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, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(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 (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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 - 29,770,234 shares outstanding as of January 4,
1996 (excluding shares owned by subsidiaries of the Registrant)
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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 sheets -- November 30, 1995 and 1994
(unaudited) 4
Consolidated balance sheet -- February 28, 1995 (unaudited) 5
Consolidated statements of operations -- Nine and three
months ended November 30, 1995 and 1994 (unaudited) 6
Consolidated statements of cash flows -- Nine
months ended November 30, 1995 and 1994 (unaudited) 7-8
Notes to consolidated financial statements 9-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-15
PART II. OTHER INFORMATION 17-20
SIGNATURES 21
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PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($000s Omitted)
(UNAUDITED)
================================================================================
November 30,
------------
ASSETS 1995 1994
------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,058 $ 1,149
Certificates of deposit 228 222
Accounts receivable, net 10,661 10,912
Inventories 6,311 4,581
Other current assets 490 291
--------- ---------
TOTAL CURRENT ASSETS 18,748 17,155
PROPERTY AND EQUIPMENT, net 1,397 934
OTHER ASSETS 1,622 713
--------- ----------
TOTAL ASSETS $ 21,767 $ 18,802
======== =========
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 2,293
Accrued interest payable (including $827 and $786 due to
related parties in 1995 and 1994) 1,011 934
Accrued state income taxes 1,044 1,212
Accrued other 10,687 10,414
Current portion of long-term obligations (including $299
and $240 due to related parties in 1995 and 1994) 455 343
--------- ---------
TOTAL CURRENT LIABILITIES 18,817 20,538
LONG-TERM OBLIGATIONS (including $1,192 and $1,500
due to related parties in 1995 and 1994) 4,428 1,500
SUBORDINATED AMOUNTS DUE TO RELATED PARTIES 125,483 116,364
--------- ---------
TOTAL LIABILITIES 148,728 138,402
COMMITMENTS AND CONTINGENCIES
CAPITAL DEFICIT (126,961) (119,600)
--------- ---------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 21,767 $ 18,802
========= =========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
February 28, 1995
($000s Omitted)
(UNAUDITED)
================================================================================
ASSETS
------
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
=========
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($000s Omitted)
(UNAUDITED)
================================================================================
Nine months ended Three months ended
November 30, November 30,
------------ ------------
1995 1994 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
OTHER (CHARGES) CREDITS:
Interest expense (including amounts
due to related parties of $7,348 and
$2,450 in 1995 and $6,811 and $2,098
in 1994) (7,997) (7,332) (2,641) (2,420)
Other income 24 10 1 4
------- ------- ------- -------
Net loss $(5,469) $(3,505) $(2,598) $(1,379)
======= ======= ======= =======
LOSS PER COMMON SHARE $ (0.18) $ (0.11) $ (0.09) $ (0.04)
======= ======= ======= =======
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
================================================================================
Nine months ended
November 30,
------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($5,469) ($3,505)
------- -------
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 456 476
Provision for losses on accounts
receivable (470) 356
Increase in subordinated amounts due related
parties in exchange for interest 7,102 6,695
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)
Inventories (640) (1,011)
Other current assets 61 -
Other assets (1,070) -
Increase (decrease) in liabilities:
Accounts payable (1,499) (84)
Accrued interest payable 228 102
Accrued state income taxes (93) 202
Accrued other liabilities 639 1,127
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Total adjustments 6,120 5,807
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Net cash provided by operating activities 651 2,302
------- -------
See notes to consolidated financial statements
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THE ARLEN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
($000s Omitted)
(UNAUDITED)
(Continued)
================================================================================
Nine months ended
November 30,
------------
1995 1994
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in certificates of deposit (561) (4)
Investment in capital assets (298) (279)
Acquisition of new automotive aftermarket
business, net of cash acquired (54) -
-------- --------
Net cash used in investing activities (913) (283)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving credit line (13,424) (28,861)
Proceeds from revolving credit line 13,982 27,572
Principal payments on short-term borrowings (622) (5)
Principal payments on long-term borrowings (362) (237)
Principal payments on subordinated debt - (57)
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Net cash used by financing activities (426) (1,588)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS (688) 431
CASH AND CASH EQUIVALENTS, at
February 28, 1995 and 1994 1,192 718
-------- --------
CASH AND CASH EQUIVALENTS, at
November 30, 1995 and 1994 $ 504 $ 1,149
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months ended
November 30, 1995 and 1994 for interest $ 372 $ 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.
See notes to consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of November 30, 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 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.
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 nine month
period ended November 30, 1995 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. For further information, reference is made to the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements included in the 1995 10-K.
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THE ARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of November 30, 1995
(UNAUDITED)
(Continued)
================================================================================
Note B -- Acquisitions
The accompanying financial statements reflect the acquisition in May 1995, by a
newly-organized, wholly-owned subsidiary 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 earnings 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 payments 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
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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'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. Although the actuarial valuation of the Plan as of
March 1, 1993 (the latest Plan valuation) indicated that the unfunded actuarial
accrued liability was approximately $850,000, the Registrant received an
examination report in July 1995 from the IRS asserting 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 this
examination report, the Registrant 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 with the $850,000 provision
already reflected in the accompanying balance sheets.
Note F -- 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 November 30, 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 the nine and
three month periods ended November 30, 1995 and 1994, respectively, inclusive of
Class B common 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 CONDITION AND RESULTS OF OPERATIONS
================================================================================
Liquidity and Capital Resources
At November 30, 1995, the Registrant had a shareholders' deficit of $126,961,000
and its ratio of current assets 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 directors of the Registrant, or to persons related to them or their
trusts or affiliated entities, in 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
result 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
cease to continue as a viable business entity.
If the UCC sale shall take place and 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 of an unsatisfied judgment, past due promissory notes and a maturity
date for the Notes which is less than two years away,
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THE ARLEN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
================================================================================
Liquidity and Capital Resources (Continued)
though the Registrant must still 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
necessitated 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.
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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 in Note B of the Notes to Consolidated Financial
Statements included in this Report, neither the accompanying financial
statements nor this management's discussion of the results of operations of the
Registrant for the three and nine months ended November 30, 1995 reflect the
operations of the Registrant's newest subsidiary, which was acquired on August
17, 1995.
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PART II - OTHER INFORMATION
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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
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"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
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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.
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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.
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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
/s/ Allan J. Marrus
------------------------------------
Date: January 19, 1996 By Allan J. Marrus, President
/s/ David S. Chaiken
------------------------------------
Date: January 19, 1996 By David S. Chaiken, Treasurer
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EXHIBIT INDEX
Exhibit Page
Number 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.