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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1995
__ 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 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1165854
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
129 Church Street, Suite 717, New Haven, Connecticut 06510
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 867-4090
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 8, 1995, 1,105,204 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock outstanding of The Aristotle
Corporation held by nonaffiliates was approximately $4,175,852.
Documents Incorporated by Reference
Portions of the Registrant's 1995 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of the Registrant's
fiscal year are incorporated by reference to Part III.
PART I
ITEM 1. BUSINESS.
GENERAL. The Aristotle Corporation ("Aristotle") is a holding company for
its subsidiary, Aristotle Sub, Inc. ("ASI"). ASI is a holding company for The
Strouse, Adler Company ("Strouse"). Strouse designs, manufactures and markets
women's intimate apparel. Unless the context indicates otherwise, all references
herein to the "Company" include Aristotle, ASI and Strouse.
PRODUCTS. The Company designs, manufactures and markets two specific
categories of women's intimate apparel: specialty brassieres and women's
shapewear. Specialty brassieres are specifically designed to provide support and
figure enhancement for women who are wearing apparel with backless, strapless or
halter features, such as strapless and/or low back line dresses and gowns,
halter tops and wedding gowns. The Company maintains a strong market position in
three particular categories of specialty brassieres: strapless, backless
strapless, and backless convertible/halter. Women's shapewear products provide
support and control for a woman's abdominal area in the same manner as the
traditional girdle. Such shapewear products include so-called "body briefers,"
medium control panties, and medium and heavy control bottoms that may extend
from the bottom of a woman's brassiere to just above her knee. For fiscal year
1995, approximately 41% of the Company's total net sales were attributable to
its lines of specialty brassieres, and the remaining 59% of total net sales were
attributable to its lines of women's shapewear.
The Company distributes its products under several brand names, including
Smoothie, Fleur de Lace, Smooth Advantage, Renaissance Rose, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand names, Smoothie and
Fleur de Lace, are 40 and 18 years old, respectively. See the Consolidated
Financial Statements contained elsewhere in this report for financial
information relating to the Company's business.
BUSINESS STRATEGY. Aristotle's strategy is to acquire other companies,
including companies within the women's specialty intimate apparel field with
manufacturing processes and distribution channels which complement Strouse's
operations. Although Aristotle is not currently engaged in a search for an
acquisition, Aristotle intends to review any acquisition opportunities which
come to its attention. Strouse's strategy is to build on the strength of its
brand names with consumer-oriented marketing programs in its existing department
and specialty store channels of distribution and to expand its distribution on a
selective basis in the private label segment with specific product lines in
catalogs and national chains. Strouse attributes the strength of its private
label and brand names to the quality, price, fit and design of its products.
MARKETING AND DISTRIBUTION. The Company's products are marketed and
distributed throughout the United States to retailers. A network of 13 sales
executives, who are full-time employees of the Company, are responsible for
marketing the Company's products in the continental United States. These sales
executives are compensated by combinations of salary, commissions and other
incentives based upon net sales. Alfred A. Kniberg, President and Chief
Operating Officer of Strouse, oversees the sales executives and takes an active
role in supervising the marketing and distribution process.
The Company currently sells products under its brand names to the largest
department stores in the United States, including Macy's, May Company,
Dillard's, Bloomingdales, Dayton Hudson, Broadway, Nordstroms, Nieman Marcus and
Lord & Taylor, as well as to catalogs and other leading retailers such as
Spiegel. Since 1991, the Company has sold private label goods to accounts such
as Victoria's Secret, Dillard's and J.C. Penney. Two of the Company's customers
accounted for 24.6% of total net sales for fiscal 1995.
The Company believes that there has been a consolidation of retailers into
larger entities during the past few years. In addition, retailers have attempted
to consolidate the purchases of their products by reducing their number of
suppliers. The Company cannot predict what effect, if any, these trends will
have on its business.
The Company's sales are not substantially affected by seasonal consumption.
However, the Company generally experiences reduced sales during the months of
December and January.
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MANUFACTURING AND RAW MATERIALS. The Company conducts some manufacturing
operations consisting primarily of cutting, sewing (approximately 11% of sewing)
and packaging, at its facility located in New Haven, Connecticut. All other
manufacturing of the Company's products is subcontracted to manufacturers in the
Caribbean (primarily the Dominican Republic and Jamaica) and the continental
United States. Approximately 85% of the Company's products are manufactured and
sewn in the Caribbean, with approximately 60% of the Company's products
manufactured and sewn in the Dominican Republic. Accordingly, the Company's
operations may be adversely affected by political instability or other factors
which may occur from time to time in the Dominican Republic or elsewhere in the
Caribbean. This concentration of subcontractors in the Caribbean can also expose
Strouse to abnormal production cost increases. Strouse continues to seek to
develop multiple sources of manufacturing.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period. Management believes
that the lease agreement will help provide the capacity needed to support future
growth. Approximately 20% of the Company's products are manufactured and sewn in
Jamaica.
The design and manufacture of specialty brassieres and women's shapewear
are complex, requiring specialized and sophisticated machinery and tools. The
complex design and manufacturing process results in a higher per unit cost and a
lower volume of units being produced, as compared to the design and manufacture
of simpler garments.
The Company uses various synthetic fibers and natural materials, such as
cotton, in the manufacture of its products. These raw materials are generally
available from multiple sources; the Company purchases the majority of its raw
materials from sources within the United States.
COMPETITION. The women's intimate apparel industry is highly competitive.
The Company's products compete for customers with numerous manufacturers of
well-known brands of women's intimate apparel. With respect to specialty
brassieres, the Company's primary competition is from the Trueform, Warners,
Maidenform, Playtex and Vanity Fair lines of specialty brassieres; with
respect to shapewear, the Company competes primarily with the Olga, Vanity
Fair, Trueform, Playtex and Bali lines of shapewear.
The principal competitive factors in the intimate apparel market are
quality, price, fit and design of products, engineering, customer and brand
loyalty, and customer service (including maintenance of sufficient inventories
for timely delivery). Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more resources and effort
than the Company in areas such as marketing and product development.
EMPLOYEES. As of September 15, 1995, the Company employed 184 full time
personnel. None of the Company's employees are members of a union.
BANK FINANCING. On November 9, 1994, Strouse and Fleet Bank, National
Association (the "Bank") entered into a credit agreement (the "Credit
Agreement") that provides for a line-of-credit facility and two term loan
facilities (the "Credit Facilities"). The line-of-credit facility provides for
maximum borrowing of $8,500,000 through October 1995, $11,000,000 thereafter
through October 1996, and $13,000,000 thereafter through October 1997. The
principal amounts of the term loans are $2,500,000 and $225,000, respectively.
The Credit Agreement matures on October 31, 1997. Strouse uses the Credit
Facilities for working capital and other general corporate purposes.
Within the minimum limits set forth above, borrowing under the line-of-
credit (the "Borrowing Base") is limited to 80% of eligible accounts receivable,
plus the lesser of (i) the sum of 50% of eligible raw materials, 50% of eligible
finished goods, and 20% of eligible work-in-process, or (ii) the inventory cap
of $5,000,000 through October 1995, $6,000,000 thereafter through October 1996,
and $7,000,000 thereafter through October 1997. In addition, the Credit
Agreement permits advances to exceed the Borrowing Base amount ("Overadvances")
by up to $500,000 through June 1995, $1,000,000 thereafter through June 1996,
and $1,500,000 thereafter through October 1997 (so long as the total line-of-
3
credit is not more than the maximum borrowing allowed and Strouse reduces any
Overadvance to zero for a thirty day period in each July).
The line-of-credit bears interest at a rate per annum equal to either .25%
over the Bank's prime rate, the Bank's fixed rate, or 2.0% over LIBOR (London
Interbank Offer Rate), at the option of Strouse. The term loans bear interest at
a rate per annum equal to either .25% over the Bank's prime rate, the Bank's
fixed rate, or 2.5% over LIBOR, at the option of Strouse. Currently and through
October 1998, the interest rate on the line-of-credit is fixed at 8.3% per annum
for the first $3,500,000 and varies at .25% over the Bank's prime rate for the
remaining balance. The per annum interest rates on the $2,500,000 and $225,000
term loans were fixed until October 1998 at 8.55% and 7.25%, respectively.
The Credit Facilities are secured by a lien on all assets of Strouse. In
addition, ASI has guaranteed the Credit Facilities. To secure ASI's guarantee of
the Credit Facilities, ASI has pledged and recourse under the ASI guaranty is
limited to, all of the capital stock of Strouse that is owned by ASI.
Strouse must maintain certain financial ratios and satisfy various other
covenants in connection with the Credit Facilities (See Note 4 of Notes to
Consolidated Financial Statements). At June 30, 1995, Strouse was not in
compliance with certain of the covenants. On October 6, 1995, the Company and
the Bank executed a Letter of Intent (the "Letter of Intent") pursuant to which:
(i) they agreed in principle to a modification of certain terms of the Credit
Agreement; and (ii) the Bank waived Strouse's non-compliance with such covenants
through September 30, 1995.
Pursuant to such Letter of Intent, which is conditioned on a closing taking
place on or before October 31, 1995, the Bank and the Company have agreed: (i)
to modify the maturity date of the Credit Agreement to October 31, 1996; (ii) to
modify the maximum borrowing under the line-of-credit facility to $8,750,000
through October 31, 1996; (iii) to reduce the maximum amounts that the Bank will
advance against inventory to $5,000,000 through October 31, 1996; (iv) to reduce
the amount of Overadvances that are available to $1,000,000 through December
1995, and to $500,000 at all times thereafter; (v) that the interest rate on the
line-of-credit will be increased to 1.0% over the Bank's prime rate, or 3.0%
over LIBOR; (vi) that Aristotle and ASI will unconditionally guarantee the
$2,500,000 term loan; (vii) that the Company will make a prepayment on the Term
Loans of a portion of the amount, if any, of the tax refund received and
retained by the Company after the resolution of the Federal Deposit Insurance
Corporation's ("FDIC") claim that it is entitled to such tax refund. See "Legal
Proceedings-FDIC Tax Claim."
As of September 25, 1995, the balances outstanding on the line-of-credit
was $6,717,000 and the amounts outstanding under the term loans were $2,347,000
and $150,000, respectively. As of September 25, 1995, subject to the granting of
the Bank waiver, the additional borrowing available on the line-of-credit was
$448,000.
BACKGROUND REGARDING ARISTOTLE. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was Aristotle's only subsidiary and
which, on October 2, 1992, was seized by the FDIC. On April 11, 1994, Aristotle
acquired (the "Acquisition") Strouse pursuant to the terms of a Capital
Contribution Agreement and certain other agreements (collectively, the
"Acquisition Agreements"). As a result of the Acquisition, Aristotle currently
owns approximately 97% of the issued and outstanding common stock of ASI, which
in turn owns all of the outstanding capital stock of Strouse. Aristotle
therefore currently indirectly owns 97% of the issued and outstanding capital
stock of Strouse and Aristotle's business is the business of Strouse. In May
1994, the Company effectuated a one for ten reverse stock split.
Aristotle was organized in 1986 and is chartered in the State of Delaware.
On April 14, 1993, the Company changed its name from First Constitution
Financial Corporation to The Aristotle Corporation.
ITEM 2. PROPERTIES.
Strouse's principal facility is located in New Haven, Connecticut (the "New
Haven Facility"). Such facility is leased from New England Resources Limited
Partnership ("NERLP"), consists of approximately 117,500 square feet, and houses
Strouse's general administrative offices. In addition, the New Haven Facility is
used for manufacturing, packaging, storage, quality control, receiving and
distribution. The leases for the New Haven Facility expire on December 31, 1999
and provide for annual rent of approximately $3.83 per square foot in fiscal
1995. One of such leases, involving 11,650 square
4
feet, may be canceled upon six months prior notice from either party. NERLP is
affiliated with David S. Howell, a former director of the Company and the former
Chairman and Chief Executive Officer of Strouse, and Ann-Marie Howell, a former
Vice President and the former Secretary of Strouse.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period for $700,000. Under
the terms of the lease, Strouse makes quarterly payments of $81,250, $87,500,
and $93,750, for calendar years 1995, 1996 and 1997, respectively. Management
believes that the lease agreement will help provide the capacity needed to
support future growth. Approximately 20% of the Company's products are
manufactured and sewn in Jamaica.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to the following material legal proceedings:
The Stockholders Litigation. During 1990, two separate purported
stockholder class actions were commenced in the United States District Court for
the District of Connecticut and a consolidated complaint, captioned In Re: First
Constitution Stockholders Litigation, was filed on August 3, 1990 (the
"Stockholder Litigation"). The consolidated complaint alleges, among other
things, that during the purported class period (January 25, 1989 to April 5,
1990), the Company, a former director and certain former officers acted to
inflate the price of Common Stock of Aristotle (the "Common Stock") by issuing
materially false and misleading statements or omissions. The consolidated
complaint also alleges claims based on common law fraud and misrepresentation,
and seeks unspecified damages, as well as recovery of attorneys' fees. On
October 14, 1992, the court issued a stay of all proceedings in the Stockholder
Litigation as a result of the receivership proceedings concerning the Bank. On
November 15, 1993, the plaintiffs filed a motion with the court to vacate any
existing stay of proceedings. The Company filed a response on December 9, 1993,
opposing this request pending a decision on a motion for a reconsideration of
the denial of an earlier filed motion to dismiss. On January 13, 1994, the court
denied the plaintiffs' motion to vacate any existing stay of proceedings and
granted the Company's motion for reconsideration of the denial of an earlier
motion to dismiss. On November 2, 1994 defendants' renewed motion for
reconsideration was denied. The plaintiffs in the Stockholder Litigation have
not alleged a specific amount of damages in their claim. The Company is not able
to determine at this time what the outcome of such litigation will be or what
effect it may have upon the Company. Although the Company believes any liability
arising out of the Stockholder Litigation would be covered in whole or in part
by directors' and officers' insurance policies, the magnitude of any amount
which may be awarded or agreed to be paid in connection therewith could exceed
such insurance.
FDIC Tax Claim. On April 19, 1995, the FDIC filed a complaint related to
this matter captioned Federal Deposit Insurance Corporation vs. The Aristotle
Corporation, in the United States District Court for the District of Connecticut
(Civil No. 395CV00684TFGD). The FDIC is claiming entitlement to income tax
refunds previously received and yet to be received by Aristotle. Although
Aristotle believes that the FDIC is not entitled to the entire amount of the
refunds or to damages for Aristotle's refusal to pay the refunds to the Bank or
to the FDIC, Aristotle established a reserve of $3,982,000 for this potential
claim as of June 30, 1993. Currently, amounts equal to the refunds that have
been received by Aristotle, $3,982,000, have been deposited in a special escrow
account. Aristotle and the FDIC have agreed that certain future refunds,
including a refund of approximately $1,300,000, will also be deposited in a
separate escrow account. At this time, the Company is unable to predict the
outcome of this litigation. See Note 5 of the Notes to Consolidated Financial
Statements.
Caldrello Claim. On November 4, 1994, the Company received an amended
complaint (the "Amended Complaint") relating to a legal proceeding first filed
in 1993 and entitled Joseph M. Caldrello vs. Federal Deposit Insurance
Corporation, United States Federal District Court, District of Connecticut,
Civil No. 3:93CV-1560(AHN). In the Amended Complaint, the plaintiffs alleged,
among other things, that the Bank breached a contractual obligation to the
plaintiffs, breached a deposit account contract with the plaintiffs, acted in
bad faith and negligently mismanaged the plaintiffs' deposit accounts. Robert
Carney and John Crawford, as the former Chairman of the Board and President of
the Bank, respectively, were named as defendants for the first time in the
Amended Complaint. Mr. Crawford is currently the Chief Executive Officer and a
Director of Aristotle. Pursuant to the Company's Bylaws, Aristotle could have
been required to indemnify Mr. Carney and Mr. Crawford against expenses,
judgments and amounts paid in settlement of the claim. The
5
plaintiffs sought in excess of $38,000,000 in damages. On March 8, 1995, the
court dismissed this matter as barred by the statute of limitations.
FDIC Investigation Re: Certain Bank Loan Losses. The Company is aware that
the FDIC is preparing claims against certain former officers and directors of
the Bank based on alleged negligence in approving certain loans that the Bank
made and subsequently lost money on when the borrowers defaulted. Under Delaware
law and under Aristotle's bylaws, Aristotle may have an obligation to indemnify
these officers and directors for expenses and liabilities incurred by them in
connection with any action the FDIC may bring to enforce its claims. Due to the
fact that the FDIC has not yet defined its claims with precision, and given the
uncertainties of litigation, the Company is unable to determine what the outcome
of these claims will be or what effect, if any, these FDIC claims will have on
the financial condition of the Company.
If an amount awarded or paid in connection with any of the legal
proceedings described above (or any other event or circumstance) caused the net
worth of Aristotle to fall below $1,000,000 on or before April 11, 1999, then,
under certain circumstances, certain holders of the preferred stock of ASI have
the right to compel a partial unwinding of the Acquisition. See Note 1 of the
Notes to Consolidated Financial Statements.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The table below sets forth the high and low prices per share of Common
Stock for the periods indicated, adjusted to reflect a 1 for 10 reverse stock
split that was effective on May 11, 1994.
Market Price
--------------------------------
FISCAL YEAR ENDED JUNE 30, 1995: High Low
June 30 5 3/4 3
March 31 5 1/2 4
December 31 6 1/4 4
September 30 7 4 1/2
FISCAL YEAR ENDED JUNE 30, 1994:
June 30 6 4 1/2
March 31 6 7/8 4 3/8
December 31 8 3/4 3 1/8
September 30 9 1/16 4 3/8
The Common Stock is listed for trading on the Nasdaq SmallCap Market under
the symbol "ARTL." As of September 8, 1995, there were approximately 4,300
stockholders of record and 3,000 additional beneficial stockholders
(stockholders holding Common Stock in brokerage accounts). As of September 8,
1995, the last reported sale price per share of Common Stock was $4. It is
unlikely that the Company will pay any dividends with respect to its Common
Stock in the foreseeable future.
6
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following are selected consolidated financial data for the Company for
the fiscal years ended December 31, 1990, 1991 and 1992, the six-month periods
ended June 30, 1992 and 1993, and for the fiscal years ended June 30, 1994 and
1995. The selected consolidated financial data presented below should be read in
conjunction with the Consolidated Financial Statements of the Company, together
with the Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report.
Six-Months Ended Fiscal Years Ended
Fiscal Years Ended December 31, June 30, June 30,
(unaudited)
---------------------------------------------------------------------------------
1990 1991 1992(1) 1992 1993(2) 1994 1995
---------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ --- $ --- $ --- $ --- $ --- $ 5,538 $ 21,701
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Costs of goods sold --- --- --- --- --- 3,859 16,447
Operating expenses 1,954 1,729 1,484 444 651 1,977 5,481
Reserve for subsidiary litigation --- 1,510 (1,510) --- --- --- ---
Other income (expense) (9,202) 108 1,292 1,096 174 159 (435)
---------- --------- --------- --------- --------- --------- ----------
Income (loss) from continuing operations
before income taxes and minority interest (11,156) (3,131) 1,318 652 (477) (139) (662)
Income tax expense (benefit)(3) (566) 312 (1,481) (1,609) 4,287 (20) 25
Minority interest --- --- --- --- --- (60) (211)
--------- --------- --------- --------- --------- ---------- ----------
Income (loss) from continuing operations ( 10,590) ( 3,443) 2,799 2,261 ( 4,764) ( 179) ( 898)
Loss from discontinued operations ( 80,314) ( 53,172) ( 59,727) ( 34,278) --- --- ---
---------- ---------- ---------- ---------- --------- --------- ---------
Net loss ($ 90,904) ($ 56,615) ($ 56,928) ($ 32,017) ($ 4,764) ($ 179) ($ 898)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss) per share:
Continuing operations ($ 9.67) ($ 3.14) $ 2.55 $ 2.06 ($ 4.35) ($ 0.16) ($ 0.81)
Discontinued operations ( 73.34) ( 48.56) ( 54.51) ( 31.28) --- --- ---
---------- ---------- ---------- ---------- --------- --------- ---------
Net loss per share ($ 83.01) ($ 51.70) ($ 51.96) ($ 29.22) ($ 4.35) ($ 0.16) ($ .81)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding (4) 1,095,033 1,095,072 1,095,643 1,095,652 1,096,017 1,087,039 1,113,250
CONSOLIDATED BALANCE SHEET DATA:
Total assets 124,687 69,925 11,371 37,618 10,545 23,162 26,820
Stockholders' equity 124,435 67,827 10,897 35,810 6,159 5,805 4,996
Long-term debt -- -- -- -- -- 251 10,274
_________________________
(1) In October 1992, the FDIC was appointed receiver for the Bank. Substantially
all the Bank's operations have been shown as discontinued.
(2) Effective June 30, 1993, the Company changed its fiscal year end from
December 31 to June 30.
(3) Income tax expense for the six-months ended June 30, 1993 included a reserve
of $4,300 for a tax claim by the FDIC.
(4) The number of shares outstanding has been adjusted to reflect the one for
ten reverse stock split that was effective on May 11, 1994.
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SELECTED FINANCIAL DATA OF STROUSE
(AMOUNTS IN THOUSANDS)
The following are selected financial data for Strouse for the fiscal years
ended August 31, 1991 and 1992 and June 30, 1993, 1994 and 1995. The selected
financial data for the fiscal years ended June 30, 1993 and 1994 have not been
audited, but, in the opinion of the management of Strouse, all adjustments
necessary for a fair presentation have been included. All such adjustments are
of a normal, recurring nature. The selected financial data presented below
should be read in conjunction with the Consolidated Financial Statements of the
Company, together with the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Fiscal Years Ended Fiscal Years Ended June 30,
August 31, (unaudited) (unaudited)
------------------------ -------------------------------------
1991 1992 1993 1994 1995
------------------------ -------------------------------------
Statements of operations data:
Net sales $11,891 $13,019 $14,966 $18,267 $21,701
-------- -------- -------- -------- --------
Costs and expenses:
Costs of goods sold (1) 8,402 8,515 9,996 12,831 16,403
Product development 255 375 378 433 485
Selling, general and administrative (2) 2,825 3,051 3,428 4,362 4,134
Restructuring charge -- -- -- -- 219
Interest expense 450 387 395 486 823
-------- -------- -------- -------- --------
11,932 12,328 14,197 18,112 22,064
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes (41) 691 769 155 (363)
Income tax expense (benefit) -- 20 191 (98) (45)
-------- -------- -------- -------- --------
Net income (loss) ($ 41) $ 671 $ 578 $ 253 $ (318)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 714 $5,360 $5,429 $ 1,924 $ 10,604
Total assets 5,537 7,107 7,977 12,945 16,571
Long-term debt 823 4,863 4,551 251 10,274
Stockholders' equity 267 937 1,417 2,400 2,083
_________________________
(1) Costs of goods sold for the fiscal year ended June 30, 1994 includes $89 in
transaction costs incurred in connection with the Acquisition.
(2) Selling, general and administrative expenses for the fiscal year ended June
30, 1994 include $491 in transaction costs incurred in connection with the
Acquisition.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
CHANGES IN THE BUSINESS OF ARISTOTLE AND THE METHODOLOGY FOR MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Aristotle's business has changed substantially over the last three years.
See "Item 1. Business-Background Regarding Aristotle." Aristotle has been, and
continues to be, a holding company for its subsidiaries. From 1986 to 1992, its
sole subsidiary was the Bank. From the time the Bank was seized by the FDIC in
October 1992, until April 1994 when Aristotle acquired Strouse, Aristotle had no
operating subsidiaries. From April 1994 on, the assets of the Company primarily
consisted of the assets of Strouse, and the operations of the Company were
substantially comprised of the operations of Strouse.
This discussion and analysis of financial condition and results of
operations will discuss and analyze the results of operations of both the
Company, on a consolidated basis, and Strouse, on a stand alone basis. It will
also discuss and analyze the financial condition of the Company on a
consolidated basis. This discussion and analysis of financial condition and
results of operations have been derived from, and should be read in conjunction
with, the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere in this report. Effective June 30, 1993, the
Company changed its fiscal year end from December 31 to June 30.
RESULTS OF OPERATIONS OF THE COMPANY
FISCAL YEAR ENDED JUNE 30, 1995 AS COMPARED TO THE YEAR ENDED JUNE 30, 1994
The Company's net sales for the fiscal year ended June 30, 1995 were
$21,701,000 versus net sales of $5,538,000 for the year ended June 30, 1994. The
increase reflects the operations of its main subsidiary, Strouse, for the entire
year ended June 30, 1995, but the fiscal year ended June 30, 1994 only included
the operations of Strouse for the period April 12, 1994 to June 30, 1994.
The Company's gross profit for the fiscal year ended June 30, 1995 was $
5,254,000 versus gross profit of $1,679,000 for the year ended June 30, 1994.
The increase reflects the operations of its main subsidiary, Strouse, for the
entire year ended June 30, 1995, but the fiscal year ended June 30, 1994 only
included the operations of Strouse for the period April 12, 1994 to June 30,
1994.
Operating expenses includes selling, general and administrative, product
development, and restructuring charges. Selling, general and administrative
expenses for the fiscal year ended June 30, 1995 were $4,777,000 versus
$1,875,000 for the year ended June 30, 1994. Expenses incurred at Aristotle were
$643,000 for the year ended June 30, 1995 versus $967,000 for the fiscal year
ended June 30, 1994, which mainly reflects reductions in compensation of
officers. Aristotle expenses included board of directors fees, corporate
insurance costs, stockholder expenses and professional fees. Expenses incurred
by Strouse for the fiscal year ended June 30, 1995 were $4,134,000 versus
$908,000 for the year ended June 30, 1994. The increase at Strouse reflects the
operations for the entire year ended June 30, 1995, but the fiscal year ended
June 30, 1994 only included the operations of Strouse for the period April 12,
1994 to June 30, 1994.
Product development costs for the Company for the fiscal year ended June
30, 1995 were $485,000 versus $102,000 for the year ended June 30, 1994. The
increase reflects the operations of its main subsidiary, Strouse, for the entire
year ended June 30, 1995, but the fiscal year ended June 30, 1994 only included
the operations of Strouse for the period April 12, 1994 to June 30, 1994.
Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflect the downsizing of the Strouse operations in New Haven, Connecticut and
the related costs of terminating employees.
Other income includes investment and interest income and expense.
Investment and interest income of $321,000 and $294,000 in fiscal year ended
June 30, 1995 and 1994, respectively was principally generated by two escrowed
9
investment accounts (the "Escrowed Accounts") with account balances totaling
$4,682,000 and $4,638,000 in fiscal year ended June 30, 1995 and 1994,
respectively.
The Company's interest expense for the fiscal year ended June 30, 1995 was
$756,000 versus $135,000 for the year ended June 30, 1994. The increase reflects
the operations of its main subsidiary, Strouse, for the entire year ended June
30, 1995, but the fiscal year ended June 30, 1994 only included the operations
of Strouse for the period April 12, 1994 to June 30, 1994.
Minority interest expense was $211,000 for the fiscal year ended June 30,
1995 versus $60,000 for the year ended June 30, 1994. The minority interest
expense is mainly due to dividends paid and accrued during the year on the ASI
preferred stock for the entire year of fiscal 1995, but the fiscal year ended
June 30, 1994 only included dividends for the period April 12, 1994 to June 30,
1994.
SIX MONTH INTERIM PERIOD ENDED JUNE 30, 1993 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1992
The Company's net loss for the six month interim period ended June 30, 1993
was $4,764,000, or $4.35 per share, compared with a net loss of $32,017,000, or
$29.22 per share, for the six months ended June 30, 1992.
The Company's investment and interest income for the six month interim
period ended June 30, 1993 was $174,000 compared with investment and interest
income of $648,000 for the same period in 1992. The decrease in investment and
interest income primarily resulted from a loss on the sale of securities of
$27,000 for the six month interim period ended June 30, 1993 compared to a gain
of $608,000 for the six months ended June 30, 1992. Interest and dividend income
for the six month interim period ended June 30, 1993 was $201,000 compared with
$40,000 for the corresponding period in 1992. This increase was the result of a
shift in investments into income producing securities.
During the six months ended June 30, 1992 the Company recognized $448,000
as other income through the establishment of a receivable for legal fees
expended which the Company believes are recoverable from the Company's insurance
carrier in the Stockholder Litigation.
Operating expenses for the six month interim period ended June 30, 1993
were $651,000 compared with $444,000 for the corresponding period in 1992. This
increase in operating expenses primarily resulted from an allocation from the
Bank to the Company of certain costs, principally insurance premiums of
$191,000, incurred by the Company. Compensation and benefits expenses were
$148,000 and $158,000 for the six month interim period ended June 30, 1993 and
for the six months ended June 30, 1992, respectively. Legal and professional
fees were $218,000 and $227,000 for the six month interim period ended June 30,
1993 and for the six months ended June 30, 1992, respectively.
The Company recorded a reserve of $4,287,000 during the June 30, 1993
period related to the claim of the FDIC, as receiver for the Bank, on federal
income tax refunds received or to be received by the Company.
As a result of the seizure of the Bank in October 1992, the operating
results of the Bank have been presented as the results from a discontinued
operation. During the six months ended June 30, 1992 the Company presented a
loss from discontinued operations of $34,278,000 which produced a loss per share
from discontinued operations of $31.28.
FISCAL YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1991
The Company's net loss for the fiscal year ended December 31, 1992 was
$56,928,000, or $51.96 per share, compared with a net loss of $56,615,000, or
$51.70 per share, for the fiscal year ended December 31, 1991. The losses in
both years were primarily due to the operations of the Bank.
The Company's investment and interest income for the fiscal year ended
December 31, 1992 was $844,000. This compared with investment and interest
income of $108,000 for fiscal year 1991. The increase in investment and interest
income primarily resulted from a gain on the sale of securities of $688,000 for
the fiscal year ended December 31, 1992.
10
During the fiscal year ended December 31, 1992 the Company recognized
$448,000 as other income through the establishment of a receivable for legal
fees expended which the Company believes are recoverable from the Company's
insurance carrier in the Stockholder Litigation.
Operating expenses for fiscal year 1992 were $1,484,000 compared with
$1,729,000 for fiscal year 1991. This decrease in operating expenses primarily
resulted from a decrease in professional fees from $1,167,000 in fiscal 1991 to
$531,000 in fiscal 1992. Significant professional fees were expended by the
Company in fiscal year 1991 in efforts to raise additional capital, in
discussions with regulatory bodies, and on accounting and tax issues.
Compensation and benefits expenses were $427,000 and $280,000 for the fiscal
years ended December 31, 1992 and 1991, respectively.
During the fiscal year ended December 31, 1992 the Company recognized a
loss from discontinued operations of $59,727,000 which related to the seizure of
the Bank and produced a loss per share from discontinued operations of $54.51.
During the fiscal year ended December 31, 1991 the Company presented a loss from
discontinued operations of $53,172,000 which related to the seizure of the Bank
which produced a loss per share from discontinued operations of $48.56. These
losses reflected the continuing deterioration of the Bank during these fiscal
years.
RESULTS OF OPERATIONS OF STROUSE
YEAR ENDED JUNE 30, 1995 AS COMPARED TO THE YEAR ENDED JUNE 30, 1994
Strouse's net sales for the year ended June 30, 1995 increased 19% to
$21,701,000 compared to net sales of $18,267,000 for the prior year. The
increase was generated by a $3,720,000 volume growth in shapewear products and a
$311,000 impact from increased prices, partially offset by a $581,000 volume
decrease in specialty brassiere products and increases in in-store markdowns and
discounts for sales events.
Strouse's price increases during the year ended June 30, 1995, expressed as
a percentage of total price, have been lower than the increase in the Consumer
Price Index for the corresponding period. Strouse's private label business which
began in 1991 has grown substantially since 1991, representing 21.8% of revenues
in the year ended June 30, 1995, compared to 0.4% in 1991. Since the principal
market for Strouse's products is the United States, continued expansion of the
economy of the United States is important to Strouse.
Gross profit for the year ended June 30, 1995 decreased to $5,298,000 from
$5,436,000 for the prior year, and gross margin decreased to 24.4% from 29.8%.
The decrease in gross margin is principally due to increased subcontracting
costs, higher production scrap, growth in the private label business (which
contributes comparable operating income margins comparable to the branded
business, but lower gross margins), costs incurred relating to the resourcing of
manufacturing operations, and extra costs incurred in response to delayed
deliveries from suppliers.
Selling, general and administrative expenses for the fiscal year ended June
30, 1995 were $4,134,000 compared to $4,362,000 for the corresponding period in
1994. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, customer service, accounting,
personnel, data processing, and administration departments, and professional
fees. The $228,000 decrease principally reflects transaction costs of $491,000
incurred in connection with the Acquisition in 1994 and decreased advertising
costs in 1995, partially offset by increased selling expenses of $276,000
resulting primarily from higher commissions and staffing for a new merchandiser
program.
Product development costs for the fiscal year ended June 30, 1995 were
$485,000, compared to $433,000 for the corresponding period in 1994. Product
development costs primarily included compensation of company personnel. All
products are designed internally in Strouse's New Haven and New York design
centers. The increase in costs reflects Strouse's continued investment in the
product development process.
Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflect the downsizing of operations in New Haven, Connecticut and the related
costs of terminating employees.
Interest expense for 1995 increased to $823,000 from $486,000 in the prior
year. The increase reflected higher borrowing rates and higher borrowing levels
to support working capital needs and business growth.
11
The provisions for income taxes for the year ended June 30, 1995 was a
benefit of $45,000, compared to a benefit of $98,000 in the prior year. The
benefit in 1995 results from the 1995 loss. The benefit in 1994 is primarily due
to the tax deduction of $620,000 generated by the exercise by management of
Strouse of certain options to purchase Strouse common stock prior to the
Acquisition and the payment of certain bonuses to management of Strouse equal,
in the aggregate, to the net tax savings realized by Strouse and attributable to
the disposition by such persons of certain Strouse stock acquired pursuant to
the exercise of such options and the payment of such bonus.
YEAR ENDED JUNE 30, 1994 AS COMPARED TO THE YEAR ENDED JUNE 30, 1993
The results of operations of Strouse, on a stand alone basis, for the year
ended June 30, 1994 include certain transaction costs incurred by Strouse in the
Acquisition, in addition to costs incurred by Strouse in the ordinary course of
its operating activities.
Strouse's net sales for the year ended June 30, 1994 increased 22% to
$18,267,000, compared to net sales of $14,966,000 for the prior year. The
increase was generated by a $2,200,000 volume growth in shapewear products, a
$1,200,000 volume growth in specialty brassiere products, and a $200,000 impact
from increased prices, partially offset by increases in in-store markdowns and
discounts for sales events.
Strouse's price increases during the year ended June 30, 1994, expressed as
a percentage of total price, have been lower than the increase in the Consumer
Price Index for the corresponding period. Strouse's private label business which
began in 1991 has grown substantially since 1991, representing 19.6% of revenues
in the year ended June 30, 1994, compared to 0.4% in 1991. Since the principal
market for Strouse's products is the United States, continued expansion of the
economy of the United States is important to Strouse.
Gross profit for the year ended June 30, 1994 increased to $5,436,000 from
$4,970,000 for the prior year, but gross margin decreased to 29.8% from 33.2%.
The decrease in gross margin is principally due to (i) growth in the private
label business which contributes operating income margins comparable to the
branded business, but lower gross margins, (ii) transaction costs of $89,000
related to the Acquisition, and (iii) increases in production costs.
Selling, general and administrative expenses for the fiscal year ended June
30, 1994 were $4,362,000, compared to $3,428,000 for the corresponding period in
1993. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, employee compensation for the
customer service, accounting, personnel, data processing, and administration
departments, and professional fees. The $934,000 increase was principally a
result of transaction costs of $491,000 incurred in connection with the
Acquisition, increased selling expenses of $270,000 resulting primarily from
commissions, staffing in customer service, and electronic data interchange, and
increased advertising costs of $90,000.
Product development costs for the fiscal year ended June 30, 1994 were
$433,000, compared to $378,000 for the corresponding period in 1993. Product
development costs primarily included compensation of company personnel. All
products are designed internally in Strouse's New Haven design center and a
design center maintained by Strouse in New York. The increase in costs reflects
Strouse's continued investment in the product development process.
Interest expense for 1994 increased to $486,000 from $395,000 in the prior
year. The increase reflected higher borrowing rates and higher borrowing levels
to support working capital needs and business growth.
The provisions for income taxes for the year ended June 30, 1994 was a
benefit of $98,000, compared to an expense of $191,000 in the prior year. The
benefit is primarily due to the tax deduction of $620,000 generated by the
exercise by management of Strouse of certain options to purchase Strouse common
stock prior to the Acquisition and the payment of certain bonuses to management
of Strouse equal, in the aggregate, to the net tax savings realized by Strouse
and attributable to the disposition by such persons of certain Strouse stock
acquired pursuant to the exercise of such options and the payment of such bonus.
12
Strouse's net income for the year ended June 30, 1994 was $253,000,
compared to net income of $578,000 for the year ended June 30, 1993. The
decrease in net income was principally due to transaction costs-net of taxes of
$430,000 related to the Acquisition, partially offset by income generated by the
increase in sales.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Substantially all of the Company's assets are either dedicated to support
Strouse's business needs (primarily inventory of $11,782,000 and accounts
receivable of $4,498,000) or are held in the Escrowed Accounts ($4,682,000).
Cash required to fund the working capital needs of Strouse is supplied
principally through the Credit Facilities with the Bank, trade credit, and
internally generated funds. At June 30, 1995, Strouse was not in compliance with
certain of the covenants in the Credit Agreement. On October 6, 1995, the
Company and the Bank executed the Letter of Intent pursuant to which the Bank
waived Strouse's non-compliance with such covenants through September 30, 1995.
Pursuant to such Letter of Intent, which is conditioned on a closing taking
place on or before October 31, 1995, the Bank and the Company have agreed to,
among other things, modify certain covenants, to modify the maturity date of the
Credit Agreement to October 31, 1996 and to modify the maximum borrowing under
the line-of-credit facility to $8,750,000 through October 31, 1996. See "Item 1.
Business-Financing" and Note 4 of the Notes to Consolidated Financial
Statements.
Cash required to fund the operations of Aristotle is supplied primarily
through earnings generated from the two Escrowed Accounts, amounts payable to
Aristotle pursuant to certain notes from certain officers of Strouse, and taxes
received from Strouse in connection with a tax sharing agreement between
Aristotle and Strouse. If earnings from the two Escrowed Accounts and taxes
received from Strouse are below current projections and no funds are generated
through the settlements of the Stockholder Litigation and the FDIC tax claim,
Aristotle's cash flow would not be sufficient to meet its operating expenses. If
the former stockholders of Strouse do not convert certain preferred stock of ASI
that was issued in connection with the Acquisition, and if the maximum
additional payments to the former stockholders of Strouse were earned and paid,
then Aristotle would have to pay up to $4,499,000 during the next four fiscal
years to such stockholders as part of the Acquisition. It is not anticipated
that current amounts of capital will be sufficient to satisfy potential
commitments related to the Acquisition. Any default in the payments due to the
former stockholders of Strouse could create a partial unwinding of the
Acquisition. See "Item 3. Legal Proceedings" and Note 1 of the Notes to
Consolidated Financial Statements.
In order to meet its projected capital requirements and potential
commitments to the former stockholders of Strouse, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.
DISCUSSION OF AUDITORS' REPORTS
KPMG Peat Marwick LLP's Auditor's Report on the Company's consolidated
financial statements for the period ended December 31, 1992 does not express an
opinion. Peat Marwick has indicated to the Company that this "disclaimer" of
opinion was not caused by any limitations on the scope of their audit engagement
or any departures from generally accepted accounting principles. The disclaimer
of opinion was caused by significant uncertainties (an unasserted claim by the
FDIC for the proceeds of a tax refund, and the Stockholders Litigation, both of
which raised a substantial doubt as to the Company's ability to continue as a
going-concern). KPMG Peat Marwick did perform an audit on the 1992 consolidated
financial statements. They concluded, based upon their review of circumstances
at that time, that there was sufficient uncertainty as to those matters that
they could not express an opinion on the consolidated financial statements. Such
disclaimer of opinion generally precludes the Company from undertaking a
securities offering under the Securities Act of 1933 until such time, generally
three years, as the disclaimed financial statements are no longer includable in
a filing.
Richard A. Eisner & Company, LLP audited the Company's financial statements
as of and for the six-month period ending June 30, 1993 and the fiscal year
ended June 30, 1994 and they did express an opinion. At June 30, 1993, the
Company had fully reserved for the potential tax refund claim. In addition, by
the date of Richard A. Eisner & Company, LLP's audit report, the FDIC had
asserted the tax refund claim, thus significantly reducing that uncertainty.
Richard A. Eisner & Company, LLP's auditor's report contains disclosures
relating to the continuing uncertainty of the Stockholders' Litigation and
expresses substantial doubt about whether the Company could continue as a going-
concern as a result of
13
actions, if any, which could be asserted arising from the Bank's activities. To
date, no action has been asserted, other than a claim for recovery of the tax
refund and an investigation as to whether a claim will be asserted by the FDIC
against the former officers and directors of the Bank. If such claims are
asserted, Aristotle may have an obligation to indemnify such former officers and
directors. See "Legal Proceedings". In addition, footnotes to the financial
statements include information about the uncertainties arising from the Bank's
operations.
Arthur Andersen LLP audited the Company's financial statements as of June
30, 1995 and they did express an unqualified opinion.
The Company believes that the audit reports of Arthur Andersen LLP, Richard
A. Eisner & Company, LLP and KPMG Peat Marwick LLP, taken as a whole, allow the
user to make an informed evaluation of the Company's financial statements.
INCOME TAXES
At June 30, 1995, the Company had federal and state tax carryforwards as
follows (excluding the re-attributed losses described in the second paragraph
below):
Federal net operating loss $2,000,000
Federal capital loss $4,800,000
State net operating loss $5,000,000
State capital loss $9,800,000
All federal net operating loss carryforwards expire by 2010 and all federal
capital loss carryforwards expire by 1999. State of Connecticut net operating
loss and capital loss carryforwards expire from 1995 to 1999.
In addition, for the tax return filed for the year ending December 31,
1992, the Company made elections under provisions set forth in regulations
proposed by the Internal Revenue Service in April of 1992 as guidance for the
application of Section 597 of the Internal Revenue Code of 1986, as amended (the
"Code") and under Section 1.1502-20(g)(1) of the Federal Income Tax Regulations.
The elections enabled the Company to disaffiliate from the Bank for federal
income tax purposes and to re-attribute certain losses of the Bank to the
Company. As a result of these elections, the Company expects to succeed to
federal net operating loss carryforwards of the Bank in amounts in excess of
$81,000,000.
The application of tax law with respect to the Company's election to
disaffiliate from the Bank and to re-attribute Bank tax losses to the Company is
not certain. Although the Company believes that the tax law permitted it to re-
attribute to itself the loss carryforwards of the Bank, there is no assurance
that any part of the net operating loss carryforwards of the Bank will be
available to be utilized by the Company. If the re-attributed Bank tax losses
are disallowed, such losses will not be available to offset future income of the
Company and its Subsidiaries. Even if the Company succeeds to any part of the
Bank's tax loss carryforwards, its ability to fully utilize such carryforwards
is dependent upon many factors including, (1) the realization of taxable income
by the Company, and (2) avoiding a 50 percent "ownership change" as defined in
Section 382 of the Code. If there is an "ownership change", utilization of the
tax loss carryforwards of the Company (including the re-attributed losses) would
be significantly reduced or eliminated. An ownership change occurs with respect
to a "loss corporation", such as the Company, if the percentage of stock owned
by one or more "5% stockholders" increases, during a rolling 3-year testing
period, by more than 50 percentage points over the lowest percentage of stock
owned by such stockholders at any time during the testing period.
The Company believes, assuming that the Strouse Stockholders currently own
the maximum number of shares of Common Stock they could acquire through the
exercise of their various rights and options in the Acquisition, that the
Company has not undergone an ownership change within the meaning of Section 382
of the Code. During the period which the Company has an unutilized federal net
operating loss carryforward, which may be for many years into the future,
particularly if the Company does succeed to a significant portion of the Bank's
net operating loss carryforward, it will be necessary for the Company to
determine whether an ownership change has occurred each time a new or existing
stockholder becomes a 5% stockholder or an existing 5% stockholder increases its
ownership interest. Except with respect to the Strouse Stockholders, the Company
does not know of any stockholders who currently own or would, upon the exercise
of options or warrants, own five percent or more of the Common Stock.
14
At a special meeting of stockholders held on April 8, 1994, the
stockholders voted to restrict certain share transfers because they could affect
the Company's ability to use its net operating losses under Section 382.For
state tax purposes the election to re-attribute the losses of the Bank to the
Company is not applicable and it is unlikely that the Company will obtain any
Connecticut tax loss carryforwards as a result of its disposition of the Bank.
During the first quarter of 1992, the Company adopted Financial Accounting
Statement Number 109, which had no material effect on the Company's financial
statements.
The FDIC is claiming entitlement to income tax refunds previously received
and yet to be received by Aristotle. See "Item 3. Legal Proceedings-FDIC Tax
Claim."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company and the Notes to
Consolidated Financial Statements and Supplementary Data, appear on Pages F-1
through F-28 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 3, 1994, the Board of Directors appointed Arthur Andersen LLP to
serve as independent accountants for the Company, subject to ratification of
such appointment by the stockholders. The information required by this Item 9
has been previously reported in the Company's current report on Form 8-K filed
with the Securities and Exchange Commission ("SEC") on October 21, 1994, as
amended.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item will be set forth under the section
entitled "Election of Directors" and "Executive Officers" in the Company's 1995
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Company's fiscal year, and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION.
Information required by this item will be set forth under the section
entitled "Executive Compensation" in the Company's 1995 definitive proxy
statement, and, except for the "Report on Executive Compensation" and the
"Performance Graph," is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item will be set forth under the section
entitled "Stock Owned by Management and Principal Stockholders" in the Company's
1995 definitive proxy statement, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item will be set forth under the section
entitled "Certain Transactions" in the Company's 1995 definitive proxy
statement, and is incorporated herein by reference.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part of
this Form 10-K, see Page F-1.
(2) Financial Statement Schedules: Page
----
Reports of Independent Public Accountants F-1, F-1A and F-1B
Schedule I - Condensed Financial Information of the Registrant F-25
Schedule II - Valuation and Qualifying Accounts F-28
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements on notes thereto.
(3) Exhibits:
Exhibit 2.1- Capital Contribution Agreement dated as of November 19,
1993 by and among The Aristotle Corporation, Aristotle Sub, Inc.,
The Strouse, Adler Company and the Stockholders of Strouse.
Incorporated herein by reference to Exhibit 2.1 of The Aristotle
Corporation's Current Report on Form 8-K dated April 14, 1994, as
amended (the "1994 Current Report").
Exhibit 3.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendments thereto, and Certificate of
Correction thereto. Incorporated herein by reference to Exhibit 4.2
of the 1994 Current Report.
Exhibit 3.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation.
Incorporated herein by reference to Exhibit 4.3 of the 1994 Current
Report.
Exhibit 3.3- Bylaws. Incorporated herein by reference to Exhibit 3.2
of The Aristotle Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, filed on March 31, 1993 (the
"1992 Form 10-K").
Exhibit 4.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendment thereto, and Certificate of
Correction thereto. See Exhibit 3.1 hereof.
Exhibit 4.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation.
See Exhibit 3.2 hereof.
Exhibit 4.3- Amended and Restated Certificate of Incorporation of
Aristotle Sub, Inc., and amendment thereto. Incorporated herein by
reference to Exhibit 4.1 of the 1994 Current Report.
Exhibit 4.4- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Aristotle Sub, Inc. filed August 30,
1995 is attached hereto as Exhibit 4.4.
Exhibit 4.5- Form of Stock Purchase Warrant Series A of The
Aristotle Corporation dated as of April 11, 1994. Incorporated
herein by reference to Exhibit 2.10 of the 1994 Current Report.
Exhibit 4.6- Form of Stock Purchase Warrant Series B of The
Aristotle Corporation dated as of April 11, 1994. Incorporated
herein by reference to Exhibit 2.11 of the 1994 Current Report.
17
Exhibit 10.1- Form of Option Agreement between Aristotle Sub, Inc.
and optionees dated as of April 11, 1994. Incorporated herein by
reference to Exhibit 2.2 of the 1994 Current Report.
Exhibit 10.2- Pledge and Escrow Agreement dated as of April 11, 1994
by and among Aristotle Sub, Inc. and certain other parties.
Incorporated herein by reference to Exhibit 2.8 of the 1994 Current
Report.
Exhibit 10.3- Letter Agreement by and among The Aristotle
Corporation, Aristotle Sub, Inc., Alfred Kniberg and David Howell
dated June 27, 1995 is attached hereto as Exhibit 10.3.
Exhibit 10.4- Security Agreement dated as of April 11, 1994 by and
among The Strouse, Adler Company and certain other parties.
Incorporated herein by reference to Exhibit 2.9 of the 1994 Current
Report.
Exhibit 10.5- Term Promissory Notes dated April 11, 1994 payable to
The Aristotle Corporation. Incorporated herein by reference to
Exhibit 2.12 of the 1994 Current Report.
Exhibit 10.6- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and David Howell. Incorporated herein by reference to
Exhibit 2.3 of the 1994 Current Report.
Exhibit 10.7- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Alfred Kniberg. Incorporated herein by reference
to Exhibit 2.4 of the 1994 Current Report.
Exhibit 10.8- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Joyce Baran. Incorporated herein by reference to
Exhibit 2.5 of the 1994 Current Report.
Exhibit 10.9- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Paul McDonald. Incorporated herein by reference to
Exhibit 2.6 of the 1994 Current Report.
Exhibit 10.10- Employment Agreement dated as of April 11, 1994 by
and among The Aristotle Corporation, Aristotle Sub, Inc., The
Strouse, Adler Company and Graeme Caulfield. Incorporated herein by
reference to Exhibit 2.7 of the 1994 Current Report.
Exhibit 10.11- Shareholder Loan Pledge Agreements dated as of April
11, 1994 by and between certain parties and The Aristotle
Corporation. Incorporated herein by reference to Exhibit 2.13 of the
1994 Current Report.
Exhibit 10.12- Stock Option Plan of The Aristotle Corporation, as
amended. Incorporated herein by reference to Exhibit 10.2 of the
1992 Form 10-K.
Exhibit 10.13- Form of Stock Option Agreement (for non-employee
directors). Incorporated herein by reference to Exhibit 10.3 of the
1992 Form 10-K.
Exhibit 10.14- Form of Incentive Stock Option Agreement (for
employees). Incorporated herein by reference to Exhibit 10.4 of the
1992 Form 10-K.
Exhibit 10.15- Lease dated October 4, 1991 by and between The
Strouse, Adler Company and New England Resources Limited Partnership
is attached hereto as Exhibit 10.15.
Exhibit 10.16- First Amendment to Lease dated April 11, 1994 by and
between New England Resources Limited Partnership is attached hereto
as Exhibit 10.16.
18
Exhibit 10.17- Second Amendment to Lease dated December 14, 1994 by
and between New England Resources Limited Partnership is attached
hereto as Exhibit 10.17.
Exhibit 10.18- First Amended and Restated Master Credit Agreement
dated as of November 9, 1994 by and between The Strouse, Adler
Company and Fleet Bank, National Association is attached hereto as
Exhibit 10.18.
Exhibit 10.19- Letter of Intent dated October 6, 1995 by and between
The Strouse, Adler Company, The Aristotle Corporation, Aristotle
Sub, Inc. and Fleet Bank, National Association is attached hereto as
Exhibit 10.19.
Exhibit 10.20- Option Agreement dated as of December 22, 1994 by and
among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan
Properties Ltd. and Maggie Manufacturing Company Ltd. is attached
hereto as Exhibit 10.20.
Exhibit 10.21- Exclusive Subcontracting Agreement dated as of
December 22, 1994 by and among The Strouse, Adler Company, PBS
Enterprises Ltd., Davedan Properties Ltd. and Maggie Manufacturing
Company Ltd. is attached hereto as Exhibit 10.21.
Exhibit 10.22- Restrictive Covenant Agreement dated as of December
22, 1994 by and among The Strouse, Adler Company, PBS Enterprises
Ltd., Davedan Properties Ltd., Maggie Manufacturing Company Ltd.,
Peter Blair Shalleck and Sandy Shalleck is attached hereto as
Exhibit 10.22.
Exhibit 10.23- Specific Performance Agreement dated as of December
22, 1994 by and among The Strouse, Adler Company, Peter Blair
Shalleck and Sandy Shalleck is attached hereto as Exhibit 10.23.
Exhibit 21.1- Subsidiaries of The Aristotle Corporation is attached
hereto as Exhibit 21.1.
Exhibit 27- Financial Data is attached hereto as Exhibit 27.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed in the fourth quarter of the
Company's fiscal year ended June 30, 1995.
(c) See (a)(3) above.
(d) See (a)(2) above.
19
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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 ARISTOTLE CORPORATION
/s/ John J. Crawford
---------------------------
John J. Crawford
Its President, Chief Executive Officer
and Chairman of the Board
Date: October 11, 1995
/s/ Paul M. McDonald
---------------------------
Paul M. McDonald
Its Chief Financial Officer
and Secretary
Date: October 11, 1995
20
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John J. Crawford President, Chief Executive October 11, 1995
- ----------------------- Officer, Chairman of the
John J. Crawford Board and Director
/s/ Paul McDonald Chief Financial Officer and October 11, 1995
- ----------------------- Secretary
Paul McDonald
/s/ Barry R. Banducci Director October 11, 1995
- -----------------------
Barry R. Banducci
/s/ Mary Jane Burt Director October 11, 1995
- -----------------------
Mary Jane Burt
/s/ Robert L. Fiscus Director October 11, 1995
- -----------------------
Robert L. Fiscus
/s/ Betsy Henley-Cohn Director October 11, 1995
- -----------------------
Betsy Henley-Cohn
/s/ Marcus R. McCraven Director October 11, 1995
- -----------------------
Marcus R. McCraven
/s/ Daniel J. Miglio Director October 11, 1995
- -----------------------
Daniel J. Miglio
/s/ Sharon M. Oster Director October 11, 1995
- -----------------------
Sharon M. Oster
/s/ Alfred A. Kniberg Director October 11, 1995
- -----------------------
Alfred A. Kniberg
/s/ John C. Warfel Director October 11, 1995
- -----------------------
John C. Warfel
21
INDEX OF FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report of Arthur Andersen LLP F-1
Independent Auditors' Report of Richard A. Eisner & Company, LLP F-1A
Independent Auditors' Report of KPMG Peat Marwick LLP F-1B
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-2
Consolidated Statements of Operations for the Twelve Months
Ended June 30, 1995and 1994, the Six Months Ended June 30,
1993 and the Twelve Months Ended December 31, 1992 F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1992, the Six Month Period
and the Years Ended Ended June 30, 1993, June 30, 1994 and 1995 F-4
Consolidated Statements of Cash Flows for the Twelve Months
Ended June 30, 1995 and 1994, the Six Months Ended June 30,
1993 and the Twelve Months Ended December 31, 1992 F-5
Notes to Consolidated Financial Statements F-6
i
[LETTERHEAD OF ARTHUR ANDERSEN LLP APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited the accompanying consolidated balance sheet of The Aristotle
Corporation (the "Company") and subsidiary as of June 30, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Aristotle Corporation and
subsidiary as of June 30, 1995, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/S/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New Haven, Connecticut
September 1, 1995
(except with respect to the
matter discussed in Note 4,
as to which the date is
October 6, 1995)
F-1
LETTER HEAD OF RICHARD A.EISNER & COMPANY, LLP APPEARS HERE
- --------------------------------------------------------------------------------
Accountants and Consultants
[LOGO OF RAE APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut
We have audited the accompanying consolidated balance sheet of The
Aristotle Corporation (the "Company") and subsidiaries as of June 30, 1994, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended June 30, 1994 and the six months ended
June 30, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of The Aristotle
Corporation and subsidiaries present fairly, in all material respects, the
financial position of The Aristotle Corporation and subsidiaries as at June 30,
1994, and the results of their operations and their cash flows for the year
ended June 30, 1994 and the six months ended June 30, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 5 to the financial statements, in 1990 the Company
and certain of its former officers and directors were named in litigation
alleging certain securities law violations, amongst which were filing false and
misleading financial information, or omitting certain information. At the time
that the litigation was initiated, the Company's principal operation was
banking. In 1992, its bank operating subsidiary was seized by the Federal
Deposit Insurance Corporation (FDIC). At the time of the FDIC seizure the
stockholder litigation was stayed. The ultimate outcome of this litigation is
not presently determinable.
The Company cannot evaluate what claims, if any, could be asserted as a
result of its former subsidiary's banking activities (which, if successful,
could trigger a partial unwinding of the Company's major acquisition consummated
in April 1994). This uncertainty raises substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
adjustments, if any, which could result from this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
August 26, 1994
F-1A
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
The Aristotle Corporation:
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of The Aristotle Corporation (formerly First
Constitution Financial Corporation) for the year ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on the results
of our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our report.
As discussed in Note 1 to the financial statements, the Company's prior
subsidiary, First Constitution Bank (the "Bank"), was seized by the Federal
Deposit Insurance Corporation on October 2, 1992. The loss of the Bank has been
presented as a discontinued operation in the accompanying financial statements,
which have been prepared assuming the Company will continue as a going concern.
As discussed in Note 5 to the financial statements, the Company received $4.0
million in refunded federal income taxes and has accrued for the receipt of an
additional $300,000 of federal income taxes refundable. The federal income tax
refunds have been retained and recorded by the Company based on management's
application of the tax sharing agreement between the Company and the Bank. The
Office of Thrift Supervision ("OTS"), which regulated the Company while the
Company owned the Bank, and to whom the Company has requested deregistration as
a savings and loan holding company, has informed the Company that it believes
the tax refunds are related to the Bank and therefore, payable to the Federal
Deposit Insurance Corporation ("FDIC"). While not presently asserted, the FDIC
as receiver of the Bank, may assert a claim for these federal income tax
refunds. The ultimate outcome of the OTS's assertion and the potential FDIC
claim, if asserted, cannot presently be determined. Accordingly, no liability
has been recorded in the accompanying financial statements.
As discussed in Note 5 to the financial statements, the Company and certain of
its present and former officers and directors are defendants in a lawsuit
alleging, among other things, that the Company and certain of its present and
former officers and directors issued false or misleading financial information
or omitted to issue certain information. Proceedings have been stayed pending a
court decision on the Company's motion to dismiss the lawsuit. The ultimate
outcome of the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the accompanying financial statements.
F-1B
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the two preceding paragraphs,
the Company is presently involved in litigation and regulatory matters which at
December 31, 1992, raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Because of the significance of the uncertainties discussed above, we are unable
to express, and do not express, an opinion on the accompanying 1992 financial
statements.
/s/ KPMG Peat Marwick LLP
New Haven, Connecticut
March 3, 1993
F-1BB
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30, 1995 AND 1994
----------------------------
(dollars in thousands, except for share data)
1995 1994
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 188 $ 12
Accounts receivable, net of reserves
of $171 and $177 4,498 3,564
Inventories 11,782 10,071
Other current assets 867 1,197
--------- ---------
Total current assets 17,335 14,844
--------- ---------
Property and equipment, net 1,517 581
--------- ---------
Other assets:
Marketable securities held in escrow
at market value 4,682 4,638
Employee notes receivable 354 354
Patents and trademarks, net 88 98
Goodwill, net of amortization of $52 and $8 1,894 1,610
Deferred tax asset 725 901
Other noncurrent assets 225 136
--------- ---------
7,968 7,737
--------- ---------
$ 26,820 $ 23,162
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 548 $ 6,736
Accounts payable 2,367 1,904
Accrued expenses 1,304 1,090
Deferred tax liability 725 800
--------- ---------
Total current liabilities 4,944 10,530
--------- ---------
Long-term debt, less current maturities 10,274 251
Reserve for potential FDIC tax refund claim 3,982 3,982
--------- ---------
14,256 4,233
--------- ---------
Total liabilities 19,200 14,763
--------- ---------
Minority interest in subsidiary's preferred stock 2,454 2,454
--------- ---------
Minority interest in subsidiary's common stock 167 137
--------- ---------
Commitments and contingencies (Note 5)
Redeemable preferred stock, $.01 par value
3,000,000 shares authorized; 122,691
Series A, 61,345 Series B, 61,345
Series C and 24,998 Series D issued
and outstanding 3 3
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000
shares authorized, 1,105,801 shares
issued and outstanding 11 11
Additional paid-in capital 159,843 159,816
Retained earnings (deficit) (154,713) (153,815)
Treasury stock, at cost, 18,268 shares in
1995 and 21,610 shares in 1994 (151) (143)
Net unrealized investment gains (losses) 6 (64)
--------- ---------
Total stockholders' equity 4,996 5,805
--------- ---------
$ 26,820 $ 23,162
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(dollars in thousands, except for share data)
Twelve Six Twelve
Months Ended Months Ended Months Ended
------------
June 30, June 30, June 30, December 31,
1995 1994 1993 1992
---- ---- ---- ----
Net sales $21,701 $5,538 $ - $ -
Cost of goods sold 16,447 3,859 - -
------- ------ ------- --------
Gross profit 5,254 1,679
Operating expenses:
Selling 2,826 704 - -
General and administrative 1,951 1,171 651 1,484
Product development 485 102 - -
Restructuring charges 219 - - -
Reserve for subsidiary
litigation - - - (1,510)
------- ------ ------- --------
Operating income
(loss) (227) (298) (651) 26
------- ------ ------- --------
Other income (expense):
Investment and interest
income 321 294 174 844
Interest expense (756) (135) - -
Recoverable legal fees - - - 448
------- ------ ------- --------
(435) 159 174 1,292
------- ------ ------- --------
Income (loss) from
continuing operations
before income taxes
and minority interest (662) (139) (477) 1,318
Income tax expense (benefit) 25 (20) 4,287 (1,481)
------- ------ ------- --------
Income (loss) from
continuing
operations before
minority interest (687) (119) (4,764) 2,799
Minority interest (211) (60) - -
------- ------ ------- --------
Income (loss) from continuing
operations (898) (179) (4,764) 2,799
------- ------ ------- --------
Discontinued operations:
Loss from operations of
subsidiary prior to
seizure - - - (34,280)
Loss on write-off of
subsidiary upon
seizure - - - (25,447)
------- ------ ------- --------
Loss from discontinued
operations $ - $ - - (59,727)
------- ------ ------- --------
NET LOSS $ (898) $ (179) $(4,764) $(56,928)
======= ====== ======= ========
Income (loss) per share
from continuing operations $(.81) $(.16) $(4.35) $2.55
Loss per share from
discontinued operations - - - (54.51)
----- ----- ------ -------
Net loss per share $(.81) $(.16) $(4.35) $(51.96)
===== ===== ====== =======
Weighted average shares
outstanding 1,113,250 1,087,039 1,096,017 1,095,643
========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1992
----------------------------
SIX-MONTH PERIOD ENDED JUNE 30, 1993 AND
----------------------------------------
YEARS ENDED JUNE 30, 1994 AND 1995
----------------------------------
(dollars in thousands, except for share data)
Net
Additional Retained Unrealized
Common Paid-in Earnings Treasury Investment
Stock Capital (Deficit) Stock Losses Total
----- ------- --------- ----- ------ -----
Balance, December 31,
1991 $ 11,058 $150,313 $ (91,944) $ (1,600) $ - $ 67,827
Net loss - - (56,928) - - (56,928)
Purchase of treasury
stock - - - (2) - (2)
-------- -------- --------- -------- --- --------
Balance, December 31,
1992 11,058 150,313 (148,872) (1,602) - 10,897
Net loss - - (4,764) - - (4,764)
Issuance of treasury
stock to directors - (680) - 707 - 27
Purchase of treasury
stock - - - (1) - (1)
-------- -------- --------- -------- --- --------
Balance, June 30, 1993 11,058 149,633 (153,636) (896) - 6,159
Net loss - - (179) - - (179)
Net unrealized investment
loss - - - - (64) (64)
Issuance of treasury
stock to directors - (854) - 896 - 42
Purchase of treasury
stock - - - (143) - (143)
Ten to one reverse
stock split and change
in par value (11,047) 11,037 - - - (10)
-------- -------- --------- -------- --- --------
Balance, June 30, 1994 11 159,816 (153,815) (143) (64) 5,805
Net loss - - (898) - (898)
Purchase of treasury
stock - - - (11) - (11)
Issuance of treasury
stock to directors - 27 - 3 - 30
Net unrealized invest-
ment gain - - - - 70 70
-------- -------- --------- -------- --- --------
Balance, June 30, 1995 $ 11 $159,843 $(154,713) $ (151) $ 6 $ 4,996
======== ======== ========= ======== === ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(dollars in thousands)
Twelve
Months EndedSix Twelve
June 30, Months Ended Months Ended
-----------------
1995 1994 June 30, 1993 Dec 31, 1992
---- ---- ------------- ------------
Cash flows from operating activities:
Net loss $ (898) $ (179) $(4,764) $(56,928)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Loss from discontinued operations - - - 59,727
(Gain) loss on sale of
investments held for sale - 48 (11) (688)
Write-down of securities - - 38 -
Reserve for tax refund claim - - 4,287 -
Other - - 128 141
Depreciation and amortization 355 46 - -
Issuance of treasury stock
for services 30 42 - -
Changes in assets and
liabilities:
Accounts receivable (934) (687) - -
Inventories (1,711) 98 - -
Other assets 200 39 - -
Accounts payable 464 (400) - -
Accrued expenses 214 (420) - -
------- ------- ------- --------
Net cash provided
by (used in)
operating activities (2,280) (1,413) (322) 2,252
------- ------- ------- --------
Cash flows from investing activities:
Increase in notes from employees - (354) - -
Purchase of investments held for sale - (8,479) (4,077) -
Proceeds from sale of investments
held for sale 26 7,778 23 1,565
Purchase of property and equipment (640) (113) - -
Purchase of subsidiary, net of
acquired cash of $589 (184) (2,617) - -
Minority interest 29 12 - -
------- ------- ------- --------
Net cash provided by
(used in) investing
activities (769) (3,773) (4,054) 1,565
------- ------- ------- --------
Cash flows from financing activities:
Net borrowings (payments) under
line of credit 996 (479) - -
Borrowings under term notes 2,500 - - -
Principal debt payments (260) (12) - -
Purchase of treasury stock (11) (143) (1) (2)
Decrease in amounts due
from (to) subsidiary - - - (40)
------- ------- ------- --------
Net cash provided by
(used in) financing
activities 3,225 (634) (1) (42)
------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 176 (5,820) (4,377) 3,775
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12 5,832 10,209 6,434
------- ------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 188 $ 12 $ 5,832 $ 10,209
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 690 $ 137 $ - $ -
======= ======= ======= ========
Income taxes $ (216) $ (72) $ (24) $ 240
======= ======= ======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1995
-------------
1. Basis of Presentation and Nature of Business:
--------------------------------------------
The Aristotle Corporation ("Aristotle" or the "Company"), prior to October
2, 1992, was the holding company of First Constitution Bank (the "Bank"), a
thrift institution. On October 2, 1992, the Federal Deposit Insurance
Corporation (the "FDIC") was appointed by the Connecticut Superior Court -
District of New Haven as receiver of the Bank. Upon transfer of the Bank to
receivership, Aristotle wrote off its investment in the Bank of
$25,400,000. The banking operations are presented in the accompanying
financial statements as discontinued operations.
Effective June 30, 1993, Aristotle changed its fiscal year end from
December 31 to June 30.
On April 11, 1994, Aristotle, through a newly created subsidiary Aristotle
Sub., Inc. ("ASI"), acquired (the "Acquisition") 97.78% of the outstanding
common stock of The Strouse, Adler Company ("Strouse"). Strouse designs,
manufactures and markets women's intimate apparel. The Acquisition was
accounted for as a purchase.
Total acquisition cost to date is $5,990,000 (including expenses of the
Acquisition of $610,000) of which: (i) $2,454,000 represents the issuance
of 122,691 shares of 8.9% Series A, 61,345 shares of 8.9% Series B and
61,345 shares of 8.9% Series C preferred stock of ASI (collectively
referred to herein as the "ASI Preferred Stock"), valued at its redemption
value of $10 per share; (ii) $125,000 represents the value of 25,000 common
shares of ASI issued at the Acquisition (the "ASI Common Stock"); (iii)
$2,617,000 is cash paid at date of acquisition; and (iv) $184,000
represents the August 31, 1994 Additional EBIT Consideration (see below).
The excess of cost over the fair value of net assets acquired amounts to
$1,946,000, which is being amortized over forty years. The fair value of
assets purchased and liabilities assumed amounted to $14,934,000 and
$10,890,000, respectively.
The operating results of Strouse are included in the consolidated financial
statements since the date of the Acquisition.
Operating results for the year ended June 30, 1994 and 1993 on a pro forma
basis as though Strouse was acquired as of July 1, 1992 are:
(Dollars in Thousands
except share data)
June 30,
---------------------
1994 1993
---- ----
(Unaudited)
Net sales $18,267 $14,966
Net loss (132) (4,364)
Net loss per share $ (.12) $ (3.89)
F-6
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would
have occurred had the Acquisition been consummated as of the above dates,
nor are they necessarily indicative of the future operating results. The
pro forma adjustments include amortization of intangibles, decreased
interest income and expense, minority share and preferred dividend costs
and related income tax effects of the Acquisition.
The Acquisition agreements (the "Acquisition Agreements") provide that the
former stockholders of Strouse (the "Strouse Stockholders") may receive
additional consideration (the "Additional EBIT Consideration"), the amount
of which will be based upon the earnings before interest and income tax
("EBIT") of Strouse, calculated on an August 31 fiscal year through August
31, 1996, with the maximum amount of such consideration not to exceed
$1,854,000. The EBIT target will be increased by an amount equal to one-
half of the aggregate management bonuses paid pursuant to certain
Employment Agreements with some of the Strouse Stockholders (see Note 5).
Of each years Additional EBIT Consideration, if any, 80% will be paid in
cash and 20% will be paid in ASI Common Stock. The ASI Common Stock issued
as Additional EBIT Consideration is convertible into Common Stock of
Aristotle (the "Aristotle Common Stock").
Additional EBIT Consideration of $184,000 was paid to the Strouse
Stockholders for the fiscal period ended August 31, 1994. In accordance
with the Acquisition Agreements, $147,270 of the Additional EBIT
Consideration was paid in cash and $36,817 was paid through the issuance of
8,424 shares of ASI Common Stock. No Additional EBIT Consideration has been
recognized for this fiscal period ended August 31, 1995 as the EBIT target
is not expected to be met based on EBIT earned through June 30, 1995.
The 25,000 shares of ASI Common Stock issued at the date of Acquisition to
the Strouse Stockholders pursuant to the Acquisition represented 2.22% of
the outstanding ASI Common Stock. The Strouse Stockholders also received
options (the "ASI Options") to purchase 25,000 additional shares of ASI
Common Stock at $5.45 per share. The ASI Common Stock exercisable pursuant
to the ASI Options represented an additional 2.13% of the outstanding ASI
Common Stock at date of Acquisition, if exercised. After recognition of the
fiscal 1994 Additional EBIT Consideration, and the bonuses paid pursuant to
the Employment Agreements (see Note 5), the Strouse Stockholders hold
33,424 shares of ASI Common Stock (2.95% of the outstanding shares of ASI
Common Stock as of June 30, 1995) and ASI Options to purchase 35,208 shares
of ASI Common Stock (an additional 3.10% of the outstanding shares of ASI
Common Stock, if exercised, as of June 30, 1995).
The ASI Preferred Stock has a liquidation preference of $2,454,000 in the
aggregate, or $10 per share. Dividends at the rate of 8.9% per annum are
payable on the ASI Preferred Stock until the later of: (i) the dates on
which the Put Right (as defined below) commences (between April 11, 1996
and April 11, 2001); and (ii) the first date upon which Aristotle has
sufficient audited financial statements in order to satisfy the
requirements for filing a registration statement under the federal
securities laws pursuant to which the shares of Aristotle's Common Stock
issued to the Strouse Stockholders can be registered for sale. Aristotle
F-7
received an independent auditors' report containing a disclaimer of opinion
on the 1992 financial statements from a predecessor auditor relating to
uncertainties associated with its former banking activities, which may
preclude such registration from taking place before June 30, 1996.
Aristotle is obligated to pay the costs of such registration under the
Acquisition Agreements. The ASI Preferred Stock is redeemable by ASI.
Aristotle has issued to the Strouse Stockholders warrants (the "Warrants")
that permit the holders of the Warrants to exchange their ASI Preferred
Stock and/or ASI Common Stock for Aristotle Common Stock. After recognition
of the fiscal 1994 Additional EBIT Consideration and the bonuses paid
pursuant to the Employment Agreements (see Note 5), the Strouse
Stockholders hold warrants that entitle them to purchase 383,223 shares of
Aristotle Common Stock, which, if exercised, would represent 25.7% of the
outstanding Aristotle Common Stock as of June 30, 1995. If the Strouse
Stockholders do not exercise their Warrants and exchange their ASI
Preferred Stock for Aristotle Common Stock, they have the right to put such
shares of ASI Preferred Stock back to Aristotle (the "Put Right") for
$2,454,000, plus any accrued and unpaid dividends, beginning April 11,
1996. The Put Right during the period from April 11, 1996 to April 10, 1997
is limited to $700,000. Such $700,000 is in marketable securities, is held
in escrow to protect against various contingencies, may be available to
fund the Put Right and is contained within marketable securities held in
escrow at market value in the accompanying consolidated balance sheet.
In connection with the Acquisition, Aristotle also issued 270,379 shares of
voting preferred stock, which shares will not have the right to receive
dividends and will not share in the proceeds from any liquidation of the
assets of Aristotle (the "Aristotle Preferred Stock"). The Aristotle
Preferred Stock has one vote per share or aggregate voting power of 19.65%
of all of the issued and outstanding capital stock of Aristotle, with
respect to matters other than the election of directors and auditors.
As a condition to the exercise of any Warrant, the exercise of the Put
Right, or the redemption of the ASI Preferred Stock, the Strouse
Stockholders must redeem the Aristotle Preferred Stock for $.001 per share.
The Aristotle Preferred Stock will automatically be redeemed, for $.001 per
share, at various dates beginning on and after April 11, 1999, or upon the
cessation of the voting rights of the Aristotle Preferred Stock.
The Acquisition Agreements provide for loans from the Company at 8.9%
interest to the Strouse Stockholders aggregating $707,000, of which
$354,000 was outstanding at June 30, 1995 and 1994. The Acquisition
Agreements also provide that the Strouse Stockholders have the right to
require a partial unwinding (the "Partial Unwinding") of the Acquisition if
the net worth of Aristotle, as defined in the Acquisition Agreements, falls
below $1,000,000 during a five-year period subsequent to April 11, 1994. A
Partial Unwinding would result in the return by ASI to the Strouse
Stockholders of 59% of the outstanding common stock of Strouse in exchange
for an amount of ASI Preferred Stock, Aristotle Common Stock and cash that,
taken together, have the aggregate value of $2,100,000.
F-8
If, after April 11, 1994, an Acceleration Event occurs, then the Strouse
Stockholders may require that ASI immediately repurchase the ASI Preferred
Stock or immediately exchange the ASI Preferred Stock for Aristotle Common
Stock, and require that the Additional EBIT Consideration be immediately
paid in cash. An "Acceleration Event" includes the sale of all of the stock
or assets of Strouse, ASI or Aristotle; a merger or reorganization
involving Strouse, ASI or Aristotle in which Strouse, ASI or Aristotle is
not the survivor; the bankruptcy or insolvency of Strouse, ASI or
Aristotle; or the breach by Strouse, ASI or Aristotle of certain
obligations to the Strouse Stockholders.
Pursuant to the Acquisition Agreements, ASI and Strouse are bound by
certain standstill provisions until approximately April 11, 1999,
including, without limitation, limitations on the payment of dividends, the
incurring of certain indebtedness, the granting of any lien, the issuance
of securities, and the amendment of their certificates of incorporation and
bylaws.
2. Significant Accounting Policies and Other Matters:
-------------------------------------------------
Principle of consolidation -
--------------------------
The consolidated financial statements include the accounts of Aristotle and
its majority owed subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents -
-------------------------
Cash and cash equivalents include cash and highly liquid investments with
an original maturity of three months or less.
Inventories -
-----------
Inventories are valued at the lower of cost, using the last-in, first-out
method (LIFO), or market.
As a result of the application of purchase accounting in 1994, the
financial accounting basis of the Company's inventories changed, while the
basis for federal income tax reporting purposes did not. Accordingly, as of
June 30, 1995, the LIFO inventories reflected in the accompanying
consolidated balance sheet are stated at an amount $2,031,000 greater than
LIFO inventories reported for federal income tax purposes.
At June 30, 1995, the LIFO inventories reflected in the accompanying
consolidated balance sheets are $1,207,000 greater than current costs.
F-9
At June 30, 1995 and 1994, inventories consisted of the following (in
thousands):
1995 1994
---- ----
Raw materials $ 2,600 $ 2,628
Work-in-process 4,503 2,387
Finished goods 3,472 5,056
------- -------
10,575 10,071
LIFO reserve 1,207 -
------- -------
$11,782 $10,071
======= =======
Property and equipment -
----------------------
Property and equipment are recorded at cost and are depreciated or
amortized, using the straight-line method, over their estimated useful life
of five to ten years.
At June 30, 1995 and 1994, property and equipment consisted of the
following (in thousands):
1995 1994
---- ----
Machinery and equipment $1,002 $561
Furniture and fixtures 42 10
Leasehold improvements 213 46
Equipment under capital lease 600 -
------ ----
1,857 617
Less accumulated depreciation and
amortization (340) (36)
------ ----
$1,517 $581
====== ====
Expenditures for repairs and maintenance are charged against income as
incurred. Renewals and betterments are capitalized.
Goodwill -
--------
The excess of cost over the fair value of net tangible and identifiable
intangible assets acquired results from the Acquisition and is being
amortized using the straight-line method over 40 years.
The Company will continually evaluate whether events and circumstances have
occurred which indicate that the remaining estimated useful life of
goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable.
F-10
Earnings (loss) per share -
-------------------------
Earnings (loss) per share is computed using the weighted average common
shares after giving retroactive effect to the 10 to 1 reverse stock split
(effected in May 1994) for all years presented. Fully diluted earnings
(loss) per share is not presented since its effect is anti-dilutive.
Revenue recognition -
-------------------
The Company recognizes revenue as the product is shipped.
Co-op advertising -
-----------------
The Company grants customers a co-op advertising credit relating to
qualified advertising and promotional costs incurred by the customer in
promoting the Company's products. These credits are recognized in the
Company's consolidated financial statements as the advertising costs are
incurred.
Restructuring charges -
---------------------
In 1995, the Company recognized a $219,000 restructuring charge related to
curtailing certain manufacturing operations at the New Haven facility and
the termination of employees.
Principal supplier -
------------------
In 1995, approximately 85% of the Company's products were manufactured and
sewn in the Caribbean, with approximately 60% of the Company's products
assembled in Santo Domingo, Dominican Republic.
Concentration of credit risk -
----------------------------
Substantially all of the Company's accounts receivable reflected in the
accompanying consolidated balance sheets are from a diverse group of
retailers. Net sales to two customers accounted for approximately 14% and
11% of total sales in 1995 and one customer accounted for approximately 11
% of total net sales for fiscal 1994.
Investments in debt and equity securities -
-----------------------------------------
During 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), which requires that, except for debt securities
classified as "held-to-maturity securities", investments in debt and equity
securities be reported at fair value. Implementation did not have a
material effect on the financial results of the Company.
Disclosures about fair value of financial instruments -
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
F-11
Cash, accounts receivable, employee notes receivable, payables, and
-------------------------------------------------------------------
accrued expenses -
----------------
For these short-term account balances, the carrying amount is a
reasonable estimate of fair value.
Notes payable and long-term debt -
--------------------------------
The carrying amount is a reasonable estimate of fair value as the debt
is frequently repriced based on prime, and there has been no significant
change in credit risks and interest rates since the financing was
obtained or repriced.
Estimated liability for potential tax refund claim -
--------------------------------------------------
It is not practical to determine a fair value of this liability.
Reclassifications -
-----------------
Certain reclassifications have been made to the 1994 financial statements
to make them consistent with the 1995 presentation.
3. Marketable Securities Held in Escrow:
------------------------------------
To enable the Strouse Stockholders to effectuate the Partial Unwinding, and
to secure the obligations of the Company to pay dividends on the ASI
Preferred Stock, to repurchase the ASI Preferred Stock if the Strouse
Stockholders exercise their Put Rights and to pay the Additional EBIT
Consideration to the Strouse Stockholders, the Company pledged 59% of the
outstanding common stock of Strouse and cash collateral in the amount of
$700,000 to the Strouse Stockholders (See Note 1). Strouse also granted to
the Strouse Stockholders a security interest in all of its assets to secure
such obligations.
Under an agreement with the Office of Thrift Supervision (the "OTS"), the
Company placed $3,982,000 (the "Principal Amount") in an escrow account
(the "OTS Escrow") that was established to provide a vehicle to pay
possible amounts arising from disputed tax refunds based on a tax sharing
agreement between Aristotle and the Bank. The Company may withdraw all
interest and dividend income earned on the Principal Amount. The potential
amount of the full loss was provided for in 1993 and the matter is being
contested. In addition, the Company and the FDIC have agreed that certain
future refunds, including a refund for approximately $1,300,000, will also
be deposited in a separate escrow account. The Company may not withdraw
interest and dividend income on the future refunds placed in the second
escrow account.
The funds relating to the above mentioned escrow arrangements are invested
in U.S. Treasuries and high-grade corporate debentures which mature at
various dates through 1998. These securities have been classified as
available for sale and an unrealized holding gain (loss) of approximately
$6,000 and ($64,000) is recorded as a component of stockholders' equity as
of June 30, 1995 and 1994, respectively. As these securities mature, the
proceeds will be invested in United States Treasury Notes with a maturity
of not more than 120 days.
F-12
Investment securities available for sale relating to the above escrow
arrangements are summarized as follows (dollars in thousands):
June 30, 1995
-----------------------
Gross
Amortized Unrealized Market
Cost Gains Value
---- ----- -----
Company obligations:
U.S. Treasuries maturing
in 1 to 5 years $ 171 $ - $ 171
Corporate debt maturing
in 1 to 5 years 157 - 157
Cash equivalents and
interest receivable 372 - 372
------ ---- ------
700 - 700
------ ---- ------
OTS Escrow:
U.S. Treasuries maturing
in 1 to 5 years 1,804 6 1,810
Corporate debt maturing
in 1 to 5 years 2,029 - 2,029
Cash equivalents and
interest receivable 143 - 143
------ ---- ------
3,976 6 3,982
------ ---- ------
Total $4,676 $ 6 $4,682
====== ==== ======
June 30, 1994
-----------------------
Gross
Amortized Unrealized Market
Cost Gains Value
---- ----- -----
Company obligations:
U.S. Treasuries maturing
in 1 to 5 years $ 355 $ (6) $ 349
Corporate debt maturing
in 1 to 5 years 347 (4) 343
------ ---- ------
702 (10) 692
------ ---- ------
OTS Escrow re: tax claim:
U.S. Treasuries maturing
in 1 to 5 years 1,838 (20) 1,818
Corporate debt maturing
in 1 to 5 years 2,162 (34) 2,128
------ ---- ------
4,000 (54) 3,946
------ ---- ------
Total $4,702 $(64) $4,638
====== ==== ======
F-13
4. Notes Payable and Long-Term Debt:
--------------------------------
Notes payable and long-term debt at June 30, 1995 and 1994, consisted of
the following (in thousands):
1995 1994
---- ----
Borrowings under a bank line of credit $ 7,687 $6,691
Term notes payable to a bank 2,389 -
Note payable to a bank, due in
monthly principal installments of
$3,750 plus interest through
January 1999, bearing interest at
7.25%, collateralized by substantially
all of the assets of the Company 161 206
Note payable bearing interest at
6% with interest only payable monthly
through April 1997, thereafter
monthly installments of $2,114
including interest and principal through
April 2001, collateralized by
substantially all of the assets of
the Company 90 90
Capital lease obligation 495 -
------- ------
Total 10,822 6,987
Less current maturities 548 6,736
------- ------
$10,274 $ 251
======= ======
Line of credit and term notes -
-----------------------------
On November 9, 1994, Strouse entered into a three-year agreement (the Bank
Agreement) which established a line-of-credit facility and two term loan
facilities. The Bank Agreement matures on October 31, 1997.
The line-of-credit facility provides for maximum borrowings of $8,500,000
in the first year, $11,000,000 in the second year, and $13,000,000 in the
third year. Primary borrowings under the line-of-credit are limited to 80%
of eligible accounts receivable plus the lesser of (i) 50% of eligible raw
materials, 50% of eligible finished goods, and 20% of eligible work-in-
process or (ii) $5 million in the first year, $6 million in the second
year, and $7 million in the third year. In addition to the primary
borrowings, the bank agreement permits advances to exceed the formula
amounts (the seasonal "Overadvance") by up to $500,000 in the first year,
$1,000,000 in the second year and $1,500,000 in the third year (so long as
the total line-of-credit is not more than the maximum borrowings allowed
and the Overadvance reduces to zero at each fiscal year end). At June 30,
1995, additional borrowings of approximately $590,000 were available under
the line-of-credit facility.
F-14
The interest rate on the line-of-credit is fixed at 8.3% for the first
$3,500,000 million and varies at prime plus .25 for the remaining balance.
The term notes are a $2,500,000 facility which has an interest rate fixed
at 8.55% and a $225,000 facility which has an interest rate fixed at 7.25%.
The term loan facilities have a three year term and require principal
payments to reduce the amount outstanding based on a 15 year amortization
for the $2,500,000 facility and a 5 year amortization for the $225,000
facility.
The Bank Agreement also provides that (i) a currently existing $500,000
subordinated loan from Aristotle to Strouse may be repaid after June 30,
1995 if certain covenants are achieved, and (ii) Strouse may pay dividends
up to an aggregate of $500,000 per year to Aristotle if certain covenants
are achieved.
Strouse must maintain certain financial ratios in connection with these
loans. These covenants, which use the first-in, first-out (FIFO) inventory
costing method, require that the Company maintain (a) a net worth, as
defined, of $3,750,000 at June 30, 1995 increasing thereafter to $5,000,000
by June 30, 1997, (b) a debt service ratio, as defined, of 1.5 to 1.0 at
June 30, 1995 increasing to 1.75 at June 30, 1996 and thereafter, (c) a
debt to net worth ratio, as defined, of 3.5 to 1.0 at June 30, 1995
decreasing to 3.0 to 1.0 by June 30, 1997 and (d) an inventory turnover
ratio, as defined, of 1.5 to 1.0. At June 30, 1995 the Company was not in
compliance with certain of these covenants, for which the bank has waived
noncompliance.
Borrowings under the Bank Agreement are collateralized by substantially all
of the assets of Strouse. In addition, Aristotle has provided a guarantee
against the Overadvances.
On October 6, 1995, the Company and its bank executed a letter of intent
(the "Letter of Intent") pursuant to which they agreed in principle to a
modification of certain terms of the Bank Agreement (the "Amended Bank
Agreement").
Pursuant to such Letter of Intent, the bank and the Company have agreed (i)
to modify the maturity of the Bank Agreement to October 31, 1996; (ii) to
provide for maximum borrowings of $8,750,000 under the line-of-credit;
(iii) to reduce the maximum amount that the bank will advance against
eligible inventory, as defined, to $5,000,000; (iv) to reduce the amount of
Overadvances that are available to $1,000,000 through December 31, 1995,
and to $500,000 at all times thereafter; (v) to adjust the interest rate on
the line-of-credit to 1.0% over the bank's prime rate, or 3.0% over LIBOR;
(vi) to require that the Company and ASI unconditionally guarantee the
$2,500,000 term loan; and (vii) to prohibit Strouse from paying any
dividends up to the Company without the prior consent of the bank.
The Amended Bank Agreement also requires that the Company use certain
proceeds, if any, resulting from the release of amounts from the OTS Escrow
(see Note 3) to prepay up to one half of all amounts outstanding under the
term notes, with such prepayment not to exceed $500,000. The utilization of
any such proceeds in excess of the prepayment is also limited until such
time as the term loans are paid in full.
F-15
In addition, the Amended Bank Agreement provides for revised financial
covenants to require (i) a net worth, as defined, of $3,100,000 through
December 31, 1995 and increasing thereafter to $3,700,000 as of June 30,
1996; (ii) a debt service ratio, as defined, of 1.4 to 1.0 at June 30,
1996; (iii) a debt to net worth ratio, as defined, of 4.25 to 1.0 through
March 30, 1996 and decreasing thereafter to 3.75 to 1.0 as of June 30,
1996; (iv) an interest coverage ratio, as defined, of 1.5 to 1.0 through
March 31, 1996 and increasing thereafter to 1.75 to 1.0 and (v) a capital
expenditure limitation, as defined, of $450,000 for fiscal year 1996.
Capital lease obligation -
------------------------
Strouse has entered into a capital lease obligation with one of their
principal suppliers to lease the supplier's land, building, machinery and
equipment. Under the terms of the lease, Strouse makes quarterly payments
of $81,250, $87,500, and $93,750, for principal, interest and executor
costs, for calendar years 1995, 1996 and 1997, respectively. The imputed
interest rate on the obligation is 9.0% per annum. Included in the
accompanying consolidated balance sheet is $600,000 of land, building and
equipment under capital lease, net of accumulated depreciation of $39,000,
resulting from this lease commitment.
In connection with this lease, Strouse has the option to purchase the land,
building, machinery and equipment for $700,000.
Aggregate maturities of all long-term debt and notes payable for each of
the succeeding five years subsequent to June 30, 1995 and thereafter are as
follows (in thousands):
Year Ending
June 30, Amount
-------- ------
1996 $ 548
1997 428
1998 9,760
1999 48
2000 24
Thereafter 14
-------
Total $10,822
=======
5. Commitments and Contingencies:
-----------------------------
Lease commitments -
-----------------
Strouse is the lessee of space in its New Haven facility from a related
party. The agreement provides that the Company will pay for its prorated
portion of operating expenses associated with the building. As of June 30,
1995, Strouse owed the related party $27,000 related to this lease which is
included in accrued liabilities in the accompanying 1995 consolidated
balance sheet. In addition, Strouse leases showroom space in New York City
and Aristotle leases an administrative office in New
F-16
Haven. Rent expense under these operating leases amounted to approximately
$474,000 for the year ended June 30, 1995 and $118,000 for the period from
the Acquisition to June 30, 1994. Rent expense for years prior to 1994 was
not significant.
At June 30, 1995, approximate future minimum payments including current
escalations for operating expenses under these operating leases are as
follows (in thousands):
Year Ending
June 30, Amount
-------- ------
1996 $487
1997 498
1998 523
1999 549
2000 288
Guarantee -
---------
Strouse has guaranteed annuity payments to the participants of a terminated
Company pension plan. The payments are currently being satisfied under an
annuity contract with an insurance company.
Contingencies -
-------------
During 1990, two separate purported stockholder class action suits were
filed against the Company and were subsequently filed as a consolidated
complaint. The complaint alleges, among other things, that the Company, a
former director and certain former officers acted to inflate the price of
the Company's common stock by issuing materially false and misleading
statements or omissions. Management believes that the aggregate
liabilities, if any, net of insurance coverage, arising from such actions
will not have a material adverse effect on the results of operations or
financial position of the Company. An insurance claim for recoverable legal
fees of $576,000 is included in other current assets in 1995 and 1994.
The Company is aware that the FDIC is preparing claims against former
officers and directors of the Bank based on alleged negligence in approving
certain loans that the Bank made and subsequently lost money on when the
borrowers defaulted. Under Delaware law and under the Company's bylaws, the
Company may have an obligation to indemnify these officers and directors
for expenses and liabilities incurred by them in connection with any action
the FDIC may bring to enforce its claims. Due to the fact that the FDIC has
not yet defined its claims with precision, and given the uncertainties of
litigation, the Company is unable to determine what the outcome of these
claims will have on the financial condition of the Company. Any potential
loss from those indemnifications has not been accrued for.
On April 19, 1995, the FDIC filed a complaint claiming entitlement to
income tax refunds previously received and yet to be received by the
Company. Although the Company believes that the FDIC is not entitled to the
entire amount of the refunds or to damages for the Company's refusal
F-17
to pay the refunds to the Bank or to the FDIC, the Company established a
reserve of $3,982,000 which was reflected in income tax expense during the
six months ended June 30, 1993. Currently, amounts equal to the $3,982,000
of refunds that have been received by the Company have been deposited in an
escrow account. The Company and the FDIC have agreed that certain future
refunds, including a refund of approximately $1,300,000, will also be
deposited in a separate escrow account. (See Note 3).
Other commitments -
-----------------
The Company has entered into five-year employment agreements (the
"Employment Agreements") with four officers. In addition to providing for
base salaries, the Employment Agreements provide for (a) 6% annual
increases if certain levels of EBIT are achieved, and (b) an annual cash
bonus and the annual grant of stock options to purchase ASI Common Stock,
if certain other levels of EBIT are achieved. The minimum level of EBIT
required in order for such employees to receive the bonus and stock options
under the Employment Agreements for the one-year period ended August 31,
1995 is $2,022,000. The annual bonus increases proportionately from 20% of
salary for achieving the minimum level of EBIT to 100% of salary for
achieving EBIT of more than double the minimum level of EBIT. The annual
stock options increase proportionately from 10,000 shares of ASI Common
Stock for achieving the minimum level of EBIT to 20,000 shares for
achieving EBIT of more than double the minimum level of EBIT. The stock
options will be exercisable at the market price on the date that they are
granted. The number of stock options granted to each employee will be based
on the amount of his or her salary in relation to the amounts of the
salaries of the other employees who are parties to such Employment
Agreements. During 1994, approximately $93,000 of bonuses were accrued of
which approximately $75,000 was recorded in the Acquisition discussed in
Note 1. In conjunction therewith, the Strouse Stockholders were issued
options to purchase 10,208 shares of ASI Common Stock. There is no similar
bonus accrued for as of June 30, 1995 as management does not expect to meet
the EBIT target.
6. Stockholders' Equity:
--------------------
In April 1994, Aristotle's stockholders and board of directors approved an
amendment to Aristotle's certificate of incorporation which, among other
things: (i) decreased the number of authorized shares of Aristotle's common
stock from 20,000,000 shares to 3,000,000 shares; (ii) provided for a ten
to one reverse stock split of Aristotle's common stock and (iii) reduced
the par value of the Aristotle common stock and Aristotle preferred stock
from $1.00 per share to $.01 per share.
The Company had the following common, treasury and preferred stock issued
and outstanding at June 30, 1995 and 1994:
F-18
Redeemable
Common Preferred Treasury
Stock Stock Stock
----- ----- ----
Outstanding, January 1, 1992 11,058,019 - 101,500
Purchase of treasury stock - - 7,869
----------- -------- --------
Outstanding, December 31, 1992 11,058,019 - 109,369
Issuance of treasury stock
to directors - - (45,118)
Purchase of treasury stock - - 3,816
----------- -------- --------
Outstanding, June 30, 1993 11,058,019 - 68,067
Issuance of treasury stock
to directors - - (67,172)
Purchases of treasury stock - - 215,200
Issuance of preferred stock
in connection with the
Acquisition (Note 1) - 270,379 -
Ten to one reverse stock split (9,952,218) - (194,485)
----------- -------- --------
Outstanding, June 30, 1994 1,105,801 270,379 21,610
Issuance of treasury stock
to directors - - (5,417)
Redemption of fractional shares - - 2,075
----------- -------- --------
Outstanding, June 30, 1995 1,105,801 270,379 18,268
=========== ======== ========
Aristotle common shares reserved for future issuance consist of the
following:
1995 1994
---- ----
Conversion of ASI Preferred Stock 314,591 314,591
Conversion of ASI Common Stock 33,424 25,000
Exercise of ASI Options 35,208 25,000
Exercise of stock options granted
under the Plan (Note 8) 65,037 60,537
Options remaining to be granted
under the Plan (Note 8) 41,453 45,953
------- -------
Total 489,713 471,081
======= =======
F-19
7. Income Taxes:
------------
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 utilizes the
liability method and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax
basis of assets and liabilities given the provisions of enacted tax laws.
At June 30, 1995 and 1994, the principal components of deferred tax assets,
liabilities and the valuation allowance are as follows (in thousands):
1995
--------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
------------- ---------------
Federal net operating loss carryforwards $ 250 $ 440
Federal capital loss carryforwards - 1,648
State of Connecticut net operating loss
carryforwards - 580
State of Connecticut capital loss
carryforwards - 1,133
Inventory purchase accounting basis
difference (812) -
Patents and trademarks purchase
accounting basis difference - (35)
Other 191 152
----- --------
(371) 3,918
Valuation allowance (354) (3,193)
----- --------
$(725) $ 725
===== ========
1994
--------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
------------- ---------------
Federal net operating loss carryforwards $ - $ 588
Federal capital loss carryforwards - 1,648
State of Connecticut net operating loss
carryforwards - 545
State of Connecticut capital loss
carryforwards - 1,133
Inventory purchase accounting basis
difference (830) -
Patents and trademarks purchase
accounting basis difference - (36)
Other 221 -
----- -------
(609) 3,878
Valuation allowance (191) (2,977)
----- -------
$(800) $ 901
===== =======
F-20
Charges (benefits) for income taxes are comprised of the following:
(Dollars in Thousands)
--------------------------------------------------
Twelve
Twelve Months Ended Six Months Ended Months Ended
------------------- ----------------
June 30, June 30, December 31,
--------
1995 1994 1993 1992
---- ---- ---- ----
Current:
Federal $ - $ 21 $4,287 $(1,412)
State 25 (41) - (69)
--- ---- ------ -------
$25 $(20) $4,287 $(1,481)
=== ==== ====== =======
The 1995 tax provision relates principally to minimum state and franchise
taxes as the statutory tax benefit has been fully offset by an increase in
the valuation allowance. The 1994 tax benefit relates principally to a
state tax refund of $86,000, a federal built in gains tax of $21,000 for a
LIFO decrement occurring subsequent to the business s combination discussed
in Note 1 and state taxes of $31,000.
At June 30, 1995, the Company had Federal net operating loss carryforwards
of approximately $2,000,000 (expiring by 2010) and capital loss
carryforward of approximately $4,800,000 (expiring by 1999). In addition,
for the tax return filed for the year ended December 31, 1992, the Company
made elections under provisions set forth in regulations proposed by the
Internal Revenue Service in April 1992. The elections will enable the
Company to disaffiliate from the Bank for federal income tax purposes and
to reattribute certain losses of the Bank to the Company. As a result of
these elections, the Company expects to succeed to Federal net operating
loss carryforwards of approximately $81,600,000. These carryforwards may be
reduced by the amounts of assistance given the acquirer of the assets and
liabilities of the Bank.
The application of tax law with respect to the Company's election to
disaffiliate from the Bank and to reattribute bank tax losses to the
Company is not certain and the Company can make no assurance that any part
of the net operating loss carryforwards of the Bank will be available to be
utilized by the Company. Even if the Company succeeds to any part of the
Bank's tax loss carryforwards, its ability to fully utilize such tax loss
carryforwards is dependent upon many factors including, (1) the acquisition
by the Company of profitable investments, and (2) avoiding a fifty percent
"ownership change" as defined in Section 382 of the Internal Revenue Code.
If there is an "ownership change", the tax loss carryforwards available to
the Company would be significantly reduced or eliminated. At a special
stockholders meeting held on April 8, 1994 the stockholders voted to
restrict certain stockholder transfers.
For state tax purposes, the election to reattribute the losses of the Bank
to the Company is not applicable and it is unlikely that the Company will
obtain a Connecticut tax loss carryforward as a result of its disposition
of the Bank. Excluding any state tax benefit from disposition of the Bank,
Connecticut net operating loss carryforwards and capital loss carryforwards
are approximately $5,000,000 and $9,800,000, respectively, and expire from
1995 through 1999.
F-21
8. Stock Option Plan and Profit Sharing Plan:
-----------------------------------------
The Company established a Stock Option Plan (the "Plan") in 1986, which
provides for the granting of nonincentive and incentive stock options to
directors and officers of the Company for the purchase of Aristotle common
stock. Nonincentive stock options and certain incentive stock options
granted under the Plan are generally exercisable after one year but within
ten years as of the date of the grant. Additionally, certain nonincentive
stock options granted under the Plan may be accompanied by stock
appreciation rights ("SAR"). The granting of such stock options (SAR's)
entitle the holder to surrender an option and receive cash equal to the
increase in the fair market value of the common stock from the date of
grant to the date of exercise.
In 1990, the Board of Directors of the Company approved a Stock Option
Exchange program that gave officers holding nonincentive and incentive
stock options granted prior to 1990 the opportunity to voluntarily cancel
their outstanding stock options ("Original Options") and receive in
exchange new incentive stock options ("Exchange Options") on a one-for-
four-basis (i.e., four Original Options exchange for one Exchange Option).
The Original Options were exercisable at various prices, all at or
exceeding $100.00 per share. The option exercise price of Exchange Options
was 100% of the fair value of the Company's common stock on the date of
grant, or $13.13 per share. All Exchange Options are exercisable six months
after the date of grant and generally expire within five years of the date
of grant. In 1990, 15,270 Original Options were exchanged for 3,818
Exchange Options.
The activity for the Plan for each of the following periods as adjusted for
the 10 to 1 reverse stock split in May 1994, is as follows:
Twelve Months Ended Twelve Months Ended
June 30,1995 June 30, 1994
----------------------- -----------------------
Number of Option Number of Option
Shares Price Shares Price
------ ----- ------ -----
Options outstanding,
beginning of period 60,537 $5.30-$150.00 58,141 $10.00-$150.00
Options exercised - - - -
Options granted 4,500 5.45 2,396 $5.30
Options canceled or
expired - - - -
------- -------
Options outstanding,
end of period 65,037 $5.30-$150.00 60,537 $ 5.30-$150.00
======= =======
F-22
Six Months Ended Six Months Ended
June 30, 1993 June 30, 1992
----------------------- -----------------------
Number of Option Number of Option
Shares Price Shares Price
------ ----- ------ -----
Options outstanding,
beginning of period 39,641 $10.00-$150.00 89,901 $10.00-$151.13
Options exercised - - - -
Options granted 25,375 $10.00 12,396 $10.00-$ 11.25
Options canceled or
expired 6,875 $10.00-$150.00 62,656 $10.00-$151.00
------- -------
Options outstanding,
end of period 58,141 $10.00-$150.00 39,641 $10.00-$150.00
======= =======
Options for 38,031 shares were exercisable at June 30, 1995. At that date,
there were options for 41,453 shares remaining to be granted under the
Plan.
Strouse has a deferred profit sharing plan (the "Profit Plan"). Under the
Profit Plan, Strouse will match 25% of employee contributions not to exceed
4% of participants' annual compensation. Eligibility is based on attaining
twenty-one years of age and completing one year of service, as defined
within the Profit Plan. Strouse contributions will vest 20% in year 3 and
an additional 20% per year thereafter until full vesting is achieved.
Strouse contributions were approximately $35,000 for the year ended June
30, 1995 and $9,300 for the period from the Acquisition to June 30, 1994.
9. Related Party Transactions:
--------------------------
During the years ended June 30, 1995, 1994 and the six-months ended June
30, 1993, the Company paid its directors $62,000, $76,000 and $48,000,
respectively, in compensation for services as directors of the Company.
Additionally, in 1995, 1994 and 1993, $30,000, $42,000 and $27,000,
respectively, was paid in the form of shares of Aristotle common stock
issued out of treasury stock.
During the year ended December 31, 1992 and the six-month period ended June
30, 1993, certain costs, principally insurance and compensation, incurred
by the Company were allocated to the Company from the Bank.
F-23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in The Aristotle Corporation's Form 10-K, and have
issued our report thereon dated September 1, 1995, except with respect to the
matter discussed in Note 4, as to which the date was October 6, 1995. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in the index of financial statements are presented
for purposes of complying with the Securities and Exchange Commissions rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New Haven, Connecticut
September 1, 1995
F-24
[LOGO OF RAE APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut
The audits referred to in our report dated August 26, 1994 included a
Schedule of Valuation and Qualifying Accounts for the year ended June 30, 1994.
In our opinion, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulation of the
Securities and Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
August 26, 1994
F-24A
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
BALANCE SHEETS:
JUNE 30, 1995 JUNE 30, 1994
------------- -------------
ASSETS
- ------
CURRENT ASSETS
Cash $ 164 $ 7
Other Current Assets 523 844
----- ------
Total Current Assets 687 851
----- ------
INVESTMENT IN SUBSIDIARY 2,844 3,471
----- ------
OTHER ASSETS
Marketable Securities
Held in Escrow at Market Value 4,682 4,638
Employee Notes Receivable 354 354
Notes Receivable from Subsidiaries 989 1,050
----- ------
6,025 6,042
----- ------
$9,556 $10,364
===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accrued Expenses and Other Liabilities $ 578 $ 577
----- ------
Total Current Liabilities 578 577
ESTIMATED LIABILITY, tax refund claim 3,982 3,982
----- ------
Total Liabilities 4,560 4,559
----- ------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY 4,996 5,805
----- ------
$9,556 $10,364
===== ======
F-25
SCHEDULE I
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS:
TWELVE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 DECEMBER 31, 1992
------------- ------------- ------------- -----------------
INCOME
Investment and Interest Income $ 392 $ 343 $ 174 $ 844
Other Expenses (589) (1,016) (651) 474
------ ----- -------- ---------
Income (Loss) from Continuing Operations
Before Provision for Income Tax and Equity
in Undistributed Earnings of Subsidiary (197) (673) (477) 1,318
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARY (626) 253 - -
INCOME TAX EXPENSE (BENEFIT) 75 (241) 4,287 (1,481)
------ ----- -------- ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS (898) (179) (4,764) 2,799
DISCONTINUED OPERATIONS
Loss from Operations of Subsidiary
Prior to Seizure - - - (34,280)
Loss on Write-off of Subsidiary Upon
Seizure - - - (25,447)
------ ----- -------- --------
Loss from Discontinued Operations - - - (59,727)
------ ----- -------- --------
NET LOSS ($898) ($ 179) ($4,764) ($56,928)
====== ======== ======== =========
F-26
SCHEDULE I
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
STATEMENTS OF CASH FLOWS:
TWELVE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993 DECEMBER 31, 1992
------------- ------------- ------------- -----------------
OPERATING ACTIVITIES
Net Loss ($898) ($ 179) ($4,764) ($56,928)
Equity in Undistributed Earnings of Subsidiary 626 (253) - -
(Gain) Loss on Sale of Investment Securities - 48 (11) (688)
Write-down of Securities - - 38 -
Issuance of Treasury Stock for Services 30 42 - -
Loss from Discontinued Operations - - - 59,727
Reserve for FDIC Claim - - 4,287 -
Other 384 (1,668) 128 141
------ ------- -------- ---------
Total Cash Provided from (Used in)
Operating Activities 142 (2,010) (322) 2,252
INVESTING ACTIVITIES
Increase in Notes Receivable from Employees - (354) - -
Proceeds from Sale of Investment Securities 26 7,778 23 1,565
Purchases of Investment Securities - (8,479) (4,077) -
Purchase of Subsidiary, Net of Acquired Cash - (2,617) - -
------ ------- -------- ---------
Total Cash Provided by (Used in)
Investing Activities 26 (3,672) (4,054) 1,565
FINANCING ACTIVITIES
Purchase of Treasury Stock (11) (143) (1) (2)
Decrease in amounts due from/to Subsidiary - - - (40)
------ ------- -------- ---------
Total Cash Used by Financing Activities (11) (143) (1) (42)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 157 (5,825) (4,377) 3,775
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 7 5,832 10,209 6,434
------ ------- -------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $164 $ 7 $5,832 $10,209
====== ======= ======== =========
F-27
SCHEDULE II
THE ARISTOTLE CORPORATION AND SUBSIDIARY
VALUATION ACCOUNTS
(DOLLARS IN THOUSANDS)
_________________________________________________________________________________________________________________
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------
Additions
===============================
(1) (2)
-------------------------------------
Balance at Charged to Balance
beginning of costs and Deductions/ at end
Description period expenses Other (A) write-offs of period
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1995
- -------------------------------
Accounts Receivable Reserve $108 - - (8) $100
Co-op Advertising Reserve $ 69 84 - (82) $ 71
Accounts Receivable - LT Reserve $ 63 15 - (42) $ 36
FISCAL YEAR ENDED JUNE 30, 1994
- -------------------------------
Accounts Receivable Reserve $ - 8 117 (17) $108
Co-op Advertising Reserve $ - 152 59 (142) $ 69
Accounts Receivable - LT Reserve $ - 5 58 - $ 63
(A) Acquired through business combination
F-28
EXHIBIT INDEX
Exhibit 4.4- Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Aristotle Sub, Inc. filed August 30, 1995
Exhibit 10.3- Letter Agreement by and among The Aristotle Corporation, Aristotle
Sub, Inc., Alfred Kniberg and David Howell dated June 27, 1995
Exhibit 10.15- Lease dated October 4, 1991 by and between The Strouse, Adler
Company and New England Resources Limited Partnership
Exhibit 10.16- First Amendment to Lease dated April 11, 1994 by and between New
England Resources Limited Partnership
Exhibit 10.17- Second Amendment to Lease dated December 14, 1994 by and between
New England Resources Limited Partnership
Exhibit 10.18- First Amended and Restated Master Credit Agreement dated as of
November 9, 1994 by and between The Strouse, Adler Company and Fleet Bank,
National Association
Exhibit 10.19- Letter Agreement dated October 6, 1995 by and between The
Strouse, Adler Company, The Aristotle Corporation, Aristotle Sub, Inc. and Fleet
Bank, National Association
Exhibit 10.20- Option Agreement dated as of December 22, 1994 by and among The
Strouse, Adler Company, PBS Enterprises Ltd., Davedan Properties Ltd. and Maggie
Manufacturing Company Ltd.
Exhibit 10.21- Exclusive Subcontracting Agreement dated as of December 22, 1994
by and among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan
Properties Ltd. and Maggie Manufacturing Company Ltd.
Exhibit 10.22- Restrictive Covenant Agreement dated as of December 22, 1994 by
and among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan Properties
Ltd., Maggie Manufacturing Company Ltd., Peter Blair Shalleck and Sandy Shalleck
Exhibit 10.23- Specific Performance Agreement dated as of December 22, 1994 by
and among The Strouse, Adler Company, Peter Blair Shalleck and Sandy Shalleck
Exhibit 21.1- Subsidiaries of The Aristotle Corporation
Exhibit 27- Financial Data