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 November 30, 1995August 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
  -------------------------------------------------------                  ------------------------------
(StateState or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

 505 Eighth Avenue, New York, New York                   10018
-------------------------------         ------------------------------
         (Address- ---------------------------------------             ---------------
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 (1)(l) has filed all reports required
to be filed by Section 13l3 or 15(d)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 - 29,770,23430,770,307 shares outstanding as of  January 4,October 10,
 1996 (excluding shares owned by subsidiaries of the Registrant) 


                                                                              1
   2
                     THE ARLEN CORPORATION AND SUBSIDIARIES

                                      INDEX
================================================================================

PAGE PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements Consolidated balance sheetssheet -- November 30, 1995 and 1994August 31, 1996 (unaudited) 4 Consolidated balance sheet -- February 28, 199529, 1996 (unaudited) 5 Consolidated statements of operations -- NineSix and three months ended November 30,August 31, 1996 and 1995 and 1994 (unaudited) 6 Consolidated statements of cash flows -- NineSix months ended November 30,August 31, 1996 and 1995 and 1994 (unaudited) 7-8 Notes to consolidated financial statements 9-119-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-1511-12 PART II. OTHER INFORMATION 17-2013 SIGNATURES 2114
2 3 PART I - FINANCIAL INFORMATION Item 1.1 Financial Statements 3 4 THE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($000s Omitted) (UNAUDITED) ================================================================================
November 30, ------------THE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET August 31, 1996 ($000s Omitted) (UNAUDITED) - --------------------------------------------------------------------------------------------------------------- ASSETS 1995 1994 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,058 $ 1,149 Certificates14 Note receivable - current portion, net of deposit 228 222 Accounts receivable, net 10,661 10,912 Inventories 6,311 4,581 Other current assets 490 291 ---------unamortized discount of $75 960 --------- TOTAL CURRENT ASSETS 18,748 17,155974 PROPERTY AND EQUIPMENT, net 1,397 93461 OTHER ASSETS, 1,622 713including amounts due from former subsidiaries (Note 3) 465 NOTE RECEIVABLE, less current portion, net of unamortized discount of $5 244 --------- ---------- TOTAL ASSETS $ 21,767 $ 18,802 ========$1,744 ========= LIABILITIES AND CAPITAL DEFICIT CURRENT LIABILITIES: Notes payable (including $2,742 and $2,732 due to related parties in 1995 and 1994) $ 3,793 $ 5,342 Accounts payable 1,827 2,293137 Accrued interest payable (including $827 and $786$3 due to related parties in 1995parties) 194 Accrued expenses, fees and 1994) 1,011 934 Accrued state income taxes 1,044 1,212 Accrued other 10,687 10,414(Note 4) 7,232 Current portion of long-term obligations (including $299 and $240 due to related parties in 1995 and 1994) 455 343 ---------285 --------- TOTAL CURRENT LIABILITIES 18,817 20,5387,848 LONG-TERM OBLIGATIONS (including $1,192 and $1,500 due to related parties in 1995 and 1994) 4,428 1,500 SUBORDINATEDDUE TO RELATED PARTIES 549 AMOUNTS DUE TO RELATED PARTIES 125,483 116,364 ---------128,726 --------- TOTAL LIABILITIES 148,728 138,402137,123 COMMITMENTS AND CONTINGENCIES (Note 4) CAPITAL DEFICIT (126,961) (119,600) ---------(135,379) --------- TOTAL LIABILITIES AND CAPITAL DEFICIT $ 21,767 $ 18,802 =========$1,744 =========
See notes to consolidated financial statementsstatments. 4 5 THE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET February 28, 1995 ($000s Omitted) (UNAUDITED) ================================================================================
THE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET February 29, 1996 ($000s Omitted) (UNAUDITED) - -------------------------------------------------------------------------------- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 1,192 Certificates10 Note receivable - current portion, net of deposit 222 Accounts and notes receivable, net 11,109 Inventories 4,731 Other current assets 529unamortized discount of $117 883 --------- TOTAL CURRENT ASSETS 17,783893 PROPERTY AND EQUIPMENT, net 90372 OTHER ASSETS, 703including amounts due from former subsidiaries (Note 3) 469 NOTE RECEIVABLE, less current portion, net of unamortized discount of $33 717 --------- TOTAL ASSETS $ 19,3892,151 ========= LIABILITIES AND CAPITAL DEFICIT CURRENT LIABILITIES: Notes payable $ 137 Accrued interest payable (including $2,742$4 due to related parties) $ 6,281 Accounts payable 2,344179 Accrued interest payable (including $622 due to related parties) 776 Accrued state income taxes 1,137 Accruedexpenses, fees and other 9,993(Note 4) 7,019 Current portion of long-term obligations (including $722 due to related parties) 722parties 299 --------- TOTAL CURRENT LIABILITIES 21,2537,634 LONG-TERM OBLIGATIONS (including $1,246 due to related parties) 1,246 SUBORDINATEDDUE TO RELATED PARTIES 575 AMOUNTS DUE TO RELATED PARTIES 118,381124,389 --------- TOTAL LIABILITIES 140,880132,598 COMMITMENTS AND CONTINGENCIES (Note 4) CAPITAL DEFICIT (121,491)(130,447) --------- TOTAL LIABILITIES AND CAPITAL DEFICIT $ 19,389$2,151 =========
See notes to consolidated financial statements 5 6 THE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($000s Omitted) (UNAUDITED) ================================================================================
NineTHE ARLEN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ($000s Omitted) (UNAUDITED) - -------------------------------------------------------------------------------- Six months ended Three months ended November 30, November 30, ------------ ------------August 31, August 31, 1996 1995 19941996 1995 1994 ---- ---- ---- ---- SALES $40,597 $37,572 $12,171 $12,097 COST OF SALES 26,108 22,422 8,432 7,287 ------- ------- ------- ------- Gross profit on sales 14,489 15,150 3,739 4,810 SELLING, GENERAL & ADMINISTRATIVE EXPENSES 11,985 11,333 3,697 3,773 ------- ------- ------- ------- Operating income 2,504 3,817 42 1,037$ (581) $ (539) $ (301) $ (279) OTHER (CHARGES) CREDITS:(EXPENSES) INCOME: Interest expense, net (including amounts due to related parties of $7,348$4,272 and $1,799 in 1996 and $4,898 and $2,450 in 1995 and $6,811 and $2,098 in 1994) (7,997) (7,332) (2,641) (2,420)1995) (4,495) (5,101) (1,909) (2,551) Other income, 24 10 1 4 ------- ------- ------- -------net 144 - - - -------- -------- -------- --------- Loss from continuing operations before discontinued operations (4,932) (5,640) (2,210) (2,830) DISCONTINUED OPERATIONS: Income from discontinued operations (Note 2) - 2,769 - 1,425 -------- -------- -------- -------- Net loss $(5,469) $(3,505) $(2,598) $(1,379) ======= ======= ======= =======$(4,932) $(2,871) $(2,210) $(1,405) ======== ======== ======== ======== LOSS PER COMMON SHARE FROM CONTINUED OPERATIONS $ (0.15) $ (0.18) $ (0.07) $ (0.09) INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS (Note 2) - 0.09 - 0.05 -------- -------- -------- --------- LOSS PER COMMON SHARE $ (0.18) $ (0.11)(0.15) $ (0.09) $ (0.07) $ (0.04) ======= ======= ======= =============== ======== ======== =========
See notes to consolidated financial statements 6 7 THE ARLEN CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS ($000s Omitted) (UNAUDITED) ================================================================================
NineTHE ARLEN CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS ($000s Omitted) (UNAUDITED) - -------------------------------------------------------------------------------- Six months ended November 30, ------------ 1995 1994 ---- ----August 31, 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($5,469)4,932) ($3,505) ------- -------2,871) --------- --------- Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 456 476 Provision11 288 Amortization on note discount (70) - Provisions for losses on accounts receivable (470) 356- (457) Increase in subordinated amounts due related parties in exchange for interest 7,102 6,6955,040 4,735 Changes in assets and liabilities net of effects from the purchase of a new automotive aftermarket business: (Increase) decrease in assets: Accounts receivable 1,406 (2,056)- (195) Inventories (640) (1,011)- (758) Other current assets 61 - (348) Other assets (1,070) -4 (100) Increase (decrease) in liabilities: Accounts payable (1,499) (84)- 36 Accrued interest payable 228 10215 150 Accrued state income taxes (93) 202- 45 Accrued other liabilities 639 1,127 ------- -------213 328 --------- --------- Total adjustments 6,120 5,807 ------- -------5,213 3,724 --------- --------- Net cash provided by operating activities 651 2,302 ------- -------281 853 --------- ---------
See notes to consolidated financial statements 7 8 THE ARLEN CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS ($000s Omitted) (UNAUDITED) (Continued) ================================================================================
NineTHE ARLEN CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS ($000s Omitted) (UNAUDITED) (Continued) - -------------------------------------------------------------------------------- Six months ended November 30, ------------August 31, 1996 1995 1994 ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in certificates of deposit (561) (4)- (6) Investment in capital assets (298) (279)- (233) Acquisition of new automotive aftermarket business, net of cash acquired - (54) - -------- ----------------- Net cash used in investing activities (913) (283)- (293) -------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds on notes receivable 466 - Payments on revolving credit line - (13,424) (28,861) Proceeds from revolving credit line 13,982 27,572- 13,882 Payment on amounts due to dated papers (703) - Principal payments on short-term borrowings (622) (5)- (455) Principal payments on long-term borrowings (362) (237) Principal payments on subordinated debt - (57)(40) (320) -------- ----------------- Net cash usedprovided by financing activities (426) (1,588)(277) (317) -------- ----------------- NET INCREASE IN CASH AND CASH EQUIVALENTS (688) 4314 243 CASH AND CASH EQUIVALENTS, at February 28,29, 1996 and 1995 and 199410 1,192 718LESS CASH INCLUDED IN CURRENT ASSETS OF DISCONTINUED OPERATIONS - (1,422) -------- ----------------- CASH AND CASH EQUIVALENTS, at November 30,August 31, 1996 and 1995 and 1994 $ 50414 $ 1,14913 ======== ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the ninesix months ended November 30,August 31, 1996 and 1995 and 1994 for interest $ 372707 $ 229 ======== ======== 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 $1,789,000.262 ======= =========
See notes to consolidated financial statements 8 9 THE ARLEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of November 30, 1995 (UNAUDITED)(August 31, 1996) ================================================================================ 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 indebtedness to present or former officers and directors of the Registrant, or to persons related to them or their trusts or affiliated entities, it has been able to obtain extensions on such 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, on November 30, 1995, a subsidiary of the Registrant failed to make a required $175,000 debt payment to the Registrant's chief executive officer, Arthur G. Cohen. As reported in Item 3 of Part II of this Report, such default has triggered a notice of acceleration of the aforesaid indebtedness having an outstanding balance of approximately $125,000,000 (the "Notes") and a notice scheduling a sale, pursuant to the New York Uniform Commercial Code ("UCC"), of the stock of the Registrant's subsidiary which is the parent of all the Registrant's operating companies. In order to mitigate the anticipated loss of such operating companies which is expected to result from the involuntary sale of such stock and to augment the 25% of the net proceeds from the UCC sale which the Registrant is entitled to for its residual interest in the stock of its subsidiary, the Registrant has entered into a forbearance agreement with the holders of the Notes and Mataponi, L.L.C. ("Mataponi"), a company controlled by a trust for Mr. Cohen's wife, who is a principal shareholder of the Registrant. Mataponi expects to bid for the subsidiary's stock at the UCC sale. Pursuant to the forbearance agreement, the Registrant, with the assistance of the other parties thereto, has satisfied a financial institution's judgment and terminated its pending lawsuits against the Registrant, discharged two promissory notes of the Registrant held by such financial institution and obtained the release from Mataponi and the holders of the Notes of the stock of one of the Registrant's operating subsidiaries. The forbearance agreement also provides that if Mataponi shall be the successful bidder at the UCC sale, the maturity date of the accelerated indebtedness will be extended for 38 years (during which time interest will accrue at the current rate of 8% per annum), the Registrant will receive a $2,000,000 promissory note payable over two years and certain other benefits may be available to the Registrant. If the UCC sale shall take place and the Registrant shall lose all of its operating companies, the Registrant must rely on this promissory note to fund its operating expenses while new business opportunities are explored. If Mataponi is not the successful bidder at the UCC sale, the Registrant will not receive the benefits provided for in the forbearance agreemeent, including this promissory note and the extension in the maturity date of the accelerated indebtedness (which will remain immediately due and payable in full), and will have certain obligations to Mataponi, including to pay $3,000,000 on the Notes and to return the previously released stock of an operating subsidiary. The Registrant has received an examination report from the District Director of the Internal Revenue Service (the "IRS"), asserting that a payment of $6,726,613 is required in order to cure the accumulated funding deficiency of the Registrant's defined benefit pension plan and to pay excise taxes and penalties relating thereto. As indicated below in paragraph (b) of Note E, the Registrant believes that it will be able to achieve a manageable settlement of this deficiency claim with the IRS.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, theythe 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 nine month periodthree and six months ended November 30, 1995August 31, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 1996 and, in view of the scheduled UCC sale involving the parent of the Registrant's operating companies, may give no indication of the results that may be expected for future periods.28, 1997. For further information, reference is made to the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the 1995 10-K.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, 1996, the Company had a working capital deficiency of $6,874,000 and a capital deficit of $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. 9 10 THE ARLEN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of November 30, 1995 (UNAUDITED) (Continued) (August 31, 1996) ================================================================================ NOTE 3 - OTHER ASSETS Other assets include amounts due from former subsidiaries (see Note B -- Acquisitions The accompanying financial statements reflect2) and certain non-negotiable promissory notes (the "Mortgage Notes") assumed by related parties. Due to the acquisition in May 1995, by a newly-organized, wholly-owned subsidiaryuncertainty of the Registrant, of a business located in Duarte, California, 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 which has since been paid off 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 the new subsidiary will pay certain consulting fees depending upon the future earningstiming of the subsidiary. Certain of the new subsidiary's obligations with respect to this acquisition transaction are guaranteed by the subsidiary's parent, which itself is a wholly-owned subsidiary of the Registrant. On August 17, 1995, another newly-organized, wholly-owned subsidiary of the Registrant acquired a business, located in Placentia, California, which manufactures and sells molded polyurethane, plastic and fiberglass components for the automotive specialties and other markets. In acquiring this business, the new subsidiary purchased assets, including inventory and fixed assets, and assumed certain liabilities, consisting primarily of trade accounts payable (which may not exceed $136,000) and obligations to certain former owners of the business (which aggregate $371,000, most of which is payable in installments over a four-year period). In addition, the new subsidiary agreed to pay the seller of the business $554,000 in installments over five years and, beginning with calendar year 1996 and continuing for three and one-half years, to pay a former owner 2% of the sales of the business in excess of a specified annual level. The accompanying financial statements do not reflect the acquisition of this business inasmuch as its operations are immaterial to the financial statements.
November 30, ------------ Note C -- Inventories 1995 1994 ------ ------ Major classes of inventory consist of the following: $3,271 $2,637 Raw material 633 635 Work - in - process 2,407 1,309 ------ ------ Finished goods $6,311 $4,581 ====== ======
Note D -- Long-Term Obligations Included in Long-Term Obligations is the outstanding indebtedness ($3,000,000 at November 30, 1995) of the Registrant's automotive aftermarket subsidiaries under a loan agreement the ("Loan Agreement") entered into in August 1995 with a banking institution. Under the Loan Agreement, the subsidiaries may borrow, on a revolving credit basis, amounts not to exceed the lesser of $8,500,000 or a borrowing base calculated with reference to the subsidiaries' accounts receivable and inventories. A portion of the borrowing limit may be used for letters of credit. The revolving credit line will terminate on July 31, 1997, unless extended. Pursuant to an amendment to the Loan Agreement, the subsidiaries borrowed $3,000,000 on a term loan basis in January 1996, which loan is repayable in 18 months. Borrowings under the revolving line require monthly paymentscollection of interest only at an interest rate between the bank's "prime" rate and .75% above such rate (depending upon certain financial tests). The term loan bears interest at a rate 2.75% above the bank's "prime" rate and is to be repaid in 18 monthly installments between March 31, 1996 and August 31, 1997. The subsidiaries may THE ARLEN CORPORATION AND SUBSIDIARIES 10 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of November 30, 1995 (UNAUDITED) (Concluded) ================================================================================ Note D -- Long-Term Obligations (Continued) also elect to have all or portions of their loans bear interest at the Eurodollar rate plus a spread of between 2% and 2.75% (depending upon certain financial tests) or 4.75% in the case of the term loan; such interest is payable at the end of the applicable interest period. Borrowings under the Loan Agreement are secured by substantially all the assets of the borrower subsidiaries and the stock of three of such subsidiaries, and are guaranteed by the Registrant's subsidiary, Rucon Services Corp., the outstanding stock of which is subject to a UCC sale. The Loan Agreement has various covenants which, among other things, require the borrowers to maintain certain consolidated financial ratios and limit their capital expenditures and payment of dividends. Note E -- Contingencies (a) Environmental Matter A subsidiary of the Registrant has received a general notice of liability indicating that such subsidiary may be a potentially responsible party in connection with contamination at a San Fernando Valley Area 2 Superfund Site. The subsidiary 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's subsidiary 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'sMortgage Notes, for financial statements taken as a whole. (b) Pension Planstatement purposes the Company will record interest income from the Mortgage Notes when received. NOTE 4 - COMMITMENTS AND CONTINGENCIES The RegistrantCompany is the sponsor of a defined benefit pension plan (the "Plan") which was frozen in 1981. Although theThe actuarial valuation of the Plan as of March 1, 19931991 (the latest Plan valuation) indicated thatindicates the unfunded actuarial accrued liability was approximately $850,000,$850,000. In July 1995, the RegistrantCompany received from the District Director of the United States Internal Revenue Service (the "IRS") an examination report in July 1995 fromwith respect to the Plan. In such report, the IRS assertingasserted 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 preliminary discussions with the IRS following receipt of thisthe examination report, the RegistrantCompany 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, on a basis not significantly inconsistent withfor an aggregate amount approximating the $850,000 provision already reflected in the accompanyingCompany's balance sheets. Note F -- Loss Per Sharesheet (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 Registrant'sCompany's common share equivalents and convertible issues were anti-dilutive at November 30,August 31, 1996 and 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 29,712,000was 32,690,000 for the ninesix and three monththree-month periods ended November 30,August 31, 1996 and 31,690,000 for the six and three-month periods ended August 31, 1995, and 1994, respectively, inclusive of Class B common shares. 10 11 12 Item 2.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 1211 1312 THE ARLEN CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONPOSITION AND RESULTS OF OPERATIONS (August 31, 1996) ================================================================================ LiquidityThe following discussion and Capital Resources At November 30, 1995,analysis should be read in conjunction with the Registrant had a shareholders' deficitCompany's Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 1 of $126,961,000 and its ratioPart I of current assetsthis Report: LIQUIDITY AND CAPITAL RESOURCES Prior to current liabilities was 1.00 (having improved from the current ratio of 0.85 at February 28, 1995). The shareholders' deficit at November 30, 1995 takes into account indebtedness to present or former officers and directorsdisposition of the Registrant, or to persons related to them or their trusts or affiliated entities, inCompany's former subsidiaries on February 6, 1996, the aggregate amount of $130,766,000. As reported in Item 3 of Part II of this Report, the Registrant has received a notice of acceleration of approximately $125,000,000 of this indebtedness as a resultability of the failure of a subsidiary of the Registrant to make a required $175,000 debt payment to the Registrant's Chairman of the Board, Arthur G. Cohen, on November 30, 1995. The promissory notes which evidence the accelerated indebtedness (the "Notes") are collateralized by the stock of the Registrant's subsidiary which is the parent of all the Registrant's operating companies. The Registrant has received a notice scheduling a sale, pursuant to the New York Uniform Commercial Code ("UCC"), of the stock of such subsidiary. In order to mitigate the anticipated loss of the Registrant's operating companies which is expected to result from the involuntary sale of such stock and to augment the 25% of the net proceeds from the UCC sale which the Registrant is entitled to for its residual interest in the stock of its subsidiary, the Registrant has entered into a forbearance agreement with the holders of the Notes and Mataponi, L.L.C. ("Mataponi"), a company controlled by a trust for Mr. Cohen's wife (who is a principal shareholder of the Registrant), which expects to bid for the subsidiary's stock at the UCC sale. Pursuant to the forbearance agreement, the Registrant, with the assistance of the other parties thereto, has satisfied a financial institution's judgment and terminated its pending lawsuits against the Registrant, discharged two promissory notes of the Registrant held by such financial institution and obtained the release from Mataponi and the holders of the Notes of the stock of one of the Registrant's operating subsidiaries (which stock was used to obtain the $3,000,000 necessary to satisfy and discharge the Registrant's obligations to the financial institution). The forbearance agreement also provides that, if Mataponi shall be the successful bidder at the UCC sale, the maturity of the accelerated indebtedness will be extended for 38 years (during which time interest will accrue at the current rate of 8% per annum), the Registrant will receive a $2,000,000 promissory note payable over two years and certain other benefits may be available. If the benefits of the forbearance agreement are not available to the Registrant, it would be unable to pay the accelerated Notes and could be compelled to liquidate, as a result of which the Registrant would ceaseCompany to continue as a viable business entity. Ifgoing concern was threatened by the UCC sale shall take place andliquidity crises facing the Registrant shall lose all of its operating companies, the Registrant must rely on the $2,000,000 promissory note to fund its operating expenses while new business opportunities are explored. However, the Registrant will no longer be subject to the pending threats ofCompany from an unsatisfied judgment, past due promissory notesadditional pending litigation and athe 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 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, 1996 continues to include the Arlen Notes as substantial liabilities (accounting for $128,726,000 of the Company's total liabilities of $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 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 that the Company is able to (a) satisfy or settle an outstanding judgment for $172,000 (plus interest from 1988) which is less than two years away, 13 14 THE ARLEN CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ================================================================================ Liquiditythe subject of pending execution proceedings and Capital Resources (Continued) though the Registrant must still(b) settle or otherwise resolve the substantial previously reported claim of the Internal Revenue Service with respect to the accumulated funding deficiency relating to the Registrant's retirement plan. Results of Operations Sales for the nine and three months ended November 30, 1995 increased by 8% and 1% over the corresponding period of the prior year. The increase is the result of additional sales from a newly acquired subsidiary, combined with an increase of 7% for the nine-month period and a decrease of 3% for the three-month period in sales of the existing subsidiaries. The sales decrease in existing subsidiaries reflects a softening of demand in the automotive aftermarket industry. The sales of the Registrant's subsidiary serving the construction industry decreased by approximately 20% and 28% for the nine and three months ended November 30, 1995 from the corresponding periods of the prior year. The primary reason for the decrease is the volatility of the construction industry. 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 decreasing by 4% and 9% for the nine and three months ended November 30, 1995 when compared with such margins for the comparable periods of the prior year. This decline was primarily the result of a change in the customer mix. The gross margins of the construction subsidiary for the current nine and three month periods decreased by 11% and 20% , respectively, from the periods of the prior year (reflecting unfavorable bid terms on certain contracts). The gross margins of the automotive subsidiaries decreased by 4% and 6% for the nine and three months ended November 30, 1995 from the comparable periods of the prior year. The decline is attributable to increased material prices and increased costs associated with the newly acquired subsidiary. Corporate, selling, general and administrative expenses increased by 6% and decreased by 2% for the nine and three months ended November 30, 1995 over the corresponding periods of the prior year. The increase is made up of 12% and 6% increases 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 and the acquisition of the new subsidiary. These increases are partially offset by a 40% and 58% decrease at the construction subsidiary associated with the decline in sales. Operating income as a percentage of sales declined by 4% and 8% for the nine and three months ended November 30, 1995 over the corresponding period of the prior year, primarily due to increased costs of sales and administrative expenses at the automotive aftermarket subsidiaries necessitatedasserted by the sustained increase in the level of sales. Interest expense increased by 9% for the nine and three months ended November 30, 1995 from the corresponding periods of the prior year. The increase is primarily the result of the compounding of interest on related party obligations and additional interest expense from the newly acquired subsidiary. 14 15 THE ARLEN CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded) ================================================================================ Results of Operations (Continued) The net loss for the nine and three months ended November 30, 1995 increased by 56% and 89% from the corresponding periods of the prior year primarily because of the increase in cost of sales, administrative expenses and interest expense. In view of the scheduled UCC sale involving the parent of the Registrant's operating companies, the results of operations reported herein may give no indication of the results that may be expected for future periods. NOTE: For the reasons indicated inIRS (see Note B4 of the Notes to Consolidated Financial Statements included in Item 1 of Part I of this Report, neitherReport), management believes that the accompanying financial statements nor this management's discussionmost 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 resultsfinal payments due under the Note Receivable. RESULTS OF OPERATIONS The Company's net losses for the six and three-month periods ended August 31, 1996, representing increases of operations71% and 57%, respectively, over the net losses for the comparable periods of the Registrant forprior fiscal year, reflect primarily the three and nine months ended November 30, 1995 reflectabsence in the operationscurrent fiscal year of any income from the Registrant's newest subsidiary, which was acquired on August 17, 1995. 15Company's discontinued operations. 12 1613 PART II - OTHER INFORMATION 16Not Applicable 13 17 Item 3. Defaults Upon Senior Securities. On November 30, 1995, Rucon Services Corp. (formerly Arlen Holdings Corp.), a wholly-owned subsidiary of the Registrant ("Rucon"), failed to make a $175,000 installment payment to Arthur G. Cohen ("Mr. Cohen"), the Registrant's Chairman of the Board, pursuant to the Current Obligations Agreement dated March 29, 1993 between Rucon and Mr. Cohen. In December 1995, the Registrant and Rucon received a notice of such default (the "Current Obligations Default") from Mr. Cohen. The Current Obligations Default is an event which, after notice and time to cure, becomes an Event of Default under the Registrant's 5-1/4% Subordinated Notes, having an outstanding balance of approximately $125,000,000, issued to Mr. Cohen (the "Cohen Notes") and to members or entities of the family of Arthur N. Levien, a deceased former director/officer of the Registrant (the "Levien Notes" and, collectively with the Cohen Notes, the "Notes"). The Cohen Notes, which had an outstanding balance of approximately $84,000,000 at November 30, 1995, have been pledged since 1993 to Bank Leumi Trust Company of New York ("Bank Leumi") as security for certain obligations of Mr. Cohen to Bank Leumi. In 1993, the Registrant collateralized the Notes with, among other things, a pledge of the outstanding shares of capital stock of Rucon (the "Rucon Shares"), which indirectly owns the outstanding capital stock of all the Registrant's operating subsidiaries. Shortly after January 1, 1996, the Registrant and Rucon received from Mr. Cohen, as the agent (the "Agent") for the holders of the Notes (the "Holders"), a notice accelerating all principal and interest due under the Notes and were advised by the Agent that, in his capacity as the Agent, he expected to ultimately foreclose on the Rucon Shares and to conduct a public sale of the Rucon Shares in accordance with the New York Uniform Commercial Code. Such a sale (the "UCC Sale"), if consummated, will result in the loss by the Registrant of all its operating subsidiaries and produce for the Registrant only (a) a reduction in the outstanding indebtedness under the Notes equal to 75% of the net purchase price paid for the Rucon Shares by the successful bidder at the public sale and (b) proceeds for the residual interest of the Registrant in the Rucon Shares equal in amount to 25% of such net purchase price. Inasmuch as neither the Registrant nor Rucon is currently financially able to cure the Current Obligations Default, to pay the principal and accrued interest asserted by the Agent to be due under the Notes or to challenge the UCC Sale in the courts, the Registrant and Rucon have, since the Current Obligations Default, been discussing certain opportunities which the Agent and Mataponi, L.L.C. ("Mataponi"), a limited liability company controlled by Mr. Cohen's wife (who is a principal shareholder of the Registrant), have offered to the Registrant and Rucon if Mataponi is the successful bidder at the UCC Sale. These opportunities include the opportunity to: (1) facilitate the assignment of the indebtedness of Mr. Cohen secured by the Notes (and the collateral securing the Notes) from Bank Leumi to Mataponi, following which Mataponi and the Agent will consent to an extension in the maturity date of the Notes from July 31, 1997 to December 28, 2033 and the release of the pledged shares of Common Stock of the Registrant's and Rucon's subsidiary, Grant Products, Inc. ("Grant"), from the collateral securing the Notes; (2) satisfy the currently-unsatisfied judgment obtained against the Registrant by Morgan Guaranty Trust Company of New York ("Morgan"), have discontinued (with prejudice) the pending lawsuits initiated by Morgan against the Registrant and Rucon and have discharged and cancelled the two past due promissory notes held by Morgan which the Registrant had issued to Mr. Cohen and which Mr. Cohen had assigned to Morgan (all of the foregoing obligations to Morgan being collectively referred to as the "Morgan Obligations" and being described in the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1995), all of which could not be accomplished without (i) the availability of the shares of Common Stock of Grant (the 17 18 "Grant Stock") for their pledge to Grant's lender, Sumitomo Bank of California ("Sumitomo"), as security for a $3,000,000 term loan which would be upstreamed to Arlen to discharge and satisfy the Morgan obligations and (ii) the consent of the Agent to such term loan and the use of the proceeds thereof for such purpose; (3) satisfy, with the 25% of the net proceeds of the UCC Sale that the Registrant will retain for its residual interest, if Mataponi is the successful bidder for the Rucon Shares, certain secured obligations (the "Secured Obligations") to third parties who may be deemed to be affiliates of Mr. Cohen; and (4) attempt to acquire on favorable terms, with the assistance of Mataponi if Mataponi is the successful bidder for the Rucon Shares, two mortgage notes, secured by certain property on White Plains Road, Bronx, New York. After considering the opportunities (including the 38-year extension in the maturity date of the Notes) offered by Mataponi and the holders of the Notes to mitigate the anticipated loss of the Registrant's operating companies which will occur upon the involuntary UCC Sale of the Rucon Shares, the Registrant and Rucon entered into a Forbearance Agreement (the "Forbearance Agreement") with Mataponi and Mr. Cohen, dated as of January 5, 1996, which provides (assuming that Mataponi is the successful bidder for the Rucon Shares at the UCC Sale), among other things, that: (a) in consideration for the forbearances, extensions, opportunities and other benefits provided to the Registrant and Rucon under the Forbearance Agreement, they will not litigate or otherwise contest the acceleration of the Notes or the foreclosure and public sale of the Rucon Shares; (b) Rucon, as an accommodation to Mataponi, will acquire from Bank Leumi, pursuant to an Assignment and Assumption Agreement between Bank Leumi and Rucon (the "Assignment Agreement"), for $5,500,000 to be provided by Mataponi, and then assign to Mataponi, certain indebtedness (the "Leumi Debt") of Mr. Cohen to Bank Leumi, having a principal balance of approximately $12,000,000, which is secured by the Cohen Notes (which in turn are secured by, inter alia, the Rucon Shares and the Grant Stock); (c) in order to induce Mataponi and the Agent to consent to the release of the Grant Stock from the collateral for the Notes, Rucon will pledge to Bank Leumi, pursuant to a Restructuring Agreement between Bank Leumi and Mr. Cohen (the "Restructuring Agreement"), as collateral for indebtedness of Mr. Cohen to Bank Leumi in the principal amount of $2,722,513.33, 55% of the outstanding shares of capital stock of Rucon's wholly-owned subsidiary, Curtis Holding Corporation ("Curtis Holding"), and will cause Curtis Holding to pledge to Bank Leumi, as additional collateral therefor, 55% of the outstanding shares of capital stock of Curtis Partition Corporation ("Curtis Partition"); (d) upon the assignment to Mataponi of the Leumi Debt and the collateral therefor and the pledge of 55% of the capital stock of Curtis Holding and Curtis Partition to Bank Leumi, the Holders, Mataponi and the Agent will cause the Grant Stock to be released; (e) upon the release of the Grant Stock from the collateral for the Notes, it will be pledged to Sumitomo to induce Sumitomo to loan to Grant and a sister company, on a term loan basis, $3,000,000 (the "Sumitomo Advance"), which Sumitomo, Mataponi and the Agent would permit to be dividended through to Rucon, which would 18 19 pay these funds to the Registrant to obtain a release of certain obligations that had been assumed by Rucon from the Registrant in 1993; (f) upon the receipt of the aforesaid $3,000,000 payment from Rucon, the Registrant will use these funds to obtain from Morgan the satisfaction, discharge and cancellation of the Morgan Obligations; (g) the Registrant may attempt to acquire the Mortgage Notes, which will mature on December 28, 2034, on favorable terms, with the assistance of Mataponi if Mataponi is the successful bidder for the Rucon Shares; (h) in addition to receiving 25% of the net proceeds from the UCC Sale of the Rucon Shares for the Registrant's residual interest therein (which the Registrant will apply to the satisfaction of the Secured Obligations), the Registrant will receive from Rucon, if Mataponi is the successful bidder for the Rucon Shares, a $2,000,000 promissory note (the "$2,000,000 Note") of Rucon's then parent company, payable in quarterly installments over a two year period; and (i) the Registrant, on the one hand, and Rucon and its subsidiaries, on the other hand, will exchange mutual releases, the Registrant will deliver a general release to Mataponi and the Registrant will be released from any further obligations under the 1993 Current Obligations Agreement between Rucon and Mr. Cohen. On January 16, 1996, the transactions described above in clauses (b), (c), (d), (e) and (f) were consummated and, on January 17, 1996, the Agent notified the Registrant and Rucon that the UCC Sale has been scheduled for February 6, 1996. If the UCC Sale takes place as contemplated (a situation which is outside the control of the Registrant and in which the Registrant is not a participant) and Mataponi is the successful bidder for the Rucon Shares, the Forbearance Agreement requires that (1) the Agent remit 25% of the net proceeds from the UCC Sale to the Registrant for its residual interest in the Rucon Shares, (2) the Holders, Mataponi and the Agent withdraw the previously-delivered acceleration notice and extend the maturity date of the Notes to December 28, 2033, (3) Rucon deliver the $2,000,000 Note to the Registrant and (4) Mataponi assist the Registrant in attempting to acquire the Mortgage Notes on a favorable basis. In the event that the UCC Sale occurs, the Registrant will lose all of its operating companies and cease to have any source of income from operations in the near term. However, the Registrant will receive 25% of the net proceeds from the UCC Sale and, if Mataponi is the successful bidder for the Rucon Shares, will have the installment payments from the $2,000,000 Note to meet its short-term cash needs and the opportunity to acquire the Mortgage Notes to add long-term asset value to its balance sheet. The Notes will have been extended for 38 years (during which time interest will accrue at the current rate of 8% per annum) and will no longer be subject to default other than for non-payment of principal or interest or bankruptcy-related events. As extended, the Notes will provide for the Holders to receive 50% of the Registrant's Net Income (as defined in the Forbearance Agreement) quarterly on account of the indebtedness under the Notes and will, at the request of the Holders, be secured by certain assets which may be acquired by the Registrant within the next 18 months. In entering into the Forbearance Agreement, the Registrant believed that if the benefits thereof are not available, the Registrant would be unable to pay the acceperated Notes and would be compelled to liquidate, as a result which the Registrant would cease to continue as a viable business entity. If the Forbearance Agreement is consummated, the Registrant retains its substantial net operating loss carryforwards and, having satisfied the Morgan Obligations and, with the cooperation of Mataponi, having achieved the release of the Notes and the collateral therefor from the liens thereon of Bank Leumi, expects to seek new business opportunities. In the event that the UCC sale occurs but Mataponi is not the successful bidder for the Rucon Shares, the Registrant will be entitled to payment for its 25% residual interest therein. However, inasmuch as the transactions contemplated by the Forbearance Agreement are intended to be integrated parts of a single transaction which can be consummated only in its entirety, the Registrant will not receive certain of the benefits provided for in the Forbearance Agreement, including the extension in the maturity date of the Notes (which will then remain immediately due and payable in full) and the $2,000,000 promisory note which the Registrant considers necessary to meet its short-term operating expenses. The Registrant will also have certain obligations to Mataponi, including obligations to pay to the holders of the Notes an amount equal to the Sumitomo Advance and to deliver the Grant Stock back to Mataponi. If Mataponmi is not the successful bidder for the Rucon Shares, the Agent and Mataponi will continue to hold security interests in the outstanding stock of Arlen Automotive, Inc., which is wholly-owned by Rucon and is the direct parent of all of the Registrant's operating subsidiaries other than Curtis Partition. The foregoing summary of the transactions described in the Forbearance Agreement, the Assignment Agreement and the Restructuring Agreement is qualified in its entirety by reference to such Agreements, copies of which are filed as Exhibits 10.15, 10.16 and 10.17, respectively, to this Report. 19 20 Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits: Exhibit Number Description ------- ----------- 10.15 Forbearance Agreement dated as of January 5, 1996 among the Registrant, Rucon Services Corp., Mataponi, L.L.C. and the holders of certain of the Registrant's 5-1/4% Notes by their agents, Arthur G. Cohen and Philip J. Levien, and/or substitute agent, Mataponi, L.L.C. 10.16 Assignment and Assumption Agreement dated as of January 16, 1996 between Bank Leumi Trust Company of New York and Rucon Services Corp. 10.17 Restructuring Agreement dated as of January 16, 1996 between Bank Leumi Trust Company of New York and Arthur G. Cohen. (b) Reports on Form 8-K. None. 20 2114 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. THE ARLEN CORPORATION (Registrant) By: /s/ Allan J. Marrus ------------------------------------ Date: January 19, 1996 By------------------------------------- Allan J. Marrus, President Date: October 11, 1996 By: /s/ David S. Chaiken ------------------------------------ Date: January 19, 1996 By------------------------------------- David S. Chaiken, Treasurer 21Date: October 11, 1996 14 2215 EXHIBIT INDEX Exhibit Page NumberNo. Description No. ------- ----------- ---- 10.15 Forbearance Agreement dated as of January 5, 1996 among the Registrant, Rucon Services Corp., Mataponi, L.L.C. and the holders of certain of the Registrant's 5-1/4% Notes by their agents, Arthur G. Cohen and Philip J. Levien, and/or substitute agent, Mataponi, L.L.C. 10.16 Assignment and Assumption Agreement dated as of January 16, 1996 between Bank Leumi Trust Company of New York and Rucon Services Corp. 10.17 Restructuring Agreement dated as of January 16, 1996 between Bank Leumi Trust Company of New York and Arthur G. Cohen.27 Financial Data Schedule