7,380) ($2,871)5,469)
--------- ---------
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 11 28816 456
Amortization on note discount (70)(98) -
Provisions for losses on accounts
receivable - (457)(470)
Increase in amounts due related
parties in exchange for interest 5,040 4,7357,575 7,102
Changes in assets and liabilities
(Increase) decrease in assets:
Accounts receivable - (195)1,406
Inventories - (758)(640)
Other current assets - (348)61
Other assets 4 (100)(1,070)
Increase (decrease) in liabilities:
Accounts payable - 36(1,499)
Accrued interest payable 15 15021 228
Accrued state income taxes - 45(93)
Accrued other liabilities 213 328279 639
--------- ---------
Total adjustments 5,213 3,7247,797 6,120
--------- ---------
Net cash provided by operating activities 281 853417 651
--------- ---------
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
(Continued)
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SixNine months ended
August 31,November 30,
1996 1995
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in certificates of deposit - (6)(561)
Investment in capital assets - (233)(298)
Acquisition of new automotive aftermarket
business, net of cash acquired - (54)
-------- ---------
Net cash used in investing activities - (293)(913)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on notes receivable 466714 -
Payments on revolving credit line - (13,424)
Proceeds from revolving credit line - 13,882
Payment13,982
Payments on amounts due to dated papers (703)related parties (1,087) -
Principal payments on short-term borrowings - (455)(622)
Principal payments on long-term borrowings (40) (320)(42) (362)
-------- ---------
Net cash provided by financing activities (277) (317)(415) (426)
-------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 4 2432 (688)
CASH AND CASH EQUIVALENTS, at
February 29, 1996 and 1995 10 1,192
LESS CASH INCLUDED IN CURRENT ASSETS
OF DISCONTINUED OPERATIONS - (1,422)
-------- ---------
CASH AND CASH EQUIVALENTS, at
August 31,November 30, 1996 and 1995 $ 1412 $ 13504
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the sixnine months ended
August 31,November 30, 1996 and 1995 for interest $ 7071,092 $ 262372
======= =========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(August 31,(November 30, 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 sixnine months ended August 31,November
30, 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 August 31,November 30,
1996, the Company had a working capital deficiency of $6,874,000$6,922,000 and a capital
deficit of $135,379,000.$137,827,000. 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)
(August 31,(November 30, 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 recordrecords 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) indicatesindicated that the unfunded actuarial
accrued liability was approximately $850,000.
In July 1995, the Company received from the District Director ofNovember 1996, the United States Internal Revenue Service (the
"IRS") an examination report with
respect togranted 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
deficiencyCompany's request 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 the minimum funding
standard for the plan year ended February 29, 1996, conditioned upon (1) eight
quarterly payments by the Company to the Plan of $33,000 each beginning with
the calendar quarter ended December 31, 1996 (the first payment of which has
been made) and (2) a substantial
portioncredit balance equal to the unamortized balance of the
taxes and penalties claimedwaiver (estimated 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 reflectedapproximately $175,000) being maintained in the
Company's balance sheet (included in accrued expenses, fees and other).
Accordingly,Plan's funding standard account for each plan year commencing on or after
March 1, 1997.
After giving effect to the waiver granted by the IRS, management
believes that it has adequately provided in the Company's balance sheet (in
accrued expenses, fees and other) for thisthe Plan's unfunded accrued 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
August 31,November 30, 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 sixnine and
three-month periods ended August 31,November 30, 1996 and 31,690,000 for the sixnine and
three-month periods ended August 31,November 30, 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
(August 31,(November 30, 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,current fiscal year, 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 amountsindebtedness due to related partiesunder certain promissory notes (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 August 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 August 31,November 30, 1996 continues to
include the Arlen Notes as substantial liabilities (accounting for $128,726,000$130,877,000
of the Company's total liabilities of $137,123,000)$139,344,000) 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
August 31, 1996 being $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 thatAt the same time, the cash flow which the Company is able to (a) satisfy or settle an
outstanding judgment for $172,000 (plus interestreceives from 1988) which is the
subject
of pending execution proceedings and (b) settle or otherwise resolvenote receivable reflected on the claim
asserted by the IRS (see Note 4 of the Notes to Consolidated Financial
StatementsCompany's balance sheet at November 30, 1996
included in Item 1 of Part I of this Report), management believes
thatReport is expected to enable the most serious threatCompany
to meet its anticipated cash requirements through the current fiscal year and
into fiscal 1998. Thereafter, the Company's continued existence would bewill depend
upon its inabilityability to acquire new business operations or to otherwise generate
cash flow
prior to its receipt of the final payments due under the Note Receivable.flow.
RESULTS OF OPERATIONS
The Company's net losses for the sixnine and three-month periods ended
August 31,November 30, 1996, representing increasesreductions of 71%34.9% and 57%5.7%, respectively, over
the net losses for the comparable periods of the prior fiscal year, reflect
primarily the absence in the current fiscal year of any income from the
Company's discontinued operations. The 69.3% increase in general and
administrative expenses for the three months ended November 30, 1996 from such
expenses for the same period in the prior fiscal year is largely attributable to
increased professional fees incurred in the current year.
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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: October 11, 1996January 17, 1997
By: /s/ David S. Chaiken
-------------------------------------
David S. Chaiken, Treasurer
Date: October 11, 1996January 17, 1997
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule