<PAGE> 1
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 May 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 1-6675
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 - 29,770,223 shares outstanding as of July 6, 1995
(excluding shares owned by subsidiaries of the Registrant)
Page 1 of 14 pages
<PAGE> 2
THE ARLEN CORPORATION AND SUBSIDIARIES
INDEX
===============================================================================
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets -- May 31, 1995 and 1994
(unaudited) 4
Consolidated balance sheet -- February 28, 1995 5
Consolidated statements of operations -- Three
months ended May 31, 1995 and 1994 (unaudited) 6
Consolidated statements of cash flows -- Three
months ended May 31, 1995 and 1994 (unaudited) 7-8
Notes to consolidated financial statements 9-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-13
PART II. OTHER INFORMATION 14
SIGNATURES 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
3
<PAGE> 4
THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($000s Omitted)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
May 31,
----------------
ASSETS 1995 1994
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,061 $ 529
Certificates of deposit 226 218
Accounts receivable, net 12,681 11,381
Inventories 5,304 3,281
Other current assets 691 338
--------- ---------
TOTAL CURRENT ASSETS 20,963 15,747
PROPERTY AND EQUIPMENT, net 1,398 964
OTHER ASSETS 652 853
--------- ---------
TOTAL ASSETS $ 23,013 $ 17,564
========= =========
LIABILITIES AND CAPITAL DEFICIT
- -------------------------------
CURRENT LIABILITIES:
Notes payable (including $2,878 and $2,846 due to related
parties in 1995 and 1994) $ 7,162 $ 6,921
Accounts payable 3,233 2,318
Accrued interest payable (including $687 and $761 due to
related parties in 1995 and 1994) 856 977
Accrued state income taxes 1,227 1,191
Accrued other 10,236 9,644
Current portion of long-term obligations (including $655
and $440 due to related parties in 1995 and 1994) 1,022 448
--------- ---------
TOTAL CURRENT LIABILITIES 23,736 21,499
LONG-TERM OBLIGATIONS (including $1,235 and $1,450
due to related parties in 1995 and 1994) 1,486 1,458
SUBORDINATED AMOUNTS DUE TO RELATED PARTIES 120,748 111,808
--------- ---------
TOTAL LIABILITIES 145,970 134,765
COMMITMENTS AND CONTINGENCIES
CAPITAL DEFICIT (122,957) (117,201)
--------- ---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 23,013 $ 17,564
========= =========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 28, 1995
($000s Omitted)
===============================================================================
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,192
Certificates of deposit 222
Accounts and notes receivable, net 11,109
Inventories 4,731
Other current assets 529
---------
TOTAL CURRENT ASSETS 17,783
PROPERTY AND EQUIPMENT, net 903
OTHER ASSETS 703
---------
TOTAL ASSETS $ 19,389
=========
LIABILITIES AND CAPITAL DEFICIT
-------------------------------
CURRENT LIABILITIES:
Notes payable (including $2,742 due to related parties) $ 6,281
Accounts payable 2,344
Accrued interest payable (including $622 due to related parties) 776
Accrued state income taxes 1,137
Accrued other 9,993
Current portion of long-term obligations (including
$722 due to related parties) 722
---------
TOTAL CURRENT LIABILITIES 21,253
LONG-TERM OBLIGATIONS (including $1,246 due to related parties) 1,246
SUBORDINATED AMOUNTS DUE TO RELATED PARTIES 118,381
---------
TOTAL LIABILITIES 140,880
COMMITMENTS AND CONTINGENCIES
CAPITAL DEFICIT (121,491)
---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 19,389
=========
</TABLE>
5
<PAGE> 6
THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s Omitted)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three months ended
May 31,
------------------
1995 1994
---- ----
<S> <C> <C>
SALES $13,150 $12,653
COST OF SALES 7,932 7,655
------- -------
Gross profit on sales 5,218 4,998
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 4,035 3,654
------- -------
Operating income 1,183 1,344
OTHER (CHARGES) CREDITS:
Interest expense (including amounts due to related parties of
$2,449 in 1995 and $2,351 in 1994) (2,658) (2,453)
Other income 9 3
------- -------
Net loss ($1,466) ($1,106)
======= =======
LOSS PER COMMON SHARE ($0.05) ($0.03)
======= =======
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three months ended
May 31,
------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,466) ($1,106)
------- -------
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 130 166
Provision for losses on accounts
receivable (198) 83
Increase in subordinated amounts due related
parties in exchange for interest 2,324 2,193
Changes in assets and liabilities, net of effects from the
purchase of a new automotive aftermarket business:
(Increase) decrease in assets:
Accounts receivable (886) (2,252)
Inventories 367 289
Other current assets (141) (47)
Other assets 4 0
Increase (decrease) in liabilities:
Accounts payable (94) (59)
Accrued interest payable 116 85
Accrued state income taxes 90 181
Accrued other liabilities 188 356
------- -------
Total adjustments 1,900 995
------- -------
Net cash provided by operating activities 434 (111)
------- -------
</TABLE>
See notes to consolidated financial statements
7
<PAGE> 8
THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000's Omitted)
(UNAUDITED)
(Continued)
===============================================================================
<TABLE>
<CAPTION>
Three months ended
May 31,
----------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in certificates of deposit (4) 0
Investment in capital assets (75) (139)
Acquisition of new automotive aftermarket
business, net of cash acquired (54) 0
------- -------
Net cash used in investing activities (133) (139)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit line (8,821) (8,615)
Proceeds from revolving credit line 9,702 8,785
Principal payments on short-term borrowings (192) 0
Principal payments on long-term borrowings (121) (52)
Principal payments on subordinated debt 0 (57)
------- -------
Net cash provided by financing activities 568 61
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 869 (189)
CASH AND CASH EQUIVALENTS, at
February 28, 1995 and 1994 1,192 718
------- -------
CASH AND CASH EQUIVALENTS, at
May 31, 1995 and 1994 $ 2,061 $ 529
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the three months ended
May 31, 1995 and 1994 for interest $ 110 $ 85
======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
During May 1995, a newly organized, wholly-owned subsidiary of the Registrant acquired certain
assets of a business. In acquiring the business, the new subsidiary paid $110,000 and assumed
liabilities of $1,789,000.
</TABLE>
See notes to consolidated financial statements
8
<PAGE> 9
THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 1995
(UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note A -- Basis of Presentation
The accompanying financial statements have been prepared on the basis that the
Registrant will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Although the Registrant has incurred substantial losses for many
years, resulting principally from interest charges accrued on its subordinated
debt, it has been able to obtain extensions on such subordinated debt and
defer payments on certain of its other debt so that cash flow generated from
operations has been sufficient to cover necessary expenditures. However,
certain of the subordinated notes constituting this subordinated indebtedness,
as described in Note 7 of the Notes to Consolidated Financial Statements
included in the Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1995 (the "1995 10-K"), and a note payable, as described in
Note 5 of such Notes to Consolidated Financial Statements, issued by the
Registrant to an officer/director, have been pledged to financial institutions
by the officer/director as security for personal obligations.
The officer/director has been declared in default on a loan from one of the
financial institutions and an action was instituted against him. Two
Registrant notes totaling approximately $3,635,000, including accrued
interest of $1,039,000, had been pledged as collateral for this loan. The
financial institution commenced an action against the Registrant for
collection of these notes and, in March 1995, the financial institution
was granted a judgment on certain of their claims.
If the Registrant is required to satisfy this judgment and repay the notes,
the Registrant could face a severe liquidity problem, which may be mitigated
by negotiating a workable payout with the financial institution and/or
generating sufficient cash flow from its continuing operations to meet the
obligations. There is no assurance that the Registrant would be successful in
these efforts. The financial statements do not include any adjustments that
might be necessary if the Registrant is unable to continue as a going concern.
The accompanying unaudited consolidated financial statements 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, they 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 month
period ended May 31, 1995 are not necessarily indicative of the results that
may be expected for the fiscal year ending February 29, 1996. For further
information, reference is made to the Consolidated Financial Statements and
Notes to Consolidated Financial Statements included in the 1995 10-K.
Note B -- Acquisition
During May 1995, a newly organized, wholly-owned subsidiary of the Registrant
acquired a business which manufactures and sells metal grille guards, light
bars, tubular bumpers and side bars (steps) nationwide to the light truck and
sport utility market and performs contract metal-bending work. In acquiring
this business, the new subsidiary purchased assets, including fixed assets of
$499,000, and assumed certain bank debt and other liabilities, including bank
debt of $461,000 maturing at various dates over the next six years and
$120,000 of notes payable maturing over the next two years. In addition, the
new subsidiary entered into a six-year consulting agreement with the seller of
this business, pursuant to which earnings of the new subsidiary will pay
certain consulting fees depending upon the future earnings of the subsidiary.
Certain of the new subsidiary's obligations with respect to this acquisition
transaction, including bank debt of approximately $461,000, are guaranteed by
the subsidiary's parent, which itself is a wholly-owned subsidiary of the
Registrant.
9
<PAGE> 10
THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 1995
(UNAUDITED)
(Concluded)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note C -- Inventories
<TABLE>
May 31,
-------
1995 1994
---- ----
<S> <C> <C>
Major classes of inventory consist of the following:
Raw material $1,909 $1,870
Work - in - process 745 251
Finished goods 2,650 1,160
------ ------
$5,304 $3,281
====== ======
</TABLE>
Note D -- Contingencies
(a) Environmental Matter
The Registrant has received a general notice of liability indicating that the
Registrant may be a potentially responsible party in connection with
contamination at a San Fernando Valley Area 2 Superfund Site. The Registrant
has hired a geological consulting firm to assist in this matter. The ultimate
outcome of this matter is uncertain and no adjustments have been made to the
accompanying financial statements. Although the EPA has indicated its
intention to issue special notice letters to parties that it determines are
potentially liable with respect to the Site, the Registrant has not, as of the
date hereof, received any such special notice letter. In the opinion of
management, the ultimate resolution of this matter will not have a significant
impact, if any, on the Registrant's financial statements taken as a whole.
(b) Pension Plan
The Registrant 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,
1993 (the latest Plan valuation) indicates that the unfunded actuarial accrued
liability was approximately $850,000.
The Internal Revenue Service ("IRS") is currently auditing the Plan. The IRS
has not yet proposed any amount for the underfunding as it relates to the
minimum funding standards of the Internal Revenue Code. Management believes
that it has adequately provided in the balance sheet (included in accrued
other) for any liability that may result from the resolution of this matter.
Note E -- Loss Per Share
Loss per common share is computed by dividing the net loss 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 Registrant's common share equivalents and convertible issues were
anti-dilutive at May 31, 1995 and 1994 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 were 29,712,000 for three
month period ended May 31, 1995 and 1994, respectively, inclusive of Class B
common shares.
10
<PAGE> 11
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
11
<PAGE> 12
THE ARLEN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
At May 31, 1995, the Registrant had a shareholders' deficit of $122,957,000
and its ratio of current assets to current liabilities was 0.88 (having
improved from the current ratio of 0.85 at February 28, 1995). The
shareholders' deficit at May 31, 1995 takes into account indebtedness to
present or former officers and directors of the Registrant, or to persons
related to them or their trusts or affiliated entities, in the aggregate
amount of $126,853,000. As a result of certain transactions concluded by the
Registrant in May 1993 with the then holders of notes evidencing $120,748,000
of this indebtedness (the "Notes") (as described above in Item 1 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended February 28,
1995 (the "1995 10-K")), the Registrant obtained a significant extension, to
July 31, 1997, in the maturity dates applicable to the Notes, though the
Registrant was required to provide substantial collateral to secure the
Registrant's payment obligations under the Notes. By achieving this result,
the Registrant avoided the possibility that the Notes could all have been
accelerated in July 1993, and deferred the substantial payment obligations
under the Notes until at least July 31, 1997 (subject, however, to (a) the
occurrence of an event of default which could accelerate such payment
obligations and (b) the mandatory prepayments required upon the occurrence of
certain corporate transactions involving the collateral).
While the transactions involving the extension and collateralization of the
Notes are believed to have eased the Registrant's liquidity needs over the
four years following such transactions, the settlement of certain obligations
(the "Current Obligations") owed to the Registrant's Chairman of the Board (as
described in Item 1 of the 1995 10-K) has added additional periodic payment
obligations to those already borne by the Registrant and its subsidiaries.
Such payment obligations are specified in Item 1 of the 1995 10-K.
Nevertheless, based upon the experience of the Registrant's prior arrangements
with certain of its creditors and management's expectations of the cash flow
to be available from the Registrant's operating subsidiaries, the Registrant
believes that it will be able to meet the expenses of current operations.
Further information with respect to the payment obligations of the Registrant
and its operating subsidiaries is provided in Notes 5, 6, and 7 of the Notes
to Consolidated Financial Statements included in the 1995 10-K.
If, as a result of insufficient cash flow or otherwise, the Registrant should
be unable to meet its payment obligations under the Current Obligations, such
a default would also constitute an event of default under the Notes,
permitting the holders of the Notes to accelerate the indebtedness thereunder
and to foreclose upon the outstanding shares of common stock of the
Registrant's subsidiaries, Arlen Holdings Corp., Arlen Automotive, Inc. and
Grant Products, Inc., held as collateral for the Notes, thereby effectively
depriving the Registrant of substantially all of its operating assets, and, if
such foreclosure does not produce sufficient proceeds to pay off the
indebtedness in full as the Registrant believes it would not, the Registrant
would remain potentially liable for the amount of any deficiency.
12
<PAGE> 13
THE ARLEN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Liquidity and Capital Resources (continued)
In addition to the potential liquidity problems which could result from a
default as described in the preceding paragraph, the Registrant acknowledges
that, if the Registrant is unable to negotiate a manageable settlement with
Morgan Guaranty Trust Company of New York, the pledgee of certain promissory
notes of the Registrant and the holder of a judgment against the Registrant
(as discussed in Item 3 of the 1995 10-K), the Registrant may face a severe
liquidity crisis and be unable to continue as a going concern.
Results of Operations
Sales for the three months ended May 31, 1995 increased by 4% over the
corresponding period of the prior year. The increase is the result of
increased sales at the automotive aftermarket subsidiaries, partially offset
by decreased sales at the construction subsidiary. The sales for this period
do not include the sales of a newly-organized subsidiary, which acquired the
automotive aftermarket business of a third party as of May 19, 1995. The
sales of the Registrant's subsidiary serving the construction industry
decreased by approximately 21%. The primary reason for the decrease is the
volatility of the construction industry. The sales of the automotive
aftermarket subsidiaries increased by 10% for the three month period ended May
31, 1995 from the corresponding period of the prior year. The sales increases
reflect a continuation of improving market conditions in the industry in which
they operate.
The increase in cost of sales was primarily a function of the higher sales,
with the gross profit margins of the operating subsidiaries as a group
relatively constant for the three months ended May 31, 1995 when compared with
such margins for the comparable period of the prior year. The gross margin of
the construction subsidiary improved by 10% (reflecting favorable bid terms on
certain contracts), which was offset by a 2% decline in gross margin at the
automotive subsidiaries attributable to increased material prices and
competitive pressures.
Corporate, selling, general and administrative expenses increased by 10% from
the corresponding period of the prior year. The increase is made up of a
13% increase at the automotive aftermarket subsidiaries due to increased
selling expenses related to increased sales and increased administrative
expenses necessitated by a sustained increase in the level of sales,
patrially offset by a 5% decrease at the construction subsidiary associated
with the decline in sales.
Operating income as a percentage of sales declined by 2% primarily due to
increased administrative expenses at the automotive aftermarket subsidiaries
necessitated by the sustained increase in the level of sales.
Interest expense increased by 8% for the three months ended May 31, 1995 from
the corresponding period of the prior year. The increase is primarily the
result of the compounding of interest on related party obligations and
increased borrowing costs associated with the increase in the prime interest
rate.
The net loss for the three months ended May 31, 1995 increased by 33% from the
corresponding period of the prior year primarily because of the increase in
corporate, selling, general and administrative expenses and interest expense.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
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.
THE ARLEN CORPORATION
Date: July 14, 1995 By /s/ Allan J. Marrus
------------------------------------
Allan J. Marrus
President
Date: July 14, 1995 By /s/ David S. Chaiken
------------------------------------
David S. Chaiken
Treasurer
14
<PAGE> 15
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995 QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 31, 1995.
</LEGEND>
<CIK> 0000007346
<NAME> ARLEN CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> MAY-31-1995
<CASH> 2,287
<SECURITIES> 0
<RECEIVABLES> 12,681
<ALLOWANCES> 0
<INVENTORY> 5,304
<CURRENT-ASSETS> 20,963
<PP&E> 1,398
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,013
<CURRENT-LIABILITIES> 23,736
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (122,957)
<TOTAL-LIABILITY-AND-EQUITY> 23,013
<SALES> 13,150
<TOTAL-REVENUES> 13,150
<CGS> 7,932
<TOTAL-COSTS> 7,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,658
<INCOME-PRETAX> (1,466)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,466)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,466)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
