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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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
THE ARISTOTLE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
96 CUMMINGS POINT RD., STAMFORD, CONNECTICUT
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
06-1165854
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
06902
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(203) 867-4090
---------------------------
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
As of August 10, 2002, 17,031,687 shares of Common Stock, 1,046,716 shares
of Series I Preferred Stock and 10,984,971 shares of Series J Preferred Stock
were outstanding.
1
THE ARISTOTLE CORPORATION
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 2002
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31,
2001................................................................................3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001(unaudited)...................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001(unaudited)...................................................5
Notes to Condensed Consolidated Financial Statements (unaudited)..................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................20
Item 3 - Quantitative and Qualitative Disclosure About Market Risk.............................................24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.....................................................................................26
Item 2 - Changes in Securities.................................................................................26
Item 3 - Defaults Upon Senior Securities.......................................................................26
Item 4 - Submission of Matters to a Vote of Security Holders...................................................26
Item 5 - Other Information.....................................................................................28
Item 6 - Exhibits and Reports on Form 8-K......................................................................28
Signatures.....................................................................................................31
Exhibit Index..................................................................................................32
2
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
ASSETS (UNAUDITED)
- ------
Current assets:
Cash and cash equivalents.............................................................. $ 9,088 $ 4,465
Marketable securities.................................................................. 848 --
Accounts receivable, net............................................................... 19,601 13,750
Inventories............................................................................ 34,224 24,326
Deferred income taxes.................................................................. 6,851 1,176
Other current assets................................................................... 5,831 6,275
----------- ------------
Total current assets.............................................................. 76,443 49,992
----------- ------------
Property, plant and equipment, net.......................................................... 9,518 9,561
----------- ------------
Other assets:
Goodwill, net.......................................................................... 7,346 7,346
Deferred income taxes.................................................................. 25,183 423
Other noncurrent assets................................................................ 135 114
----------- ------------
Total other assets................................................................ 32,664 7,883
----------- ------------
Total assets...................................................................... $ 118,625 $ 67,436
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt................................................... $ 8,128 $ 8,403
Accounts payable....................................................................... 11,101 3,694
Accounts payable, affiliates........................................................... 854 --
Accrued expenses....................................................................... 3,849 5,385
Accrued dividends payable.............................................................. 306 --
Accrued income taxes................................................................... 3,749 --
Deferred revenue....................................................................... 37 --
----------- -----------
Total current liabilities......................................................... 28,024 17,482
----------- -----------
Long term debt, net of current maturities................................................... 36,631 36,027
----------- -----------
Total liabilities................................................................. 64,655 53,509
----------- -----------
Stockholders' equity:
Preferred Stock, Series I, $6.00 stated value, $.01 par value, 2,400,000 shares
authorized, 1,046,716 issued and outstanding........................................... 6,280 --
Preferred Stock, Series J, $6.00 stated value, $.01 par value, 11,200,000 shares
authorized, 10,984,971 issued and outstanding.......................................... 65,760 --
Common stock, $.01 par value, 20,000,000 shares authorized, 17,044,675 shares issued
and 17,031,687 shares outstanding as of June 2002 and 15,000,000 shares deemed issued
as of December 2001; 12,988 shares of treasury stock as of June 30,2002................ 170 150
Additional paid-in capital............................................................. (53,143) 3,103
Retained earnings...................................................................... 35,082 10,872
Accumulated other comprehensive loss................................................... (179) (198)
----------- -----------
Total stockholders' equity........................................................ 53,970 13,927
----------- -----------
$ 118,625 $ 67,436
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net revenue............................................................. $ 43,322 $ 43,238 $ 77,851 $ 76,225
Cost of goods sold...................................................... 27,987 28,427 50,264 50,171
--------- --------- --------- ---------
Gross profit.................................................. 15,335 14,811 27,587 26,054
Selling, general and administrative expenses............................ 10,053 9,946 19,518 19,219
Special charges-American Educational Products, Inc. (AMEP).............. -- 516 -- 567
--------- --------- --------- ---------
Operating income ............................................. 5,282 4,349 8,069 6,268
Other income (expense):
Investment interest and other, net................................. (8) 21 17 31
Interest expense................................................... (508) (843) (966) (1,590)
--------- --------- --------- ---------
Income before income taxes, minority interest and
extraordinary gain.......................................... 4,766 3,527 7,120 4,709
Provision for income taxes.............................................. (1,940) (1,375) (2,842) (1,842)
--------- --------- --------- ---------
Income before minority interest and extraordinary gain........ 2,826 2,152 4,278 2,867
Minority interest....................................................... -- 37 -- 68
Extraordinary gain...................................................... 20,237 -- 20,237 --
--------- --------- --------- ---------
Net income 23,063 2,189 24,515 2,935
Preferred dividends..................................................... 306 -- 306 --
--------- --------- --------- ---------
Net income applicable to common shareholders............................. $ 22,757 $ 2,189 $ 24,209 $ 2,935
========= ========= ========= =========
Basic earnings per common share:
Income before extraordinary gain........................................ $ .16 $ .15 $ .26 $ .20
Extraordinary gain................................................. 1.33 -- 1.34 --
--------- --------- --------- ---------
Net Income......................................................... $ 1.49 $ .15 $ 1.60 $ .20
========= ========= ========= =========
Diluted earnings per common share:
Income before extraordinary gain .................................. $ .16 $ .15 $ .26 $ .20
Extraordinary gain................................................. 1.31 -- 1.31 --
--------- --------- --------- ---------
Net income......................................................... $ 1.47 $ .15 $ 1.57 $ .20
========= ========= ========= =========
Weighted average shares outstanding:
Basic shares 15,290,241 15,000,000 15,145,922 15,000,000
Diluted shares 15,518,106 15,000,000 15,373,787 15,000,000
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2002 2001
------------------- ------------------
Cash flows from operating activities:
Net income applicable to common shareholders $ 24,209 $ 2,935
Adjustments to reconcile net income available to common shareholders
to net cash provided by(used in) operating activities:
Extraordinary gain (20,237) --
Depreciation and amortization 797 1,077
Stock option compensation expense 17 --
Loss on sale or disposal of property, plant and equipment 10 12
Effect of inventory purchase adjustment 147 --
Change in assets and liabilities, net of effects of acquired
business:
Accounts receivable (4,828) (6,281)
Inventories (8,046) (9,719)
Prepaid expenses and other current assets 577 842
Trade accounts payable 7,797 8,113
Accrued expenses 1,682 2,973
Intangible assets and other non-current assets 369 (68)
----------------- ------------------
Net cash provided by (used in) operating activities 2,494 (116)
----------------- ------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (765) (804)
Proceeds from the sale of property, plant and equipment -- 33
Cash acquired in merger with Nasco International, Inc. 3,272 --
Cash paid for acquisition of AMEP interest -- (4,973)
Cash paid for acquisition of Spectrum, net of cash acquired -- (5,241)
----------------- ------------------
Net cash provided by (used in) investing activities 2,507 (10,985)
----------------- ------------------
Cash flows from financing activities:
Equity contribution from parent -- 274
Payments on line of credit -- (2,541)
Proceeds from issuance of long term debt -- 20,000
Payment of Geneve notes payable -- (5,490)
Principal payments on long-term debt (378) (384)
----------------- ------------------
Net cash (used in) provided by financing activities (378) 11,859
----------------- ------------------
Net increase in cash and cash equivalents 4,623 758
Cash and cash equivalents at beginning of period 4,465 2,565
----------------- ------------------
Cash and cash equivalents at end of period $ 9,088 $ 3,323
================= ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 943 $ 1,453
Income taxes $ 400 $ 410
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Prior to June 17, 2002, The Aristotle Corporation ("Aristotle" or the
"Company") was a holding company which, through its subsidiaries, Simulaids,
Inc. ("Simulaids") and Safe Passage International, Inc. ("Safe Passage"),
conducted business in two segments, the medical education and training products
market and the computer-based training market. Simulaids' primary products
include manikins and simulation kits used for training in CPR, emergency rescue
and patient care fields. Simulaids' products are sold throughout the United
States and internationally via distributors and catalogs to end users such as
fire and emergency medical departments and nursing and medical schools. Safe
Passage develops and licenses computer-based training products to government and
industry clients.
On June 17, 2002, Aristotle merged (the "Merger") with Nasco
International, Inc. ("Nasco"), an indirect subsidiary of the Geneve Corporation,
a privately-held diversified financial services company ("Geneve"). In
connection with the Merger, Aristotle changed its accounting fiscal year from a
June 30th year-end to a December 31st year-end.
Nasco is a leading manufacturer and global catalog-distribution company
serving the education, health and agriculture markets. A selection of over
80,000 items is offered, primarily through catalogs carrying the brand of Nasco,
as well as those bearing the brands of Triarco, Summit Learning, Hubbard
Scientific, Scott Resources and Spectrum Educational Supplies. Products include
educational materials and supplies for substantially all K-12 curricula, molded
plastics, biological materials and items for the agriculture, senior care and
food industries. Simulaids, Inc. and Nasco, combine to offer simulation kits and
manikins used for training in cardiopulmonary resuscitation, and the fire and
emergency rescue and patient care fields.
Pursuant to the Merger, on June 17, 2002, the separate corporate existence
of Nasco ceased and Aristotle was the surviving entity. Immediately following
the Merger, Aristotle's business was comprised of the operations of the Nasco
group of companies, Simulaids and Safe Passage. Due to the relative sizes of
the parties and conditions to the Merger, the transaction was accounted for as a
reverse acquisition using the purchase method of accounting under accounting
principles generally accepted in the United States of America. Accordingly, for
accounting and reporting purposes, Nasco is deemed to be the acquiring company
and financial information reported for periods prior to the Merger is that of
Nasco. In applying purchase accounting to the Merger, the assets and liabilities
of Aristotle were adjusted to their fair market values at June 17, 2002. This
included recognition of a significant deferred tax asset principally
attributable to Aristotle's net operating loss carryforwards. As a result of
such recognition, Aristotle's non-current assets were reduced to zero and
negative goodwill of $20.2 million was recognized as an extraordinary gain at
the acquisition date.
As consideration for the Merger, Nasco Holdings Inc. ("Nasco Holdings"),
the sole shareholder of Nasco and a subsidiary of Geneve received 15,000,000
shares of Aristotle's common stock and 10,000,000 shares of a newly authorized
Series J $6.00 non-convertible, non-voting, cumulative 12% preferred stock, par
value $0.01 per share. Separately, Aristotle paid a stock dividend of one share
of newly authorized Series I $6.00 convertible, voting, cumulative 11% preferred
stock, par value $0.01 per share on each share of Aristotle's common stock
outstanding on June 10, 2002.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of results that may be expected for any other interim
period or for the year ending December 31, 2002. For further information, refer
to the consolidated financial statements and notes included in Aristotle's Proxy
Statement-Prospectus dated May 15, 2002, Annual Report on Form 10-K for the year
ended June 30, 2001 and quarterly reports on Form 10-Q for the quarterly periods
ended September 30, 2001, December 31, 2001 and March 31, 2002.
6
2. PRO FORMA FINANCIAL DATA
The pro forma financial data and accompanying notes set forth below,
which are unaudited, should be read in conjunction with the Consolidated
Financial Statements and related notes included in this Quarterly Report on Form
10-Q and in Aristotle's Proxy Statement - Prospectus dated May 15, 2002, and
Aristotle's 2001 Annual Report on Form 10-K previously filed with the Securities
and Exchange Commission. The pro forma financial data is provided for
informational purposes only and should not be construed to be indicative of
Aristotle's financial condition or results of operations had the Merger been
consummated on the dates assumed, and is not intended to project Aristotle's
financial condition on any future date or results of operations for any future
period.
The assumptions used in preparing this pro forma data are comparable to
the assumptions described in the notes to the pro forma statements of operations
and the pro forma balance sheet set forth later in this footnote. Operating
results for the three and six months ended June 30, 2002 and 2001, on a pro
forma basis as though Aristotle was acquired by Nasco on January 1, 2001, are
summarized below.
Three Months Ended Six Months Ended
------------------- ----------------
June 30, June 30,
-------- --------
(unaudited)
(dollars in thousands, except per share data)
2002 2001 2002 2001
---- ---- ---- ----
Net revenue $45,175 $45,001 $81,421 $81,522
Net income applicable to common shareholders,
before extraordinary gain $ 1,098 $ 318 $ 826 $(1,338)
Basic earnings per common share, before
extraordinary gain $ .06 $ .02 $ .05 $ (.08)
Diluted earnings per common shares, before $ .06 $ .02 $ .05 $ (.08)
extraordinary gain
The following pro forma statements of operations for the six months
ended June 30, 2002 and the twelve months ended December 31, 2001 reflect the
historical accounts of Nasco and Aristotle, adjusted to give pro forma effect to
the Merger and the stock dividend issuance as if those transactions had occurred
at the beginning of the respective periods. The gain resulting from the
generation of negative goodwill in the Merger does not appear in the pro forma
statements of operations because it is considered extraordinary. The pro forma
data for 2001 also reflects the Nasco's acquisition of Spectrum Educational
Supplies Ltd, ("Spectrum") as if such acquisition had occurred at the beginning
of the period.
Also set forth below is an unaudited pro forma balance sheet as of
December 31, 2001, reflecting the historical accounts of Nasco and Aristotle as
of that date, adjusted to give pro forma effect to the Merger (and the stock
dividend which occurred simultaneously), as if they had been consummated on
December 31, 2001.
7
THE ARISTOTLE CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Nasco Aristotle Purchase
Historical Historical of Aristotle Pro Forma
---------- ---------- ------------ ----------
(a) (b) (c)
Net Revenues $ 77,851 $ 5,164 $ (1,594) (1) $ 81,421
Cost of goods sold 50,264 2,519 (1,533) (2) 51,250
---------- ---------- ----------- ----------
Gross profit (loss) 27,587 2,645 (61) 30,171
Selling, general and administrative expenses 19,518 1,855 (1,039) (3) 20,334
---------- ---------- ----------- ----------
Operating income 8,069 790 978 9,837
Investment interest and other, net 17 (12) - 5
Interest expense (966) (344) (1,310)
---------- ---------- ----------- ----------
Income before income taxes 7,120 434 978 8,532
Provisions for income taxes (2,842) (190) (374) (4) (3,406)
---------- ---------- ----------- ----------
Net income 4,278 244 604 5,126
Preferred dividends 306 - 3,994 (5) 4,300
---------- ---------- ----------- ----------
Net income applicable to common $ 3,972 $ 244 $ (3,390) $ 826
shareholders ========== ========== =========== ==========
Basic earnings per common share 0.26 $ 0.05
Diluted earnings per common share 0.26 $ 0.05
Weighted average shares outstanding:
Basis shares 15,145,922 17,031,687
Diluted shares 15,373,787 17,259,552
(a) Represents amounts reported in this Quarterly Report on Form 10-Q for
the six months ended June 30, 2002 for Nasco as the accounting acquirer
(for the entire period) and for Aristotle (for the period subsequent to
the Merger).
(b) Represents amounts for Aristotle prior to the Merger.
(c) Footnotes to Pro Forma Statement of Operations.
8
FOOTNOTES TO PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1) The elimination of intercompany sales between Nasco and Aristotle.
(2) The elimination of intercompany transactions between Nasco and
Aristotle of $1,478 and the reduction in depreciation and
amortization expense of $55 due to the elimination of all Aristotle
long-term assets.
(3) The elimination of Nasco Holdings' management fees paid by Nasco of
$854, the elimination of intercompany transactions of $116 between
Nasco and Aristotle and the reduction in depreciation and
amortization expense of $69 due to the elimination of Aristotle
long-term assets.
(4) Recognition of an effective tax rate as a result of the balance
sheet recognition of the deferred tax asset of $30,500 related to
the future utilization of net operating loss carryforwards.
(5) To record dividends on the preferred stock: 1,046,716 shares of
Series I $6.00 preferred stock with an 11% dividend. The Series I
preferred stock represents the shares distributed to the non-Geneve
shareholders on
the date of the closing of the Merger........................ $321
10,984,971 shares of Series J $6.00 Preferred Stock with a 12%
dividend. The Series J Preferred Stock represents 984,971 shares
distributed to Geneve on the date of the closing of the Merger
and 10,000,000 shares received by Nasco Holdings as part of the
exchange for its shares of Nasco's Common Stock ............. 3,673
------
Total.........................................................$3,994
Dividends are subject to the discretion of the Aristotle Board of Directors and
will be affected in part by future financial performance, available cash and
restrictions on cash dividends as set forth in credit agreements which have been
entered into by Nasco and assumed by Aristotle.
9
THE ARISTOTLE CORPORATION
PRO FORMA RESULTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Nasco Nasco Aristotle Purchase
Historical Acquisitions Historical of Aristotle Pro Forma
---------- ------------ ---------- ------------ ---------
Net revenues.................................. $161,961 $1,769(1) $9,203 $(2,062)(7) $170,871
Cost of goods sold............................ 105,447 1,049(2) 4,639 (1,394)(8) 109,741
------- ----- ----- ------- -------
Gross profit (loss)........................... 56,514 720 4,564 (668) 61,130
------ --- ----- --- ------
Selling, general and administrative expenses.. 38,207 720(3) 3,930 (1,914)(9) 40,943
Special charges--American Educational
Products, Inc. (AMEP)......................... 612 -- -- -- 612
Goodwill amortization......................... 455 43(4) 239 (239)(10) 498
--- -- --- ----- ---
Total operating expenses...................... 39,274 763 4,169 (2,153) 42,053
------ --- ----- ------- ------
Operating income (loss)....................... 17,240 (43) 395 1,485 19,077
Investment interest and other, net............ 455 -- 219 -- 674
Interest expense.............................. (3,159) (58)(5) (69) -- (3,286)
----- -- -- -- ---
Income (loss) before income taxes and
minority interest............................. 14,536 (101) 545 1,485 16,465
(Provision) benefit for income taxes.......... (5,860) 22 (6) (71) (741) (11) (6,650)
------- ---- ---- ------ -------
Income (loss) before minority interest........ 8,676 (79) 474 744 9,815
Minority interest............................. 99 -- -- -- 99
----- ----- ---- ---- -----
Net income.................................... 8,775 (79) 474 744 9,914
Preferred dividends........................... -- -- -- 8,534 (12) 8,534
----- ----- ---- ----- -----
Net income (loss) applicable to common
shareholders.................................. $8,775 $(79) $474 $(7,790) $1,380
====== ===== ==== ======== ======
Basic earnings per common share............... $ 0.52 $ 0.08
Diluted earnings per common share............. $ 0.52 $ 0.08
Weighted average shares outstanding:
Basic shares..................................16,931,581 16,931,581
Diluted shares................................16,977,104 16,977,104
10
FOOTNOTES TO PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(1) To record the historical sales of Spectrum of $1,801 for the three months
ended March 31, 2001, to include results prior to Nasco's acquisition of
Spectrum, partially offset by the elimination of intercompany sales of $32
between Spectrum and Nasco.
(2) To record the historical cost of sales of Spectrum of $1,801 for the three
months ended March 31, 2001, partially offset by the elimination of
intercompany costs between Aristotle and Nasco of $752.
(3) To record the expenses of Spectrum of $720 for the three months ended
March 31, 2001.
(4) To record goodwill amortization related to Nasco's acquisition of
Spectrum.
(5) To record interest costs incurred related to Nasco's acquisition of
Spectrum.
(6) To record the income tax benefit related to costs incurred in Nasco's
acquisition of Spectrum.
(7) The elimination of intercompany sales between Nasco and Aristotle.
(8) The elimination of intercompany transactions between Nasco and Aristotle
of $1,911, additional costs of $631 resulting from the increase in the
historical carrying value of the inventory and the resulting sale of such
inventory in the twelve months ended December 31, 2001, and the reduction
in depreciation and amortization expense of $114 due to the elimination of
all Aristotle long-term assets.
(9) The elimination of management fees paid by Nasco to Nasco Holdings, Inc.
of $1,612, the elimination of intercompany transactions of $143 between
Nasco and Aristotle and the reduction in depreciation and amortization
expense of $159 due to the elimination of Aristotle long-term assets.
(10) The reduction in amortization expense due to the elimination of Aristotle
goodwill resulting from the application of purchase accounting to the
assets and liabilities of Aristotle.
(11) Recognition of an effective tax rate as a result of the balance sheet
recognition of the deferred tax asset of $33,200 related to the future
utilization of net operating loss carryforwards.
(12) To record dividends on the preferred stock: 946,610 shares of Series I
$6.00 Preferred Stock with an 11% dividend. The Series I Preferred Stock
represents the shares distributed to the non-Geneve shareholders on the
date of the closing of the Merger.................................. $625
10,984,971 shares of Series J $6.00 Preferred Stock with a 12% dividend.
The Series J Preferred Stock represents 984,971 shares distributed to
Geneve on the date of the closing of the Merger and 10,000,000 shares
received by Nasco Holdings as part of the exchange for its shares of
Nasco's Common Stock................................................ 7,909
------
Total...............................................................$8,534
Dividends are subject to the discretion of the Aristotle Board of Directors and
will be affected in part by future financial performance, available cash and
restrictions on cash dividends as set forth in credit agreements which have been
entered into by Nasco and assumed by Aristotle.
11
THE ARISTOTLE CORPORATION
PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nasco Aristotle Recapitalization Purchase Pro
Historical Historical of Nasco of Aristotle Forma
---------- ---------- -------- ------------ -----
Cash and cash equivalents.................. $4,465 $4,388 $ -- $31 (2) $8,884
Marketable securities...................... -- 794 -- -- 794
Accounts receivable........................ 13,750 716 -- (211)(3) 14,255
Inventories................................ 24,326 847 -- 659 (4) 25,832
Deferred income taxes...................... 1,176 -- -- 5,585 (5) 6,761
Other current assets....................... 6,275 154 -- -- 6,429
----- ----- ---- ----- -----
Total current assets....................... 49,992 6,899 -- 6,064 62,955
Property, plant and equipment, net......... 9,561 1,544 -- (1,544)(6) 9,561
Other assets:
Goodwill-net............................... 7,346 6,768 -- (6,768)(6) 7,346
Deferred income taxes...................... 423 -- -- 27,906(7) 28,329
Other noncurrent assets.................... 114 529 -- (529)(6) 114
--- --- -- ----- ---
$67,436 $15,740 $ -- $25,129 $108,305
======= ======= ========= ======= ========
Current maturities of long-term debt....... $8,403 $85 $ -- $ -- $8,488
Accounts payable........................... 3,694 497 -- (50)(8) 4,141
Accrued expenses........................... 5,385 482 150(1) 1,198 (9) 7,215
Accrued tax reserves....................... -- 720 -- -- 720
Deferred revenue........................... -- 73 -- -- 73
--- --- --- --- ---
Total current liabilities.................. 17,482 1,857 150 1,148 20,637
Long-term debt............................. 36,027 659 -- -- 36,686
------ --- --- --- ------
Total liabilities.......................... 53,509 2,516 150 1,148 57,323
Common stock............................... -- 20 150(1) (1)(10) 169
Additional paid-in capital................. 3,253 163,904 (60,150)(1) (160,645)(10) (53,638)
Preferred stock--Series I.................. -- -- -- 5,680 (11) 5,680
Preferred stock--Series J.................. -- -- 59,850(1) 5,910 (12) 65,760
Retained earnings (deficit)................ 10,872 (150,541) -- 172,878 (13) 33,209
Treasury stock............................. -- (69) -- 69 (14) --
Foreign currency translation............... (198) 16 -- (16)(15) (198)
Net unrealized investment losses.......... -- (106) -- 106 (16) --
--- ----- --- ------- ---
Total stockholders' equity................. 13,927 13,224 (150) 23,981 50,982
------ ------ ----- ------ ------
$67,436 $15,740 $ -- $25,129 $108,305
======= ======= ========== ======= ========
12
FOOTNOTES TO PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
(1)(a) The issuance of fifteen million shares of common stock to Nasco Holdings:
Number of shares......................................... 15,000,000
Common stock ($.01 par value)............................ $150
Paid-in-capital.......................................... (150)
(b) The issuance of ten million shares of Series J preferred stock to Nasco Holdings:
Number of shares......................................... 10,000,000
Preferred stock ($6.00 stated value per share)........... $60,000
Preferred stock--estimated future cost of registration... (150)
-----
Preferred stock--net..................................... 59,850
Accrued expenses--estimated future cost of registration.. 150
Paid-in-capital.......................................... (60,000)
(2) The timing of payments between Nasco and Aristotle.
(3) Elimination of intercompany transactions between Nasco and Aristotle.
(4) The fair market value purchase price adjustment of Aristotle inventory...... $631
The elimination of intercompany transactions between Nasco and Aristotle.... 28
----
Total................................................................. $659
====
(5)(a) The current portion of the total net deferred tax asset of $33,184
related to the expected future utilization of Aristotle's federal
net operating loss carryforwards, or NOLs. Aristotle's historical
financial statements reflected a full valuation allowance related to its
NOLs as a result of uncertainties regarding the realization of assets,
including the lack of predictability of Aristotle's profitability and the
variability of its operating results. However, as a result of projected
future operating results of the combined entities, NOLs of $94,800 are
expected to be utilized to offset federal taxable income through 2006 and
a portion of 2007. Accordingly, a net deferred tax asset of $33,184,
reflecting a 35% federal tax rate, has been recognized as an asset when
recording the fair market value of assets and liabilities acquired.
Aristotle NOLs which are projected to expire unutilized at the end of
2006 are included in the valuation allowance and, therefore, are not
recognized as an asset........................................... $5,817
(b) The deferred tax liability resulting principally from the fair
value adjustment of Aristotle's inventory........................ (232)
-----
Total...................................................... $5,585
(6) The recognition of the deferred tax asset related to the expected future
utilization of Aristotle's net operating loss carryforwards will result
in the elimination of Aristotle's long-term assets and the creation of
negative goodwill. The long-term assets eliminated are $6,768 of
goodwill, $1,544 of property, plant, and equipment, and $529 of other
long-term assets.
(7)(a) The non-current portion of the total net deferred tax asset of $33,184
related to the expected future utilization of Aristotle's federal
NOLs............................................................ $27,367
(b) The deferred tax asset resulting principally from the difference between
the carrying value of property, plant and equipment for accounting and
tax purposes.................................................... 539
---
Total..................................................... $27,906
======
(8) Elimination of intercompany transactions between Nasco and Aristotle.
(9) Estimated transaction costs to be incurred in connection with the Merger.
(10)(a)The value of common stock issued to non-Geneve shareholders at fair
market value:
Number of shares................... 946,610
Price per share.................... $2.95
Total value........................ $2,792
Common stock ($.01 par value)...... $9
13
Paid-in-capital.................... $2,783
(b) The value of Common Stock issued to Geneve at historical carryover basis:
Number of shares...................... 984,971
Average weighted cost per share $5.91
Total value........................... $5,817
Common stock ($.01 par value)......... $10
Paid-in-capital....................... $5,807
The cost per share used in the adjustment is based on the historical cost
of such shares adjusted to reflect the applicable equity income and loss
of Aristotle but unadjusted for the subsequent Series I dividend.
(c) The value of the 115,500 stock options included in Aristotle's 1997 Stock
Plan and 80,000 stock appreciation rights, or SARs, included in Aristotle
employment agreements. Aristotle has computed the value of each stock
option at $3.66 using the Black-Scholes option-pricing model and the
value of each SAR at $1.95, which is equivalent to the excess of the
assumed fair market value over the stated price. All 1997 Stock Plan
options are fully vested.
Paid-in-capital.................................$579
(d) The elimination of Aristotle's common stock and paid-in-capital:
Common stock.... $20
Paid-in-capital.... $163,904
(e) The offset to the Series J Preferred Stock issued to Geneve in
conjunction with the Merger:
Number of shares............................ 984,971
Stated value per share...................... $6.00
Reduction in paid-in-capital................ $5,910
(11) The Series I Preferred Stock issued to non-Geneve stockholders in
conjunction with the Merger:
Number of shares ........................... 946,610
Stated value per share...................... $6.00
Total value................................. $5,680
(12) The Series J Preferred Stock issued to Geneve in conjunction with
the Merger:
Number of shares ........................... 984,971
Stated value per share...................... $6.00
Total value... ............................. $5,910
(13)(a) The extraordinary gain related to the negative goodwill
created by the Merger:
Purchase price........................................................ $14,868
Transaction costs incurred............................................ 1,198
-----
Total purchase price.................................................. 16,066
Value of net assets acquired (The net assets acquired are
principally comprised of the historical net assets of Aristotle of
$13,224 and the total net deferred tax asset of $33,184 related to the
expected future utilization of Aristotle's federal net operating
loss carry forwards).................................................. (47,346)
Elimination of Aristotle long term assets............................. 8,841
-----
Excess of the value of net assets acquired over the purchase price
(negative goodwill)................................................... 22,439
(b) The elimination of Aristotle's historical retained deficit............ 150,541
(c) The elimination of intercompany transactions between Nasco and
Aristotle............................................................. (102)
-----
Total........................................................... $172,878
(14) The elimination of Aristotle's historical treasury stock.
14
(15) The elimination of Aristotle's historical foreign currency translation
gains.
(16) The elimination of Aristotle's historical unrealized investment losses.
15
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 141, BUSINESS COMBINATIONS ("SFAS 141") as of July 1, 2001. SFAS
141 requires that the purchase method of accounting be used for all business
combinations. SFAS 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported separately from
goodwill. The Company adopted the provisions of SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("SFAS 142") effective January 1, 2002. Under SFAS 142,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, SFAS 142 requires that goodwill be evaluated at least annually for
impairment by applying a fair value based test and, if impairment occurs, the
amount of impaired goodwill must be written off immediately. The Company
evaluated its goodwill at June 30, 2002, and determined that no impairment of
goodwill existed.
For the three and six months ended June 30, 2002 and 2001, a
reconciliation of reported net earnings to adjusted net earnings before
amortization of goodwill is as follows (dollars in thousands, except per share
data):
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Net income applicable to common shareholders before
extraordinary gain $2,520 $2,189 $3,972 $2,935
Amortization of goodwill - 136 - 202
------ ------ ------ ------
Adjusted net earnings $2,520 $2,325 $3,972 $3,137
====== ====== ====== ======
Basic and diluted earnings per common share:
Net earnings as reported
before extraordinary gain $ .16 $ .15 $ .26 $ .20
Amortization of goodwill -- .01 -- .01
------ ------ ------ ------
Adjusted net earnings $ .16 $ .16 $ .26 $ .21
======= ====== ====== ======
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144").
SFAS 144 modifies the rules for accounting for the impairment or disposal of
long-lived assets. Aristotle adopted SFAS 144 on January 1, 2002. The impact of
the adoption of SFAS 144 did not have a material effect on the financial
statements or operations of the Company.
SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4,44, AND 64, AMENDMENT OF
FASB STATEMENT NO. 13 AND TECHNICAL CORRECTIONS ("SFAS 145") updates, clarifies
and simplifies several existing accounting pronouncements. Among other things,
SFAS No. 145 eliminates the requirement to aggregate gains and losses from early
extinguishments of debt and, if material, to classify these as an extraordinary
item, net of related income tax effect. SFAS No. 145 is not expected to have a
material impact on Aristotle's consolidated financial statements.
SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, requires that a liability be recognized for these costs only when
incurred, while existing practice calls for recognition of a liability when an
entity commits to an exit plan. This statement is effective for exit or disposal
activities initiated after December 31, 2002 and is not expected to have a
material impact on Aristotle's consolidated financial statements.
4. ACCOUNTING FOR STOCK-BASED COMPENSATION
In June 2002, the Company adopted a change in accounting principles to
adopt SFAS No.123 and recognize the fair value of stock options granted on or
after January 1, 2002 as an expense on its income statement. The total fair
value of the 996,000 options issued during this period was $1.5 million. This
amount will be recognized as compensation expense over the 3-year vesting period
for such options. The change in accounting reduced net income for the
16
second quarter and the first six months of 2002 by approximately $11,000. The
expected annual impact on net income of the options granted in June 2002 is
approximately $300,000.
5. DEBT AGREEMENTS
On September 27, 1999, Simulaids and Citizens Bank of Connecticut entered
into a $2.0 million credit agreement. Simulaids' outstanding indebtedness under
the credit agreement is currently comprised of an $800,000 seven-year mortgage,
secured by the primary facility in which Simulaids conducts its business.
Principal payments are scheduled on a fifteen-year straight-line amortization,
with a balloon payment at the seven-year maturity. Interest is charged at the
rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at
Simulaids' election. As of June 30, 2002, the balance outstanding on the
mortgage was $649,000. Future principal payments on the mortgage are $5,000 per
month until September 2006, at which time the remaining balance will be due.
On May 29, 2001, Nasco and its primary lenders entered into a $51.0
million 5-year credit agreement ("5-Year Credit Agreement"). Proceeds from the
credit agreement were used to extinguish $29.0 million of existing debt with its
prior lenders, to complete the acquisitions of AMEP and Spectrum, to retire a
$2.5 million note payable to its parent, and to extinguish $2.5 million of
existing American Educational Products, LLC ("AMEP) bank debt. The 5-Year Credit
Agreement had an outstanding balance of $44.0 million at June 30, 2002. The
terms of the 5-Year Credit Agreement require a reduction in the principal
outstanding of $4.0 million by September 30, 2002 and $4.0 million by December
31, 2002. At June 30, 2002, the weighted average interest rate on the $44.0
million principal balance is 4.2%, fixed through the end of September 2002.
Interest is charged at the rate of LIBOR plus 187.5 basis points on a 30, 60, 90
or 180 day LIBOR rate at Nasco's election.
Also, on May 29, 2001, Nasco and its primary lenders entered into a $2.5
million 364 Day credit agreement ("364 Day Credit Agreement"). The stated
maturity date of the 364 Day Credit Agreement was subsequently amended to June
28, 2002, and further extended until June 16, 2003. At June 30, 2002, there was
no principal balance outstanding on the 364 Day Credit Agreement.
On June 17, 2002, the primary lenders on the Five-Year Credit Agreement
and the 364 Day Credit Agreement consented to the Merger, and certain amendments
thereto were made. Also on that date, following the Merger, Aristotle executed
assumption agreements with the lenders, assuming the obligations under the
Five-Year Credit Agreement and the 364 Day Credit Agreement, as amended.
Simulaids and Safe Passage are not parties to either of the foregoing credit
agreements.
6. EARNINGS PER COMMON SHARE
The following information presents the Company's computations of basic
earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS")
for the periods presented in the consolidated statements of earnings:
(dollars in thousands, except share and per share data)
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
THREE MONTHS ENDED JUNE 30, 2002:
Basic EPS:
Income before extraordinary gain $ 2,520 15,290,241 $ .16
Extraordinary gain 20,237 15,290,241 1.33
------ ----
Net income $ 22,757 15,290,241 $ 1.49
========= ======
Diluted EPS:
Income before extraordinary gain $ 2,520 15,518,106* $ .16
Extraordinary gain 20,237 15,518,106* 1.31
------ ----
Net income $ 22,757 15,518,106* $ 1.47
========= ======
* Includes the dilutive effect of 996,000 employee stock options.
17
THREE MONTHS ENDED JUNE 30, 2001:
Basic and diluted EPS $ 2,189 15,000,000 $ .15
SIX MONTHS ENDED JUNE 30, 2002:
Basic EPS:
Income before extraordinary gain $ 3,972 15,145,922 $ .26
Extraordinary gain 20,237 15,145,922 1.34
------ ----
Net income $ 24,209 15,145,922 $ 1.60
========= ======
Diluted EPS:
Income before extraordinary gain $ 3,972 15,373,787* $ .26
Extraordinary gain 20,237 15,373,787* 1.31
------ ----
Net income $ 24,209 15,373,787* $ 1.57
========= ======
* Includes the dilutive effect of 996,000 employee stock options
SIX MONTHS ENDED JUNE 30, 2001:
Basic and diluted EPS $ 2,935 15,000,000 $ .20
7. COMPREHENSIVE INCOME
Comprehensive income requires disclosure of total comprehensive income
(net income plus changes in equity that result from transactions and economic
events from non-owner sources). Comprehensive income for the three and six
months ended June 30, 2002 and 2001 is as follows ($000 omitted):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income applicable to common shareholders $22,757 $2,189 $24,209 $2,935
Foreign currency translation adjustment (17) (2) 5 (3)
Net unrealized investment gain 14 -- 14 --
------- ------ ------- ------
Comprehensive income $22,754 $2,187 $24,228 $2,932
======= ====== ======= ======
8. SEGMENT REPORTING
Aristotle's business activities are organized into two principal business
segments, Educational and Commercial. The Educational segment markets
instructional teaching aids and materials to educational institutions
nationwide, primarily kindergarten through grade 12 classes. The primary
marketing tool is the publication and distribution of catalogs containing a
selection of over 80,000 items to these institutions. The catalogs carry the
branding of Nasco, Triarco, Summitt Learning, Hubbard Scientific, Scott
Resources and Spectrum Educational Supplies. In addition, Aristotle, through
Nasco and its subsidiary, Simulaids, offers simulation kits and manikins used
for training in cardiopulmonary resuscitation and in the fire and emergency
rescue and patient care fields. Potential for this segment to grow is directly
related to school enrollments and the relative strength of government funding of
education. The Commercial segment is comprised of several commercial industries,
including agriculture, food, sterile sampling containers and systems, senior
care activities, and novelty and gift products. This segment markets its
products through catalog distribution nationwide and through a worldwide dealer
network representing more than 60 countries. Market growth in this segment is
related to the general economic conditions of world agriculture, the increasing
size of aged population, as well as increasing global awareness of food and
water quality standards. Aristotle evaluates the performance of these segments
based on segment sales and gross profit.
18
The following table presents segment information for the three and six
months ended June 30, 2002 and 2001 ($000 omitted):
Three Months Ended June 30 Six Months Ended June 30,
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
Educational $35,974 $35,736 $63,235 $61,304
Commercial 7,869 7,915 15,385 15,544
Intercompany/other (521) (413) (769) (623)
------- ------- ------- -------
Net Sales $43,322 $43,238 $77,851 $76,225
======= ======= ======= =======
Gross Profit:
Educational $13,945 $13,445 $24,718 $23,109
Commercial 2,937 2,734 5,617 5,441
Other cost of sales (1,547) (1,368) (2,748) (2,496)
------- ------- ------- -------
Gross Profit $15,335 $14,811 $27,587 $26,054
======= ======= ======= =======
June 30, December 31,
2002 2001
---- ----
Identifiable assets:
Educational $ 27,939 $25,056
Commercial 5,746 3,937
Other corporate assets 84,940 38,443
------- -------
Identifiable assets $118,625 $67,436
======== =======
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
This discussion and analysis of financial condition and results of
operations reviews the results of operations of Aristotle (after giving effect
to the Merger), on a consolidated basis, for the three and six months ended June
30, 2002, as compared to the three and six months ended June 30, 2001. This
discussion and analysis of financial condition and results of operations have
been derived from, and should be read in conjunction with, the unaudited
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained herein.
We believe the following accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenues - Customarily applying FOB-shipping point terms, Aristotle
recognizes revenue upon shipment of products to its customer, which corresponds
to the time when risk of ownership transfers. The point of shipment may be from
one of Aristotle's distribution centers or from a vendor's location as a drop
shipment. All drop shipment sales are recorded at gross selling price. An
allowance is provided for estimated future returns.
Goodwill - Aristotle adopted "SFAS 141" as of July 1, 2001. SFAS 141
requires that the purchase method of accounting be used for all business
combinations. SFAS 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported separately from
goodwill. Aristotle also adopted the provisions of SFAS No. 142, effective
January 1, 2002. Under SFAS 142, goodwill is no longer subject to amortization
over its estimated useful life. Instead, SFAS 142 requires that goodwill be
evaluated at least annually for impairment by applying a fair value based test
and, if impairment occurs, the amount of impaired goodwill must be written off
immediately. Aristotle evaluated its goodwill at June 30, 2002, and determined
that no impairment of goodwill existed.
Taxes - The June 30, 2002 balance sheet contains a deferred tax asset of
approximately $30 million related to Aristotle's federal tax net operating loss
carryforwards. This asset is expected to be utilized to offset future federal
taxable income through 2006 and a portion of 2007. The realizability of this
asset is dependent upon projected future operating results and Aristotle's
ability to retain its net operating tax loss carryforward position. The asset
recognized at June 30, 2002 is net of a valuation allowance of approximately $12
million, which is subject to future adjustment based upon changes in
management's evaluation of the realizability of the deferred tax asset.
RESULTS OF OPERATIONS FOR THE COMPANY
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 2001.
Net sales for the three months ended June 30, 2002 increased 0.2% to $43.3
million compared to net sales of $43.2 million for the prior year. Net sales in
the Educational segment, totaling $36.0 million in the second quarter of 2002,
increased 0.7% compared to the second quarter of 2001. The Commercial segment
recorded net sales of $7.9 million in the second quarter of 2002, decreasing
0.6%. The lack of sales growth in the second quarter reflects the downturn in
the U.S. economy and the related budget constraints in the U.S. education
sector.
Gross profit for the three months ended June 30, 2002 increased 3.5% to
$15.3 million from $14.8 million in the same period last year. The gross profit
margin percentage improved to 35.4% in the second quarter of 2002 compared to
the prior year gross profit margin of 34.3%. The Educational segment yielded a
gross profit margin of 38.8% in the second quarter of 2002, improving on the
2001 gross profit margin of 37.6%. The Commercial segment gross profit margin
was 37.3% compared to 34.5% for the second quarter of 2001. Building upon
efforts initiated in the first quarter of 2002, the Company improved its second
quarter gross profit margins through purchasing efforts to reduce merchandise
costs.
Selling, general and administrative expenses for the quarter ended June
30, 2002 were $10.0 million as compared to $9.9 million in 2001, remaining
virtually even with the same period last year. Selling, general and
administrative expenses at AMEP, a
20
wholly- owned limited liability company of Aristotle, were reduced $0.7 million
compared to the second quarter of 2001 through consolidation of distribution
services and implementation of other operating efficiencies.
In addition, in the three months ended June 30, 2001, selling, general and
administrative expenses included goodwill amortization of $136,000. As discussed
above, effective January 1, 2002, Aristotle adopted SFAS No. 142 and no longer
amortizes goodwill as a reduction to earnings from operations.
During the second quarter of 2001 and not recurring in 2002, AMEP incurred
certain costs classified as special charges in the accompanying Condensed
Consolidated Statements of Operations. These non-recurring costs include
$516,000 of various legal, accounting and regulatory fees incurred by AMEP in
connection with Aristotle's acquisition of AMEP.
Interest expense decreased to $0.5 million in the three months ended June
30, 2002 compared to $0.8 million in the prior period. The decrease reflects the
variance in interest rates in effect. The applicable interest rates assessed
under Aristotle's various credit agreements, averaged 4.5% in the second quarter
of 2002, compared to 6.7% in the second quarter of 2001. The applicable interest
rate for the long-term debt has been fixed at rates that average 4.5% through
September 2002. The principal balance outstanding under these credit agreements
amounted to $44.8 million and $49.0 million at June 30, 2002 and 2001,
respectively.
The income tax provision for the three months ended June 30, 2002 was $1.9
million compared to $1.4 million for the three months ended June 30, 2001. The
difference between the Federal statutory income tax rate of 35% and the
effective income tax rate results principally from state income taxes. The
balance sheet contains a deferred tax asset at June 30, 2002 of approximately
$30 million related to Aristotle's federal net operating tax loss carryforwards.
The utilization of this asset to offset future federal taxable income will
result in Aristotle not having to pay federal income taxes for approximately the
next five years.
Preferred stock dividends of $0.3 million were accrued during the three
months ended June 30, 2002. This amount represents dividends on 1,046,716 shares
of Series I Preferred Stock and 10,984,971 shares of Series J Preferred Stock
for the period June 18, 2002 to June 30, 2002. There was no preferred stock
outstanding in the period ended June 30, 2001.
An extraordinary gain of $20.2 million was recognized during the three
months ended June 30, 2002 which represented the negative goodwill arising
principally from the deferred tax benefits recognized at the date of the Nasco
merger.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2001.
Net sales for the six months ended June 30, 2002 increased 2.1% to $77.9
million compared to net sales of $76.2 million for the prior year. The growth in
net sales is positively impacted by the acquisition of Spectrum Educational
Supplies, Ltd., ("Spectrum") completed in April 2001. Spectrum has contributed
$3.9 million in net sales in the first six months of 2002, compared to $2.1
million from the acquisition date to June 30, 2001. Excluding the net sales from
Spectrum, net sales declined 0.2% in the six months of 2002 compared to the same
period of 2001.
Net sales in the Educational segment, totaling $63.2 million, increased
3.1% in the first six months of 2002 compared to 2001. Excluding the sales
realized from Spectrum, the Educational segment sales increased 0.2% from 2001.
The Commercial segment recorded net sales of $15.4 million in the first six
months of 2002, decreasing 1.0% versus the prior year. The lack of growth in
year to date sales reflects the downturn in the U.S. economy as well as
budgetary uncertainty in the U.S. education sector.
Gross profit for the six months ended June 30, 2002 increased 5.9% to
$27.6 million from $26.1 million in the same period last year. The gross profit
margin percentage improved to 35.4% in the first six months of 2002 compared to
the prior year gross profit margin of 34.2%. Spectrum produced $1.8 million in
gross profit in the first six months of 2002, compared to $0.8 million in the
first six months of 2001. Excluding the gross profit realized from Spectrum, the
gross profit margin would still be 34.9% for the six months ended June 30, 2002,
compared to 34.1% for the same period last year. The Educational segment yielded
a gross profit margin of 39.1% in the six months of 2002, improving on the 2001
gross profit margin of 37.7%. Excluding the Spectrum gross profit, the 2002
Educational segment gross profit margin would be 38.6%, compared to 37.7% in
2001. The Commercial segment gross profit margin was 36.5% compared to 35.0% for
the first six months of 2001. In general, Aristotle improved its gross profit
margins for the first six months of 2002 through purchasing efforts to reduce
merchandise costs implemented throughout the period.
21
Selling, general and administrative expenses for the six months ended June
30, 2002 were $19.5 million as compared to $19.2 million in 2001, increasing
1.6% compared to the same period last year. Excluding Spectrum, selling, general
and administrative expense decreased by $0.2 million, or 1.0%. Selling, general
and administrative expenses at AMEP, were reduced $1.6 million compared to the
first six months of 2001 through consolidation of distribution services and
implementation of other operating efficiencies.
In the six months ended June 30, 2001, selling, general and administrative
expenses included goodwill amortization of $202,000. As discussed above,
effective January 1, 2002, Aristotle adopted SFAS No. 142 and no longer
amortizes goodwill as a reduction to earnings from operations.
During the first six months of 2001 and not recurring in 2002, AMEP
incurred certain costs classified as special charges in the accompanying
Condensed Consolidated Statements of Earnings. These non-recurring costs include
$567,000 of various legal, accounting and regulatory fees incurred by AMEP in
connection with Aristotle's acquisition of AMEP. The special charges are
reported as a reduction to earnings from operations.
Interest expense decreased to $1.0 million in the six months ended June
30, 2002 compared to $1.6 million in the prior period. The decrease reflects the
variance of interest rates in effect in 2002 compared to 2001. The applicable
interest rates assessed by Aristotle's various credit agreements averaged 4.3%
in the first six months of 2002, compared to 7.5% in the first six months of
2001. The applicable interest rate for the long-term debt has been fixed at
rates that average 4.5% through September 2002. The principal balance
outstanding under these credit agreements amounted to $44.8 million and $49.0
million at June 30, 2002 and 2001, respectively.
The income tax provision for the six months ended June 30, 2002 was $2.8
million compared to $1.8 million for the six months ended June 30, 2001. The
difference between the Federal statutory income tax rate of 35% and the
effective income tax rate results principally from state income taxes. The
balance sheet contains a deferred tax asset at June 30, 2002 of approximately
$30 million related to Aristotle's federal net operating tax loss carryforwards.
The utilization of this asset to offset future federal taxable income will
result in Aristotle not having to pay federal income taxes for approximately the
next five years.
Preferred Stock dividends of $0.3 million were accrued during the six
months ended June 30, 2002. This amount represents dividends on 1,046,716 shares
of Series I Preferred Stock and 10,984,971 shares of Series J Preferred Stock
for the period June 18, 2002 to June 30, 2002. There was no preferred stock
outstanding in the period ended June 30, 2001.
An extraordinary gain of $20.2 million was recognized during the six
months ended June 30, 2002 which represented the negative goodwill arising
principally from the deferred tax benefits recognized at the date of the Merger.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, Aristotle had cash and cash equivalents of $9.1 million
compared to $4.5 million at December 31, 2001. The overall change in cash and
cash equivalents of $4.6 million is detailed below.
Aristotle generated $2.5 million of cash from operations during the six
months ended June 30, 2002. During this period, Aristotle generated cash from
earnings plus noncash income and deductions of $4.9 million, an increase in
prepaid expenses, primarily advertising costs of $0.6 million, an increase of
$7.8 million in trade accounts payable, and an increase of $1.7 million in
accrued expenses. Offsetting these items, trade accounts receivable increased by
$4.8 million, and inventories increased by $8.0 million. These changes in
current assets and liabilities are typical for this quarter as Aristotle enters
its peak business cycle in the summer months. Aristotle used $0.1 million of
cash for operations during the six months ended June 30, 2001. During this
period, Aristotle generated cash from earnings plus depreciation and
amortization of $4.0 million, an increase in prepaid expenses, primarily
advertising costs, of $0.8 million, an increase of $8.1 million in trade
accounts payable, and an increase of $3.0 million in accrued expenses.
Offsetting these items, trade accounts receivable increased by $6.3 million, and
inventories increased by $9.7 million. These changes in current assets and
liabilities are typical for this quarter as Aristotle enters its peak business
cycle in the summer months.
22
Aristotle generated $2.5 million of cash from investing activities during
the six months ended June 30, 2002. Aristotle invested $0.8 million in capital
expenditure purchases to replace and upgrade existing capital equipment and
install new equipment and fixtures in order to provide additional operating
capacity and efficiency. As a result of the Merger, cash increased by $3.3
million. Aristotle used $11.0 million of cash in investing activities in the six
months ended June 30, 2001. The investing activity included $5.2 million paid to
the minority shareholders of AMEP for their minority ownership interests, and
$5.0 million for the acquisition of the ownership interests in Spectrum. During
that period, Aristotle invested $0.8 million in capital expenditure purchases to
replace and upgrade existing capital equipment and install new equipment and
fixtures in order to provide additional operating capacity and efficiency.
During the six months ended June 30, 2002, Aristotle used cash of $0.4
million in financing activities. The debt payments were to service existing
capital leases and other seller notes payable by AMEP incurred in previous
acquisitions. As of June 30, 2002, the balance outstanding under its credit
agreements was $44.8 million. Aristotle remained in compliance with all terms
and conditions of its primary credit agreement throughout this period. During
the six months ended June 30, 2001, financing activities provided cash of $11.9
million. Aristotle borrowed $20.0 million under an amended credit agreement with
its lenders. The funds were used to retire AMEP's short-term debt of $2.5
million, and to retire $5.4 million of short-term debt to Geneve Corporation
related to the 2000 fiscal year transfer of the AMEP ownership interest as well
as the Spectrum and AMEP acquisitions. Aristotle also used $0.4 million to
retire debt in accordance with the terms of its capital lease commitments.
Aristotle remained in compliance with all terms and conditions of its credit
agreements throughout this period.
Aristotle's cash obligations as of June 30, 2002 are as follows (in
thousands):
Total 2003 and 2005 and Years After
Amounts -------- -------- -----------
Contractual Obligations Committed 2002 2004 2006 2006
- ----------------------- --------- ---- ---- ---- ----
Principal portion of long-term credit
facility $44,000 $8,000 $18,000 $18,000 $ --
Principal portion of mortgage debt 649 54 107 107 381
Principal portion of capital lease
obligations 111 54 57 -- --
Operating lease obligations 2,356 522 1,313 521 --
Employment obligations 658 266 392 -- --
------- ------ ------- ------- ----
Total $47,774 $8,896 $19,869 $18,628 $381
======= ====== ======= ======= ====
The long-term credit facility is the Five-Year Credit Agreement. The
Five-Year Credit Agreement provides specific dates and amounts by which the size
of the principal amount of its capacity is reduced, amortizing the outstanding
debt through March 2006. The Credit Agreement is secured by the assets of Nasco.
Interest is charged at the rate of LIBOR plus 187.5 basis points on a 30, 60, 90
or 180 day rate at election.
The mortgage debt consists of the financing agreement between Simulaids
and its primary lender used to finance land and buildings located in Woodstock,
New York. Principal payments are scheduled on a fifteen-year straight-line
amortization, with a balloon payment in September 2006. Interest is charged at
the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180-day LIBOR rate at
Simulaids' election.
The capital lease obligations, related to computer equipment at Simulaids
and AMEP, consist of arrangements with IBM Credit Corporation and another
leasing company. The lease terms require monthly payments until September 2003
and January 2004, respectively. The capital leases bear annual interest rates in
the range of 8.5% to 11.5%.
23
Aristotle, through its Nasco division, leases office and distribution
facilities in Plymouth, Minnesota, Fort Atkinson, Wisconsin, Chippewa Falls,
Wisconsin, and Aurora, Ontario, Canada. The terms and conditions of the leases
vary by location, generally falling within terms and conditions which are
"market" for the respective locations in which Aristotle operates. Current lease
terms expire in 2003 through 2006. Aristotle leases its office facility in New
Haven, Connecticut, which expires in 2002. Safe Passage leases its office
facility in Rochester, New York, which expires in 2002.
The employment obligations consist of written agreements with John J.
Crawford and Paul M. McDonald of Aristotle and James S. Viscardi and Michael R.
Rooksby of Safe Passage.
Capital resources in the future are expected to be used to retire long
term debt, invest in additional capital projects designed to enhance operating
efficiencies and to acquire additional companies. The balance sheet contains a
deferred tax asset at June 30, 2002 of approximately $30 million related to
Aristotle's federal net operating tax loss carryforwards. The utilization of
this asset to offset future federal income taxable income will result in
Aristotle not having to pay federal taxes for approximately the next five years.
Aristotle anticipates that there will be sufficient financial resources to
meet its projected working capital and other cash requirements for at least the
next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described below, credit risk and interest rate risk are the primary
sources of market risk to Aristotle in its marketable securities and long-term
borrowings.
QUANTITATIVE
Aristotle's marketable securities and long-term borrowings as of June 30,
2002 are as follows (in thousands):
Maturity less Maturity greater
than one year than one year
------------- -------------
Marketable securities
Cost basis $ -- $ 834
Weighted average return -- 6.6%
Fair market value $ -- $ 848
Long-term borrowings
Amount $ 8,128 $ 36,631
Weighted average interest rate 4.5% 4.5%
Fair market value $ 8,128 $ 36,631
QUALITATIVE
Interest Rate Risk: Changes in interest rates can potentially impact
Aristotle's profitability and its ability to realize assets and satisfy
liabilities. Interest rate risk is resident primarily in Aristotle's marketable
securities and long-term borrowings, which have fixed coupon or interest rates.
Credit Risk: Aristotle's marketable securities are invested in investment
grade corporate bonds and closed-end bond funds, both domestic and
international, which have various maturities.
24
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Aristotle believes that this report may contain forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements regarding Aristotle's liquidity and are based on management's
current expectations and are subject to a number of factors and uncertainties
that could cause actual results to differ materially from those described in the
forward-looking statements. Aristotle cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors including, but not limited to, the following: (i) the ability
of Aristotle to obtain financing and additional capital to fund its business
strategy on acceptable terms, if at all; (ii) the ability of Aristotle on a
timely basis to find, prudently negotiate and consummate additional
acquisitions; (iii) Aristotle's ability to manage Nasco, Simulaids, Safe Passage
and any other acquired or to be acquired companies; (iv) the ability of
Aristotle to retain and utilize its tax net operating loss carryforward
position; and (v) general economic conditions. As a result, the Company's future
development efforts and operations involve a high degree of risk. For further
information, please see Aristotle's filings with the Securities and Exchange
Commission, including its Forms 10-K and 10-Q.
25
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
None.
ITEM 2 - CHANGES IN SECURITIES.
(a) On June 17, 2002, Aristotle consummated the merger (the "Merger") with
Nasco International, Inc. ("Nasco") contemplated by that certain Agreement and
Plan of Merger dated as of November 27, 2001, as amended (the "Merger
Agreement"). Pursuant to the terms of the Merger Agreement, as of June 17, 2002,
the separate corporate existence of Nasco ceased and Aristotle was the surviving
entity. Due to the relative sizes of the parties to the Merger, the transaction
was accounted for as a reverse acquisition using the purchase method of
accounting under generally accepted accounting principles.
As consideration for the Merger, the sole shareholder of Nasco received
15,000,000 shares of Aristotle's common stock and 10,000,000 shares of
Aristotle's newly authorized Series J $6.00 non-convertible, non-voting,
cumulative 12% preferred stock, par value $0.01 per share ("Series J Preferred
Stock"). Separately, Aristotle's Board of Directors declared, and Aristotle
paid, a stock dividend on each share of Aristotle's common stock outstanding of
one share of newly authorized Series I $6.00 convertible, voting, cumulative 11%
preferred stock, par value $0.01 per share ("Series I Preferred Stock").
See the following sections of Aristotle's Proxy Statement-Prospectus,
dated May 15, 2002, contained in Aristotle's Registration Statement on Form S-4
(File No. 333-86026) filed with the Securities and Exchange Commission on April
11, 2002 (the "Proxy Statement-Prospectus") for a detailed discussion of
Aristotle's Amended and Restated Certificate of Incorporation and Second Amended
and Restated Certificate of Incorporation and the effect of such modifications
on the rights of the holders of Aristotle's common stock, Series I Preferred
Stock and Series J Preferred Stock: "Changes to Aristotle's Certificate of
Incorporation" and "Description of Aristotle's Capital Stock". The information
contained in the foregoing noted sections of the Proxy Statement-Prospectus are
incorporated herein by reference.
(b) None.
(c) In connection with the Merger, on June 17, 2002, Aristotle issued to the
sole shareholder of Nasco, among other things, 10,000,000 shares of its Series J
Preferred Stock. In addition, Aristotle issued 984,971 shares of Series J
Preferred Stock to Geneve as a stock dividend. The shares of Series J Preferred
Stock issued were not registered under the Securities Act of 1933, as amended.
The shares of Series J Preferred Stock were issued in partial consideration for
the shares of Nasco held by the sole shareholder and as a stock dividend on the
shares of Aristotle's common stock held by Geneve.
See the following sections of Aristotle's Proxy Statement-Prospectus which
are incorporated herein by reference, for the information required by Item 701
of Regulation S-K: "Restrictions on Sales of Shares of Aristotle Stock received
by Nasco Holdings" and "Description of Aristotle's Capital Stock".
(d) None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER.
(a) On June 17, 2002 Aristotle held its annual meeting of stockholders.
(b) At the annual meeting of stockholders, Edward Netter, John J. Crawford and
Sharon M. Oster were elected as directors. The other members of the board
of directors whose term of office continued after the meeting were Robert
Fiscus, Betsy Henley-Cohn, John C. Warfel, Steven B. Lapin, Daniel J.
Miglio and John Lahey. Following the Merger, the Board of Directors of
Aristotle was comprised of the following individuals: John J. Crawford,
John Lahey, Steven B. Lapin, Donald T. Netter, Edward Netter, Sharon M.
Oster, James G. Tatum and Roy T. K. Thung.
See the following sections of Aristotle's Proxy Statement-Prospectus
(which are incorporated herein by reference): "Operations After the
Merger" and "Management of Aristotle Following the Merger-Board of
Directors of Aristotle".
(c) The following matters were voted upon at the annual meeting of the
stockholders of Aristotle held on June 17, 2002:
26
(i) A proposal to consider and vote upon the approval of the Merger
Agreement among Aristotle, Geneve Corporation, Nasco Holdings, Inc. and Nasco
International, Inc. This proposal was adopted by the stockholders by the
following vote:
Votes cast for this proposal 1,375,538
Votes cast against this proposal 2,189
Abstentions 1,006
Broker Non-votes 407,062
(ii) A proposal to amend and restate Aristotle's certificate of
incorporation, so as to authorize additional shares of Aristotle's common stock,
and to authorize and set forth the rights of Aristotle's Series I Preferred
Stock and Series J Preferred Stock. This proposal was adopted by the
stockholders by the following vote:
Votes cast for this proposal 1,374,630
Votes cast against this proposal 3,328
Abstentions 775
Broker Non-votes 407,062
(iii) A proposal to include, as part of the amendment and restatement
of Aristotle's certificate of incorporation, provisions requiring Aristotle to
indemnify its directors, officers and agents and specifying procedures with
respect thereto. This proposal was adopted by the stockholders by the following
vote:
Votes cast for this proposal 1,370,564
Votes cast against this proposal 6,228
Abstentions 1,941
Broker Non-votes 407,062
(iv) A proposal to further amend and restate Aristotle's certificate of
incorporation upon the completion of the Merger with Nasco in order to eliminate
certain provisions that (A) establish staggered terms for and classification of
the members of Aristotle's board of directors, (B) mandate that special meetings
of Aristotle's stockholders may only be called by the chairman of Aristotle's
board of directors, president or board of directors, (C) state that any action
required or permitted to be taken by Aristotle's stockholders must be taken at
an annual or special meeting of the stockholders and (D) limit the manner in
which Aristotle may adopt, amend or repeal its certificate of incorporation and
By-laws. This proposal was adopted by the stockholders by the following vote:
Votes cast for this proposal 1,373,530
Votes cast against this proposal 3,592
Abstentions 1,611
Broker Non-votes 407,062
(v) A proposal to adopt The Aristotle Corporation 2002 Employee,
Director and Consultant Stock Plan. This proposal was adopted by the
stockholders by the following vote:
Votes cast for this proposal 1,368,177
Votes cast against this proposal 8,166
Abstentions 2,390
Broker Non-votes 407,062
27
(vi) A proposal to elect John J. Crawford, Edward Netter and Sharon M.
Oster for three year terms and until their successors are duly elected and
qualified. Each nominee was elected to the board of directors by the following
vote:
John J. Crawford
----------------
Votes cast for election 1,769,111
Votes withheld 16,684
Edward Netter
-------------
Votes cast for election 1,769,111
Votes withheld 16,684
Sharon Oster
------------
Votes cast for election 1,769,111
Votes withheld 16,684
ITEM 5 - OTHER INFORMATION.
On April 11, 2002, Aristotle reached a settlement with the Internal
Revenue Service regarding a refund that it had received in 1997 for a net
operating loss carryback claim relating to its 1996 tax year. As previously
reported, the IRS had been reviewing the amount of the refund, and Aristotle
recorded a tax reserve of $720,000 with respect to such refund. In the
settlement, Aristotle agreed to pay approximately $682,000 (net of the amount
due from a previously paid contingency fee), plus approximately $318,000 (net of
the amount due from a previously paid contingency fee), which represents
interest on the portion of the unallowed refund claim.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 2.5--Amendment to Agreement and Plan of Merger, dated May 7, 2002,
among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc.
and Nasco International, Inc., incorporated herein by reference to an
exhibit to the Aristotle's Registration Statement on Form S-4 (File No.
333-86026).*
Exhibit 2.6--Amendment No. 2 to Agreement and Plan of Merger, dated May
15, 2002, among The Aristotle Corporation, Geneve Corporation, Nasco
Holdings, Inc. and Nasco International, Inc., incorporated herein by
reference to an exhibit to the Aristotle's Registration Statement on Form
S-4 (File No. 333-86026).*
Exhibit 3.1--Amended and Restated Certificate of Incorporation of The
Aristotle Corporation.
Exhibit 3.2--Amended and Restated Bylaws of The Aristotle Corporation.
Exhibit 4.1--Amended and Restated Certificate of Incorporation of The
Aristotle Corporation and Amended and Restated Bylaws filed as Exhibits
3.1 and 3.2 are incorporated into this item by reference. See Exhibits 3.1
and 3.2 above.
Exhibit 10.1--The Aristotle Corporation 2002 Employee, Director and
Consultant Stock Plan.
Exhibit 10.2--Form of Non-Qualified Stock Option Agreement (for employees,
directors and consultants).
Exhibit 10.3--Form of Incentive Stock Option Agreement (for employees).
Exhibit 10.8(b)--Amendment, dated June 17, 2002, to the Employment
Agreement dated as of February 1, 2001 by and between The Aristotle
Corporation and Paul McDonald.
28
Exhibit 10.9(b)--Amendment, dated June 17, 2002, to the Employment
Agreement dated as of February 1, 2001 by and between The Aristotle
Corporation and John J. Crawford.
Exhibit 10.11--Letter Agreement, dated May 24, 2002, between The Aristotle
Corporation and Paul McDonald regarding the exercisability of certain
stock options.
Exhibit 10.12--Letter Agreement, dated May 24, 2002, between The Aristotle
Corporation and John J. Crawford regarding the exercisability of certain
stock options.
Exhibit 10.13--Full Recourse Promissory Note, dated June 17, 2002, made by
Paul McDonald in favor of The Aristotle Corporation.
Exhibit 10.14--Form of Letter Agreement, dated May 24, 2002, between The
Aristotle Corporation and non-employee directors regarding the
exercisability of certain stock options.
Exhibit 10.15(b) --First Amendment to Amended and Restated Credit
Agreement (Five Year) and Consent, dated as of June 17, 2002, among Nasco
International, Inc., Various Financial Institutions now or hereafter
parties thereto, Bank One, Wisconsin and Bank of America, N.A.
Exhibit 10.15(c)--Assumption Agreement, dated June 17, 2002, executed by
The Aristotle Corporation pursuant to Section 3.1 of the First Amendment
to Amended and Restated Credit Agreement (Five Year) and Consent (See
Exhibit 10.14(b)).
Exhibit 10.16(b)--Second Amendment to Amended and Restated Credit
Agreement (364 Days) and Consent, dated as of June 17, 2002, among Nasco
International, Inc., Various Financial Institutions now or hereafter
parties thereto, Bank One, Wisconsin and Bank of America, N.A.
Exhibit 10.16(c) --Assumption Agreement, dated June 17, 2002, executed by
The Aristotle Corporation pursuant to Section 3.1 of the Second Amendment
to Amended and Restated Credit Agreement (364 Days) and Consent (See
Exhibit 10.15(b)).
Exhibit 10.21--Assumption of Mortgage and Modification Agreement, dated as
of July 12, 2002, by and between The Aristotle Corporation and Bank of
America, N.A.
Exhibit 10.22--Assumption of Deed of Trust and Modification Agreement,
dated as of July 12, 2002, by and between The Aristotle Corporation and
Bank of America, N.A.
Exhibit 10.23--Assumption of Deed of Trust and Modification Agreement,
dated as of July 12, 2002, by and between The Aristotle Corporation and
Bank of America, N.A.
Exhibit 10.24--Amended and Restated Subsidiary Pledge Agreement, dated as
of June 27, 2002, by and between American Educational Products LLC and
Bank of America, N.A.
Exhibit 10.25--Amended and Restated Subsidiary Security Agreement, dated
as of June 27, 2002, by and between American Educational Products LLC, the
other subsidiaries party thereto and Bank of America, N.A.+
Exhibit 10.26--Amended and Restated Pledge Agreement, dated as of June 27,
2002, by and between The Aristotle Corporation and Bank of America, N.A.+
Exhibit 10.27--Amended and Restated Security Agreement, dated as of June
27, 2002, by and between The Aristotle Corporation and Bank of America,
N.A.+
Exhibit 99.1--Registrant's Proxy Statement-Prospectus dated May 15, 2002,
incorporated by reference to The Aristotle Corporation's Registration
Statement on Form S-4 (File No. 333-86026).*
29
Exhibit 99.2--Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* These items are hereby incorporated by reference from the exhibits of
the filing or report indicated (except where noted, Commission File No.
0-14669) and are hereby incorporated by reference.
+ In accordance with Item 601(b)(2) of Regulation S-K, the schedules
have been omitted and a list briefly describing the schedules is at the
end of this Agreement. Aristotle will furnish supplementally a copy of any
omitted schedule to the Commission upon request.
(b) Reports on Form 8-K. On April 11, 2002, The Aristotle Corporation
filed a Current Report on Form 8-K under Item 5 regarding the settlement
agreement with the Internal Revenue Service.
On June 19, 2002, The Aristotle Corporation filed a Current Report on Form
8-K under Items 5, 7 and 8.
On July 1, 2002, The Aristotle Corporation filed a Current Report on Form
8-K/A under Items 2 and 7.
On August 8, 2002, The Aristotle Corporation filed a Current Report on
Form 8-K under Items 4 and 7.
30
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, CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 14, 2002
/s/ Paul M. McDonald
------------------------------
Paul M. McDonald
ITS, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Date: August 14, 2002
31
EXHIBIT INDEX
Exhibit
NUMBER DESCRIPTION
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 Current Report on Form 8-K dated April 14, 1994, as
amended (the "1994 Current Report").*
2.2 - Agreement and Plan of Reorganization, dated as of September 13, 2000
(closed on September 14, 2000), by and among The Aristotle Corporation,
Aristotle Acquisition Sub, Inc., Safe Passage International, Inc., James S.
Viscardi, Michael R. Rooksby, Howard C. Rooksby and Andrew M. Figiel,
incorporated herein by reference to Exhibit 2.1 of the Registrant's Current
Report on Form 8-K dated September 27, 2000.*
2.3 - Agreement and Plan of Merger, dated as of September 13, 2000 (closed on
September 14, 2000), by and between Aristotle Acquisition Sub, Inc. and Safe
Passage International, Inc., incorporated herein by reference to Exhibit 2.2 of
the Registrant's Current Report on Form 8-K dated September 27, 2000.*
2.4 - Agreement and Plan of Merger, dated as of November 27, 2001, among The
Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco
International, Inc. incorporated herein by reference to Exhibit 2 of The
Aristotle Corporation's Current Report on Form 8-K dated November 30, 2001.*
2.5 - Amendment to Agreement and Plan of Merger, dated May 7, 2002, among The
Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco
International, Inc. incorporated herein by reference to an exhibit to The
Aristotle Corporation's Registration Statement on Form S-4 (File No.
333-86026).*
2.6 - Amendment No. 2 to Agreement and Plan of Merger, dated May 15, 2002, among
The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco
International, Inc. incorporated herein by reference to an exhibit to The
Aristotle Corporation's Registration Statement on Form S-4 (File No.
333-86026).*
3.1 - Amended and Restated Certificate of Incorporation of The Aristotle
Corporation.
3.2 - Amended and Restated Bylaws of The Aristotle Corporation.
4.1 - Amended and Restated Certificate of Incorporation of The Aristotle
Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are
incorporated into this item by reference. See Exhibits 3.1 and 3.2 above.
4.2 - Registration Rights Agreement dated as of April 11, 1994 between The
Aristotle Corporation and the shareholders listed on Exhibit A thereto,
incorporated by reference to an exhibit to The Aristotle Corporation's
Registration Statement on Form S-3 (File No. 333-4185).*
4.3 - Preferred Stock Purchase Agreement dated as of October 22, 1997, between
The Aristotle Corporation and Geneve Corporation, incorporated herein by
reference to Exhibit 10.5 of The Aristotle Corporation's Quarterly Report on
Form 10-Q for fiscal quarter ended September 30, 1997.*
4.4 - Registration Rights Agreement dated as of October 22, 1997, between The
Aristotle Corporation and Geneve Corporation, incorporated herein by reference
to Exhibit 10.6 to The Aristotle Corporation's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1997.*
4.5 - Letter Agreement dated as of September 15, 1997, among The Aristotle
Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein
by reference to Exhibit 10.7 to The Aristotle Corporation's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1997.*
32
4.6 - Letter Agreement dated as of February 9, 2000 between The Aristotle
Corporation and the Geneve Corporation regarding certain limitations on voting
and the acquisition of additional shares of common stock, incorporated herein by
reference to The Aristotle Corporation's Report on Form 13D/A dated February 15,
2000.*
4.7 - Letter Agreement dated as of April 28, 2000 between The Aristotle
Corporation and the Geneve Corporation, modifying the letter agreement between
such parties dated as of February 9, 2000, regarding certain limitations on
voting and the acquisition of additional shares of common stock, incorporated
herein by reference to The Aristotle Corporation's Report on Form 8-K dated May
2, 2000.*
10.1 - The Aristotle Corporation 2002 Employee, Director and Consultant Stock
Plan.
10.2 - Form of Non-Qualified Stock Option Agreement (for employees, directors
and consultants).
10.3 - Form of Incentive Stock Option Agreement (for employees).
10.4 - Settlement and Release Agreement dated as of May 29, 1996, among The
Aristotle Corporation, the Federal Deposit Insurance Corporation and certain
other interested parties, incorporated herein by reference to Exhibit 10.22 of
The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended
June 30, 1996.*
10.5 - Stipulation and Agreement of Settlement dated as of May 28, 1996,
regarding In Re First Constitution Stockholders Litigation, incorporated herein
by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form
10-K for the fiscal year ended June 30, 1996.*
10.6 - Stock Purchase Agreement between The Aristotle Corporation and Kevin
Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit
2.1 of The Aristotle Corporation Current Report on form 8-K dated May 4, 1999,
as amended.*
10.7 - The Aristotle Corporation 1997 Employee and Director Stock Plan,
incorporated herein by reference to The Aristotle Corporation Registration
Statement on Form S-8 dated December 10, 1997.*
10.8(a) - The Employment Agreement dated as of February 1, 2001, by and between
The Aristotle Corporation and Paul McDonald, incorporated herein by reference to
Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2001.*
10.8(b) - Amendment, dated June 17, 2002, to the Employment Agreement dated as
of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald.
10.9(a) - The Employment Agreement dated as of February 1, 2001, by and between
The Aristotle Corporation and John Crawford, incorporated herein by reference to
Exhibit 10.9 of The Aristotle Corporation's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001.*
10.9(b) - Amendment, dated June 17, 2002, to the Employment Agreement dated as
of February 1, 2001 by and between The Aristotle Corporation and John J.
Crawford.
10.10 - Exchange Agreement, dated as of November 27, 2001, between The Aristotle
Corporation and Geneve Corporation, incorporated herein by reference to Exhibit
10 of The Aristotle Corporation Current Report on Form 8-K dated November 30,
2001.*
10.11 - Letter Agreement, dated May 24, 2002, between The Aristotle Corporation
and Paul McDonald regarding the exercisability of certain stock options.
10.12 - Letter Agreement, dated May 24, 2002, between The Aristotle Corporation
and John J. Crawford regarding the exercisability of certain stock options.
33
10.13 - Full Recourse Promissory Note, dated June 17, 2002, in the principal
amount of $32,837.50, made by Paul McDonald in favor of The Aristotle
Corporation.
10.14 - Form of Letter Agreement, dated May 24, 2002, between The Aristotle
Corporation and non-employee directors regarding the exercisability of certain
stock options.
10.15(a) - Amended and Restated Credit Agreement (5 Year) dated as of May 29,
2001, among Nasco International, Inc., Various Financial Institutions now or
hereafter parties thereto, Bank One, Wisconsin, and Bank of America, N.A.
incorporated by reference to The Aristotle Corporation's Statement on Form S-4
(File No. 333-86026).*
10.15(b) - First Amendment to Amended and Restated Credit Agreement (Five Year)
and Consent, dated as of June 17, 2002, among Nasco International, Inc., Various
Financial Institutions now or hereafter parties thereto, Bank One, Wisconsin and
Bank of America, N.A.
10.15(c) - Assumption Agreement, dated June 17, 2002, executed by The Aristotle
Corporation pursuant to Section 3.1 of the First Amendment to Amended and
Restated Credit Agreement (Five Year) and Consent (See Exhibit 10.14(b)).
10.16(a) - Amended and Restated Credit Agreement (364 Days) dated as of May 29,
2001, among Nasco International, Inc., Various Financial Institutions now or
hereafter parties thereto, Bank One, Wisconsin, and Bank of America, N.A.
incorporated by reference to The Aristotle Corporation's Registration Statement
on Form S-4 (File No. 333-86026).*
10.16(b)- Second Amendment to Amended and Restated Credit Agreement (364 Days)
and Consent, dated as of June 17, 2002, among Nasco International, Inc., Various
Financial Institutions now or hereafter parties thereto, Bank One, Wisconsin and
Bank of America, N.A.
10.16(c)- Assumption Agreement, dated June 17, 2002, executed by The Aristotle
Corporation pursuant to Section 3.1 of the Second Amendment to Amended and
Restated Credit Agreement (364 Days) and Consent (See Exhibit 10.15(b)).
10.17 -Second Amended and Restated Mortgage (and Security Agreement and
Assignment of Leases and Rents), dated as of August 21, 2001, by and between
Nasco International, Inc., as Mortgagor, in favor of Bank of America, N.A., as
agent incorporated by reference to The Aristotle Corporation's Registration
Statement on Form S-4 (File No. 333-86026).*
10.18 - Second Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases, and Fixture Filing, dated as of August 21, 2001,
by Nasco International, Inc., as Mortgagor, in favor of Commonwealth Land Title
Insurance Company, as Trustee for the benefit of Bank of America, N.A.
incorporated by reference to The Aristotle Corporation's Registration Statement
on Form S-4 (File No. 333-86026).*
10.19 - Deed of Trust, Security Agreement, Assignment of Rents and Leases, and
Fixture Filing, dated as of August 21, 2001, by American Educational Products,
Inc., as Mortgagor, in favor of The Public Trustee for the County of Larimer,
State of Colorado, as Trustee for the benefit of Bank of America, N.A.
incorporated by reference to The Aristotle Corporation's Registration Statement
on Form S-4 (File No. 333-86026).*
10.20 - Form of Stockholders Agreement by and among The Aristotle Corporation,
Geneve Corporation and Nasco Holdings, Inc., incorporated herein by reference to
Exhibit 99.3 of The Aristotle Corporation Current Report on Form 8-K dated
November 27, 2001.
10.21 - Assumption of Mortgage and Modification Agreement, dated as of July 12,
2002, by and between The Aristotle Corporation and Bank of America, N.A.
10.22 - Assumption of Deed of Trust and Modification Agreement, dated as of July
12, 2002, by and between The Aristotle Corporation and Bank of America, N.A.
10.23- Assumption of Deed of Trust and Modification Agreement, dated as of July
12, 2002, by and between The Aristotle Corporation and Bank of America, N.A.
34
10.24 - Amended and Restated Subsidiary Pledge Agreement, dated as of June 27,
2002, by and between American Educational Products LLC and Bank of America, N.A.
10.25 - Amended and Restated Subsidiary Security Agreement, dated as of June 27,
2002, by and between American Educational Products LLC, the other subsidiaries
party thereto and Bank of America, N.A.+
10.26 - Amended and Restated Pledge Agreement, dated as of June 27, 2002, by and
between The Aristotle Corporation and Bank of America, N.A.+
10.27 - Amended and Restated Security Agreement, dated as of June 27, 2002, by
and between The Aristotle Corporation and Bank of America, N.A.+
99.1 - The Aristotle Corporation's Proxy Statement-Prospectus dated May 15,
2002, incorporated by reference to The Aristotle Corporation's Registration
Statement on Form S-4 (File No. 333-86026).*
99.2--Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except where noted, Commission File No. 0-14669) and
are hereby incorporated by reference.
* In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of this
agreement. Aristotle will furnish supplementally a copy of any omitted schedule
to the Comission upon request.
35