<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended June 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _______ to
Commission file number 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1165854
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
78 Olive Street, New Haven, Connecticut 06511
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 867-4090
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of October 7, 1996, 1,104,011 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock outstanding of The Aristotle
Corporation held by nonaffiliates was approximately $3,855,626.
Documents Incorporated by Reference
Portions of the Registrant's 1996 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of the Registrant's
fiscal year are incorporated by reference to Part III.
<PAGE>
THE ARISTOTLE CORPORATION
TABLE OF CONTENTS
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Selected Consolidated Financial Data 2
Management's Discussion and Analysis 4
Consolidated Financial Statements 10
Form 10-K Cross Reference Index 35
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1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(Amounts in thousands, except share and per share data)
The following are selected consolidated financial data for The Aristotle
Corporation ("Aristotle"), Aristotle Sub, Inc. ("ASI"), and The Strouse, Adler
Company ("Strouse") on a consolidated basis for the fiscal years ended June 30,
1994, 1995 and 1996. Aristotle formed ASI in 1993 and acquired (the
"Acquisition") Strouse in 1994. Accordingly, the selected consolidated data for
the fiscal years ended December 31, 1991 and 1992, and the six-month periods
ended June 30, 1992 and 1993 are for Aristotle only. All references herein to
the "Company" include Aristotle, ASI and Strouse. The selected consolidated
financial data presented below should be read in conjunction with the
Consolidated Financial Statements of the Company, together with the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
Fiscal Years Ended Six-Months Ended Fiscal Years Ended
December 31, June 30, June 30,
(unaudited)
------------------------------------------------------------------------------------------------
1991 1992(1) 1992 1993(2) 1994 1995 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated statements of
operations data:
Net sales $ --- $ --- $ --- $ --- $ 5,538 $ 21,701 $ 24,062
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Costs of goods sold --- --- --- --- 3,859 16,447 18,393
Operating expenses 1,729 1,484 444 651 1,977 5,481 5,043
Reserve for subsidiary litigation 1,510 ( 1,510) --- --- --- --- ---
Other income (expense) 108 1,292 1,096 174 159 ( 435) ( 553)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes and minority interest ( 3,131) 1,318 652 ( 477) ( 139) ( 662) 73
Income tax expense (benefit)(3) 312 ( 1,481) ( 1,609) 4,287 ( 20) 25 ( 1,626)
Minority interest --- --- --- --- ( 60) ( 211) ( 231)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations ( 3,443) 2,799 2,261 ( 4,764) ( 179) ( 898) ( 1,468)
Loss from discontinued
operations ( 53,172) ( 59,727) ( 34,278) --- --- --- ---
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ($ 56,615) ($ 56,928) ($ 32,017) ($ 4,764) ($ 179) ($ 898) $ 1,468
========= ========= ========= ========= ========= ========= =========
Net earnings (loss) per share:
Continuing operations ($ 3.14) $ 2.55 $ 2.06 ($ 4.35) ($ 0.16) ($ 0.81) $ 1.30
Discontinued operations ( 48.56) ( 54.51) ( 31.28) --- --- --- ---
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per
primary share ($ 51.70) ($ 51.96) ($ 29.22) ($ 4.35) ($ 0.16) ($ .81) $ 1.30
========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding (4) 1,095,072 1,095,643 1,095,652 1,096,017 1,087,039 1,113,250 1,130,727
Consolidated balance sheet data:
Total assets 69,925 11,371 37,618 10,545 23,162 26,820 23,795
Stockholders' equity 67,827 10,897 35,810 6,159 5,805 4,996 6,530
Long-term debt -- -- -- -- 251 10,274 2,097
-------------------------
</TABLE>
(1) In October 1992, the Federal Deposit Insurance Corporation (the "FDIC") was
appointed receiver for Aristotle's former subsidiary, First Constitution
Bank (the "Bank"). Substantially all the Bank's operations have been shown
as discontinued. The Company's accountants for the fiscal year ended
December 31, 1992, KPMG Peat Marwick, declined to express an opinion as to
the financial statements for fiscal 1992 because of uncertainties with
respect to the Stockholder Litigation and the FDIC Claims. The Company has
settled these disputes. See "Item 3. Legal Proceedings."
(2) Effective June 30, 1993, Aristotle changed its fiscal year end from
December 31 to June 30.
(3) Income tax expense for the six-months ended June 30, 1993 includes a
reserve of $4,300 for a potential tax claim by the FDIC. Income tax benefit
for the year ended June 30, 1996 reflects a $1,650 benefit related to the
settlement of the FDIC's Claims. See "Item 3. Legal Proceedings."
(4) The number of shares outstanding has been adjusted to reflect the one for
ten reverse stock split that was effective on May 11, 1994.
2
<PAGE>
SELECTED FINANCIAL DATA OF STROUSE
(Amounts in thousands)
The following are selected financial data for Strouse presented on the
historical basis of accounting for the fiscal years ended August 31, 1992 and
June 30, 1993, 1994, 1995 and 1996. The selected financial data for the fiscal
years ended June 30, 1993 and 1994 have not been audited, but, in the opinion of
the management of Strouse, all adjustments necessary for a fair presentation
have been included. All such adjustments are of a normal, recurring nature. The
selected financial data presented below should be read in conjunction with the
Consolidated Financial Statements of the Company, together with the Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
Fiscal Year
Ended
August 31, Fiscal Years Ended June 30,
(unaudited) (unaudited)
----------- ---------------------------------------------------
1992 1993 1994 1995(1) 1996
----------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of operations data:
Net sales $13,019 $14,966 $18,267 $21,701 $24,062
------- ------- ------- ------- -------
Costs and expenses:
Costs of goods sold (2) 8,515 9,996 12,831 16,403 18,050
Product development 375 378 433 485 523
Selling, general and
administrative (3) 3,051 3,428 4,362 4,134 3,852
Restructuring charge -- -- -- 219 --
Interest expense 387 395 486 823 914
------- ------- ------- ------- -------
12,328 14,197 18,112 22,064 23,339
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes 691 769 155 ( 363) 723
Income tax expense (benefit) 20 191 ( 98) ( 45) 276
------- ------- ------- ------- -------
Net income (loss) $ 671 $ 578 $ 253 ($ 318) $ 447
======= ======= ======= ======= =======
Balance sheet data:
Working capital $ 5,360 $ 5,429 $ 1,924 $10,604 $ 2,751
Total assets 7,107 7,977 12,945 16,571 12,887
Stockholders' equity 937 1,417 2,400 2,083 2,529
Long-term debt 4,863 4,551 251 10,274 2,097
</TABLE>
- -----------------
(1) Effective June 30, 1994, Strouse changed its fiscal year end from August 31
to June 30.
(2) Costs of goods sold for the fiscal year ended June 30, 1994 includes $89 in
transaction costs incurred in connection with the Acquisition.
(3) Selling, general and administrative expenses for the fiscal year ended
June 30, 1994 include $491 in transaction costs incurred in connection with
the Acquisition.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
Changes in the Business of Aristotle and the Methodology for Management's
Discussion and Analysis of Financial Condition and Results of Operations
Aristotle's business has changed substantially over the last three fiscal
years. See "Item 1. Business-Background Regarding Aristotle." Aristotle has
been, and continues to be, a holding company for its subsidiaries. From 1986 to
1992, its sole subsidiary was the Bank. From the time the Bank was seized by the
FDIC in October 1992, until April 1994 when Aristotle acquired Strouse,
Aristotle had no operating subsidiaries. From April 1994 on, the assets of the
Company primarily consisted of the assets of Strouse, and the operations of the
Company were substantially comprised of the operations of Strouse.
This discussion and analysis of financial condition and results of
operations will discuss and analyze the results of operations of the Company, on
a consolidated basis, for the fiscal year ended June 30, 1996, as compared to
the year ended June 30, 1995, and the fiscal year ended June 30, 1995, as
compared to June 30, 1994. It will also discuss and analyze the financial
condition of Strouse, on a stand alone basis, for the fiscal year ended June 30,
1995, as compared to the year ended June 30, 1994. This discussion and analysis
of financial condition and results of operations have been derived from, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes to Consolidated Financial Statements contained elsewhere in this report.
Effective June 30, 1993, the Company changed its fiscal year end from
December 31 to June 30.
Results of Operations of the Company
Fiscal Year Ended June 30, 1996 as Compared to the Year Ended June 30, 1995
The Company's net sales for the year ended June 30, 1996 increased 11% to
$24,062,000, compared to net sales of $21,701,000 for the prior year. The
increase was primarily generated by a $639,000 volume growth in shapewear
products, a $795,000 volume growth in specialty brassiere products and a
$927,000 impact from increased prices.
The Company's gross profit for the year ended June 30, 1996 increased to
$5,669,000 from $5,254,000 for the prior year, and gross margin percentage
decreased to 23.6% from 24.2%. The increase in gross profit was mainly a result
of sales growth. The decrease in gross margin percentage was primarily a result
of higher manufacturing costs of $407,000, which reflected higher per unit costs
resulting from the reductions in production and inventory levels, and the growth
in the private label business (which contributes operating income margins
comparable to Strouse's branded business, but at lower gross margins).
Operating expenses included selling, general and administrative expenses,
product development expenses, and restructuring charges. Selling, general and
administrative expenses for the fiscal year ended June 30, 1996 were $4,520,000,
versus $4,777,000 for the year ended June 30, 1995. The $257,000 decrease was
principally a result of a reduction in administrative personnel and shareholder
expenses, partially offset by increases in advertising costs and professional
fees.
Product development costs for the Company for the fiscal year ended June
30, 1996 were $523,000, compared to $485,000 for the corresponding period in
1995. Product development costs primarily included compensation of Company
personnel and were incurred by Strouse. All products are designed internally in
Strouse's New Haven and New York Design Centers. The increase in costs reflects
Strouse's continued investment in the product development process.
Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflected costs related to Strouse's reduction in personnel at its New Haven,
Connecticut facility. No restructuring charges were incurred during the fiscal
year ended June 30, 1996.
4
<PAGE>
Other income included investment and interest income and expense.
Investment and interest income was $312,000 and $321,000 in fiscal year ended
June 30, 1996 and 1995, respectively. This income was principally generated by
(i) one investment account related to the FDIC tax dispute and subject to an
escrow agreement with the FDIC or its affiliates, which as of June 30, 1996 had
a balance of $3,982,000, and (ii) one investment account established in
connection with the Acquisition and subject to an escrow and pledge agreement
(the "Strouse Escrow Account") with the former Strouse stockholders (the "Former
Strouse Stockholders"), which as of June 30, 1996 had a balance of $493,000.
The balance of the marketable security held in escrow is an IRS refund and its
related interest income totaling $1,778,000, which in January 1996 was placed in
an escrow account pending the resolution of the FDIC tax disputes. The two
investment escrow accounts relating to the FDIC tax dispute are collectively
referred to herein as the "FDIC Escrow Accounts."
Interest expense for fiscal 1996 increased to $865,000 from $756,000 in the
prior year. The increase primarily reflected higher borrowing levels to support
working capital needs and business growth.
The provisions for income taxes for the year ended June 30, 1996 was a
benefit of $1,626,000, compared to an expense of $25,000 in the prior year. The
fiscal 1996 benefit included a net benefit of $1,650,000 related to the
settlement of the FDIC Claims, offset by a $24,000 expense. See "Item 3. Legal
Proceedings." The $24,000 expense in fiscal 1996 and $25,000 in fiscal 1995
represented minimum state taxes. The Company did not pay federal taxes in fiscal
1996 or 1995 because its federal tax obligations were offset by the utilization
of net operating loss carryforwards.
Minority interest expense was $231,000 for the fiscal year ended June 30,
1996, versus $211,000 for the year ended June 30, 1995. The minority interest
expense was principally due to preferred dividends paid and accrued during the
year on outstanding preferred stock of ASI (the "ASI Preferred Stock") issued to
the Former Strouse Stockholders in connection with the Acquisition.
Fiscal Year Ended June 30, 1995 as Compared to the Year Ended June 30, 1994
The Company's net sales for the fiscal year ended June 30, 1995 were
$21,701,000, versus net sales of $5,538,000 for the year ended June 30, 1994.
This $16,163,000 increase reflected the operations of the Company's main
subsidiary, Strouse, for the entire year ended June 30, 1995. The fiscal year
ended June 30, 1994 only included the operations of Strouse for the period from
the date following the Acquisition, April 12, 1994, to June 30, 1994.
The Company's gross profit for the fiscal year ended June 30, 1995 was
$5,254,000, versus gross profit of $1,679,000 for the year ended June 30, 1994.
The increase reflected the operations of Strouse for the entire year ended June
30, 1995.
Operating expenses included selling, general and administrative expenses,
product development expenses, and in fiscal 1995, restructuring charges.
Selling, general and administrative expenses for the fiscal year ended June 30,
1995 were $4,777,000, versus $1,875,000 for the year ended June 30, 1994.
Expenses incurred at Aristotle in fiscal 1995 were $643,000 for the year ended
June 30, 1995, versus $967,000 for the fiscal year ended June 30, 1994. Expenses
incurred at Aristotle were lower because of reductions in the compensation of
Aristotle's officers. Aristotle's expenses also included Board of Directors
fees, corporate insurance costs, stockholder expenses and professional fees.
Expenses incurred by Strouse for the fiscal year ended June 30, 1995 were
$4,134,000, versus $908,000 for the year ended June 30, 1994. The increase at
Strouse reflects the operations for the entire year ended June 30, 1995.
Product development costs for the Company for the fiscal year ended June
30, 1995 were $485,000, versus $102,000 for the year ended June 30, 1994. The
increase reflects the operations of Strouse for the entire year ended June 30,
1995.
5
<PAGE>
Other income included investment and interest income and expense.
Investment and interest income of $321,000 and $294,000 in fiscal year ended
June 30, 1995 and 1994, respectively was principally generated by one of the
FDIC Escrow Accounts and the Strouse Escrow Account with account balances
totaling $4,682,000 and $4,638,000 in fiscal year ended June 30, 1995 and 1994,
respectively.
The Company's interest expense for the fiscal year ended June 30, 1995 was
$756,000, versus $135,000 for the year ended June 30, 1994. The increase
reflects the operations of Strouse for the entire year ended June 30, 1995.
Minority interest expense was $211,000 for the fiscal year ended June 30,
1995, versus $60,000 for the year ended June 30, 1994. The minority interest
expense is mainly due to dividends paid and accrued during the 1995 fiscal year
on the ASI Preferred Stock for the entire year of fiscal 1995.
Results of Operations of Strouse
Year Ended June 30, 1995 as Compared to the Year Ended June 30, 1994
Strouse's net sales for the year ended June 30, 1995 increased 19% to
$21,701,000, compared to net sales of $18,267,000 for the prior year. The
increase was generated by a $3,720,000 volume growth in shapewear products and a
$311,000 impact from increased prices, partially offset by a $581,000 volume
decrease in specialty brassiere products and increases in in-store markdowns and
discounts for sales events.
Strouse's price increases during the year ended June 30, 1995, expressed as
a percentage of total price, were lower than the increase in the Consumer Price
Index for the corresponding period. Strouse's private label business,
represented 21.8% of revenues in the year ended June 30, 1995, compared to 0.4%
in 1991.
Gross profit for the year ended June 30, 1995 decreased to $5,298,000 from
$5,436,000 for the prior year, and gross margin decreased to 24.4% from 29.8%.
The decrease in gross margin was principally due to increased subcontracting
costs, higher production scrap, growth in the private label business, costs
incurred relating to the resourcing of manufacturing operations, and extra costs
incurred in response to delayed deliveries from suppliers.
Selling, general and administrative expenses for the fiscal year ended June
30, 1995 were $4,134,000, compared to $4,362,000 for the corresponding period in
1994. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, customer service, accounting,
personnel, data processing, and administration departments, and professional
fees. The $228,000 decrease principally reflects transaction costs of $491,000
incurred in connection with the Acquisition in 1994 and decreased advertising
costs in 1995, partially offset by increased selling expenses of $276,000,
resulting primarily from higher commissions and staffing for a fiscal 1995
merchandiser program.
Product development costs for the fiscal year ended June 30, 1995 were
$485,000, compared to $433,000 for the corresponding period in 1994. Product
development costs primarily included compensation of Company personnel.
Interest expense for 1995 increased to $823,000 from $486,000 in the prior
year. The increase primarily reflected higher borrowing levels to support
working capital needs and business growth.
The provisions for income taxes for the year ended June 30, 1995 was a
benefit of $45,000, compared to a benefit of $98,000 in the prior year. The
benefit in 1995 resulted from operating losses incurred by Strouse in 1995. The
benefit in 1994 was primarily due to the tax deduction of $620,000 generated by
the exercise by management of Strouse of certain options to purchase Strouse
common stock prior to the Acquisition and the payment of certain bonuses to
management of Strouse equal, in the aggregate, to the net tax savings realized
by Strouse and attributable to the disposition by such persons of certain
Strouse stock acquired pursuant to the exercise of such options and the payment
of such bonus.
6
<PAGE>
Liquidity and Capital Resources of the Company
During fiscal 1996, cash required to fund the working capital needs of
Strouse was supplied principally through a line-of-credit facility and two term
loan facilities with Fleet Bank, National Association ("Fleet"), trade credit,
and internally generated funds. On October 3, 1996, Strouse terminated its
credit agreement with Fleet and entered into a new credit agreement with Bank of
Boston Connecticut. See "Item 1. Business-Financing" and Note 4 of the Notes to
Consolidated Financial Statements.
During fiscal 1996, cash required to fund the operations of Aristotle was
supplied primarily through earnings generated from the FDIC Escrow Accounts and
the Strouse Escrow Account, amounts payable to Aristotle pursuant to certain
notes from certain officers of Strouse, and taxes received from Strouse in
connection with a tax sharing agreement between Aristotle and Strouse.
In connection with the Acquisition, ASI issued to the Former Strouse
Stockholders 245,381 shares of ASI Preferred Stock and Aristotle issued to the
Former Strouse Stockholders 270,379 shares of voting preferred stock of
Aristotle (the "Aristotle Preferred Stock"). The Former Strouse Stockholders may
require that ASI repurchase each share of ASI Preferred Stock at various dates
beginning in April 1996 for $10.00 per share, plus any accrued but unpaid
dividends (the "Put Right"). In order to exercise the Put Right, a Former
Strouse Stockholder must sell an equal number of shares of Aristotle Preferred
Stock to Aristotle for $.001 per share. The Put Right is secured by the Strouse
Escrow Account.
In June 1995, Aristotle and ASI entered into an agreement with the Former
Strouse Stockholders pursuant to which the Former Strouse Stockholders agreed
(i) to postpone the Put Right with respect to 52,691 shares of ASI Preferred
Stock from April 1996 to April 1997, and (ii) to permit ASI to borrow funds from
the Strouse Escrow Account to fund the Put Right. In exchange, ASI agreed to
continue to pay dividends on certain ASI Preferred Stock through April 1997. In
addition, ASI and Aristotle agreed that if Aristotle received a certain level of
proceeds in connection with the FDIC Claims and the Stockholder Litigation (i)
Aristotle would eliminate any deficit below $700,000 in the Strouse Escrow
Account, and (ii) ASI would reinstitute the Put Right with respect to the 52,691
shares of ASI Preferred Stock. See "Item 3. Legal Proceedings."
In April and May of 1996, four of the Former Strouse Stockholders,
including three executive officers of the Company, exercised their Put Right and
received an aggregate cash payment of $207,171 in exchange for 20,715 shares of
ASI Preferred Stock and 20,715 shares of Aristotle Preferred Stock. In order to
satisfy these Put Rights, ASI borrowed $207,171 from the Strouse Escrow Account.
In May 1996, the Company settled the FDIC Claims and the Stockholder
Litigation. In connection with the FDIC settlement, the Company retained
$2,000,000 of the $5,760,000 in the FDIC Escrow Accounts and the balance of the
FDIC Escrow Accounts was paid to the FDIC. After payment of its expenses,
Aristotle will retain $1,650,000 and will utilize $207,171 of such proceeds to
eliminate the deficit in the Strouse Escrow Account. ASI will also reinstitute
the Put Right with respect to 52,691 shares of ASI Preferred Stock.
If the Former Strouse Stockholders exercise their Put Right with respect to
the remaining ASI Preferred Stock, then Aristotle would have to pay up to
$2,247,000 during the next four fiscal years to such Stockholders as part of the
Acquisition. It is not anticipated that current amounts of capital will be
sufficient to satisfy potential commitments related to the acquisition. Any
default in the payments due to the Former Strouse Stockholders could create a
partial unwinding of the Acquisition. See Note 1 of the Notes to Consolidated
Financial Statements.
In order to meet its projected capital requirements and potential
commitments to the Former Strouse Stockholders, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.
7
<PAGE>
Certain Factors That May Affect Future Results of Operations
This report contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements 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. The Company 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: the
availability of financing and additional capital to fund the Company's business
strategy on acceptable terms, if at all, market responses to pricing actions,
continued competitive factors and pricing pressures, changes in product mix, the
timely acceptance of new products, inventory risks due to shifts in market
demand, the dependence by the Company on key customers, and general economic
conditions. As a result, the Company's future development efforts involve a high
degree of risk. For further information, refer to the more specific risks and
uncertainties discussed throughout this report.
Income Taxes
At June 30, 1996, the Company had federal and state tax carryforwards as
follows:
Federal net operating loss $2,165,000
Federal capital loss $4,800,000
State net operating loss $2,600,000
State capital loss $9,800,000
All federal net operating loss carryforwards expire by 2011 and all federal
capital loss carryforwards expire by 1999. State of Connecticut net operating
loss and capital loss carryforwards expire from 1997 to 2001.
The Company has filed an amended Federal income tax return for the year
ending December 31, 1992 claiming a worthless stock deduction of approximately
$54,000,000 with respect to its stock in the Bank. As a result, it has also
claimed tax refunds of approximately $10,800,000 resulting from the carryback of
the Company's net operating loss from 1992 to prior years. On the basis of these
amended filings, the Company's remaining Federal net operating loss carryforward
would be approximately $32,100,000.
On its return for 1992 as originally filed, the Company made elections
under provisions set forth in regulations proposed by the Internal Revenue
Service in April 1992 as guidance for the application of Section 597 of the
Internal Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1) of
the Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal
income tax purposes and (ii) reattribute net operating losses of the Bank in
excess of $81,000,000 to the Company. The application of the tax law with
respect to the Company's election to disaffiliate from the Bank and to
reattribute the Bank's net operating losses to the Company is not certain and,
therefore, there is no assurance that the Company could succeed to any of the
Bank's net operating losses. Moreover, no reattribution to the Company of the
Bank's net operating losses will be permitted if the position taken by the
Company on its amended returns is allowed.
The Company's refund claims have not yet been reviewed or allowed by the
Internal Revenue Service, and there is no assurance that they will be allowed.
In addition, there is no assurance that the Company will be entitled to any net
operating loss carryforward arising from, or with respect to its interest in the
Bank. Even if the Company is entitled to any net operating loss carryforward
arising from, or with respect to its interest in, the Bank, its ability to
utilize such carryforward is dependent upon many factors including (1) the
realization of taxable income by the Company, and (2) avoiding a fifty percent
"ownership change" as defined in Section 382 of the Internal Revenue Code. If
there is an "ownership change", the tax loss carryforwards available to the
Company would be significantly reduced or eliminated. Accordingly, neither the
refund claim nor the future benefit of these remaining net operating loss
carryforwards have been reflected as tax assets in the accompanying consolidated
financial statements.
8
<PAGE>
The Company believes, assuming that the former stockholders of Strouse
currently own the maximum number of shares of Common Stock of Aristotle (the
"Common Stock") they could acquire through the exercise of their various rights
and options in the Acquisition, that the Company has not undergone an ownership
change within the meaning of Section 382 of the Code. During the period which
the Company has an unutilized federal net operating loss carryforward, which may
be for many years into the future, particularly if the Company does succeed to a
significant portion of the Bank's net operating loss carryforward, it will be
necessary for the Company to determine whether an ownership change has occurred
each time a new or existing stockholder becomes a 5% stockholder or an existing
5% stockholder increases its ownership interest. Except with respect to the
Former Strouse Stockholders, the Company does not know of any stockholders who
currently own or would own, upon the exercise of options or warrants, five
percent or more of the Common Stock.
At a special meeting of stockholders held on April 8, 1994, the
stockholders voted to restrict certain share transfers because they could affect
the Company's ability to use its net operating losses under Section 382. For
state tax purposes the election to re-attribute the losses of the Bank to the
Company is not applicable and it is unlikely that the Company will obtain any
Connecticut tax loss carryforwards as a result of its disposition of the Bank.
9
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30, 1996 AND 1995
----------------------------
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 99 $ 188
Marketable securities held in escrow,
at market value 6,253 -
Accounts receivable, net of reserves of
$242 and $171 2,834 4,498
Inventories 9,478 11,782
Other current assets 359 867
------- -------
Total current assets 19,023 17,335
------- -------
Property and equipment, net 1,684 1,517
------- -------
Other assets:
Marketable securities held in escrow, at
market value - 4,682
Employee notes receivable 354 354
Goodwill, net of amortization of $101 and $52 1,845 1,894
Deferred tax asset 630 725
Other noncurrent assets 259 313
------- -------
3,088 7,968
------- -------
$23,795 $26,820
======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Notes payable and current maturities
of long-term debt $ 6,055 $ 548
FDIC tax refund claim payable 3,760 -
Accounts payable 1,372 2,367
Accrued expenses 919 1,304
Deferred tax liability 630 725
--------- ---------
Total current liabilities 12,736 4,944
--------- ---------
Long-term debt, less current maturities 2,097 10,274
Reserve for potential FDIC tax refund claim - 3,982
--------- ---------
2,097 14,256
--------- ---------
Total liabilities 14,833 19,200
--------- ---------
Minority interest in subsidiary's preferred stock 2,247 2,454
--------- ---------
Minority interest in subsidiary's common stock 182 167
--------- ---------
Commitments and contingencies (Note 5)
Redeemable preferred stock, $.01 par value
3,000,000 shares authorized; 101,976 and
122,691 shares of Series A for 1996 and 1995,
respectively, 61,345 shares Series B, 61,345
shares Series C and 24,998 shares Series D
issued and outstanding 3 3
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000
shares authorized, 1,105,801 shares
issued and outstanding 11 11
Additional paid-in capital 159,762 159,843
Retained earnings (deficit) (153,245) (154,713)
Treasury stock, at cost, 1,287 shares in
1996 and 17,361 shares in 1995 (8) (151)
Net unrealized investment gains 10 6
--------- ---------
Total stockholders' equity 6,530 4,996
--------- ---------
$ 23,795 $ 26,820
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
10
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $24,062 $21,701 $5,538
Cost of goods sold 18,393 16,447 3,859
------- ------- ------
Gross profit 5,669 5,254 1,679
Operating expenses:
Selling 2,660 2,826 704
General and administrative 1,860 1,951 1,171
Product development 523 485 102
Restructuring charges - 219 -
------- ------- ------
Operating income (loss) 626 (227) (298)
------- ------- ------
Other income (expense):
Investment and interest
income 312 321 294
Interest expense (865) (756) (135)
------- ------- ------
(553) (435) 159
------- ------- ------
Income (loss) before income
taxes and minority interest 73 (662) (139)
Income tax expense (benefit) (1,626) 25 (20)
------- ------- ------
Income (loss) before minority
interest 1,699 (687) (119)
Minority interest (231) (211) (60)
------- ------- ------
Net income (loss) $ 1,468 $ (898) $ (179)
======= ======= ======
Net income (loss) per share:
Primary $1.30 $(.81) $(.16)
======= ======= ======
Fully-diluted $1.17 $(.81) $(.16)
======= ======= ======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
11
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Retained Investment
Common Paid-in Earnings Treasury Gains
Stock Capital (Deficit) Stock (Losses) Total
--------- ----------- ---------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $ 11,058 $149,633 $(153,636) $ (896) $ - $6,159
Net loss - - (179) - - (179)
Net unrealized
investment loss - - - - (64) (64)
Issuance of treasury
stock to directors - (854) - 896 - 42
Purchase of treasury
stock - - - (143) - (143)
Ten to one reverse
stock split and
change in par value (11,047) 11,037 - - - (10)
-------- ---------- --------- -------- ---------- ------
Balance, June 30, 1994 11 159,816 (153,815) (143) (64) 5,805
Net loss - - (898) - (898)
Purchase of treasury
stock - - - (11) - (11)
Issuance of treasury
stock to directors - 27 - 3 - 30
Net unrealized
investment gain - - - - 70 70
-------- ---------- --------- -------- ---------- ------
Balance, June 30, 1995 11 159,843 (154,713) (151) 6 4,996
Net income - - 1,468 - - 1,468
Issuance of treasury
stock to directors - (81) - 143 - 62
Net unrealized
investment gain - - - - 4 4
-------- ---------- --------- -------- ---------- ------
Balance, June 30, 1996 $ 11 $159,762 $(153,245) $ (8) $ 10 $6,530
======== ========== ========= ======== ========== ======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
12
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
------------------------------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,468 $ (898) $ (179)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 461 355 46
Gain on settlement of FDIC claim (2,000) - -
Loss on sale of investments held
for sale - - 48
Issuance of treasury stock for
services 62 30 42
Changes in assets and liabilities:
Accounts receivable 1,664 (934) (687)
Inventories 2,304 (1,711) 98
Other assets 552 200 39
Proceeds from tax carryback claim 1,778 - -
Accounts payable (995) 464 (400)
Accrued expenses (385) 214 (420)
------- ------- -------
Net cash provided by (used
in) operating activities 4,909 (2,280) (1,413)
------- ------- -------
Cash flows from investing activities:
Increase in notes from employees - - (354)
Purchase of marketable securities held
in escrow (1,778) 26 (701)
Sale of marketable securities 207 - -
Repurchase of ASI Preferred Stock (207) - -
Purchase of property and equipment (565) (640) (113)
Purchase of subsidiary, net of acquired
cash of $589 - (184) (2,617)
Minority interest 15 29 12
------- ------- -------
Net cash provided by (used
in) investing activities (2,328) (769) (3,773)
------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) under
line of credit (2,412) 996 (479)
Borrowings under term notes - 2,500 -
Proceeds from issuance of debt 140 - -
Principal debt payments (398) (260) (12)
Purchase of treasury stock - (11) (143)
------- ------- -------
Net cash provided by (used
in) financing activities (2,670) 3,225 (634)
------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (89) 176 (5,820)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 188 12 5,832
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 99 $ 188 $ 12
======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 876 $ 690 $ 137
======= ======= =======
Income taxes $ 31 $ (216) $ (72)
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
13
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1996 AND 1995
----------------------
1. Basis of Presentation and Nature of Business:
---------------------------------------------
The Aristotle Corporation ("Aristotle" or the "Company"), through its wholly-
owned subsidiary Aristotle Sub., Inc. ("ASI"), owns approximately 97% of The
Strouse, Adler Company ("Strouse"). Strouse, which was acquired on April 11,
1994 in a transaction accounted for as a purchase (the "Acquisition"),
designs, manufactures and markets women's intimate apparel. Prior to
October 2, 1992, Aristotle was the holding company of First Constitution Bank
(the "Bank"). On October 2, 1992, the Federal Deposit Insurance Corporation
("FDIC") was appointed as receiver of the Bank and Aristotle wrote off its
investment in the Bank.
The total Acquisition cost of Strouse was $5,990,000 (including expenses of
the Acquisition of $610,000) of which: (i) $2,454,000 represented the
issuance of 122,691 shares of 8.9% Series A, 61,345 shares of 8.9% Series B
and 61,345 shares of 8.9% Series C preferred stock of ASI (collectively
referred to herein as the "ASI Preferred Stock"), valued at its redemption
value of $10 per share; (ii) $125,000 represented the value of 25,000 common
shares of ASI issued at the Acquisition (the "ASI Common Stock");
(iii) $2,617,000 was cash paid at date of acquisition; and (iv) $184,000
represented the August 31, 1994 Additional EBIT Consideration (see below).
The fair value of assets purchased and liabilities assumed amounted to
$14,934,000 and $10,890,000, respectively. The excess of cost over the fair
value of net assets acquired amounted to $1,946,000, which is being amortized
over forty years.
The operating results of Strouse are included in the consolidated financial
statements since the date of the Acquisition.
Operating results for the year ended June 30, 1994 on a pro forma basis as
though Strouse was acquired as of July 1, 1993 are:
<TABLE>
<CAPTION>
(Dollars in Thousands
except share data)
------------------
(Unaudited)
<S> <C>
Net sales $18,267
Net loss (132)
Net loss per share $ (.12)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would
have occurred had the Acquisition been consummated as of the above dates, nor
are they necessarily indicative of the future operating results. The pro
forma adjustments include amortization of intangibles, decreased interest
income and expense, minority share and preferred dividend costs and related
income tax effects of the Acquisition.
14
<PAGE>
The Acquisition agreements (the "Acquisition Agreements") provided that the
former stockholders of Strouse (the "Strouse Stockholders") could receive
additional consideration (the "Additional EBIT Consideration"), the amount of
which would be based upon the earnings before interest and income tax ("EBIT")
of Strouse, calculated on an August 31 fiscal year through August 31, 1996, with
the maximum amount of such consideration not to exceed $1,854,000. Of each years
Additional EBIT Consideration, if any, 80% would be paid in cash and 20% would
be paid in ASI Common Stock, with such Common Stock convertible into Common
Stock of Aristotle (the "Aristotle Common Stock"). Additional EBIT Consideration
of $184,000 was paid to the Strouse Stockholders for the year ended August 31,
1994. In accordance with the Acquisition Agreements, $147,270 of the Additional
EBIT Consideration was paid in cash and $36,817 was paid through the issuance of
8,424 shares of ASI Common Stock. No Additional EBIT Consideration was earned
for the year ended August 31, 1995 and no additional EBIT Consideration has been
recognized during the current fiscal year as the EBIT target is not expected to
be met for the year ending August 31, 1996.
The 25,000 shares of ASI Common Stock issued at the date of Acquisition to the
Strouse Stockholders pursuant to the Acquisition represented 2.22% of the
outstanding ASI Common Stock. The Strouse Stockholders also received options
(the "ASI Options") to purchase 25,000 additional shares of ASI Common Stock at
$5.45 per share. The ASI Common Stock exercisable pursuant to the ASI Options
represented an additional 2.13% of the outstanding ASI Common Stock at date of
Acquisition, if exercised. After recognition of the fiscal 1994 Additional EBIT
Consideration, and the bonuses paid pursuant to the Employment Agreements (see
Note 5), the Strouse Stockholders hold 33,424 shares of ASI Common Stock (2.95%
of the outstanding shares of ASI Common Stock as of June 30, 1996) and ASI
Options to purchase 35,208 shares of ASI Common Stock (an additional 3% of the
outstanding shares of ASI Common Stock, if exercised, as of June 30, 1996).
The ASI Preferred Stock had an original liquidation preference of $2,454,000 in
the aggregate, or $10 per share. Dividends at the rate of 8.9% per annum are
payable on the ASI Preferred Stock until the later of: (i) the dates on which
the Put Right (as defined below) is exercised (between April 11, 1996 and April
11, 2001); and (ii) the first date upon which Aristotle has sufficient audited
financial statements in order to satisfy the requirements for filing a
registration statement under the federal securities laws pursuant to which the
shares of Aristotle's Common Stock issued to the Strouse Stockholders can be
registered for sale. Aristotle is obligated to pay the costs of such
registration under the Acquisition Agreements. The ASI Preferred Stock is
redeemable by ASI.
Aristotle has issued to the Strouse Stockholders warrants (the "Warrants") that
permit the holders of the Warrants to exchange their ASI Preferred Stock and/or
ASI Common Stock for Aristotle Common Stock. After recognition of the fiscal
1994 Additional EBIT Consideration, the bonuses paid pursuant to the Employment
Agreements (see Note 5), and exercise of Put Right (as defined below) the
Strouse Stockholders hold warrants that entitle them to purchase 362,508 shares
of Aristotle Common Stock, which, if exercised, would represent 24.7% of the
outstanding Aristotle Common Stock as of June 30, 1996. If the Strouse
Stockholders do not exercise their Warrants and exchange their ASI Preferred
Stock for Aristotle
15
<PAGE>
Common Stock, they have the right to put such shares of ASI Preferred Stock back
to Aristotle (the "Put Right") for $2,454,000, plus any accrued and unpaid
dividends, beginning April 11, 1996. The Put Right is secured by an investment
account established in connection with the Acquisition and subject to an escrow
and pledge agreement with the Strouse Stockholders (the "Strouse Escrow
Account"), which as of June 30, 1996 had a balance of $493,000 (see Note 3). The
Strouse Escrow Account is contained within marketable securities held in escrow
at market value in the accompanying consolidated balance sheets.
In June 1995, Aristotle and ASI entered into an agreement with the Strouse
Stockholders pursuant to which the Strouse Stockholders agreed (i) to postpone
the Put Right with respect to 52,691 shares of ASI Preferred Stock from April
1996 to April 1997 (i.e., to limit the Put Right during April 11, 1996 to April
10, 1997 to $700,000), and (ii) to permit ASI to borrow funds from the Strouse
Escrow Account to fund the Put Right. In exchange, ASI agreed to continue to pay
dividends on certain ASI Preferred Stock through April 1997. In addition, as a
result of the FDIC Claims and Stockholder Litigation settlements (see Note 5)
ASI and Aristotle agreed that (i) Aristotle would eliminate any deficit below
$700,000 in the Strouse Escrow Account, and (ii) ASI would reinstitute the Put
Right with respect to the 52,691 shares of ASI Preferred Stock (see Note 5).
During fiscal 1996, four of the Strouse Stockholders, including three executive
officers of the Company, exercised their Put Right and received an aggregate
cash payment of $207,000 in exchange for 20,715 shares of ASI Preferred Stock
and 20,715 shares of Aristotle Preferred Stock (see below). In order to satisfy
these Put Rights, ASI borrowed $207,000 from the Strouse Escrow Account.
In connection with the Acquisition, Aristotle also issued 270,379 shares of
voting preferred stock, which shares will not have the right to receive
dividends and will not share in the proceeds from any liquidation of the assets
of Aristotle (the "Aristotle Preferred Stock"). The Aristotle Preferred Stock
has one vote per share or aggregate voting power of 19.65% of all of the issued
and outstanding capital stock of Aristotle, with respect to matters other than
the election of directors and auditors. As a condition to the exercise of any
Warrant, the exercise of the Put Right, or the redemption of the ASI Preferred
Stock, the Strouse Stockholders must redeem the Aristotle Preferred Stock for
$.001 per share. The Aristotle Preferred Stock will automatically be redeemed,
for $.001 per share, at various dates beginning on and after April 11, 1996, or
upon the cessation of the voting rights of the Aristotle Preferred Stock. During
fiscal 1996, 20,715 shares of Aristotle Preferred Stock were redeemed in
connection with the fiscal 1996 Put Right (see above).
The Acquisition Agreements provide for loans from the Company at 8.9% interest
to the Strouse Stockholders aggregating $707,000, of which $354,000 was
outstanding at June 30, 1996 and 1995. The Acquisition Agreements also provide
that the Strouse Stockholders have the right to require a partial unwinding (the
"Partial Unwinding") of the Acquisition if the net worth of Aristotle, as
defined in the Acquisition Agreements, falls below $1,000,000 during a five-year
period subsequent to April 11, 1994. A Partial Unwinding would result in the
return by ASI to the Strouse Stockholders of 59% of the outstanding common stock
of Strouse in exchange for an amount of ASI Preferred Stock, Aristotle Common
Stock and cash that, taken together, have the aggregate value of $2,100,000.
16
<PAGE>
If, after April 11, 1994, an Acceleration Event occurs, then the Strouse
Stockholders may require that ASI immediately repurchase the ASI Preferred
Stock or immediately exchange the ASI Preferred Stock for Aristotle Common
Stock, and require that the Additional EBIT Consideration be immediately paid
in cash. An "Acceleration Event" includes the sale of all of the stock or
assets of Strouse, ASI or Aristotle; a merger or reorganization involving
Strouse, ASI or Aristotle in which Strouse, ASI or Aristotle is not the
survivor; the bankruptcy or insolvency of Strouse, ASI or Aristotle; or the
breach by Strouse, ASI or Aristotle of certain obligations to the Strouse
Stockholders.
Pursuant to the Acquisition Agreements, ASI and Strouse are bound by certain
standstill provisions until approximately April 11, 1999, including, without
limitation, limitations on the payment of dividends, the incurring of certain
indebtedness, the granting of any lien, the issuance of securities, and the
amendment of their certificates of incorporation and bylaws.
2. Significant Accounting Policies and Other Matters:
-------------------------------------------------
Principles of consolidation -
---------------------------
The consolidated financial statements include the accounts of Aristotle and
its majority owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and cash equivalents -
-------------------------
Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less.
Inventories -
-----------
Inventories are valued at the lower of cost, using the last-in, first- out
method (LIFO), or market.
As a result of the application of purchase accounting to the Acquisition in
1994, the financial accounting basis of the Company's inventories changed,
while the basis for federal income tax reporting purposes did not.
Accordingly, as of June 30, 1996, the LIFO inventories reflected in the
accompanying consolidated balance sheet are stated at an amount $1,688,000
greater than LIFO inventories reported for federal income tax purposes.
At June 30, 1996 and 1995, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Raw materials $2,173 $ 2,600
Work-in-process 2,346 4,503
Finished goods 4,159 3,472
------ -------
8,678 10,575
LIFO reserve 800 1,207
------ -------
$9,478 $11,782
====== =======
</TABLE>
17
<PAGE>
During fiscal 1996, the Company liquidated certain LIFO inventories that were
carried at higher costs than those prevailing in the current year. The effect of
this liquidation was to decrease operating profit by approximately $407,000.
Property and equipment -
- ----------------------
Property and equipment are recorded at cost and are depreciated or amortized,
using the straight-line method, over their estimated useful lives of five to ten
years.
At June 30, 1996 and 1995, property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Machinery and equipment $1,536 $1,002
Furniture and fixtures 18 42
Leasehold improvements 269 213
Equipment under capital lease 600 600
------ ------
2,423 1,857
Less accumulated depreciation and
amortization (739) (340)
------ ------
$1,684 $1,517
====== ======
</TABLE>
Expenditures for repairs and maintenance are charged against income as incurred.
Renewals and betterments are capitalized.
Goodwill -
- --------
The excess of cost over the fair value of net tangible and identifiable
intangible assets acquired resulted from the Acquisition and is being amortized
using the straight-line method over 40 years.
The Company continually evaluates whether events and circumstances have occurred
which indicate that the remaining estimated useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable.
Income (loss) per share -
- -----------------------
Income (loss) per share is computed using the weighted average common
shares after giving retroactive effect to the 10 to 1 reverse stock split
(effected in May 1994) for all years presented. For purposes of computing
primary net income (loss) per share, weighted average shares for fiscal 1996,
1995 and 1994 were 1,130,727, 1,113,250 and 1,087,039, respectively. For
fiscal 1996, the weighted average shares for purposes of the fully-diluted
calculation was 1,441,383 and for fiscal 1995 and 1994, the effect of
conversion of the underlying securities would have been anti-dilutive.
18
<PAGE>
Revenue recognition -
- ---------------------
The Company recognizes revenue as the product is shipped to its customers.
Co-op advertising -
- -------------------
The Company grants customers a co-op advertising credit relating to qualified
advertising and promotional costs incurred by the customer in promoting the
Company's products. These credits are recognized in the Company's consolidated
financial statements as the advertising costs are incurred.
Principal supplier -
- --------------------
In 1996, 1995 and 1994, approximately 95%, 85% and 81%, respectively, of the
Company's products were manufactured and sewn in the Caribbean, with
approximately 68%, 60% and 57%, respectively, of the Company's products
assembled in Santo Domingo, Dominican Republic.
Restructuring charges -
- -----------------------
In 1995, the Company recognized a $219,000 restructuring charge related to
curtailing certain manufacturing operations at the New Haven facility and the
termination of employees.
Concentration of sales and credit risk -
- ----------------------------------------
Substantially all of the Company's accounts receivable reflected in the
accompanying consolidated balance sheets are from a diverse group of retailers.
Net sales to three customers accounted for approximately 17%, 13% and 12% of
total net sales in 1996, two customers accounted for approximately 14% and 11%
of total net sales in 1995 and one customer accounted for approximately 11% of
total net sales in 1994.
Investments in debt and equity securities -
- -------------------------------------------
During 1994, the Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115), which requires that, except for debt securities classified as
"held-to-maturity securities", investments in debt and equity securities be
reported at fair value. Implementation did not have a material effect on the
financial results of the Company.
Disclosures about fair value of financial instruments -
- -------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash, accounts receivable, marketable securities, employee notes
- ----------------------------------------------------------------
receivable, payables, accrued expenses and FDIC tax refund claim -
- ------------------------------------------------------------------
For these short-term account balances, the carrying amount is a reasonable
estimate of fair value.
19
<PAGE>
Notes payable and long-term debt -
----------------------------------
The carrying amount is a reasonable estimate of fair value as the debt is
frequently repriced and there has been no significant change in credit
risks and interest rates since the financing was obtained or repriced.
Reclassifications -
- --------------------
Certain reclassifications have been made to the 1994 and 1995 financial
statements to make them consistent with the 1996 presentation.
Use of estimates -
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently issued accounting standards -
- --------------------------------------
In March 1995, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets" (SFAS 121). SFAS 121 requires a company to review long- lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Company is required
to adopt SFAS 121 no later than fiscal 1997, although earlier implementation is
permitted. SFAS 121 is required to be applied prospectively for assets to be
held and used. The Company does not believe the adoption of the new standard
will have a significant impact on the Company's results of operations or
financial position.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock- Based
Compensation" (SFAS 123). SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued for Employees" (Opinion 25).
Entities electing to remain with the accounting in Opinion 25 must make pro
forma disclosures of net income, as if the fair value based method of accounting
defined in SFAS 123 had been applied. The Company is required to adopt SFAS 123
during fiscal 1997. Based upon the Company's initial evaluation, adoption is not
expected to have a material impact on the Company's financial position or
results of operations because the Company intends to make pro forma disclosures
to comply with this statement.
20
<PAGE>
3. Marketable Securities Held in Escrow:
-------------------------------------
To enable the Strouse Stockholders to effectuate the Partial Unwinding, and
to secure the obligations of the Company to pay dividends on the ASI
Preferred Stock and to repurchase the ASI Preferred Stock if the Strouse
Stockholders exercise their Put Rights, the Company has pledged 59% of the
outstanding common stock of Strouse and the Strouse Escrow Account, which as
of June 30, 1996 had a balance of $493,000 (see Note 1). Strouse also granted
to the Strouse Stockholders a security interest in all of its assets to
secure such obligations.
Under an agreement with the Office of Thrift Supervision and a court order
with the FDIC, as of June 30, 1996, the Company had placed $5,760,000 (the
"Principal Amount") in two escrow accounts (the "FDIC Escrow Accounts") that
were established to provide a vehicle to pay possible amounts arising from
disputed tax refunds based on a tax sharing agreement between Aristotle and
the Bank. The Company may withdraw interest and dividend income earned on
$3,982,000 of the Principal Amount. The potential amount of the full loss
arising from the disputed tax refunds was provided for in 1993. Subsequent to
yearend, the Company entered into a settlement agreement whereby $3,760,000
of the escrow amount will be remitted to the FDIC and $2,000,000 will be
retained by the Company (see Note 5).
The funds relating to the above mentioned escrow arrangements are invested in
U.S. Treasuries and high-grade corporate debentures which mature at various
dates through 1998. These securities have been classified as available for
sale and an unrealized holding gain (loss) of approximately $10,000, $6,000
and ($64,000) is recorded as a component of stockholders' equity as of June
30, 1996, 1995 and 1994, respectively. As these securities mature, the
proceeds will be invested in United States Treasury Notes with a maturity of
not more than 120 days.
Investment securities available for sale relating to the above escrow
arrangements are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------
Amortized Unrealized Gross Market
Cost Gains Value
--------- ---------- ------------
<S> <C> <C> <C>
Company obligations:
U.S. Treasuries maturing
in 1 to 5 years $ 171 $ - $ 171
Corporate debt maturing
in 1 to 5 years 156 - 156
Cash equivalents and
interest receivable 166 - 166
--------- ---------- ------------
493 - 493
--------- ---------- ------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
----------------------
Amortized Unrealized Gross Market
Cost Gains Value
---- ----- -----
FDIC Escrow Accounts: tax claim:
<S> <C> <C> <C>
U.S. Treasuries maturing
in 1 to 5 years 1,793 5 1,798
Corporate debt maturing
in 1 to 5 years 1,885 5 1,890
U.S. Treasury securities
maturing 1 to 5 years 1,778 - 1,778
Cash equivalents and
interest receivable 294 - 294
------ ---------- ------
5,750 10 5,760
------ ---------- ------
Total $6,243 $10 $6,253
====== ========== ======
<CAPTION>
June 30, 1995
------------------------
Gross
Amortized Unrealized Market
Cost Gains Value
--------- ---------- ------
<S> <C> <C> <C>
Company obligations:
U.S. Treasuries maturing
in 1 to 5 years $ 171 $ - $ 171
Corporate debt maturing
in 1 to 5 years 157 - 157
Cash equivalents and
interest receivable 372 - 372
------ ---------- ------
700 - 700
------ ---------- ------
FDIC Escrow Accounts re: tax claim:
U.S. Treasuries maturing
in 1 to 5 years 1,804 6 1,810
Corporate debt maturing
in 1 to 5 years 2,029 - 2,029
Cash equivalents and
interest receivable 143 - 143
------ ---------- ------
3,976 6 3,982
------ ---------- ------
Total $4,676 $ 6 $4,682
====== ========== ======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
June 30, 1994
----------------------------------
Gross
Amortized Unrealized Market
Cost Losses Value
--------- ----------- ------
<S> <C> <C> <C>
Company obligations:
U.S. Treasuries maturing
in 1 to 5 years $ 355 $ (6) $ 349
Corporate debt maturing
in 1 to 5 years 347 (4) 343
------ ---- ------
702 (10) 692
------ ---- ------
FDIC Escrow Accounts: tax claim:
U.S. Treasuries maturing
in 1 to 5 years 1,838 (20) 1,818
Corporate debt maturing
in 1 to 5 years 2,162 (34) 2,128
------ ---- ------
4,000 (54) 3,946
------ ---- ------
Total $4,702 $(64) $4,638
====== ==== ======
</TABLE>
4. Notes Payable and Long-Term Debt:
---------------------------------
Line of credit and term notes -
-------------------------------
As of June 30, 1996, Strouse had outstanding borrowings of $7,613,000
pursuant to a Bank debt facility (the Credit Agreement), of which $2,222,000
related to a term loan, $116,000 related to a note payable and $5,275,000 was
a revolving loan. The Credit Agreement as of June 30, 1996 required that
Strouse meet various restrictive covenants and that all outstanding
obligations be satisfied prior to October 31, 1997. In October 1996, Strouse
entered into a new credit agreement (New Credit Agreement) with another bank
which, among other things, adjusted the maturity date, the interest rate and
the financial and nonfinancial covenants.
Notes payable and long-term debt at June 30, 1996 and 1995, after
consideration of the New Credit Agreement, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Borrowings under bank line of credit $5,613 $ 7,687
Term notes payable to bank 2,000 2,389
Capital lease obligation 374 495
Other 165 251
------ -------
Total 8,152 10,822
Less current maturities 6,055 548
------ -------
$2,097 $10,274
====== =======
</TABLE>
23
<PAGE>
The New Credit Agreement provides for a Revolving Loan and a $2,000,000 Term
Loan. Borrowings of up to $8,000,000 are available under the Revolving Loan,
with such borrowings limited to 80% of eligible accounts receivable, 50% of
eligible raw material inventory and 60% of eligible finished goods inventory, as
defined. In addition to the primary borrowings, the New Credit Agreement will
permit advances to exceed the formula amounts (the seasonal "Overadvance") by up
to $750,000 during the first year and reducing to $500,000 thereafter (so long
as the total line-of-credit is not more than the maximum borrowings allowed and
the Overadvance reduces to zero for 30 consecutive days per annum). The New
Credit Agreement matures in September 1999.
The interest rate on the Revolving Loan will vary from prime to prime plus 1.0%
or Eurodollar plus 1.75% to Eurodollar plus 3% per annum based on the level of
total liabilities to total net worth, as defined. In addition, the amended
credit agreement provides for a .35% per annum commitment fee on the unused
portion of the Revolving Loan.
The Term Loan will bear interest at prime plus .75%, Eurodollar plus 2.5% or at
a fixed rate of cost of funds plus 2.25%. The Term Loan has a three year term
and requires principal payments to reduce the amount outstanding based on a ten
year amortization.
Under the provisions of the New Credit Agreement, Strouse would be required to
prepay its Term Loan by an amount, if any, equal to 25% of its excess cash flow,
as defined, for a fiscal year.
The New Credit Agreement requires that Strouse maintain certain financial ratios
in connection with these loans. These covenants, which use the first-in,
first-out (FIFO) inventory costing methodology, requires that Strouse maintain
(a) an interest coverage ratio, as defined, of 1.75 to 1.0, (b) a debt service
coverage ratio, as defined, of 1.10 to 1.0, (c) a debt to net worth ratio, as
defined, of 6.0 to 1.0 at September 30, 1996 and decreasing thereafter to 4.0 to
1.0 in fiscal 1999 and (d) a profitability requirement, as defined.
Borrowings under the New Credit Agreement are collateralized by substantially
all of the assets of Strouse and are guaranteed by Aristotle and ASI, with each
guaranty limited to $2,000,000. Aristotle will secure its guaranty with $500,000
to be held by and pledged to the Bank. In addition, the New Credit Agreement
restricts the amount of dividends that Strouse can pay to ASI or Aristotle.
Capital lease obligation -
- --------------------------
During fiscal 1995, Strouse entered into a capital lease obligation with one of
their principal suppliers to lease the supplier's land, building, machinery and
equipment. Under the terms of the lease, Strouse makes quarterly payments of
$81,250, $87,500, and $93,750, for principal, interest and executor costs, for
calendar years 1995, 1996 and 1997, respectively. The imputed interest rate on
the obligation is 9.0% per annum. Included in the accompanying consolidated
balance sheet is $600,000 of land, building and equipment under capital lease,
net of accumulated depreciation of $77,000 and $39,000 at June 30, 1996 and
1995, respectively, resulting from this lease commitment.
In connection with this lease, Strouse has the option to purchase the land,
building, machinery and equipment for $700,000.
24
<PAGE>
Aggregate maturities of all long-term debt and notes payable for each of the
succeeding five years subsequent to June 30, 1996 and thereafter are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
--------------- ------
<S> <C>
1997 $6,055
1998 304
1999 181
2000 193
2001 199
Thereafter 1,220
------
Total $8,152
======
</TABLE>
5. Commitments and Contingencies:
------------------------------
Lease commitments -
-------------------
The Company is the lessee of space in its New Haven facility from a related
party. The agreement provides that the Company will pay for its prorated
portion of operating expenses associated with the building. In addition,
Strouse leases showroom space in New York City. Rent expense under these
operating leases amounted to approximately $454,000 and $474,000 for the
years ended June 30, 1996 and 1995 and $118,000 for the period from the
Acquisition to June 30, 1994.
At June 30, 1996, approximate future minimum payments including current
escalations for operating expenses under these operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
June 30, Amount
--------------- ------
<S> <C>
1997 $512
1998 523
1999 549
2000 577
</TABLE>
Guarantee -
- -----------
Strouse has guaranteed annuity payments to the participants of a terminated
Company pension plan. The payments are currently being satisfied under an
annuity contract with an insurance company.
Contingencies -
- ---------------
In April 1995, the FDIC filed a complaint related to the matter captioned
Federal Deposit Insurance Corporation vs. The Aristotle Corporation, in the
United States District Court for the District of Connecticut. The FDIC
claimed that it was entitled to income tax refunds previously received and
yet to be received by Aristotle.
25
<PAGE>
In addition, the Company was aware that the FDIC was preparing claims against
certain former officers and directors of the Bank based on alleged negligence in
approving certain loans that the Bank made and subsequently lost money on when
borrowers defaulted. Under Delaware law and under Aristotle's bylaws, Aristotle
may have had an obligation to indemnify these officers and directors for
expenses and liabilities incurred by them in connection with any action the FDIC
brought to enforce its claims.
The Company, the FDIC and certain other interested parties entered into a
settlement agreement dated May 29, 1996 regarding the foregoing asserted claims
and potential claims (the "FDIC Claims"). Under the settlement agreement, the
Company retained $2,000,000 of the disputed $5,760,000 in tax refunds.
Accordingly, the Company has recorded an income tax benefit, net of legal costs,
as a result of the above agreement (see Note 7). The FDIC received the balance
of the tax refunds. The FDIC and Aristotle each dismissed the above-captioned
action, as it related to the other party. As part of the settlement agreement,
the FDIC released Aristotle, certain of Aristotle's former officers and
directors, and certain officers and directors of the Bank from any claims
pertaining to the operations or failure of the Bank. Aristotle released the FDIC
from all claims relating to the Bank.
During 1990, two separate purported stockholder class actions were commenced in
the United States District Court for the District of Connecticut and a
consolidated complaint, captioned In Re: First Constitution Stockholders
Litigation, was filed on August 3, 1990 (the "Stockholder Litigation"). The
consolidated complaint alleged, among other things, that during the purported
class period (January 25, 1989 to April 5, 1990), the Company, a former director
and certain former officers acted to inflate the price of the Aristotle Common
Stock by issuing materially false and misleading statements on omissions. The
consolidated complaint also alleged claims based on common law fraud and
misrepresentation, and sought unspecified damages, as well as recovery of
attorneys' fees.
On May 23, 1996, the plaintiffs, Aristotle and the individual defendants entered
into a Stipulation and Agreement of Settlement pursuant to which, among other
things, the Stockholder Litigation would be settled for $2,300,000, which,
following the payment of attorneys' fees and costs, would be distributed to
class members who timely submitted valid proofs of claim. Aristotle's directors
and officers liability insurance carrier has funded the entire settlement
amount. By order and judgment dated August 2, 1996, the Court approved the
settlement and dismissed the Stockholder Litigation with prejudice.
Other commitments -
- -------------------
In April 1994, the Company has entered into five-year employment agreements (the
"Employment Agreements") with four officers. In addition to providing for base
salaries, the Employment Agreements provide for (a) 6% annual increases if
certain levels of EBIT are achieved, and (b) an annual cash bonus and the annual
grant of stock options to purchase ASI Common Stock, if certain other levels of
EBIT are achieved. The annual bonus increases proportionately from 20% of salary
for achieving the minimum level of EBIT to 100% of salary for achieving EBIT of
more than
26
<PAGE>
double the minimum level of EBIT. The annual stock options increase
proportionately from 10,000 shares of ASI Common Stock for achieving the
minimum level of EBIT to 20,000 shares for achieving EBIT of more than double
the minimum level of EBIT. The stock options will be exercisable at the
market price on the date that they are granted. The number of stock options
granted to each employee will be based on the amount of his or her salary in
relation to the amounts of the salaries of the other employees who are
parties to such Employment Agreements. During 1994, approximately $93,000 of
bonuses were accrued of which approximately $75,000 was recorded in the
Acquisition discussed in Note 1. In conjunction therewith, the Strouse
Stockholders were issued options to purchase 10,208 shares of ASI Common
Stock, with such options immediately exercisable at date of grant. There was
no bonus earned for the fiscal year ended August 31, 1995 and there is no
similar bonus accrued for as of June 30, 1996 as management does not expect
to meet the EBIT target.
6. Stockholders' Equity:
---------------------
In April 1994, Aristotle's stockholders and board of directors approved an
amendment to Aristotle's certificate of incorporation which, among other
things: (i) decreased the number of authorized shares of Aristotle's common
stock from 20,000,000 shares to 3,000,000 shares; (ii) provided for a ten to
one reverse stock split of Aristotle's common stock and (iii) reduced the par
value of the Aristotle common stock and Aristotle preferred stock from $1.00
per share to $.01 per share.
The Company had the following common, treasury and preferred stock issued and
outstanding at June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Redeemable
Common Preferred Treasury
Stock Stock Stock
----------- --------- -----------
<S> <C> <C> <C>
Outstanding, June 30, 1993 11,058,019 - 68,067
Issuance of treasury stock
to directors - - (67,172)
Purchases of treasury stock - - 215,200
Issuance of preferred stock
in connection with the
Acquisition (Note 1) - 270,379 -
Ten to one reverse stock split (9,952,218) - (194,485)
---------- --------- --------
Outstanding, June 30, 1994 1,105,801 270,379 21,610
Issuance of treasury stock
to directors - - (5,417)
Redemption of fractional shares - - 1,168
---------- --------- --------
Outstanding, June 30, 1995 1,105,801 270,379 17,361
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Redeemable
Common Preferred Treasury
Stock Stock Stock
--------- ---------- -----------
<S> <C> <C> <C>
Issuance of treasury stock
to directors - - (16,074)
Exercise of Put Right (Note 1) - (20,715) -
--------- ------- ----------
Outstanding, June 30, 1996 1,105,801 249,664 1,287
========= ======= ==========
<CAPTION>
Aristotle common shares reserved for future issuance consist of the following:
1996 1995
---- ----
<S> <C> <C>
Conversion of ASI Preferred Stock 288,022 314,591
Conversion of ASI Common Stock 33,424 33,424
Exercise of ASI Options 35,208 35,208
Exercise of stock options granted
under the Plan (Note 8) 44,435 55,037
Options remaining to be granted
under the Plan (Note 8) - 51,453
Exercise of stock options granted
outside of the Plan (Note 8) 20,000 20,000
--------- -------
Total 421,089 509,713
========= =======
</TABLE>
7. Income Taxes:
-------------
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 utilizes the liability
method and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax basis of
assets and liabilities given the provisions of enacted tax laws.
At June 30, 1996 and 1995, the principal components of deferred tax assets,
liabilities and the valuation allowance are as follows (in thousands):
28
<PAGE>
<TABLE>
<CAPTION>
1996
------------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
---------------- ----------------
<S> <C> <C>
Federal net operating loss carryforwards $ - $ 736
Federal capital loss carryforwards - 1,648
State of Connecticut net operating
loss carryforwards - 306
State of Connecticut capital loss
carryforwards - 1,133
Inventory purchase accounting basis
difference (675) -
Other 215 (63)
----- -------
(460) 3,760
Valuation allowance (170) (3,130)
----- -------
$(630) $ 630
===== =======
<CAPTION>
1995
------------------------------------
Current Asset Long-term Asset
(Liability) (Liability)
---------------- ----------------
<S> <C> <C>
Federal net operating loss carryforwards $ 250 $ 440
Federal capital loss carryforwards - 1,648
State of Connecticut net operating
loss carryforwards - 580
State of Connecticut capital loss
carryforwards - 1,133
Inventory purchase accounting basis
difference (812) -
Other 191 117
----- -------
(371) 3,918
Valuation allowance (354) (3,193)
----- -------
$(725) $ 725
===== =======
</TABLE>
A valuation allowance has been recorded for the deferred tax assets as a result
of uncertainties regarding the realization of the asset, including the lack of
profitability to date and the variability of operating results.
29
<PAGE>
Charges (benefits) for income taxes are comprised of the following for
the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------
1996 1995 1994
-------- ----- ------
<S> <C> <C> <C>
Current:
Federal $(1,650) $ - $ 21
State 24 25 (41)
------- ----- -----
$(1,626) $ 25 $ (20)
======= ===== =====
</TABLE>
The 1996 federal tax benefit relates to the settlement of the FDIC tax refund
complaint (See Note 5). The 1996 and 1995 state tax provisions relate
principally to minimum state and franchise taxes. The 1994 tax benefit relates
principally to a state tax refund of $86,000, a federal built in gains tax of
$21,000 for a LIFO decrement occurring subsequent to the business s combination
discussed in Note 1 and state taxes of $31,000.
At June 30, 1996, the Company had Federal net operating loss carryforwards of
approximately $2,165,000 (expiring by 2011) and capital loss carryforward of
approximately $4,800,000 (expiring by 1999). Connecticut net operating loss
carryforwards and capital loss carryforwards are approximately $2,600,000 and
$9,800,000, respectively, and expire from 1997 through 2001.
On its return for 1992 as originally filed, the Company made elections under
provisions set forth in regulations proposed by the Internal Revenue Service in
April 1992 as guidance for the application of Section 597 of the Internal
Revenue Code of 1986, as amended and under Section 1.1502.20(g)(1) of the
Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal
income tax purposes and (ii) reattribute net operating losses of the Bank in
excess of $81,000,000 to the Company. The application of the tax law with
respect to the Company's election to disaffiliate from the Bank and to
reattribute the Bank's net operating losses to the Company is not certain and,
therefore, there is no assurance that the Company could succeed to any of the
Bank's net operating losses.
In September, 1996, the Company filed amended Federal and state income tax
returns for the year ending December 31, 1992 claiming a worthless stock
deduction of approximately $54,000,000 with respect to its stock in the Bank. As
a result, it has also claimed tax refunds of approximately $10,800,000 resulting
from the carryback of the Company's net operating loss from 1992 to prior years.
On the basis of these amended filings, the Company's remaining Federal net
operating loss carryforward would be approximately $32,100,000 and no
reattribution to the Company of the Bank's net operating losses will be
permitted if the position taken by the Company on its amended returns is
allowed. The amended state tax return did not result in a claim for refund.
Rather, it increased the Company's net operating loss carryforward by
approximately $54,000,000. The Company's refund claims have not yet been
reviewed or allowed by the Internal Revenue Service, and there is no assurance
that they will be allowed. Accordingly, neither the refund claim nor the future
benefit of these remaining net operating loss carryforwards have been reflected
as tax assets in the accompanying consolidated financial statements.
30
<PAGE>
The Company's ability to utilize tax carryforwards is dependent upon many
factors including, (1) the acquisition by the Company of profitable
investments, and (2) avoiding a fifty percent "ownership change" as defined
in Section 382 of the Internal Revenue Code. If there is an "ownership
change", the tax loss carryforwards available to the Company would be
significantly reduced or eliminated. At a special stockholders meeting held
on April 8, 1994 the stockholders voted to restrict certain stockholder
transfers.
8. Stock Option Plan and Profit Sharing Plan:
------------------------------------------
The Company established a Stock Option Plan (the "Plan") in 1986, which
provided for the granting of nonincentive and incentive stock options to
directors and officers of the Company for the purchase of Aristotle common
stock. Nonincentive stock options and certain incentive stock options granted
under the Plan are generally exercisable after one year but within ten years
as of the date of the grant. Additionally, certain nonincentive stock options
granted under the Plan may be accompanied by stock appreciation rights
("SAR"). The granting of such stock options (SAR's) entitle the holder to
surrender an option and receive cash equal to the increase in the fair market
value of the common stock from the date of grant to the date of exercise.
The activity for the Plan for each of the following periods as adjusted for
the 10 to 1 reverse stock split in May 1994, is as follows:
<TABLE>
<CAPTION>
Number Option
of Shares Price
---------- --------------
<S> <C> <C>
Options outstanding, July 1, 1993 58,141 $10.00-$150.00
Options granted 2,396 5.30
------- --------------
Options outstanding, June 30, 1994 60,537 5.30- 150.00
Options granted 4,500 5.45
Options cancelled or expired (10,000) 10.00- 15.00
------- --------------
Options outstanding, June 30, 1995 55,037 5.30- 150.00
Options cancelled or expired (10,602) 5.45- 150.00
------- --------------
Options outstanding, June 30, 1996 44,435 $ 5.30-$150.00
======= ==============
</TABLE>
All outstanding options were exercisable at June 30, 1996. As of June 30,
1996, the Company elected not to grant any additional future options under
the Plan.
31
<PAGE>
In addition to the options outstanding under the foregoing Plans, the Company
has granted a director of the Company stock options to purchase 20,000 common
stock shares at $5.40 per share, with 10,000 of such options vesting on each
of August 5, 1995 and 1996 and exercisable through August 5, 2004.
Strouse has a deferred profit sharing plan (the "Profit Plan"). Under the
Profit Plan, Strouse will match 25% of employee contributions not to exceed
4% of participants' annual compensation. Eligibility is based on attaining
twenty-one years of age and completing one year of service, as defined within
the Profit Plan. Strouse contributions will vest 20% in year 3 and an
additional 20% per year thereafter until full vesting is achieved. Strouse
contributions were approximately $25,000 and $35,000 for the years ended June
30, 1996 and 1995 and $9,300 for the period from the Acquisition to June 30,
1994.
9. Related Party Transactions:
---------------------------
During the years ended June 30, 1996, 1995 and 1994, the Company paid its
directors $64,000, $62,000 and $76,000, respectively, in compensation for
services as directors of the Company. Additionally, in 1996, 1995 and 1994,
$62,000, $30,000 and $42,000, respectively, was paid in the form of shares of
Aristotle Common Stock issued out of treasury stock.
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited the accompanying consolidated balance sheets of The Aristotle
Corporation (the "Company") and subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Aristotle Corporation and
subsidiary as of June 30, 1996 and 1995, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New Haven, Connecticut
October 3, 1996
33
<PAGE>
[LETTERHEAD OF RICHARD A. EISNER & COMPANY, INC. APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows for the year ended June 30, 1994
of The Aristotle Corporation (the "Company") and subsidiaries. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the results of operations and cash flows of The Aristotle Corporation and
subsidiaries for the year ended June 30, 1994 in conformity with generally
accepted accounting principles.
In 1990 the Company and certain of its former officers and directors were
named in litigation alleging certain securities law violations, amongst which
were filing false and misleading financial information, or omitting certain
information. At the time that the litigation was initiated, the Company's
principal operation was banking. In 1992, its bank operating subsidiary was
seized by the Federal Deposit Insurance Corporation (FDIC). At the time of the
FDIC seizure the stockholder litigation was stayed.
As of June 30, 1994, the Company cannot evaluate what claims, if any, could
be asserted as a result of its former subsidiary's banking activities (which, if
successful, could trigger a partial unwinding of the Company's major acquisition
consummated in April 1994). This uncertainty raises substantial doubt about the
Company's ability to continue as a going concern. The financial statements
enumerated above do not include adjustments, if any, which could result from
this uncertainty.
/s/ Richard A. Eisner & Company, LLP
New York, New York
August 26, 1994
<PAGE>
<TABLE>
FORM 10-K CROSS REFERENCE INDEX
<S> <C> <C>
PART I
Item 1. Business 36
Item 2. Properties 38
Item 3. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 39
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 40
Item 6. Selected Financial Data 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
</TABLE>
35
<PAGE>
PART I
------
ITEM 1. BUSINESS
General. Aristotle is a holding company for its subsidiary, ASI. ASI is a
holding company for Strouse. Strouse designs, manufactures and markets women's
intimate apparel. Unless the context indicates otherwise, all references herein
to the "Company" include Aristotle, ASI and Strouse.
Products. The Company designs, manufactures and markets two specific
categories of women's intimate apparel: specialty brassieres and women's
shapewear. Specialty brassieres are specifically designed to provide support and
figure enhancement for women who are wearing apparel with backless, strapless or
halter features, such as strapless and/or low back line dresses and gowns,
halter tops and wedding gowns. The Company maintains a strong market position in
three particular categories of specialty brassieres: strapless, backless
strapless, and backless convertible/halter. Women's shapewear products provide
support and control for a woman's abdominal area in the same manner as the
traditional girdle. Such shapewear products include so-called "body briefers,"
and light, medium and firm control shapers that may extend from the bottom of a
woman's brassiere to just above her knee. For fiscal year 1996, approximately
41% of the Company's total net sales were attributable to its lines of specialty
brassieres, and the remaining 59% of total net sales were attributable to its
lines of women's shapewear.
The Company distributes its products under several brand names, including
Smoothie, Fleur de Lace, Smooth Advantage, Renaissance Rose, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand names, Smoothie and
Fleur de Lace, are 41 and 19 years old, respectively. See the Consolidated
Financial Statements contained elsewhere in this report for financial
information relating to the Company's business.
Business Strategy. Aristotle's strategy is to acquire other companies,
including companies within the women's specialty intimate apparel field with
manufacturing processes and distribution channels which complement Strouse's
operations. Although Aristotle is not currently engaged in a search for an
acquisition target, Aristotle intends to review any acquisition opportunities
which come to its attention. Strouse's strategy is to build on the strength of
its brand names with consumer-oriented marketing programs in its existing
department and specialty store channels of distribution and to expand its
distribution on a selective basis in the private label segment with specific
product lines in catalogs and national chains. Strouse attributes the strength
of its private label and brand names to the quality, price, fit and design of
its products.
Marketing and Distribution. The Company's products are marketed and
distributed throughout the United States to retailers. a network of 13 sales
executives, who are full-time employees of the Company, are responsible for
marketing the Company's products in the continental United States. These sales
executives are compensated by a combination of commissions and other incentives
based upon net sales. Alfred A. Kniberg, President and Chief Operating Officer
of Strouse, oversees the sales executives and takes an active role in
supervising the marketing and distribution process.
The Company currently sells products under its brand names to the largest
department stores in the United States, including Macy's, May Company,
Dillard's, Bloomingdales, Dayton Hudson, Nordstroms, Nieman Marcus and Lord &
Taylor, as well as to catalogs and other leading retailers such as Spiegel.
since 1991, the Company has sold private label goods to accounts such as
Victoria's Secret, Dillard's and J.C. Penney. Three of the Company's corporate
customers accounted for 42.4% of total net sales for fiscal 1996. If any one of
these three customers substantially reduced the amount of products it purchased
from the Company, the Company's financial condition could be adversely affected.
The Company believes that there has been a consolidation of retailers into
larger entities during the past few years. In addition, retailers have attempted
to consolidate the purchases of their products by reducing their number of
suppliers. The company cannot predict what effect, if any, these trends will
have on its business.
The Company's sales are not substantially affected by seasonal consumption.
However, the Company generally experiences reduced sales during the months of
December and January.
36
<PAGE>
Manufacturing and Raw Materials. The Company conducts some manufacturing
operations, consisting primarily of cutting, sewing (approximately 4% of sewing)
and packaging, at its facility located in New Haven, Connecticut. All other
manufacturing of the Company's products is subcontracted to manufacturers in the
Caribbean (primarily the Dominican Republic and Jamaica) and the continental
United States. Approximately 95% of the Company's products are manufactured and
sewn in the Caribbean, with approximately 68% of the Company's products
manufactured and sewn in the Dominican Republic. Accordingly, the Company's
operations may be adversely affected by political instability or other factors
which may occur from time to time in the Dominican Republic or elsewhere in the
Caribbean. This concentration of subcontractors in the Caribbean can also
expose Strouse to abnormal production cost increases. Strouse continues to seek
to develop multiple sources of manufacturing.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period. Management believes
that the lease agreement will help provide the capacity needed to support future
growth. Approximately 24% of the Company's products are manufactured and sewn in
Jamaica.
The design and manufacture of specialty brassieres and women's shapewear
are complex, requiring specialized and sophisticated machinery and tools. The
complex design and manufacturing process results in a higher per unit cost and a
lower volume of units being produced, as compared to the design and manufacture
of simpler garments.
The Company uses various synthetic fibers and natural materials, such as
cotton, in the manufacture of its products. These raw materials are generally
available from multiple sources; the Company purchases the majority of its raw
materials from sources within the United States.
Competition. The women's intimate apparel industry is highly competitive.
The Company's products compete for customers with numerous manufacturers of
well-known brands of women's intimate apparel. With respect to specialty
brassieres, the Company's primary competition is from the Truform, Warners,
Maidenform, Playtex and Vanity Fair lines of specialty brassieres; with respect
to shapewear, the Company competes primarily with the Olga, Vanity Fair,
Truform, Playtex and Bali lines of shapewear.
The principal competitive factors in the intimate apparel market are
quality, price, fit and design of products, engineering, customer and brand
loyalty, and customer service (including maintenance of sufficient inventories
for timely delivery). Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more resources and effort
than the Company in areas such as marketing and product development.
Employees. As of September 2, 1996, the Company employed 144 full time
personnel. None of the Company's employees are members of a union.
Bank Financing. On November 3, 1995, Strouse and Fleet Bank, National
Association ("Fleet") entered into a credit agreement which provided for a line-
of-credit facility and two term loan facilities. The line-of-credit facility
provided for maximum borrowings of $8,750,000. The principal amounts of the term
loans were $2,500,000 and $225,000, respectively. The Fleet credit agreement
would have matured on October 31, 1996.
37
<PAGE>
On October 3, 1996, Strouse terminated its credit agreement with Fleet and
entered into a new credit agreement with Bank of Boston Connecticut ("Bank of
Boston"). The new credit agreement provides for a line-of-credit facility and a
term loan facility (the "Credit Facilities"). Borrowing under the line-of-credit
is determined by a borrowing base which is equal to the sum of 80% of eligible
accounts receivable, plus 50% of eligible raw material inventory, plus 60% of
eligible finished goods inventory with a maximum borrowing of $8,000,000 at any
one time. In addition, the line-of-credit facility permits advances to exceed
the borrowing base amount by up to $750,000 through September 1997, and $500,000
thereafter through September 1999 (so long as the total line-of-credit is not
more than the $8,000,000 and the overadvance is reduced to zero for 30
consecutive days per annum). The principal amount of the term loan is
$2,000,000. The credit agreement matures in September 1999. Strouse uses the
Credit Facilities for working capital and other general corporate purposes.
The interest on the line-of-credit will vary from prime to prime plus 1.0%
or Eurodollar plus 1.75% to Eurodollar plus 3.0% per annum based on the
financial performance of Strouse. The term loan bears interest at the option of
the Company at a rate per annum equal to prime plus .75%, Eurodollar plus 2.5%
or at a fixed rate of Bank of Boston's cost of funds plus 2.25%. The term loan
has a three year term and requires principal payments to reduce the amount
outstanding based on a ten year amortization.
The Credit Facilities are secured by a lien on all assets of Strouse.
Aristotle and ASI have unconditionally guaranteed the Credit Facilities.
Recourse under each guaranty is limited to $2,000,000. To secure Aristotle's
guarantee of the Credit Facilities, Aristotle has pledged $500,000. The Credit
Agreement further provides that Strouse may not pay dividends to ASI or
Aristotle without Bank of Boston's prior written consent. Strouse must maintain
certain financial ratios and satisfy various other covenants in connection with
the Credit Facilities (See Note 4 of Notes to Consolidated Financial
Statements).
As of October 3, 1996, the balances outstanding on the line-of-credit was
$6,003,000 and the term loan was $2,000,000. As of October 3, 1996, the
additional borrowing available on the overadvance was $677,000.
Background Regarding Aristotle. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was Aristotle's only subsidiary and
which, on October 2, 1992, was seized by the FDIC. On April 11, 1994, Aristotle
acquired (the "Acquisition") Strouse pursuant to the terms of a Capital
Contribution Agreement and certain other agreements. As a result of the
Acquisition, Aristotle currently owns approximately 97% of the issued and
outstanding common stock of ASI, which in turn owns all of the outstanding
capital stock of Strouse. Aristotle therefore currently indirectly owns 97% of
the issued and outstanding capital stock of Strouse and Aristotle's business is
the business of Strouse. In May 1994, the Company effectuated a one for ten
reverse stock split.
Aristotle was organized in 1986 and is chartered in the State of Delaware.
on April 14, 1993, the Company changed its name from First Constitution
Financial Corporation to The Aristotle Corporation.
ITEM 2. PROPERTIES
The Company's principal facility is located in New Haven, Connecticut (the
"New Haven Facility"). Such facility is leased from New England Resources
Limited Partnership ("NERLP"), consists of approximately 115,000 square feet,
and houses Strouse's general administrative offices. In addition, the New Haven
Facility is used for manufacturing, packaging, storage, quality control,
receiving and distribution. The leases for the New Haven Facility expire on
December 31, 1999 and provide for annual rent of approximately $3.75 per square
foot in fiscal 1996. One of such leases, involving 11,650 square feet, may be
canceled upon six months prior notice from either party. NERLP is affiliated
with David S. Howell, a former director of the Company and the former Chairman
and Chief Executive Officer of Strouse, and Ann-Marie Howell, a former Vice
President and the former Secretary of Strouse.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period for $700,000. Under
the terms of the lease, Strouse makes quarterly payments of $81,250, $87,500,
and $93,750, for calendar years 1995, 1996 and 1997, respectively.
38
<PAGE>
Management believes that the lease agreement will help provide the capacity
needed to support future growth. Approximately 24% of the Company's products are
manufactured and sewn in Jamaica.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to the following material legal proceedings:
The Stockholders Litigation. During 1990, two separate purported
stockholder class actions were commenced in the United States District Court for
the District of Connecticut and a consolidated complaint, captioned In Re: First
Constitution Stockholders Litigation, was filed on August 3, 1990 (the
"Stockholder Litigation"). The consolidated complaint alleged, among other
things, that during the purported class period (January 25, 1989 to April 5,
1990), the Company, a former director and certain former officers acted to
inflate the price of Common Stock of Aristotle (the "Common Stock") by issuing
materially false and misleading statements or omissions. The consolidated
complaint also alleged claims based on common law fraud and misrepresentation,
and sought unspecified damages, as well as recovery of attorneys' fees.
On May 23, 1996, plaintiffs, Aristotle and the individual defendants
entered into a Stipulation and Agreement of Settlement pursuant to which, among
other things, the Stockholder Litigation would be settled for $2,300,000 which,
following the payment of attorney's fees and costs, would be distributed to
class members who timely submitted valid proofs of claim. Aristotle's directors
and officers liability insurance carrier has funded the entire settlement
amount. By order and judgment dated August 2, 1996, the Court approved the
settlement and dismissed the Stockholder Litigation with prejudice.
FDIC Claims. In April 1995, the FDIC filed a complaint related to this
matter captioned Federal Deposit Insurance Corporation vs. The Aristotle
Corporation, in the United States District Court for the District of Connecticut
(Civil No. 395CV00684TFGD). The FDIC claimed that it was entitled to income tax
refunds for certain tax years that were received or were about to be received by
Aristotle. Aristotle established a reserve of $3,982,000 for this potential
claim as of June 30, 1993. Approximately $5,740,000 in tax refunds were
deposited in special escrow accounts (the "FDIC Escrow Accounts").
In addition, the FDIC reported to the Company that it was investigating
potential claims against certain former officers and directors of the Bank based
on alleged negligence in approving certain loans that the Bank made and
subsequently lost money on when borrowers defaulted. Under Delaware law and
under Aristotle's bylaws, Aristotle may have had an obligation to indemnify
these officers and directors for expenses and liabilities incurred by them in
connection with any action the FDIC brought to enforce its claims.
The Company, the FDIC and certain other interested parties entered into a
settlement agreement dated May 29, 1996 regarding the foregoing asserted claims
and potential claims (the "FDIC Claims"). Under the settlement agreement, the
Company retained $2,000,000 of the disputed $5,740,000 in tax refunds, plus the
accrued interest on the refunds. The FDIC received the balance of the tax
refunds. The FDIC and Aristotle each dismissed the above-captioned action, as it
related to the other party. As part of the settlement agreement, the FDIC
released Aristotle, certain of Aristotle's former officers and directors and
certain officers and directors of the Bank from any claims pertaining to the
operations or failure of the Bank. Aristotle released the FDIC from all claims
relating to the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
39
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The table below sets forth the high and low prices per share of Common
Stock for the periods indicated.
<TABLE>
<CAPTION>
Market Price
----------------------------
<S> <C> <C>
Fiscal Year Ended June 30, 1996: High Low
June 30 4 1/4 2 1/8
March 31 6 2 1/8
December 31 5 1/4 2
September 30 5 2 3/4
Fiscal Year Ended June 30, 1995:
June 30 5 3/4 3
March 31 5 1/2 4
December 31 6 1/4 4
September 30 7 4 1/2
</TABLE>
The Common Stock is listed for trading on the NASDAQ SmallCap Market under
the symbol "ARTL." As of October 7, 1996, there were approximately 4,100
stockholders of record and 3,000 additional beneficial stockholders
(stockholders holding Common Stock in brokage accounts). It is unlikely that the
Company will pay any dividends with respect to its Common Stock in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data of the Company and selected financial
data of Strouse can be found on pages 2 to 3 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
"Management's Discussion and Analysis of Financial Conditions and Results
of Operations" can be found on pages 4 to 9 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its subsidiary,
together with the related Notes to Consolidated Financial Statements and the
reports of independent auditors, can be found on pages 10 to 34 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 3, 1994, the Board of Directors appointed Arthur Andersen LLP
to serve as independent accountants for the Company, subject to ratification of
such appointment by the stockholders. The information required by this Item 9
has been previously reported in the Company's current report on Form 8-K filed
with the Securities and Exchange Commission on October 21, 1994, as amended.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item will be set forth under the section
entitled "Election of Directors" and "Executive Officers" in the Company's 1996
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Company's fiscal year, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be set forth under the section
entitled "Executive Compensation" in the Company's 1996 definitive proxy
statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be set forth under the section
entitled "Stock Owned by Management and Principal Stockholders" in the Company's
1996 definitive proxy statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be set forth under the section
entitled "Certain Transactions" in the Company's 1996 definitive proxy
statement, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
<TABLE>
<S> <C>
(1) Financial Statements:
Consolidated Balance Sheets 10
Consolidated Statements of Operations 11
Consolidated Statements of Changes in Stockholders' Equity 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
Reports of Independent Public Accountants 33
(2) Financial Statement Schedules:
Reports of Independent Public Accountants on Schedules S-1
Schedule I - Condensed Financial Information of the Registrant S-2
Schedule II - Valuation and Qualifying Accounts S-5
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits:
Exhibit 2.1- Capital Contribution Agreement dated as of November 19,
1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The
Strouse, Adler Company and the Stockholders of Strouse. Incorporated
herein by reference to Exhibit 2.1 of The Aristotle Corporation's
Current Report on Form 8-K dated April 14, 1994, as amended (the "1994
Current Report").
41
<PAGE>
Exhibit 3.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendments thereto, and Certificate of
Correction thereto. Incorporated herein by reference to Exhibit 4.2 of
the 1994 Current Report.
Exhibit 3.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation.
Incorporated herein by reference to Exhibit 4.3 of the 1994 Current
Report.
Exhibit 3.3- Bylaws. Incorporated herein by reference to Exhibit 3.2
of The Aristotle Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, filed on March 31, 1993 (the
"1992 Form 10-K").
Exhibit 4.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendment thereto, and Certificate of
Correction thereto. See Exhibit 3.1 hereof.
Exhibit 4.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation. See
Exhibit 3.2 hereof.
Exhibit 4.3- Amended and Restated Certificate of Incorporation of
Aristotle Sub, Inc., and amendment thereto. Incorporated herein by
reference to Exhibit 4.1 of the 1994 Current Report.
Exhibit 4.4- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Aristotle Sub, Inc. filed August 30,
1995. Incorporated herein by reference to Exhibit 4.4 of The Aristotle
Corporation's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995, filed on October 12, 1995 (the "1995 Form 10-K").
Exhibit 4.5- Form of Stock Purchase Warrant Series A of The Aristotle
Corporation dated as of April 11, 1994. Incorporated herein by
reference to Exhibit 2.10 of the 1994 Current Report.
Exhibit 4.6- Form of Stock Purchase Warrant Series B of The Aristotle
Corporation dated as of April 11, 1994. Incorporated herein by
reference to Exhibit 2.11 of the 1994 Current Report.
Exhibit 10.1- Form of Option Agreement between Aristotle Sub, Inc. and
optionees dated as of April 11, 1994. Incorporated herein by reference
to Exhibit 2.2 of the 1994 Current Report.
Exhibit 10.2- Pledge and Escrow Agreement dated as of April 11, 1994
by and among Aristotle Sub, Inc. and certain other parties.
Incorporated herein by reference to Exhibit 2.8 of the 1994 Current
Report.
Exhibit 10.3- Letter Agreement by and among The Aristotle Corporation,
Aristotle Sub, Inc., Alfred Kniberg and David Howell dated June 27,
1995. Incorporated herein by reference to Exhibit 10.3 of the 1995
Form 10-K.
Exhibit 10.4- Security Agreement dated as of April 11, 1994 by and
among The Strouse, Adler Company and certain other parties.
Incorporated herein by reference to Exhibit 2.9 of the 1994 Current
Report.
Exhibit 10.5- Term Promissory Notes dated April 11, 1994 payable to
The Aristotle Corporation. Incorporated herein by reference to Exhibit
2.12 of the 1994 Current Report.
Exhibit 10.6- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and David Howell. Incorporated herein by reference to
Exhibit 2.3 of the 1994 Current Report.
42
<PAGE>
Exhibit 10.7- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Alfred Kniberg. Incorporated herein by reference to
Exhibit 2.4 of the 1994 Current Report.
Exhibit 10.8- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Joyce Baran. Incorporated herein by reference to
Exhibit 2.5 of the 1994 Current Report.
Exhibit 10.9- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Paul McDonald. Incorporated herein by reference to
Exhibit 2.6 of the 1994 Current Report.
Exhibit 10.10- Shareholder Loan Pledge Agreements dated as of April
11, 1994 by and between certain parties and The Aristotle Corporation.
Incorporated herein by reference to Exhibit 2.13 of the 1994 Current
Report.
Exhibit 10.11- Stock Option Plan of The Aristotle Corporation, as
amended. Incorporated herein by reference to Exhibit 10.2 of the 1992
Form 10-K.
Exhibit 10.12- Form of Stock Option Agreement (for non-employee
directors). Incorporated herein by reference to Exhibit 10.3 of the
1992 Form 10-K.
Exhibit 10.13- Form of Incentive Stock Option Agreement (for
employees). Incorporated herein by reference to Exhibit 10.4 of the
1992 Form 10-K.
Exhibit 10.14- Lease dated October 4, 1991 by and between The Strouse,
Adler Company and New England Resources Limited Partnership.
Incorporated herein by reference to Exhibit 10.15 of the 1995 Form 10-
K.
Exhibit 10.15- First Amendment to Lease dated April 11, 1994 by and
between New England Resources Limited Partnership. Incorporated herein
by reference to Exhibit 10.16 of the 1995 Form 10-K.
Exhibit 10.16- Second Amendment to Lease dated December 14, 1994 by
and between New England Resources Limited Partnership. Incorporated
herein by reference to Exhibit 10.17 of the 1995 Form 10-K.
Exhibit 10.17- Master Credit Agreement dated as of October 3, 1996 by
and between The Strouse, Adler Company and Bank of Boston Connecticut
is attached hereto as Exhibit 10.17.
Exhibit 10.18- Option Agreement dated as of December 22, 1994 by and
among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan
Properties Ltd. and Maggie Manufacturing Company Ltd. Incorporated
herein by reference to Exhibit 10.20 of the 1995 Form 10-K.
Exhibit 10.19- Exclusive Subcontracting Agreement dated as of December
22, 1994 by and among The Strouse, Adler Company, PBS Enterprises
Ltd., Davedan Properties Ltd. and Maggie Manufacturing Company Ltd.
Incorporated herein by reference to Exhibit 10.21 of the 1995 Form 10-
K.
Exhibit 10.20- Restrictive Covenant Agreement dated as of December 22,
1994 by and among The Strouse, Adler Company, PBS Enterprises Ltd.,
Davedan Properties Ltd., Maggie Manufacturing Company Ltd., Peter
Blair Shalleck and Sandy Shalleck. Incorporated herein by reference to
Exhibit 10.22 of the 1995 Form 10-K.
Exhibit 10.21- Specific Performance Agreement dated as of December 22,
1994 by and among The Strouse, Adler Company, Peter Blair Shalleck and
Sandy Shalleck. Incorporated herein by reference to Exhibit 10.23 of
the 1995 Form 10-K.
43
<PAGE>
Exhibit 10.22- Settlement and Release Agreement dated as of May 29,
1996 among The Aristotle Corporation, the Federal Deposit Insurance
Corporation and certain other interested parties is attached hereto as
Exhibit 10.22.
Exhibit 10.23- Stipulation and Agreement of Settlement dated as of May
28, 1996 Re: In Re First Constitution Shareholders Litigation is
attached hereto as Exhibit 10.23.
Exhibit 10.24- Letter Agreement dated October 27, 1995 Re: Amended Put
Rights. Incorporated herein by reference to Exhibit 10.1 of The
Aristotle Corporation's Quarterly Report for the quarterly period
ended December 31, 1995, filed on January 31, 1996.
Exhibit 21.1- Subsidiaries of The Aristotle Corporation is attached
hereto as Exhibit 21.1.
Exhibit 27- Financial Data Schedule is attached hereto as Exhibit 27.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed in the fourth quarter of the
Company's fiscal year ended June 30, 1996.
(c) See (a)(3) above.
(d) See (a)(2) above.
44
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ARISTOTLE CORPORATION
/s/ John J. Crawford
--------------------
John J. Crawford
Its President, Chief Executive Officer
and Chairman of the Board
Date: October 15, 1996
45
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John J. Crawford President, Chief Executive Officer, October 15, 1996
- --------------------- Chairman of the Board and Director
John J. Crawford (principal executive officer)
/s/ Paul McDonald Chief Financial Officer and Secretary October 15, 1996
- --------------------- (principal financial and accounting
Paul McDonald officer)
/s/ Robert L. Fiscus Director October 15, 1996
- ---------------------
Robert L. Fiscus
/s/ Betsy Henley-Cohn Director October 15, 1996
- ---------------------
Betsy Henley-Cohn
/s/ Daniel J. Miglio Director October 15, 1996
- ---------------------
Daniel J. Miglio
/s/ Alfred A. Kniberg Director October 15, 1996
- ---------------------
Alfred A. Kniberg
/s/ John C. Warfel Director October 15, 1996
- ---------------------
John C. Warfel
</TABLE>
46
<PAGE>
FINANCIAL STATEMENT SCHEDULES INDEX
-----------------------------------
Schedule I - Condensed Financial Information of the Registrant
Schedule II - Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
-----------------------------------------------------
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in The Aristotle Corporation's Form 10-K, and have
issued our report thereon dated October 3, 1996. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed in the index of financial statements are presented for purposes
of complying with the Securities and Exchange Commission's rules and are not
part of the basic financial statements. These schedules have been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New Haven, Connecticut
October 3, 1996
S-1
<PAGE>
[LETTERHEAD OF RICHARD A. EISNER & COMPANY, INC. APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut
The audit referred to in our report dated August 26, 1994 included Schedule
II for the year ended June 30, 1994.
In our opinion, such schedule presents fairly the information set forth
therein in compliance with the applicable accounting regulation of the
Securities and Exchange Commission.
/s/ Richard A. Eisner & Company, LLP
New York, New York
August 26, 1994
S-1a
<PAGE>
Schedule I
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE SHEETS:
ASSETS June 30, 1996 June 30, 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 91 $ 164
Marketable securities held
in escrow at market value 6,253 -
Other current assets 179 523
------- ------
Total current assets 6,523 687
------- ------
ADVANCES TO AND
INVESTMENT IN SUBSIDIARIES 4,311 4,000
------- ------
OTHER ASSETS
Marketable securities held
in escrow at market value - 4,682
Employee notes receivable 354 354
------- ------
354 5,036
------- ------
$11,188 $9,723
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES
Notes payable $ 75 $ -
FDIC tax refund payable 3,760 -
Accrued expenses and other liabilities 641 578
------- ------
Total current liabilities 4,476 578
TAX REFUND CLAIM - 3,982
------- ------
Total liabilities 4,476 4,560
------- ------
MINORITY INTEREST IN
SUBSIDIARIES COMMON STOCK 182 167
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY 6,530 4,996
------- ------
$11,188 $9,723
======= ======
</TABLE>
S - 2
<PAGE>
SCHEDULE I (cont.)
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS:
FOR THE YEARS ENDED
ASSETS June 30, 1996 June 30, 1995 June 30, 1994
------ ------------- ------------- -------------
<S> <C> <C> <C>
INCOME
Investment and interest income $ 353 $ 392 $ 343
Other expenses (612) (589) (1,016)
-------- ----- -------
Income (loss) from operations
before provision for income tax
and equity in undistributed
earnings of subsidiary (259) (197) (673)
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY (175) (626) 253
INCOME TAX EXPENSE (BENEFIT) (1,902 ) 75 (241)
-------- ----- -------
NET INCOME (LOSS) $ 1,468 $(898) $ (179)
======== ===== =======
</TABLE>
S - 3
<PAGE>
SCHEDULE I (cont.)
CONDENSED FINANCIAL INFORMATION OF
THE ARISTOTLE CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS:
FOR THE YEARS ENDED
OPERATING ACTIVITIES: June 30, 1996 June 30, 1995 June 30, 1994
- -------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $ 1,468 $(898) $ (179)
Equity in undistributed
earnings of subsidiary 175 626 (253)
Loss on sale of investment
securities - - 48
Gain on settlement of FDIC claim (2,000) - -
Issuance of treasury stock for services 62 30 42
Proceeds from tax carryback claim 1,778 - -
Other 132 355 (1,680)
------- ----- -------
Total cash provided from
(used in) operating activities 1,615 113 (2,022)
INVESTING ACTIVITIES:
--------------------
Increase in notes receivable from employees - - (354)
Sale of marketable securities 207 26 7,778
Purchase of marketable securities held in escrow (1,778) - (8,479)
Repurchase of ASI preferred stock (207) - -
Purchase of subsidiary,
net of acquired cash - - (2,617)
Minority interest 15 29 12
------- ----- -------
Total cash provided by
(used in) investing activities (1,763) 55 (3,660)
FINANCING ACTIVITIES:
--------------------
Purchase of treasury stock - (11) (143)
Proceed from the issuance of debt 75 - -
------- ----- -------
Total cash used by financing activities 75 (11) (143)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
(73) 157 (5,825)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 164 7 5,832
------- ----- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 91 $ 164 $ 7
======= ===== =======
</TABLE>
S - 4
<PAGE>
SCHEDULE II
THE ARISTOTLE CORPORATION AND SUBSIDIARY
VALUATION ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(1) (2)
-------------------------
Balance at Charged to Balance at
beginning of costs and Deductions/ end of
period expenses Other (A) write-offs period
- --------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1996
- -------------------------------
<S> <C> <C> <C> <C> <C>
Accounts receivable reserve $100 59 - (34) $125
Co-op advertising reserve $ 71 270 - (224) $117
Accounts receivable - long term reserve $ 36 25 - (50) $ 11
FISCAL YEAR ENDED JUNE 30, 1995
- -------------------------------
Accounts receivable reserve $108 - - (8) $100
Co-op advertising reserve $ 69 183 - (181) $ 71
Accounts receivable - long term reserve $ 63 15 - (42) $ 36
FISCAL YEAR ENDED JUNE 30, 1994
- -------------------------------
Accounts receivable reserve $ - 8 117 (17) $108
Co-op advertising reserve $ - 152 59 (142) $ 69
Accounts receivable - long term reserve $ - 5 58 - $ 63
(A) Acquired through business combination
</TABLE>
S - 5
<PAGE>
EXHIBIT INDEX
Exhibit 10.17 - Master Credit Agreement dated as of October 3, 1996 by and
between The Strouse, Adler Company and Bank of Boston Connecticut
Exhibit 10.22 - Settlement and Release Agreement dated as of May 29, 1996 among
The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain
other interested parties
Exhibit 10.23 - Stipulation and Agreement of Settlement dated as of May 28, 1996
Re: In Re First Constitution Shareholders Litigation
Exhibit 21.1 - Subsidiaries of The Aristotle Corporation
Exhibit 27 - Financial Data Schedule
<PAGE>
Exhibit 10.17
================================================================================
MASTER CREDIT AGREEMENT
by and between
BANK OF BOSTON CONNECTICUT
and
THE STROUSE, ADLER COMPANY
October 3, 1996
================================================================================
<PAGE>
MASTER CREDIT AGREEMENT
-----------------------
This MASTER CREDIT AGREEMENT (the "Agreement") is made as of this 3rd day
of October, 1996 by and between BANK OF BOSTON CONNECTICUT, a Connecticut
savings bank, with its chief executive office located at 31 Pratt Street,
Hartford, Connecticut 06103 (the "Bank") and THE STROUSE, ADLER COMPANY, a
Delaware corporation, with its chief executive office located at 78 Olive
Street, New Haven, Connecticut 06507 (the "Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Bank provide Borrower with certain
credit facilities pursuant to which Bank would make loans and advances and
otherwise extend credit to Borrower; and
WHEREAS, Bank is willing to provide such credit facilities; and
WHEREAS, Bank and Borrower wish to document the terms and conditions on
which Bank will provide said credit facilities;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, Bank and Borrower hereby agree as follows:
SECTION 1. DEFINITIONS
All capitalized terms used in this Agreement, the Notes or the Other
Documents, or in any certificate, report or other document, instrument or
agreement executed or delivered pursuant hereto and thereto (unless otherwise
indicated therein) shall have the meanings ascribed to such terms below.
Section 1.1. "Acceptance" or "Acceptances" means any Draft accepted by
---------- -----------
the Bank for the account of the Borrower under and in accordance with Section
2.3. hereof.
Section 1.2. "Account Debtor" means any Person obligated to Borrower with
--------------
respect to an Account Receivable.
Section 1.3. "Account Receivable" or "Accounts Receivable" means the
------------------ -------------------
unpaid portion of obligations as stated on the respective invoices issued to a
customer of Borrower or any of its Subsidiaries with respect to Inventory sold
and shipped or services performed or rendered in the ordinary course of
business.
<PAGE>
-2-
Section 1.4. "Adjusted Eurodollar Rate" means, as applied to any Interest
------------------------
Period, a rate per annum determined by Bank pursuant to the following formula:
AER = [ IOR ] *
---------
[1.00 - RP]
AER = Adjusted Eurodollar Rate
IOR = Interbank Offered Rate
RP = Reserve Percentage
* The amount in brackets shall be rounded upwards, if
necessary to the next higher 1/100 of 1%.
Where:
Interbank Offered Rate" applicable to any Eurodollar Loan for any
Interest Period means the rate of interest determined by The First
National Bank of Boston to be the prevailing rate per annum at which
deposits in U.S. dollars are offered to The First National Bank of
Boston by first-class banks in the interbank Eurodollar market in
which it regularly participates on or about 10:00 a.m. (Boston time)
two Business Days before the first day of such Interest Period in an
amount approximately equal to the principal amount of the Eurodollar
Loan to which such Interest Period is to apply for a period of time
approximately equal to such Interest Period.
"Reserve Percentage" applicable to any Interest Period means the rate
(expressed as a decimal) applicable to The First National Bank of
Boston during such Interest Period under regulations issued from time
to time by the Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement (including, without
limitation, any basic, supplemental, emergency or marginal reserve
requirement) of The First National Bank of Boston with respect to
"Eurocurrency liabilities" as that term is defined under such
regulations. As of the Closing Date, there is no applicable Reserve
Percentage
Section 1.5. "Affiliate" means any Person (i) which directly or
---------
indirectly controls, or is controlled by, or is under common control with,
Borrower or any Subsidiary of Borrower; (ii) which directly or indirectly
beneficially owns or holds ten percent (10%) or more of any class of voting
stock of Borrower or any Subsidiary of Borrower; or (iii) ten percent (10%) or
more of the voting stock of which is directly or indirectly beneficially owned
or held by Borrower or any Subsidiary of Borrower. The term "control" (and its
correlative meanings "controlled by" and "under common control with") as used in
this section means the possession, directly or indirectly, of the power to
direct, or cause the direction of, the management and policies of a Person,
whether through ownership of voting stock, by contract or otherwise.
<PAGE>
-3-
Section 1.6. "Agreement" means this Master Credit Agreement, including
---------
all schedules and exhibits attached hereto, and any and all amendments,
modifications and supplements hereto.
Section 1.7. "Aristotle" means THE ARISTOTLE CORPORATION, a Delaware
---------
corporation, having its chief executive office located at 78 Olive Street, New
Haven, Connecticut 06507
Section 1.8. "Aristotle Guaranty" has the meaning set forth in Section
------------------
3.2.2. hereof.
Section 1.9. "Bank" has the meaning set forth in the Preamble hereof.
----
Section 1.10. "Bank Affiliate" or "Bank Affiliates" means any Affiliate
-------------- ---------------
of Bank or its parent bank holding company.
Section 1.11. "Bank Agents" has the meaning set forth in Section 2.2.7.
-----------
hereof.
Section 1.12. "Bankruptcy Code" means Title 11 of the United States Code,
---------------
entitled "Bankruptcy", as amended from time to time and all rules and
regulations promulgated thereunder.
Section 1.13. "Base Rate" means the greater of (i) the rate of interest
---------
announced from time to time by The First National Bank of Boston at its head
office located at 100 Federal Street, Boston, Massachusetts 02110 as its "Base
Rate", and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum
(rounded upwards, if necessary, to the next 1/8 of 1%).
Section 1.14. "Base Rate Loan" means any Revolving Loan or portion of the
--------------
Term Loan bearing interest determined by reference to the Base Rate.
Section 1.15. "Base Rate Margin" has the meaning set forth in Section
----------------
2.5.2. hereof.
Section 1.16. "Beneficiary" means the beneficiary of any Letter of Credit
-----------
or Letter of Credit Guaranty issued by Bank for the account of Borrower or any
Subsidiary of Borrower.
Section 1.17. "Borrower" has the meaning set forth in the Preamble
--------
hereof.
Section 1.18. "Borrowing Base" means, as of any date as of which the
--------------
amount thereof shall be determined, an amount equal to the sum of (i) the
Security Value of Accounts Receivable as of such date and (ii) the Security
Value of Inventory as of such date.
Section 1.19. "Borrowing Base Certificate" has the meaning set forth in
--------------------------
Section 7.1.3. hereof.
<PAGE>
-4-
Section 1.20. "Business Day" means, in the case of a Eurodollar Loan, any
------------
day in which dealings in foreign currencies and exchange between banks may be
carried on that is also a Business Day and, in all other cases, any day other
than a Saturday, Sunday, legal holiday or other day on which banks in the State
of Connecticut or Commonwealth of Massachusetts are required or permitted by law
to close.
Section 1.21. "Capital Expenditures" means, without duplication, for any
--------------------
period, the aggregate of all expenditures on a consolidated basis including
deposits (whether paid in cash or property or accrued as liabilities and
including the aggregate amount of all principal payments due for the entire term
of all Capital Leases that are required to be capitalized on the balance sheet)
made by Borrower and its Subsidiaries that, in conformity with GAAP, are
required to be included in the property, plant, equipment, or similar fixed
asset account.
Section 1.22. "Capital Lease" means any lease of any property (whether
-------------
real, personal or mixed) that, in conformity with GAAP, should be accounted for
as a capital lease.
Section 1.23. "Cash Management Agreements" shall have the meaning set
--------------------------
forth in Section 2.1.4. hereof and shall include any and all schedules and
exhibits thereto.
Section 1.24. "Cash Taxes" means, for any period, Borrower's aggregate
----------
obligation to make payments of (i) taxes (other than real estate, excise and
sales and use taxes) during such period or (ii) amounts in lieu of thereof under
the Tax Sharing Agreement.
Section 1.25. "Closing Date" means the date hereof.
------------
Section 1.26. "Code" means the Internal Revenue Code of 1986 and the rules
----
and regulations promulgated thereunder, collectively, as the same may from time
to time be supplemented or amended and remain in effect.
Section 1.27. "Collateral" means all collateral received or delivered as
----------
security for the Obligations pursuant to, and as more particularly described in,
the Security Agreement, the Stock Pledge, the Letter of Credit Applications and
the Collateral Disclosure List and any property or interest provided in addition
to or in substitution for any of the foregoing.
Section 1.28. "Collateral Disclosure List" has the meaning set forth in
--------------------------
Section 3.1. hereof.
Section 1.29. "Commitment Amount" means (i) the amount of EIGHT MILLION
-----------------
AND NO/100 DOLLARS ($8,000,000.00) during the period commencing as of the
Closing Date and continuing through the Revolving Credit Termination Date or
(ii) any lesser amount, including zero (0), resulting from a reduction or
termination of such amount in accordance with Section 2.1.6. or Section 12.1.
<PAGE>
-5-
Section 1.30. "Contractual Obligation" means, as applied to any Person,
----------------------
any indenture, mortgage, deed of trust, contract, undertaking, agreement or
other instrument to which that Person is a party or by which it or any of its
properties is bound or to which it or any of its properties is subject.
Section 1.31. "Controlled Group" means all trades or businesses (whether
----------------
or not incorporated) under common control that together with Borrower, are
treated as a single employer under Section 414(b) or 414(c) of the Code or
Section 4001 of ERISA.
Section 1.32. "Cost of Funds Rate" means a rate of interest equal to the
------------------
then prevailing fixed rate offered by the Bank, in its sole and absolute
discretion, for loans of a similar nature and amount and having a similar
maturity as of the date on which such rate is requested.
Section 1.33. "Covered Employees" means Alfred Kniberg, Joyce Baran and
-----------------
Paul McDonald.
Section 1.34. "Credits Outstanding" means, as of any date as of which the
-------------------
amount thereof shall be determined, the aggregate undrawn amount of all issued
and outstanding Letters of Credit and Letter of Credit Guaranties but excluding
any amounts which constitute unpaid Reimbursement Obligations as of such date.
Section 1.35. "Debt to Worth Ratio" means the ratio of Total Debt to Net
-------------------
Worth as calculated and defined in Section 9.3. hereof.
Section 1.36. "Debt Service Coverage Ratio" means the ratio of EBITDA
---------------------------
minus Cash Taxes and Capital Expenditures to Total Debt Service as calculated
and defined in Section 9.2. hereof.
Section 1.37. "Default" means an event or condition that, but for the
-------
lapse of time, the giving of notice, or both, would constitute an Event of
Default if that event or condition was not cured or removed within any
applicable grace or cure period.
Section 1.38. "Default Rate" has the meaning set forth in Section 2.5.9.
------------
hereof.
Section 1.39. "Deposit Account" has the meaning set forth in Section
---------------
3.2.2. hereof.
Section 1.40. "Deposit Account Pledge" means the pledge agreement executed
----------------------
and delivered by Aristotle in favor of Bank with respect to the Deposit Account
on the Closing Date.
Section 1.41. "Discount Margin" means a per annum rate equal to Eurodollar
---------------
Margin as in effect from time to time.
Section 1.42. "Disqualified Accounts Receivable" means:
--------------------------------
a. An Account Receivable which does not arise out of a bona fide
---- ----
sale of goods or rendering of services of the kind sold or rendered by Borrower
in the ordinary course of its business.
<PAGE>
-6-
b. An Account Receivable which remains unpaid for more than sixty
(60) days after the due date; or
c. An Account Receivable owing by an Account Debtor if fifty
percent (50%) or more of the dollar value of all Accounts Receivable owed by
such Account Debtor remain unpaid for more than sixty (60) days after the due
date; or
d. An Account Receivable with respect to which the Account Debtor
is a director, officer, employee or agent of Borrower or is a Subsidiary or an
Affiliate of Borrower; or
e. An Account Receivable with respect to which any covenant,
representation or warranty set forth in this Agreement has been breached; or
f. An Account Receivable with respect to which the Account Debtor
has commenced a voluntary case in bankruptcy, or made an assignment for the
benefit of creditors, or if a decree or order for relief has been entered by a
court having jurisdiction over the Account Debtor in an involuntary case in
bankruptcy, or if any petition or other application for relief in bankruptcy has
been filed against the Account Debtor, or if the Account Debtor has failed,
ceased business operations, become insolvent or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for it or all or
substantially all of its properties or assets unless Bank otherwise consents to
the inclusion of such Account Receivable in the calculation of the Borrowing
Base; or
g. An Account Receivable with respect to which the goods giving
rise thereto have not been shipped to the Account Debtor or the services giving
rise thereto have not been performed by Borrower or if the Account Receivable
does not otherwise represent a final sale; or
h. An Account Receivable owing by a single Account Debtor located
outside of the United States of America, Canada or Puerto Rico unless such
Account Receivable is a Secured Foreign Receivable or an Insured Foreign
Receivable; or
i. An Account Receivable with respect to which the sale giving
rise thereto is on a bill-and-hold, sale-and-return, sale on approval,
consignment or other repurchase or return basis; or
j. An Account Receivable with respect to which the Account Debtor
is the United States of America or any department, agency or office thereof
unless Borrower assigns its right to payment of such Account Receivable to Bank
in accordance with the Federal Assignment of Claims Act of 1940; or
k. An Account Receivable to the extent that the Account Debtor has
paid or advanced to Borrower any deposit or other advance in respect of the
payment thereof; or
l. An Account Receivable to the extent that the Account Debtor has
earned or accrued, or is due, any rebate, credit or other allowance by Borrower;
or
<PAGE>
-7-
m. An Account Receivable to the extent of any amounts owed by
Borrower to such Account Debtor; or
n. An Account Receivable in which Bank does not possess a valid
and perfected first priority security interest; or
o. An Account Receivable owing by an Account Debtor located in a
jurisdiction in which Borrower has not complied with any laws which might
restrict Borrower's ability to collect such Account Receivable; or
p. An Account Receivable which Bank, in its reasonable credit
judgment, excludes from the calculation of the Borrowing Base under Section
2.1.5. hereof.
Section 1.43. "Disqualified Inventory" means:
----------------------
a. Inventory in which Bank does not possess a valid and perfected
first priority security interest; or
b. Inventory which is not in good, saleable and readily usable
condition or is obsolete or unmerchantable; or
c. Inventory which is located outside of, or in transit to, the
United States of America, Canada or Puerto Rico unless Bank otherwise consents
to the inclusion of such Inventory in the calculation of the Borrowing Base; or
d. Inventory which has been produced in violation of the Fair
Labor Standards Act and subject to the so-called "hot goods" provisions
contained in 29 U.S.C. 215 (a); or
e. Inventory with respect to which any covenant, representation or
warranty set forth in this Agreement has been breached; or
f. Inventory which consists of Work-in-Process;
g. Inventory which Bank, in its reasonable credit judgment,
excludes from the calculation of the Borrowing Base under Section 2.1.5. hereof.
Section 1.44. "Dividend" or "Dividends" means the payment of any dividend
-------- ---------
or other distribution in respect of the capital stock of a corporation in cash
or other property (excepting distribution in the form of such stock) or the
redemption or acquisition of any capital stock or security of a corporation.
Section 1.45. "Draft" or "Drafts" means any draft designated by the
----- ------
Borrower for acceptance by the Bank under and in accordance with Section 2.3.
hereof.
Section 1.46. "Drawing" or "Drawings" means any payment(s) or
---------------------
disbursement(s) made by Bank under any Letter of Credit or any Letter of Credit
Guaranty issued by Bank for the account of Borrower honoring any demand for
payment presented by the Beneficiary of such Letter of Credit or such Letter of
Credit Guaranty in accordance with the terms thereof.
<PAGE>
-8-
Section 1.47. "EBIT" means, for any period, the net income (as such term
----
is understood under GAAP) but excluding any extraordinary items of gain of
Borrower and up to $150,000 in non-cash losses resulting from the cessation of
Borrower's Jamaican business operations before any provision for (i) taxes paid
or payable for such period (other than real estate and sales and use taxes) and
(ii) all interest paid or accrued for such period in respect of all
Indebtedness, all of the foregoing determined in accordance with GAAP and
valuing Inventory on a "FIFO" basis.
Section 1.48. "EBITDA" means, for any period, the net income (as such term
------
is understood under GAAP) but excluding any extraordinary items of gain of
Borrower and up to $150,000 in non-cash losses resulting from the cessation of
Borrower's Jamaican business operations before any provision for (i) taxes paid
or payable for such period (other than real estate and sales and use taxes) or
payments in lieu thereof under the Tax Sharing Agreement (ii) all interest paid
or accrued for such period in respect of all Indebtedness and (iii) amounts in
respect of depreciation and amortization for such period, all of the foregoing
determined in accordance with GAAP and valuing Inventory on a "FIFO" basis.
Section 1.49. "Eligible Account Receivable" means an Account Receivable
---------------------------
which is NOT a Disqualified Account Receivable.
---
Section 1.50. "Eligible Inventory" means that portion of Borrower's
------------------
inventory which is NOT Disqualified Inventory.
---
Section 1.51. "Encumbrance or "Encumbrances" means any security interest,
----------- ------------
mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement,
lessor's interest under a financing lease or any analogous arrangements in any
of Borrower's properties or assets, intended as, or having the effect of,
security.
Section 1.52. "Environmental Certificate" has the meaning set forth in
-------------------------
Section 5.2.11. hereof.
Section 1.53. "Environmental Laws" means any and all laws, statutes,
------------------
ordinances, rules, regulations, orders, or determinations of any Federal, state
or local governmental body, instrumentality or agency pertaining to the
environment, including without limitation, the Clean Water Act, the Clean Air
Act, as amended, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), and as may be further amended (all
together herein called "CERCLA"), the Federal Water Pollution Control
Amendments, the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Hazardous Materials Transportation Act of 1975, as amended, the
Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as
amended, and any comparable or similar environmental laws of the State of
Connecticut and any other state in which Borrower maintains business premises.
Likewise, the terms "hazardous substance," "release," and "threatened release"
herein referenced in connection with Environmental Laws shall have the meanings
specified in CERCLA and the terms "solid waste" and "dispose" (or "disposed")
shall have the meanings specified in RCRA; provided, however, in the event
-------- -------
either [6~CLA or RCRA is amended so as to broaden the meaning of any term
defined therein, such broader meaning shall apply subsequent to the effective
date of such amendment.
<PAGE>
-9-
Section 1.54. "Equipment" means all of Borrower's machinery, equipment,
---------
office machinery, furniture, trade fixtures, conveyors, tools, materials,
storage and handling equipment, computer equipment and hardware, including
central processing units, terminals, drives, memory units, printers, keyboards,
screens, peripherals and input or output devices, automotive equipment, trucks,
molds, dies, stamps, motor vehicles and other equipment of every kind and
nature.
Section 1.55. "ERISA" means the Employee Retirement Income Security Act of
-----
1974 and the rules and regulations promulgated thereunder; collectively, as the
same may from time to time be supplemented or amended and remain in effect.
Section 1.56. "Eurodollar Loan" means any Revolving Loan corporation of
---------------
the Term Loan bearing interest at a rate determined by reference to the Adjusted
Eurodollar Rate.
Section 1.57. "Eurodollar Margin" has the meaning set forth in Section
-----------------
2.5.2. hereof.
Section 1.58. "Event of Default" has the meaning set forth in Section 11.
----------------
hereof.
Section 1.59. "Excess Cash Flow" means, for any period, Borrower's EBITDA
----------------
for such period minus Cash Taxes for such period, Capital Expenditures for such
period and Total Debt Service for such period.
Section 1.60. "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
Section 1.61. "Extension of Credit" means any Acceptance, Loan, Letter of
-------------------
Credit, Letter of Credit Guaranty or any other loan, advance or extension of
credit by Bank to Borrower under this Agreement or the Other Documents.
Section 1.62. "Facility Fee" has the meaning set forth in Section 2.1.14.
------------
hereof.
Section 1.63. "Federal Funds Effective Rate" means for any day, a
----------------------------
fluctuating interest rate per annum equal to the weighted average of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published for such day (or, if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average of the quotations for such day on such
transactions received by The First National Bank of Boston from three (3)
Federal funds brokers of recognized standing selected by The First National Bank
of Boston.
Section 1.64. "FIFO" means the first in, first out method of valuing
----
inventory.
<PAGE>
-10-
Section 1.65. "Financial Statement" or "Financial Statements" means, as of
------------------- --------------------
any date, or with respect to any period, as applicable, a financial report or
reports consisting of (i) a balance sheet; (ii) an income statement; (iii) a
statement of cash flow; and (iv) a statement of changes in stockholders' equity.
Section 1.66. "Finished Goods" means that portion of Borrower's Eligible
--------------
Inventory which consists of finished goods.
Section 1.67. "Fiscal Year" means June 30 in each year.
-----------
Section 1.68. "Fixed Rate Loan" means the Term Loan during any period
---------------
which the rate of interest applicable thereto is determined by reference to the
Cost of Funds Rate.
Section 1.69. "Forecasts" has the meaning set forth in Section 4.8.
---------
hereof.
Section 1.70. "Foreign Credit Insurer" means either (i) collectively, the
----------------------
Foreign Credit Insurance Association and the Export-Import Bank of the United
States of America or (ii) or any private insurer approved in writing by Bank.
Section 1.71. "GAAP" means generally accepted accounting principles as set
----
forth in Statement on Auditing Standards No. 69 entitled "The Meaning of
`Present Fairly in Conformity with Generally Accepted Accounting Principles' in
the Independent Auditor's Report" issued by the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial Accounting
Standards Board that are applicable to the circumstances as of the date of
determination.
Section 1.72. "Governmental Authority" means any Federal, state, local or
----------------------
foreign court, commission or tribunal, or governmental, administrative or
regulatory agency, department, authority, instrumentality or other body.
Section 1.73. "Government Obligations" means securities which are general
----------------------
obligations of the United States of America or which are unconditionally
guaranteed by the United States of America as to timely payment of principal and
interest.
Section 1.74. "Government Contract" means any contract for the purchase of
-------------------
goods or services by the United States of America or any department, agency or
office thereof.
Section 1.75. "Guarantees" means, as applied to Borrower and its
----------
Subsidiaries, all guarantees, endorsements or other contingent or surety
obligations with respect to obligations of any other Person, whether or not
reflected on the consolidated balance sheet of Borrower and its Subsidiaries,
including any obligation to furnish funds, directly or indirectly (whether by
virtue of partnership arrangements, by agreement to keep-well or otherwise),
through the purchase of goods, supplies or services, or by way of stock
purchase, capital contribution, advance or loan, or to enter into a contract for
any of the foregoing, for the purpose of payment of obligations of any other
Person.
<PAGE>
-11-
Section 1.76. "Hazardous Materials" means (i) any chemical, compound,
-------------------
material, mixture or substance that is now or hereafter defined as or included
in the definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous waste", "restricted hazardous waste", or "toxic
substances" or terms of similar import under any applicable Federal, state or
local law or under the regulations adopted or promulgated pursuant thereto,
including, without limitation, Environmental Laws; (ii) any oil, petroleum or
petroleum derived substance, any drilling fluids, produced waters and other
wastes associated with the exploration, development or production of crude oil,
any flammable substances or explosives, any radioactive materials, any hazardous
wastes or substances, any toxic wastes or substances or any other materials or
pollutants which (a) could pose a hazard to any properties or assets of Borrower
or its Subsidiaries or (b) could cause any of such properties or assets to be in
violation of any Environmental Laws; (iii) asbestos in any form, urea
formaldehyde foam insulation, electrical equipment which contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of
fifty (50) parts per million; and (iv) any other chemical, material or
substance, exposure to, or disposal of, which is now or hereafter prohibited,
limited or regulated by any Federal, state or local governmental body,
instrumentality or agency.
Section 1.77. "Indebtedness" means, as applied to any Person, without
------------
duplication: (a) all indebtedness for borrowed money; (b) that portion of
obligations with respect to Capital Leases that is properly classified as a
liability on a balance sheet in conformity with GAAP; (c) notes payable and
drafts accepted representing extensions of credit whether or not representing
obligations for borrowed money; (d) any obligation owed for all or any part of
the deferred purchase price of property or services if the purchase price is due
more than six months from the date the obligation is incurred or is evidenced by
a note or similar written instrument; (e) all indebtedness secured by any
Encumbrance on any property or asset owned or held by that Person regardless of
whether the indebtedness secured thereby shall have been assumed by that Person
or is nonrecourse to the credit of that Person and (f) any other obligations
which would be classified as liabilities on a balance sheet in conformity with
GAAP but for purposes of calculating "Indebtedness" of Borrower option, lease
and sub-contracting obligations in respect of the Jamaica manufacturing facility
shall be excluded.
Section 1.78. "Insured Foreign Receivable" means an Account Receivable
--------------------------
(other than a Secured Foreign Receivable) that arises from a sale of goods to an
Account Debtor having its principal assets or place of business outside of the
United States of America, Canada or Puerto Rico, so long as a Foreign Credit
Insurer has assumed the risk of nonpayment due to the Account Debtor's financial
inability to pay and due to foreign currency restrictions and political matters
in the country of such Account Debtor, and Borrower has promptly and properly
submitted to the Foreign Credit Insurer proof of loss with respect to all
Accounts Receivable of such Account Debtor for which a claim could be submitted
under the foreign credit insurance policy insuring Borrower's sales to such
Account Debtor.
<PAGE>
-12-
Section 1.79. "Interest Period" means
---------------
(a) with respect to each Eurodollar Loan, the period commencing on
the date of the making or continuation of, or conversion to, such Eurodollar
Loan and ending one (1), two (2), three (3) or, if available, six (6) or (12)
months thereafter, as Borrower may elect in the applicable Notice; and
(b) with respect to each Fixed Rate Loan, the period commencing on
the date of the making or continuation of or conversion to such Fixed Rate Loan
and ending on the Maturity Date, or such earlier date as Borrower may elect in
the applicable Notice; and
(c) with respect to each Base Rate Loan, the period commencing on
the date of the making or continuation of, or conversion to such Base Rate Loan
and ending in the case of a Revolving Loan, on the Revolving Credit Termination
Date, in the case of the Term Loan, on the Maturity Date, or in the case of any
Loan, or such earlier date as Borrower may elect in the applicable Notice;
provided, however, that:
- -------- -------
(i) any Interest Period (other than an Interest Period
determined pursuant to clause (iii) below) that
would otherwise end on a day that is not a Business
Day shall be extended to the next succeeding
Business Day unless, in the case of Eurodollar
Loans, such Business Day falls in the next calendar
month, in which case such Interest Period shall end
on the immediately preceding Business Day;
(ii) any Interest Period applicable to a Eurodollar Loan
that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically
corresponding day in the calendar month at the end
of such Interest Period) shall, subject to clause
(iii) below, end on the last Business Day of a
calendar month;
(iii) any Interest Period during the Revolving Credit
Period that would otherwise end after the Revolving
Credit Termination Date shall end on the Revolving
Credit Termination Date, and any Interest Period
after the Revolving Credit Period that would
otherwise end after the Maturity Date of the Term
Loan shall end on Maturity Date; and
(iv) no Interest Period applicable to the Term Loan shall
include a principal repayment date for such Term
Loan unless an aggregate principal amount of Loans
at least equal to the principal amount due on such
principal repayment date shall be Base Rate Loans or
other Loans having Interest Periods ending on or
before such date; and
<PAGE>
-13-
(v) notwithstanding clause (iii) and (iv) above, no
Interest Period applicable to a Eurodollar Loan or
Fixed Rate Loan shall have a duration of less than
one (1) month and if any Interest Period applicable
to such Revolving Loans would be for a shorter
Interest Period, such Interest Period shall not be
available hereunder.
Section 1.80. "Inventory" means all goods, merchandise, raw materials,
---------
supplies, work in process, finished goods and other tangible personal property
held by Borrower for processing, sale or lease or furnished or to be furnished
by Borrower under contracts of service or to be used or consumed in Borrower's
business.
Section 1.81. "Investment" means, as applied to Borrower and its
----------
Subsidiaries, the purchase or acquisition of (i) any share of capital stock,
partnership interest, evidence of indebtedness or other equity security of any
other Person, or (ii) all or any material portion of the properties and assets
of any Person, any loan, advance or extension of credit to, or contribution to
the capital of, any other Person, any real estate held for sale or investment,
any commodities futures contracts held other than in connection with bona fide
hedging transactions, any other investment in any other Person, and the making
of any commitment or acquisition of any option to make an Investment.
Section 1.82. "Letter of Credit" or "Letters of Credit" means any
---------------- -----------------
letter(s) of credit issued by Bank for the account of Borrower or its
Subsidiaries and shall include any Letter of Credit as it may be amended,
modified or extended from time to time.
Section 1.83. "Letter of Credit Application" has the meaning set forth in
----------------------------
Section 2.2.2. hereof.
Section 1.84. "Letter of Credit Guaranty" means a guaranty issued by Bank
-------------------------
or a Bank Affiliate to guaranty the payment of a letter of credit to a Bank
which has issued such letter of credit for the account of Borrower or a
Subsidiary of Borrower.
Section 1.85. "Line of Credit" has the meaning set forth in Section 2.1.1.
--------------
hereof.
Section 1.86. "Loan" means any Revolving Loan or the Term Loan Loan
---- --
Loans"
Section 1.87. "Loans" means each Revolving Loan and the Term Loan.
----- ---
Section 1.88. "Loan Account" means the account established by Borrower
------------
with Bank or a Bank Affiliate for purposes of administering the Line of Credit.
Section 1.89. "Lockbox Account" has the meaning set forth in Section
---------------
10.1.1. hereof.
Section 1.90. "Margin Change" has the meaning set forth in Section 2.5.2.
-------------
hereof.
<PAGE>
-14-
Section 1.91. "Material Adverse Effect" means (i) a material adverse
-----------------------
effect upon the business, operations, properties, assets or condition (financial
or otherwise) of Borrower and its Subsidiaries, taken as a whole, or (ii) a
material adverse effect on the ability of Borrower to perform its obligations
under this Agreement, the Notes or the Other Documents or the ability of Bank to
enforce or collect any of the Obligations. In determining whether any individual
event would result in a Material Adverse Effect, notwithstanding that such event
does not of itself have such an effect, a Material Adverse Effect shall be
deemed to have occurred if the cumulative effect of such event and all other
then existing events would result in a Material Adverse Effect.
Section 1.92. "Maturity Date" means September 30, 1999.
-------------
Section 1.93. "Net Worth" means, as of any date, Borrower's total
---------
shareholders equity plus additional paid in capital and retained earnings after
deducting treasury stock plus Subordinated Debt, all as determined in accordance
with GAAP but calculated valuing Inventory on a "FIFO" basis and Equipment on a
basis which is consistent with the manner in which Borrower has historically
valued Equipment on its internally prepared Financial Statements.
Section 1.94. "Note" means the Revolving Credit Note or the Term Note.
---- --
Section 1.95. "Notes" means the Revolving Credit Note and the Term Note.
----- ---
Section 1.96. "Notice" means a Notice of Borrowing or a Notice of
------ --
Continuation or Conversion.
Section 1.97. "Notice of Borrowing" has the meaning set forth in Section
-------------------
2.1.3. hereof.
Section 1.98. "Notice of Continuation or Conversion" shall have the
------------------------------------
meaning set forth in Section 2.4.3. hereof.
Section 1.99. "Obligations" means any and all loans, advances,
-----------
indebtedness, liabilities, obligations, covenants or duties of Borrower to Bank
of any kind or nature, including obligations to pay money and to perform acts or
refrain from taking action, whether arising under a loan, lease, credit card,
line of credit, letter of credit, guaranty, indemnity, confirmation, acceptance,
currency exchange, interest rate protection arrangement, overdraft or other type
of financing arrangement, and any and all extensions and renewals thereof, and
modifications and amendments thereto, whether in whole or in part, whether any
of the foregoing are direct or indirect, joint or several, absolute or
contingent under, due or to become due, now existing or hereafter arising,
whether any present or future agreement or instrument, and whether or not
evidenced by a writing and specifically including but not being limited to (i)
the unpaid principal amount outstanding at any time under the Notes, plus all
accrued and unpaid interest thereon, together with all fees, expenses, including
attorneys' fees, penalties, and other amounts owing by or chargeable to by
Borrower under this Agreement, the Notes or the Other Documents and (ii) unpaid
Reimbursement Obligations.
<PAGE>
-15-
Section 1.100. "Other Documents" means the Collateral Disclosure List, the
---------------
Security Agreement, and the Letter of Credit Applications, all of even date
herewith and any other document, agreement or instrument executed by Borrower in
connection with any Extension of Credit and any and all amendments,
modifications and supplements thereto.
Section 1.101. "Outstanding Amount" means, as of any date as of which the
------------------
amount thereof shall be determined, the outstanding principal amount of the Line
of Credit as of the date of determination.
Section 1.102. "Overadvances" has the meaning set forth in Section 2.1.2.
------------
hereof.
Section 1.103. "Overadvance Limit" means, as of any date as of which the
-----------------
amount thereof shall be determined, an amount not to exceed SEVEN HUNDRED FIFTY
THOUSAND AND NO/100 DOLLARS ($750,000.00) during the period commencing as of the
Closing Date and continuing through September 30, 1997 and FIVE HUNDRED THOUSAND
AND NO/100 DOLLARS ($500,000.00) during the period commencing as of October 1,
1997 and continuing through the Revolving Credit Termination Date.
Section 1.104. "PBGC" means the Pension Benefit Guaranty Corporation or
----
any entity succeeding to all or part of its functions under ERISA.
Section 1.105. "Permitted Encumbrances" has the meaning set forth in
----------------------
Section 8.4. hereof.
Section 1.106. "Permitted Indebtedness" has the meaning set forth in
----------------------
Section 8.1. hereof.
Section 1.107. "Person" means an individual, partnership, corporation,
------
business trust, joint stock company, trust, unincorporated association, joint
venture or other entity of whatever nature, whether public or private.
Section 1.108. "Plan" means, at any time, an employee pension or other
----
benefit plan that is subject to Title IV of ERISA or subject to the minimum
funding standards under Section 412 of the Code and is either (i) maintained by
Borrower or any member of the Controlled Group for employees of Borrower or any
member of the Controlled Group or (ii) if such plan is established, maintained
pursuant to a collective bargaining agreement or any other arrangement under
which more than one (1) employer makes contributions and to which Borrower or
any member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five (5) plan years made
contributions.
Section 1.109. "Post Closing Matters" has the meaning set forth on Section
--------------------
11.1.(l) hereof.
<PAGE>
-16-
Section 1.110. "Qualifications" means, with respect to any report of
--------------
independent public accountants covering any Financial Statements of Borrower and
its Subsidiaries, a qualification to such report (such as a "subject to" or
"except for" statement therein) (i) resulting from a limitation on the scope of
examination of the Financial Statements or the underlying data; (ii) as to the
capability of the Person whose Financial Statements are certified to continue
operations as a going concern; or (iii) which could be eliminated by changes in
the Financial Statements or notes thereto covered by such report (such as, by
the creation of or increase in a reserve or a decrease in the carrying value of
assets) and which if so eliminated by the making of any such change and after
giving effect thereto would constitute of and Event of Default; provided that
neither of the following shall constitute a Qualification: (a) a consistency
exception relating to a change in accounting principles with which the
independent public accountants for the Person whose Financial Statements are
being examined have concurred or (b) a qualification relating to the outcome or
disposition of any uncertainty, including but not limited to threatened
litigation, pending litigation being contested in good faith, pending or
threatened claims or other contingencies, the impact of which litigation,
claims, contingencies or uncertainties cannot be determined with sufficient
certainty to permit certification in such Financial Statements.
Section 1.111. "Qualified Investments" means, as applied to Borrower and
---------------------
its Subsidiaries, investments in (i) notes, bonds or other obligations of the
United States of America or any agency thereof that as to principal and interest
constitute direct obligations of or are guaranteed by the United States of
America; (ii) certificates of deposit or other deposit instruments or accounts
of Banks or trust companies organized under the laws of the United States or any
state thereof that have capital and surplus of at least ONE HUNDRED MILLION AND
NO/100 DOLLARS ($100,000,000.00); (iii) commercial paper that is rated not less
than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, respectively, or their successors; and (iv) any
repurchase agreement secured by any one (1) or more of the foregoing.
Section 1.112. "Raw Materials" means that portion of Borrower's Eligible
-------------
Inventory which consists of raw materials.
Section 1.113. "Reimbursement Obligations" means, as of any date as of
-------------------------
which the amount thereof shall be determined, the aggregate obligation of
Borrower, as of such date, to reimburse Bank in respect of Letters of Credit in
accordance with Section 2.2.3. hereof and in respect of Acceptances in
accordance with Section 2.3.4. hereof.
Section 1.114. "Release" means any release, emission, disposal, leaching,
-------
or migration into the environment, (including, without limitation, the
abandonment or disposal of any barrels, containers, or other closed receptacles
containing any Hazardous Materials), or into or out of any property owned,
occupied or used by Borrower.
Section 1.115. "Reportable Event" means any of the events described in
----------------
Section 4043(b) of ERISA.
<PAGE>
-17-
Section 1.116. "Revolving Credit Period" means the period beginning on the
-----------------------
Closing Date and extending through and including the Revolving Credit
Termination Date or such earlier date on which the obligation of Bank to make
Revolving Loans is terminated or the Commitment Amount is reduced to zero (0) in
accordance with the terms hereof.
Section 1.117. "Revolving Credit Termination Date" means September 30,
---------------------------------
1999, and any subsequent date to which the Revolving Credit Termination Date may
be extended under Section 2.1.11. hereof.
Section 1.118. "Revolving Credit Note" has the meaning set forth in
---------------------
Section 2.1.7. hereof.
Section 1.119. "Revolving Loan" or "Revolving Loans" means the loan(s) and
-------------- ---------------
advance(s) which Borrower requests or is deemed to have requested pursuant to
Section 2.1.1. hereof, and to the extent permitted under this Agreement, Section
2.1.2. hereof.
Section 1.120. "Secured Foreign Receivable" means an Account Receivable
--------------------------
(other than an Insured Foreign Receivable) that arises from the sale of goods to
an Account Debtor having its principal assets or place of business outside of
the United States of America, Canada or Puerto Rico so long as Bank has received
in respect of such Account Receivable a letter of credit or similar guaranty of
payment in form and substance and issued or confirmed by a financial institution
satisfactory to Bank and its legal counsel that has not expired, been revoked or
terminated, and has been pledged to, and had the proceeds thereof assigned to,
Bank.
Section 1.121. "Security Agreement" means the security agreement executed
------------------
and delivered by Borrower in favor of Bank on the Closing Date, as it may be
amended, modified, confirmed or supplemented from time to time.
Section 1.122. "Security Value of Accounts Receivable" means, as of any
-------------------------------------
date as of which the amount thereof shall be determined, eighty percent (80%) of
Borrower's Eligible Account Receivables as of the date of determination.
Section 1.123. "Security Value of Inventory" means, as of any date as of
---------------------------
which the amount thereof shall be determined, the sum of fifty percent (50%) of
Borrower's Raw Materials as of the date of determination plus sixty percent
(60%) of Borrower's Finished Goods as of the date of determination, all of the
foregoing valued on a FIFO basis at the lower of cost or market value.
Section 1.124. "Solvent" means, when used with respect to any Person, that
-------
as of the date as to which the Person's solvency is to be determined:
(a) the fair saleable value of such Person's properties and assets
is in excess of the total amount of its liabilities (including contingent
liabilities) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able to meet its debts as they mature.
<PAGE>
-18-
Section 1.125. "Sub" means ARISTOTLE SUB, INC., a Delaware corporation,
---
with its chief executive office located at 129 Church Street, New Haven,
Connecticut 06510.
Section Section 1.126. "Sub Guaranty" has the meaning set forth in Section
------------
3.2.3. hereof.
Section 1.127. "Subordinated Indebtedness" means Indebtedness, whether now
-------------------------
existing or hereafter arising, with respect to which the payment of the
principal of and interest on is expressly subordinated in right of payment, in
form and on terms approved by Bank in writing, to the prior payment of the
Obligations.
Section 1.128. "Subordination Agreement" means each subordination and
-----------------------
intercreditor agreement executed and delivered by Aristotle and Sub in favor of
Bank on the Closing Date, as it may be amended, modified or supplemented from
time to time.
Section 1.129. "Subsidiary" means any Person of which fifty percent (50%)
----------
or more of the ordinary voting power for the election of a majority of the
members of the board of directors or other governing body of such Person is held
or controlled by Borrower or a Subsidiary of Borrower; or any other such
organization the management of which is directly or indirectly controlled by
Borrower or Subsidiary of Borrower through the exercise of voting power or
otherwise; or any joint venture, whether incorporated or not, in which Borrower
has a fifty percent (50%) or more ownership interest. The term "control" (and
its correlative meanings "controlled by" and "under common control with") as
used in this section means the possession, directly or indirectly, of the power
to direct, or cause the direction of, the management and policies of a Person,
whether through ownership of voting stock, by contract or otherwise.
Section 1.130. "Tax Sharing Agreement" means that certain tax sharing
---------------------
agreement dated April 11, 1994 by and among Borrower, Aristotle and Aristotle
Sub, as it may be amended, modifed or supplemented from time to time.
Section 1.131. "Term Note" has the meaning set forth in Section 2.3.2.
---------
hereof.
Section 1.132. "Term Loan" has the meaning set forth in Section 2.3.1.
---------
hereof.
Section 1.133. "Total Debt" means, as of any date as of which the amount
----------
thereof shall be determined, all Indebtedness of Borrower including the
Obligations but excluding Subordinated Indebtedness, as of such date and
Indebtedness described in Section 8.1.(e).
Section 1.134. "Total Debt Service" means, for any period, the aggregate
------------------
amount of Borrower's obligation to make payments of principal, interest and
other amounts in respect of all Total Debt and Subordinated Debt for such
period; provided, however, that for purposes of the calculation of Total Debt
Service, the obligation of Borrower to make payments of principal with respect
to the Line of Credit shall be considered a long term obligation not payable
within any such period and any payments under Section 2.4.6. hereof in respect
of the Term Loan and trade payables shall be excluded.
<PAGE>
-19-
Section 1.135. "Total Interest" means, for any period, Borrower's
--------------
aggregate obligation to make payments of interest in respect of Total Debt
(other than trade payables) and Subordinated Debt during such period.
Section 1.136. "Unmatured Acceptances" means, as of any date as of which
---------------------
the amount thereof shall be determined, the aggregate amount of Unmatured
Acceptances as of such date but excluding any amounts which constitute unpaid
Reimbursement Obligations as of such date.
Section 1.137. "Uniform Customs and Practice" means the Uniform Customs
----------------------------
and Practice for Documentary Credits (1993) Revision, International Chamber of
Commerce Publication No. 500.
Section 1.138. "Unused Portion" means for any month the average daily
--------------
difference between the Commitment Amount and the aggregate principal amount of
Revolving Loans, Credits Outstanding and any amounts deemed to be Revolving
Loans, whether now existing or hereafter arising.
SECTION 2. THE CREDIT FACILITIES
Section 2.1. Line of Credit.
--------------
Section 2.1.1. Revolving Loans. Upon the execution of this Agreement, Bank
---------------
agrees to extend to Borrower a line of credit, so that as long as no Default or
Event of Default has occurred and is continuing, Borrower may borrow, repay and
reborrow, on a revolving basis in one (1) or more Revolving Loans from time to
time prior to the close of business on the Revolving Credit Termination Date,
amounts which together with the amount of Credits Outstanding, Unmatured
Acceptances and unpaid Reimbursement Obligations deemed to be Revolving Loans
under this Section 2.1.1., do not exceed in the aggregate at any one time
outstanding the lesser of the Borrowing Base or the Commitment Amount in effect
from time to time (the "Line of Credit"). Bank shall have the right, in its
reasonable credit judgment, to deem any unpaid Reimbursement Obligations and any
other payments, deposits, guaranties or indemnifications made by Bank for the
account of Borrower under any letter of credit, reimbursement agreement,
acceptance, guaranty or similar instrument to be Revolving Loans, and Bank may,
in its reasonable credit judgment, establish such reserves as it deems
appropriate against any present or future obligation of Bank to make payment, to
deposit or to perform in respect of any of the same. Bank may, in its reasonable
credit judgment and upon notice to Borrower, fund such reserves and/or charge
the same to the Loan Account at such time as it deems appropriate.
Notwithstanding any provision of this Agreement to the contrary, all Revolving
Loans, including Overadvances, and any unpaid Reimbursement Obligations and
other payments, deposits, guaranties or indemnifications deemed to be Revolving
Loans by Bank hereunder, shall constitute one obligation of Borrower to Bank,
secured by Bank's security interest in the Collateral.
<PAGE>
-20-
Section 2.1.2. Overadvances. Notwithstanding the provisions of Section
------------
2.1.1. hereof, the Borrower may from time to time request, and Bank shall make,
Revolving Loans which exceed the available Borrowing Base ("Overadvances") but
which, in addition to all Revolving Loans, Credits Outstanding and any unpaid
Reimbursement Obligations and other payments, deposits, guaranties or
indemnifications deemed to be Revolving Loans made under Section 2.1.1. hereof
in respect of the Borrowing Base, do not exceed the Commitment Amount in effect
from time to time; provided, however, that the aggregate outstanding principal
-------- -------
amount of Overadvances shall in no event exceed the Overadvance Limit in effect
from time to time and provided, further, that Borrower must reduce the amount of
-------- -------
Overadvances to zero (0) and maintain such zero (o) balance for thirty (30) days
on at least one (1) occasion during the twelve (12) month period following the
Closing Date and each anniversary thereof during the Revolving Credit Period.
Section 2.1.3. Notice and Manner of Borrowing. Except as provided in the
------------------------------
Cash Management Agreements, whenever Borrower desires to obtain a Revolving
Loan, Borrower shall notify Bank (which notice shall be irrevocable) by telex,
telegraph, telephone or telecopier received no later than 2:00 p.m. on the date
on which the requested Revolving Loan is to be made. Such notice shall specify
the effective date and amount of each Revolving Loan subject to the limitations
set forth in Section 2.1.1. hereof. Each such notification (a "Notice of
Borrowing") shall be immediately followed by a written confirmation thereof by
Borrower in substantially the form of Exhibit A attached hereto; provided,
however, that if such written confirmation differs in any material respect from
the action taken by Bank, the records of Bank shall control absent manifest
error. Subject to the terms and conditions of this Agreement, and provided that
the Borrowing Base is sufficient to permit Bank to make the requested Revolving
Loan, Bank shall make each Revolving Loan on the effective date specified
therefor by crediting the amount of such Revolving Loan to the Loan Account.
Section 2.1.4. Administration of the Line of Credit. Notwithstanding any
------------------------------------
provision of this Agreement to the contrary, Borrower and Bank hereby
acknowledge and agree that the purpose of the Line of Credit and the making of
loans and advances thereunder is to fund Borrower's daily cash requirements. In
furtherance thereof, Borrower hereby authorizes Bank, subject to the terms,
conditions and limitations of this Agreement and the cash management, lockbox
and similar agreements (the "Cash Management Agreements") which Bank requires
Borrower to execute and deliver from time to time in connection with the
administration of the Line of Credit, to automatically make Revolving Loans in
such amounts as may be necessary to fund Borrower's daily cash requirements. In
addition, Bank hereby agrees to apply and credit against the Line of Credit any
amounts which are deposited on any Business Day in the Lockbox Account in
accordance with the terms, conditions and limitations of this Agreement and the
Cash Management Agreements. Borrower acknowledges that Bank shall have the right
to terminate its obligations and agreements under this Section 2.1.4. upon the
occurrence of a Default or Event of Default or in accordance with the terms of
the Cash Management Agreements.
<PAGE>
-21-
Section 2.1.5. Calculation of Borrowing Base. The Borrowing Base as of any
-----------------------------
time shall be calculated by Bank using the most recent Borrowing Base
Certificate and other financial reports delivered by Borrower to Bank under
Section 7.1. hereof. Bank shall have the right, in its reasonable credit
judgment, and at any time and for any reason, to reduce the dollar amount of (i)
Eligible Accounts Receivable by the amount of discounts, credits, allowances and
returns of any kind then outstanding, issued, granted, owing, accrued or liable
to be accrued or (ii) Eligible Inventory by the amount of special order goods,
advertising, packaging, parts, supplies, tooling or similar items. Any Accounts
Receivable or Inventory which have been so excluded as well as any Accounts
Receivable or Inventory which are or have become Disqualified Accounts
Receivable or Disqualified Inventory for any other reason shall remain as
collateral for the Obligations notwithstanding such exclusion or
disqualification.
Section 2.1.6. Reduction of Commitment Amount. Borrower may from time to
------------------------------
time, by written notice delivered to Bank at least five (5) Business Days prior
to the date of the requested reduction, reduce by integral multiples of ONE
HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) any unborrowed portion of the
Commitment Amount. No reduction of the Commitment Amount shall be subject to
reinstatement.
Section 2.1.7. Revolving Credit Note. Revolving Loans shall be evidenced
---------------------
by a promissory note executed by Borrower in substantially the form attached
hereto as Exhibit B (the "Revolving Credit Note"), with all blanks therein
appropriately completed, payable to the order of Bank, which Revolving Credit
Note is hereby incorporated herein by reference and made a part hereof.
Section 2.1.8. Payment of Principal. The aggregate unpaid principal amount
--------------------
of all Revolving Loans, together with accrued and unpaid interest thereon, as
evidenced by the Revolving Credit Note, shall, unless sooner accelerated by Bank
following the occurrence of an Event of Default, be repaid by Borrower on the
Revolving Credit Termination Date.
Section 2.1.9. Record of Revolving Loans. Each Revolving Loan shall be
-------------------------
recorded on the books maintained by Bank with respect to the Loan Account by
Bank. Bank shall also record on such books all payments made by Borrower on the
Revolving Credit Note, interest and expenses and other appropriate debits and
credits as herein provided. Bank shall from time to time render and send to
Borrower a statement of the Loan Account showing the outstanding aggregate
principal balance of the Revolving Credit Note, together with interest and other
appropriate debits and credits as of the date of the statement. The statement of
Loan Account shall be considered correct in all respects and accepted by and be
conclusively binding upon Borrower unless Borrower makes specific written
objections thereto within sixty (60) days after the date the statement of the
Loan Account is received or later presents objective evidence demonstrating a
manifest error by Bank in the preparation of the statement of the Loan Account.
Bank may also record and endorse on Schedule A attached to and forming a part of
----------
the Revolving Credit Note appropriate notations evidencing (i) the date and
amount of each Revolving Loan to be evidenced by the Revolving Credit Note and
(ii) the date and amount of each payment of
<PAGE>
-22-
principal made by Borrower with respect thereto; provided, however, that the
failure of Bank to make such notation shall not limit or otherwise affect the
obligations of Borrower under the Revolving Credit Note or this Agreement. Bank
is hereby irrevocably authorized by Borrower to so endorse such Schedule A and
----------
to attach to and make a part of the Revolving Credit Note a continuation of such
Schedule A as and when required.
- ----------
Section 2.1.10. Termination. The Line of Credit and Bank's obligation to
-----------
lend thereunder shall terminate on the Revolving Credit Termination Date, at
which point all of the sums due and owing under the Line of Credit shall be
immediately due and payable, unless the Line of Credit is renewed in accordance
with Section 2.1.11. hereof.
Section 2.1.11. Renewal. Bank may, in its sole and absolute discretion,
-------
upon written agreement with Borrower, renew the Line of Credit for additional
periods of time on such terms and conditions as it may elect. In the event of
the renewal of the Line of Credit, the Revolving Credit Termination Date shall
be extended for a corresponding period.
Section 2.1.12. Use of Proceeds. The proceeds of Revolving Loans may be
---------------
used by the Borrower for general working capital purposes and for any other
purpose not prohibited under this Agreement.
Section 2.1.13. Mandatory Prepayment. If at any time the outstanding
--------------------
aggregate principal amount of all Revolving Loans shall exceed the Borrowing
Base plus the amount of the Overadvance Limit in effect from time to time, then
any such excess amount shall, at Bank's election, be due and payable on demand.
Section 2.1.14. Facility Fee. In consideration of the maintenance of the
------------
Line of Credit, Borrower hereby agrees to pay to Bank commencing November 15,
1996 and continuing on the fifteenth day of each succeeding month a facility fee
equal to one-quarter of one percentage point (.25%) of the amount of the Unused
Portion for the preceding month times a fraction, the numerator of which is the
actual number of days in such period and the denominator of which is 360 (the
"Facility Fee").
Section 2.2. Letters of Credit.
-----------------
Section 2.2.1. Issuance. Upon the execution of this Agreement, and
--------
as long as no Default or Event of Default has occurred and is continuing, Bank,
either directly or through a Bank Affiliate, hereby agrees to issue, extend,
amend or renew Letters of Credit or Letter of Credit Guaranties from time to
time after the Closing Date, either directly or through a Bank Affiliate, for
the account of Borrower; provided, however, that the amount of each requested
-------- -------
Letter of Credit or Letter of Credit Guaranty, when added to the aggregate
amount of all Revolving Loans, all Credits Outstanding, all Unmatured
Acceptances and all unpaid Reimbursement Obligations deemed to be Revolving
Loans and other payments, deposits, guaranties or indemnifications deemed to be
Revolving Loans under Section 2.1.1. hereof, does not exceed the lesser of the
Borrowing Base or the Commitment Amount in effect from time to time and
provided, further,
- -------- -------
<PAGE>
-23-
that the aggregate amount of Credits Outstanding and unpaid Reimbursement
Obligations (after taking into account the amount of the requested Letter of
Credit or Letter of Credit Guaranty) shall not exceed ONE MILLION AND NO/100
DOLLARS ($1,000,000.00) Notwithstanding the foregoing, the issuance of each
Letter of Credit or Letter of Credit Guaranty other than documentary letters of
credit shall be made on a case by case basis in the sole and absolute discretion
of Bank.
Section 2.2.2. Application. Borrower shall request the issuance of
-----------
a Letter of Credit or Letter of Credit Guaranty by its execution and delivery to
Bank of an application in such form as Bank may require from time to time (the
"Letter of Credit Application"). If the Letter of Credit Application is
acceptable to Bank, in its sole and absolute discretion, then Bank shall prepare
the Letter of Credit or the Letter of Credit Guaranty in accordance with the
instructions set forth in the Letter of Credit Application and, provided that
there is adequate availability under the Line of Credit as set forth in Section
2.2.1. above, issue the Letter of Credit or the Letter of Credit Guaranty to the
Beneficiary thereof unless otherwise instructed by Borrower. Borrower
acknowledges and agrees that Bank shall have no obligation to issue any Letter
of Credit or any Letter of Credit Guaranty which provides for an expiration date
later than thirty (30) days prior to the Revolving Credit Termination Date.
Section 2.2.3. Reimbursement. Borrower hereby acknowledges and
-------------
agrees that it shall be obligated to reimburse Bank in respect of obligations
under Letters of Credit and Letter of Credit Guaranties:
(a) except as otherwise provided in this Agreement, or the applicable
Letter of Credit Application, on each date that any Drawing is honored by
Bank or a Bank Affiliate, Bank or a Bank Affiliate or otherwise makes a
payment with respect thereto, and only to the extent that such Drawing is
not deemed to be a Revolving Loan under Section 2.1.1. hereof, (i) the
amount paid by Bank or a Bank Affiliate under or with respect to such
Drawing, and (ii) the amount of any taxes, fees, charges or other
reasonable costs and expenses whatsoever incurred by Bank or any Bank
Affiliate in connection with any payment made by Bank or a Bank Affiliate
under, or with respect to, such Letter of Credit or the Letter of Credit
Guaranty;
(b) upon the reduction (but not termination) of the Commitment Amount to
an amount less than the sum of (i) all Revolving Loans and amounts deemed
to be Revolving Loans as of such date and Credits Outstanding as of such
date plus (ii) the amount of unpaid Reimbursement Obligations as of such
----
date, an amount equal to any such difference, which amount shall be held
by Bank as cash collateral for all Reimbursement Obligations; and
(c) upon the termination of the Commitment Amount, or the acceleration of
the Reimbursement Obligations in accordance with Section 12.1. hereof, an
amount equal to the sum of (i) Credits Outstanding as of such date plus
----
(ii) the amount of unpaid Reimbursement Obligations as of such date, which
amount shall be held by Bank as cash collateral for all Reimbursement
Obligations.
<PAGE>
-24-
Borrower shall pay interest on any amounts due and payable under this Section
2.2.3. from the date such amounts are payable (whether at maturity, by
acceleration or otherwise) until paid in full at the rate of interest applicable
to Prime Rate Loans for three (3) days and, thereafter, at the Default Rate
applicable to Prime Rate Loans.
Section 2.2.4. Debit to Line of Credit. Bank shall be entitled, in its
-----------------------
sole and absolute discretion, to debit the amount of any Drawing as well as any
fees, costs and expenses incurred by Bank or a Bank Affiliate in connection with
such Drawing against the Line of Credit and deem such amount to be Revolving
Loans under Section 2.1.1. hereof.
Section 2.2.5. Termination of Obligation. The obligation of Bank to issue
-------------------------
Letters of Credit or Letter of Credit Guaranties under this Section 2.2. shall
terminate thirty (30) days prior to the Revolving Credit Termination Date or any
renewal thereof.
Section 2.2.6. Obligations Absolute. The obligations of Borrower with
--------------------
respect to Letters of Credit or Letter of Credit Guaranties issued under this
Agreement shall be unconditional and irrevocable, shall be paid strictly in
accordance with the terms of this Agreement under all circumstances and shall
not be reduced by: (a) any lack of validity or enforceability of any document
executed between Borrower and a Beneficiary; (b) the existence of any claim,
set-off, defense or other right which Borrower may have at any time against a
Beneficiary or any transferee of a Letter of Credit or Letter of Credit
Guaranties (or any Persons for which such Beneficiary or any such transferee may
be acting) or against any other Person, whether in connection with this
Agreement, the transactions contemplated herein or any unrelated transaction;
and (c) any statement or any other document presented under a Letter of Credit
or Letter of Credit Guaranties proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect, unless Bank had actual knowledge (without any investigation
having been made) that such statement or other document was forged, fraudulent,
invalid or insufficient.
Section 2.2.7. Indemnification. Borrower hereby indemnifies and holds
---------------
Bank, and its directors, officers, employees and agents (collectively, the "Bank
Agents"), harmless from and against any and all claims, damages, losses,
liabilities, costs or expenses (including reasonable legal fees and expenses)
which Bank or any Bank Agents may incur or which may be claimed against Bank by
any Person by reason of or in connection with the execution and delivery or
transfer of, or payment or failure to make lawful payment under, a Letter of
Credit or Letter of Credit Guaranties; provided, however, that Borrower shall
-------- -------
not be required to indemnify Bank or any Bank Agents for any claims, damages,
losses, liabilities, costs or expenses to the extent, but only to the extent,
caused by Bank's (i) failure to act in good faith and in conformity with such
<PAGE>
-25-
laws, regulations or commercial or banking customs, as Bank may reasonably deem
to be applicable, or (ii) honoring a Drawing on a Letter of Credit or Letter of
Credit Guaranty issued hereunder when at the time of such honoring Bank had
actual knowledge (without any investigation having been made) that such Drawing
was forged, fraudulent, invalid or insufficient. Nothing in this Section 2.2.7.
is intended to limit Borrower's obligations hereunder. Without prejudice to the
survival of any other obligation of Borrower hereunder, the indemnities and
obligations of Borrower contained in this Section 2.2.7. shall survive the
payment in full of the Obligations. In case any claim is asserted or any action
or proceeding is brought against Bank or any Bank Agents, Bank or any such Bank
Agents shall promptly notify Borrower of such claim, action or proceeding and
Borrower shall resist, settle or defend with counsel reasonably acceptable to
Bank, such claim, action or proceeding. If, within ten (10) days of Borrower's
receipt of such notice, Borrower does not commence and continue to prosecute the
defense of such claim, action or proceeding, Bank, or any such Bank Agents, may
retain legal counsel to represent it in such defense and Borrower shall
indemnify Bank, or any such Bank Agents, for the reasonable fees and expenses of
such legal counsel. Subject to the foregoing, Bank shall cooperate and join with
Borrower, at the expense of Borrower, as may be required in connection with any
action taken or defended by Borrower.
Section 2.2.8. Liability of Bank. Any action, inaction or omission on the
-----------------
part of Bank under or in connection with a Letter of Credit or Letter of Credit
Guaranty issued hereunder or related instruments or documents, if in good faith
and in conformity with such laws, regulations or commercial or banking customs
as Bank may reasonably deem to be applicable, shall be binding upon Borrower,
shall not place Bank under any liability to Borrower, shall not affect, impair
or prevent the vesting of any of Bank's rights or powers hereunder or Borrower's
obligation to make full reimbursement to Bank. Borrower assumes all risks of the
acts or omissions of a Beneficiary or transferee of a Letter of Credit or Letter
of Credit Guaranty with respect to its use of the Letter of Credit or Letter of
Credit Guaranty. In furtherance of, and not in limitation of Bank's rights and
powers under the Uniform Customs and Practice, but subject to all other
provisions of this Section 2.2. it is understood and agreed that Bank shall not
have any liability for and that Borrower assumes all responsibility for: (a) the
genuineness of any signature; (b) the form, correctness, validity, sufficiency,
genuineness, falsification and legal effect of any draft, certification or other
document required by a Letter of Credit or Letter of Credit Guaranty and the
authority of the person signing the same; (c) the failure of any instrument to
bear any reference or adequate reference to the Letter of Credit or Letter of
Credit Guaranty or the failure of any persons to note the amount of any
instrument on the reverse of the Letter of Credit or to surrender the Letter of
Credit or Letter of Credit Guaranty or otherwise to comply with the terms and
conditions of the Letter of Credit or Letter of Credit Guaranty; (d) the good
faith or acts of any person other than Bank and its agents and employees; (e)
the existence,
<PAGE>
-26-
form, sufficiency or breach of or default under any other agreement or
instrument of any nature whatsoever; (f) any delay in giving or failure to give
any notice, demand or protest; and (g) any error, omission, delay in or
nondelivery of any notice or other communication, however sent. The
determination as to whether the required documents are presented prior to the
expiration of a Letter of Credit or Letter of Credit Guaranty issued hereunder
and whether such other documents are in proper and sufficient form for
compliance with the Letter of Credit or Letter of Credit Guaranty shall be made
by Bank in its sole and absolute discretion.
Section 2.2.9. Fees. Borrower hereby agrees to pay to Bank or a Bank
----
Affiliate any issuance, drawing, renewal, amendment or other fee or charge
customarily assessed by Bank or a Bank Affiliate in connection with any Letter
of Credit or Letter of Credit Guaranty. Any such fees shall be paid at the time
Borrower becomes obligated to pay any such fee.
Section 2.3. Acceptances.
-----------
Section 2.3.1. Drafts for Acceptances. Upon the execution of this
----------------------
Agreement, and as long as no Default or Event of Default has occurred and is
continuing, the Bank hereby agrees, either directly or through one or more of
its Bank Affiliates, and in its sole and absolute discretion, subject to, in
accordance with and in reliance upon the terms and conditions set forth in this
Section 2.3., to receive from the Borrower from time to time after the Closing
Date and continuing through the Revolving Credit Termination Date, Drafts for
acceptance by the Bank; provided, however, that the amount of each requested
-------- -------
Acceptance, when added to the aggregate amount of all Revolving Loans, all
Credits Outstanding, all Unmatured Acceptances, all Reimbursement Obligations
and other payments, deposits, guaranties or indemnifications deemed to be
Revolving Loans under Section 2.1.1. hereof does not exceed the lesser of the
Borrowing Base plus the Overadvance Limit in effect from time to time or the
Commitment Amount; and provided further, that the aggregate amount of Unmatured
-------- -------
Acceptances and unpaid Reimbursement Obligations relating to Acceptances (after
taking into account the amount of the Draft to be accepted) shall not exceed TWO
MILLION AND NO/100 DOLLARS ($2,000,000.00). The term of each Acceptance shall be
thirty (30), sixty (60) or ninety (90) days. The obligation of the Bank to
receive Drafts for acceptance under this Section 2.3. is subject to the Bank's
customary rules, procedures and standards for banker's acceptances, including
the requirement that any such Draft must be "eligible" under the Federal Reserve
Act and the rules, regulations and interpretations promulgated thereunder by the
Federal Reserve Board, and all applicable laws, rules and regulations, including
the requirement that the Borrower shall notify the Bank in writing of its
intention to present a Draft for acceptance at least two (2) Business Days prior
to the date of the requested Acceptance. The Borrower acknowledges and agrees
that the Bank shall have no obligation to receive any Draft for acceptance which
provides for a maturity date later than thirty (30) days prior to the Revolving
Credit Termination Date or any renewal thereof.
<PAGE>
-27-
Section 2.3.2. Commissions. In consideration of the acceptance of
-----------
each Draft, the Borrower hereby agrees to pay to the Bank a commission calcu-
lated by reference to The First National Bank of Boston's then current discount
rate for banker's acceptances plus the Discount Margin; provided, however,
-------- -------
that the minimum commission shall be $300.00. Any commission shall be paid
upon the acceptance of the Draft by the Bank.
Section 2.3.3. Reimbursement of Matured Acceptance. The Borrower
-----------------------------------
hereby acknowledges and agrees that it shall be obligated to reimburse the Bank
in respect of any obligations in respect of Acceptances:
(a) except as otherwise provided in this Agreement, on each date that any
payment is made under the Acceptance by the Bank, or the Bank otherwise makes a
payment with respect thereto and only to the extent that such payment is not
deemed to be a Revolving Loan under Section 2.1.1. hereof, (i) the amount paid
by the Bank under or with respect to such Acceptance, and (ii) the amount of any
taxes, fees, charges or other reasonable costs and expenses whatsoever incurred
by the Bank in connection with any payment made by the Bank under, or with
respect to, such Acceptance;
(b) upon the reduction (but not termination) of the Commitment Amount to
an amount less than the sum of (i) Credits Outstanding as of such date plus (ii)
----
the amount of Unmatured Acceptances as of such date plus (iii) the amount of
----
unpaid Reimbursement Obligations as of such date, an amount equal to any such
difference which relates to Acceptances, which amount shall be held by the Bank
as cash collateral for all Reimbursement Obligations; and
(c) upon the termination of the Commitment Amount, or the acceleration of
the Reimbursement Obligations in accordance with Section 13.1. hereof, an amount
equal to the sum of (i) the amount of Unmatured Acceptances as of such date plus
----
(ii) the amount of unpaid Reimbursement Obligations relating to Acceptances as
of such date, which amount shall be held by the Bank as cash collateral for all
Reimbursement Obligations.
The Borrower shall pay interest on any amounts due and payable under this
Section 2.3.4. from the date such amounts are payable (whether at maturity, by
acceleration or otherwise) until paid in full at the rate of interest applicable
to Base Rate Loans for three (3) days and, thereafter, at the Default Rate
applicable to the Reimbursement Obligations.
Section 2.3.4. Termination of Obligation. The obligation of the Bank
-------------------------
to receive Drafts for acceptance under this Section 2.3. shall terminate thirty
(30) days prior to the Revolving Credit Termination Date or any renewal thereof.
Section 2.3.5. Documentation and Insurance Relating to Property.
------------------------------------------------
The Borrower will procure promptly any necessary documentation, permits or
licensees for the import, export or shipping of the property in connection with
which an Acceptance is issued; will comply with all foreign and domestic
governmental requirements relating to the shipment or financing of such
property; and will
<PAGE>
-28-
furnish such evidence that the above requirements have been fulfilled as the
Bank may require. The Borrower will keep such property insured in amounts,
against risks and with companies satisfactory to the Bank; will make any loss or
adjustment payable to the Bank or, at the Bank option, will assign the policies
or certificates of insurance to the Bank and will furnish the Bank on demand
with evidence of acceptance by the insurers of such assignment. Should the
insurance upon such property for any reason be unsatisfactory to the Bank, the
Bank may, at the Borrower's expense, obtain insurance satisfactory to the Bank.
Section 2.3.6. Warranties of the Borrower. The Borrower represents and
--------------------------
warrants that (a) the proceeds of the sale of any property underlying each
Acceptance transaction will forthwith be applied in liquidation of such
Acceptance; (b) the total amount of each Acceptance shall at no time exceed the
lesser of (1) the amount contracted for in any bona fide transaction (other than
---- ----
a transaction between the Borrower and the agent(s) of the Borrower) with
respect to such property, or (2) the amount necessary to effect the importation,
exportation or domestic shipment of goods or the storage of readily marketable
staples; (c) each Draft shall have matured within one hundred eighty (180) days
and the period from acceptance to maturity shall be related to the transaction
being financed such that it finances a "current shipment" as defined by the
Federal Reserve Board; (d) any document accompanying a Draft will, when
delivered to the Bank, be genuine, valid and correct in all material respects;
(e) no other financing will be in effect or will be sought with respect to any
transaction relating to a Draft; and (f) the Borrower shall have, or with the
proceeds of each Acceptance will forthwith obtain, good title, free of all liens
and claims other than those possessed by the Bank, to any documents and property
related to an Acceptance, and shall have the right and power to give the Bank a
security interest therein, and will hold any such documents and property not
delivered to the Bank and any proceeds thereof in trust for the Bank as its
property.
Section 2.3.7. Security Interest. The Borrower grants to the Bank a
-----------------
security interest in all goods, documents, instruments and accounts which shall
come into the possession or control of the Bank, any of the Bank's
correspondents, or the Borrower, or in which the Borrower may acquire an
interest, in connection with the transaction(s) related to an Acceptance, and
the proceeds thereof, as security for (a) all payments made or to be made by the
Bank or its correspondents under an Acceptance, (b) any interest, commission or
other customer charges in relation to an Acceptance, and (c) any other
obligations of the Borrower to the Bank under this Agreement.
Section 2.3.8. Responsibility of Bank. The Borrower hereby acknow-
----------------------
ledges and agrees that neither the Bank, any Bank Affiliates nor any of Bank's
correspondents shall be responsible for:
(a) The existence, character, quality, quantity, condition, packing,
value or delivery of the property purporting to be represented by documents;
(b) Any difference in character, quality, quantity, condition or
value of any relative goods, readily marketable commodities, or other property
from that expressed in documents;
<PAGE>
-29-
(c) The validity, sufficiency, or genuineness of documents, or of any
endorsement, even if such documents should in fact prove to be in any or all
respects invalid, fraudulent or forged;
(d) The time, place, manner or order in which shipment is made;
(e) The character, adequacy, validity, or genuineness of any insurance;
(f) The solvency or responsibility of any insurer, or for any other risk
connected with insurance;
(g) Any deviation from instructions, delay, default, or fraud by the
shipper and/or any other(s) in connection with the property or the shipping;
(h) The solvency, responsibility, or relationship to the property of any
party issuing any documents in connection with the property;
(i) Delay in arrival, or failure to arrive, of either the property or any
of the documents;
(j) Delay in giving, or failure to give, notice of arrival or any other
notice;
(k) Any breach of contract between the shipper(s) or vendor(s) and the
consignee(s) or buyer(s); or
(l) Errors, omissions, interruptions or delays in transmission or
delivery of any messages by mail, cable, telegraph, wireless telex, courier, or
otherwise, whether or not they may be in cipher or scrambled; and that neither
the Bank, any Bank Affiliate nor any of the Bank's correspondents shall be
responsible for any act, error, neglect, default, omission, insolvency or
failure in business of any correspondent, carrier, or warehouseman, and that the
happening of any one or more of the contingencies referred to in the preceding
sentence shall not affect, impair or prevent the vesting of any of the Bank's
rights or powers. In furtherance and extension and not in limitation of the
specific provisions above, it is agreed that any action, inaction, or omission
taken or suffered by the Bank, the Banks, any Bank Affiliate or by any of the
Bank's correspondents, under or in connection with any Draft accepted by the
Bank or any Bank Affiliate, or any of the relative documents or property, if in
good faith, and in conformity with such foreign or domestic laws, customs, or
regulations as the Bank, any Bank Affiliate or any of the Bank's correspondents
deem to be applicable, shall be binding upon the Borrower and shall not place
the Bank, any Bank Affiliate or the Bank's correspondent under any resulting
liability to the Borrower.
<PAGE>
-30-
Section 2.3.9. Indemnification. The Borrower hereby indemnifies
---------------
and holds the Bank, any Bank Affiliate and any Bank Agents, harmless from and
against any and all claims, damages, losses, liabilities, costs or expenses
(including reasonable legal fees and expenses) which the Bank, any Bank
Affiliate or any Bank Agents may incur or which may be claimed against the Bank
or any Bank Affiliate by any Person by reason of or in connection with the
execution and delivery or transfer of, or payment or failure to make lawful
payment under, or as may otherwise arise in respect of, an Acceptance; provided,
--------
however, that the Borrower shall not be required to indemnify the Bank, any Bank
- -------
Affiliate or any Bank Agents for any claims, damages, losses, liabilities, costs
or expenses to the extent, but only to the extent, caused by the Bank's or any
Bank Affiliate's failure to act in good faith and in conformity with such laws,
regulations or commercial or banking customs, as may be applicable. Nothing in
this Section 2.3.11. is intended to limit the Borrower's obligations hereunder.
Without prejudice to the survival of any other obligation of the Borrower
hereunder, the indemnities and obligations of the Borrower contained in this
Section 2.3.11. shall survive the payment in full of the Obligations. In case
any claim is asserted or any action or proceeding is brought against the Bank,
any Bank Affiliate or any Bank Agents, the Bank, any such Bank Affiliate or any
such Bank Agents shall promptly notify the Borrower of such claim, action or
proceeding and the Borrower shall resist, settle or defend with counsel
reasonably acceptable to the Bank, such claim, action or proceeding. If, within
ten (10) days of the Borrower's receipt of such notice, the Borrower does not
commence and continue to prosecute the defense of such claim, action or
proceeding, the Bank, any such Bank Affiliate or any such Bank Agents may retain
legal counsel to represent it in such defense and the Borrower shall indemnify
the Bank, any such Bank Affiliate and any such Bank Agents for the reasonable
fees and expenses of such legal counsel. Subject to the foregoing, the Bank, any
such Bank Affiliate and any such Bank Agents shall cooperate and join with the
Borrower, at the expense of the Borrower, as may be required in connection with
any action taken or defended by the Borrower.
Section 2.4. Term Loan.
---------
Section 2.4.1. Amount of Loan. Upon the execution of this Agreement,
--------------
Borrower agrees to borrow from Bank, and Bank agrees to loan to Borrower, the
principal amount of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) (the "Term
Loan").
Section 2.4.2. Term Note. The Term Loan shall be evidenced by a
---------
promissory note executed by Borrower in substantially the form attached hereto
as Exhibit C (the "Term Note"), with all blanks therein appropriately completed
---------
and payable to the order of Bank, which Term Note is hereby incorporated by
reference and made a part hereof.
Section 2.4.3. Payment of Principal. Commencing October 15, 1996, and
--------------------
continuing on the same day of each succeeding month thereafter, the principal
amount of the Term Note shall be payable in thirty-six (36) consecutive monthly
installments, the first thirty-
<PAGE>
-31-
five (35) of such installments to be in the amount of SIXTEEN THOUSAND SIX
HUNDRED SIXTY-SIX AND 66/100 DOLLARS ($16,666.66) and if not sooner paid, a
final installment in the then unpaid principal amount of the Term Loan, together
with all other amounts due and owing under the Term Note, shall be due and
payable on the Maturity Date.
Section 2.4.4. Maturity. Except where this Agreement or any
--------
instrument evidencing indebtedness hereunder provides that the obligations of
Borrower shall become due upon any earlier date and notwithstanding any
applicable provision permitting repayment at a later date, the Term Loan shall
become fully and finally due and payable on the Maturity Date.
Section 2.4.5. Use of Proceeds. The proceeds of the Term Loan shall
---------------
be used to refinance existing Indebtedness of Borrower.
Section 2.4.6. Mandatory Prepayment. Notwithstanding any provision of
--------------------
this Agreement to the contrary, Borrower shall make a mandatory prepayment in
respect of the principal amount of the Term Loan within one hundred twenty (120)
days following end of each Fiscal Year in an amount equal to twenty-five percent
(25%) of Excess Cash Flow for such Fiscal Year.
Section 2.5. Interest on the Loans.
---------------------
Section 2.5.1. Interest Rates and Payments of Interest. (a) Each Base
---------------------------------------
Rate Loan which is a Revolving Loan shall bear interest on the outstanding
principal amount thereof at a rate per annum equal to the Base Rate plus the
Base Rate Margin (provided, however, that Base Rate Loans which are Overadvances
shall bear interest at the Base Rate plus one percentage (1.0%)) and each Base
Rate Loan which relates to the Term Loan shall bear interest on the outstanding
principal amount thereof at a rate per annum equal to the Base Rate plus three-
quarters of one percentage point (.75%). Such interest shall be payable on the
fifteenth day of each month commencing November 15, 1996 and continuing on the
same day of each succeeding month until such Loan is due (whether at maturity,
by reason of acceleration, by reason of prepayment or otherwise).
(b) Each Eurodollar Loan shall bear interest on the outstanding principal
amount thereof, for each Interest Period applicable thereto, at a rate per
annum, in the case of Revolving Loans, equal to the Adjusted Eurodollar Rate
plus the Eurodollar Margin (provided however that Revolving Loans which are
Overadvances shall bear interest at the Adjusted Eurodolloar Rate plus three
percentage points (3.0%)) and, in the case of the Term Loan, equal to the
Adjusted Eurodollar Rate plus two and one-half percentage points (2.5%). Such
interest shall be payable on the last day of the Interest Period applicable
thereto; provided, however, that interest accruing on any Eurodollar Loan having
an Interest Period in excess of three (3) months shall be payable at intervals
of three (3) months from the first day of such Interest Period and when such
Loan is due (whether at maturity, by reason of acceleration, prepayment or
otherwise).
<PAGE>
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(c) Each Fixed Rate Loan shall bear interest on the outstanding principal
amount thereof, for each Interest Period applicable thereto, at a rate per annum
equal to the Cost of Funds Rate plus two and one-quarter of one percentage
points (2.25%). Such interest shall be payable on the fifteenth day of each
month commencing November 15, 1996 and continuing on the same day of each
succeeding month until such Fixed Rate Loan is due (whether at maturity, by
reason of acceleration, by reason of prepayment or otherwise).
(d) Interest shall be computed daily on the basis of a year of three
hundred sixty (360) days and paid for the actual number of days elapsed during
each Interest Period. If the due date for any payment of principal is extended
by operation of law, interest shall be payable for such extended time. If any
payment required by this Agreement becomes due on a day that is not a Business
Day such payment may be made on the next succeeding Business Day (subject to
clause (i) of the definition of Interest Period), and such extension shall be
included in computing interest in connection with such payment.
Section 2.5.2. Interest Rate Margins.
---------------------
(a) On the Closing Date and continuing until the effective date of
a Margin Change, the margin applicable to Base Rate Loans (the "Base Rate
Margin") shall be one-half of one percentage point (.50%) and the margin
applicable to Eurodollar Loans (the "Eurodollar Margin") shall be two and
one-quarter of one percentage points (2.25%).
(a) Commencing with the Fiscal Quarter ending March 31, 1996, and
as long as no Default or Event of Default shall have occurred and be continuing,
the Base Rate Margin and the Eurodollar Margin shall be subject to change (a
"Margin Change") as of the end of each Fiscal Quarter by reference to the Debt
Service Coverage Ratio and Debt to Worth Ratio as of the end of such Fiscal
Quarter as follows:
(i) If the Debt Service Coverage Ratio is greater than 1.25
to 1.0 and the Debt to Worth Ratio is:
(a) greater than 5.0 to 1.0, then the the Base Rate Margin shall
be one-half of one percentage point (.50%) and the Eurodollar
Margin shall be two and one-quarter percentage points (2.25%); or
(b) less than 5.0 to 1.0 but greater than or equal to 4.0 to 1.0,
then the the Base Rate Margin shall be one-quarter of one
percentage point (.25%) and the Eurodollar Margin shall be two
percentage points (2.00%); or
(c) less than 4.0 to 1.0, then the the Base Rate Margin shall be
zero (0) and the Eurodollar Margin shall be one and three-quarters
percentage points (1.75%).
(ii) If the Debt Service Coverage Ratio is greater than 1.10 to
1.0 but less than or equal to 1.25 to 1.0 and the Debt to Worth
Ratio is:
(a) greater than 5.0 to 1.0, then the the Base Rate Margin shall
be three-quarters of one percentage point (.75%) and
<PAGE>
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the Eurodollar Margin shall be two and one-half percentage points
(2.50%); or
(b) less than 5.0 to 1.0 but greater than or equal to 4.0 to 1.0,
then the the Base Rate Margin shall be one-half of one percentage
point (.50%) and the Eurodollar Margin shall be two and
one-quarter percentage points (2.25%); or
(c) less than 4.0 to 1.0, then the the Base Rate Margin shall be
one-quarter of one percentage point (.25%) and the Eurodollar
Margin shall be two and one-quarter percentage points (2.25%).
(iii) If the Debt Service Coverage Ratio is greater than 1.0 to
1.0 but less than or equal to 1.10 to 1.0 and the Debt to Worth
Ratio is:
(a) greater than 5.0 to 1.0, then the the Base Rate Margin shall
be one percentage point (1.0%) and the Eurodollar Margin shall be
three percentage points (3.00%); or
(b) less than 5.0 to 1.0 but greater than or equal to 4.0 to 1.0,
then the the Base Rate Margin shall be three-quarters of one
percentage point (.75%) and the Eurodollar Margin shall be two and
one-half percentage points (2.50%); or
(c) less than 4.0 to 1.0, then the the Base Rate Margin shall be
one-half of one percentage points (.50%) and the Eurodollar Margin
shall be two and one-quarters percentage points (2.25%).
(iv) The calculation of Debt Service Ratio and the Debt to Worth
Ratio shall be performed by the Bank, in its sole and absolute
discretion, by reference to the Financial Statements to be
provided by Borrower under Section 7. of the Agreement. The
calculation of the Debt Service Coverage Ratio for purposes of a
Margin Change shall be performed on a rolling basis by reference
to the Fiscal Quarter then ending and the three (3) preceding
Fiscal Quarters.
(v) Notwithstanding any provision of this Agreement to the
contrary, each Margin Change shall be effective with respect to
Base Rate Loans, including Base Rate Loans which are then
outstanding, as of the date on which the Financial Statements
referred to in subsection (iv) above are provided to the Bank
(notwithstanding the fact that the calculation of Debt Service
Coverage Ratio and Debt to Worth Ratio Coverage is performed by
the Bank at a later date). With respect to Eurodollar Loans, each
Margin Change shall be effective as of
<PAGE>
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the date on which the Bank performs the required calculation of
Debt Service Coverage Ratio and Debt to Worth Ratio Coverage as
aforesaid and then only with respect to Eurodollar Loans which are
requested, continued or converted on or after such date.
Section 2.5.3. Base Rate. Each adjustment in the Base Rate shall
---------
result immediately, without notice or demand of any kind, in a new rate of
interest effective with respect to periods on and after the date of such
adjustment. The Base Rate is a base interest rate used by Bank for loans making
reference thereto and is not necessarily the lowest rate at which Bank may lend
money. The Base Rate is neither tied to any external rate of interest nor is it
a rate charged by Bank to nay particular class or category of customer. If the
Base Rate shall be discontinued or for any other reason not be available for
determining the rate of interest chargeable under this Agreement, then Bank
shall select a substitute method of determining the rate of interest chargeable
under this Agreement and shall notify Borrower of such selection which method
shall, in Bank's estimation, yield a rate of return to Bank substantially
equivalent to the rate of return that Bank would have expected to receive if the
Base Rate remained available for that purpose.
Section 2.5.4. Continuation or Conversion of Loans. As long as no Default
-----------------------------------
or Event of Default shall have occurred and be continuing, Borrower may continue
or convert all or any part (in integral multiples of TEN THOUSAND AND NO/100
DOLLARS ($10,000.00) of any outstanding Loan into a Loan of any other type
provided for in this Agreement in the same aggregate principal amount, on any
Business Day (which, in the case of a conversion of a Eurodollar Loan shall be
the last day of the Interest Period applicable to such Eurodollar Loan .
Borrower shall give Bank prior notice of each such conversion (which notice
shall be effective upon receipt) in accordance with Section 2.1.3. hereof. Such
notice shall specify: (i) the effective date and amount of each Loan or portion
thereof to be continued or converted; (ii) the interest rate option to be
applicable thereto; and (iii) the duration of the applicable Interest Period, if
any (subject to the provisions of the definition of Interest Period and Section
2.4.4. hereof). Each such notification (a "Notice of Continuation or
Conversion") shall be immediately followed by a written confirmation thereof by
Borrower in substantially the form of Exhibit D attached hereto; provided,
--------- --------
however, that if such written confirmation differs in any material respect from
- -------
the action taken by the Bank, the records of the Bank shall control absent
manifest error.
Section 2.5.5. Duration of Interest Periods.
----------------------------
(a) Subject to the provisions of the definition of Interest
Period, the duration of each Interest Period applicable to a Loan shall be as
specified in the applicable Notice. Borrower shall have the option to elect a
subsequent Interest Period to be applicable to such Loan by giving notice of
such election to the Bank received no later than 10:00 a.m. Hartford,
Connecticut time on the date one (1) Business Day before to the end of the then
applicable Interest Period if such Loan is to be continued as or converted to a
Base Rate Loan
<PAGE>
-35-
and three (3) Business Days before the end of the then applicable Interest
Period if such Loan is to be continued as or converted to a Eurodollar Loan.
(b) If the Bank does not receive a Notice for a Eurodollar Loan
pursuant to subsection (a) above within the applicable time limits specified
therein, or if, when such notice must be given, a Default or Event of Default
shall have occurred and be continuing, Borrower shall be deemed to have elected
to convert such Loan in whole into a Base Rate Loan on the last day of the then
current Interest Period with respect thereto.
(c) Notwithstanding the foregoing, Borrower may not select an
Interest Period that would end, but for the provisions of the definition of
Interest Period, after the Revolving Credit Termination Date or the Maturity
Date.
Section 2.5.6. Changed Circumstances.
---------------------
(a) In the event that:
(i) on any date on which the Adjusted Eurodollar Rate
would otherwise be set the Bank shall have
determined in good faith (which determination shall
be final and conclusive) that adequate and fair
means do not exist for ascertaining the Interbank
Offered Rate, or
(ii) at any time the Bank shall have determined in good
faith (which determination shall be final and
conclusive) that:
(A) the making or continuation of or conversion
of any Loan to a Eurodollar Loan has been
made impracticable or unlawfully by (1) the
occurrence of a contingency that materially
and adversely affect the interbank market or
(2) compliance by the Bank in good faith
with any applicable law or governmental
regulation, guideline or order or
interpretation or change thereof by any
governmental authority charged with the
interpretation or administration thereof or
with any request or directive of any such
governmental authority (whether or not
having the force of law); or
(B) the Adjusted Eurodollar Rate shall no longer
represent the effective cost to Bank for
U.S. dollar deposits in the interbank
Eurodollar market for deposits in which it
regularly participates;
then, and in any such event, the Bank shall forthwith so notify Borrower
thereof. Until the Bank notifies Borrower that the circumstances giving rise to
such notice no longer apply, the
<PAGE>
-36-
obligation of the Bank to allow selection by Borrower of the type of Loan
affected by the contingencies described in this Section 2.4.5. (herein called
"Affected Loans") shall be suspended. If at the time the Bank so notifies
--------------
Borrower, Borrower has previously given the Bank a Notice with respect to one or
more Affected Loans but such Revolving Loans have not yet gone into effect, such
notification shall be deemed to be void and Borrower may borrow Loans of a non-
affected type by giving a substitute Notice pursuant to Section 2.1.3. hereof.
Upon such date as shall be specified in such notice (which shall not be
earlier than five (5) days from the date such notice is given) Borrower shall,
with respect to the outstanding Affected Loans, prepay the same, together with
interest thereon and any amounts required to be paid pursuant to Section 2.4.8.
hereof, and may borrow a Revolving Loan of another type by giving a Notice
pursuant to Section 2.1.3. hereof.
Section 2.5.7. Prepayments of the Loans. (a) Revolving Loans that are
------------------------
Eurodollar Loans may be prepaid at any time, without premium or penalty, on the
last day of any Interest Period applicable thereto, upon three (3) Business
Days' notice, in the case of Eurodollar Loans. Revolving Loans that are Base
Rate Loans may be prepaid at any time, without premium or penalty, upon one (1)
Business Day's notice. Any interest accrued on the amounts so prepaid to the
date of such payment must be paid at the time of any such payment. No prepayment
of the Revolving Loans during the Revolving Credit Period shall affect the
Commitment Amount or impair Borrower's right to borrow as set forth in Section
2.1.1. hereof.
(b) The Term Loan may be prepaid at any time, in whole or in part,
on the last day of any Interest Period applicable thereto in the case of any
portion of the Term Loan that is a Eurodollar Loan, and at any time in the case
of any portion of the Term Loan that is a Base Loan, without premium or penalty,
upon one Business Day's notice in the case of a Base Rate Loan and upon three
Business Days' notice in the case of a Eurodollar Loan, provided that interest
--------
accrued on the amounts so paid to the date of such payment must be paid at the
time of any such payment. Prepayment of the Term Loan shall be applied to
installments of principal due thereunder in the inverse order of their
maturities.
Section 2.5.8. Payments Not at End of Interest Period. If Borrower for any
--------------------------------------
reason makes any payment of principal with respect to any Eurodollar Loan on any
day other than the last day of an Interest Period applicable to such Eurodollar
Loan or fails to borrow or continue or convert to a Eurodollar Loan after giving
a Notice pursuant to Section 2.1.3. hereof, or if any Eurodollar Loan is
accelerated pursuant to Section 12. hereof, Borrower shall pay to the Bank an
amount computed pursuant to the following formula:
L = (R - T) x P x D
-------------------
360
L = amount payable to Bank
R = interest rate on such Loan
<PAGE>
-37-
T = effective interest rate per annum at which any readily
marketable bond or other obligation of the United States,
selected at Bank's sole discretion, maturing on or near the
last day of the then applicable Interest Period of such
Loan and in approximately the same amount as such Loan can
be purchased by the Bank on the day of such payment of
principal or failure to borrow or continue or convert
P = the amount of principal prepaid or the amount of the
requested Loan
D = the number of days remaining in the Interest Period as of
the date of such payment or the number of days of the
requested Interest Period
If Borrower for any reason makes any payment of principal with respect to
any Fixed Rate Loan on any day other than the last day of an Interest Period
applicable to such Fixed Rate Loan (including specifically in the event of the
making of the mandatory prepayment required by Section 2.4.6. hereof) or fails
to borrow or continue or convert to a Fixed Rate Loan after giving a Notice
pursuant to Section 2.5.3. hereof, or if any Fixed Rate Loan is accelerated
pursuant to Section 12.1. hereof, Borrower shall pay to Bank, an amount computed
pursuant to the following formula:
The latest published rate preceding the date of prepayment for
United States Treasury Notes or Bills (Bills on a discounted basis
shall be converted to a bond equivalent) as published weekly in
the Federal Reserve Statistical Release with a maturity date
closest to the last date of the then applicable Interest Period as
to which the prepayment is made shall be subtracted from the
interest rate in effect at the time of prepayment with respect to
the indebtedness being paid. If the result is zero or a negative
number, there shall be no prepayment premium. If the result is
positive number, then the resulting percentage shall be multiplied
by the amount of the principal balance being prepaid. The
resulting amount will be divided by 360 and multiplied by the
number of days remaining in the then applicable Interest Period.
Said amount shall be reduced to present value calculated by using
the above-referenced United States Treasury Note or Bill rate as
of the date of prepayment as the discount rate. The resulting
amount shall be the prepayment premium due to the Bank upon
prepayment.
Borrower shall pay such amount upon presentation by Bank of a statement
setting forth the amount and the Bank's calculation thereof pursuant hereto,
which statement shall be deemed true and correct absent manifest error.
Section 2.5.9. Default Rate. Upon the occurrence and during the
------------
continuance of an Event of Default, Bank shall have the right, in its sole and
absolute discretion, to increase the interest rate applicable to any Loan to a
rate which is three percentage points (3.0%) above the interest rate applicable
to such Loan during the then applicable Interest Period until the expiration of
such Interest Period, and thereafter, three percentage points (3.0%) above the
rate then applicable to Base Rate Loans.
<PAGE>
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Section 2.6. General Terms Applicable to Any Extension of Credit
---------------------------------------------------
Section 2.6.1. Increased Costs and Capital Adequacy.
------------------------------------
(a) If Bank determines that any change in any law or regulation or
directive or bulletin or in the interpretation thereof after the Closing Date by
any court or administrative or governmental authority charged with the
administration thereof shall either (i) impose, modify or deem applicable any
reserve, special deposit or similar requirement against any credit extended by
Bank under this Agreement, or (ii) impose on Bank or its parent bank holding
company any other condition regarding this Agreement and the result of any event
referred to in the preceding clause (i) or (ii) above shall be to increase the
cost to Bank or such holding company of issuing, funding or maintaining any
Extension of Credit (which increase in cost shall be determined by Bank's
reasonable allocation of the aggregate of such cost increases resulting from
such event), then, upon written demand by Bank, Borrower shall pay to Bank from
time to time as specified by Bank, additional amounts which shall be sufficient
to compensate Bank for such increased cost from the date of such change. A
certificate as to such increased cost incurred by Bank as a result of any event
mentioned in clause (i) or (ii) above prepared in reasonable detail (which shall
include the method employed by Bank in determining the allocation of such costs
to Borrower) and otherwise in accordance with this subsection (a), submitted by
Bank to Borrower, shall be conclusive evidence, absent manifest error, as to the
amount thereof.
(b) If Bank shall determine that the adoption after the Closing
Date of any applicable law, rule or regulation pursuant to or arising out of the
July 1988 report of the Basle Committee on Banking Regulations and Supervisory
Practices entitled "International Convergence of Capital Measurement and Capital
Standards", or the adoption after the date hereof of any other law, rule, or
regulation regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof, or compliance by Bank or its
parent bank holding company with any requirement or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
Bank or comparable agency, except any such adoption or change or any such
compliance with a request or directive which applies or has been applied solely
to Bank or its parent Bank holding company by reason of events or conditions
relating solely to Bank, has the effect of reducing the rate of return on Bank's
or its parent Bank holding company's capital as a consequence of its commitment
hereunder or to a level below that which Bank or such holding company could have
achieved but for such adoption, change or compliance by an amount deemed by Bank
to be material (for which reduction of the rate of return shall be determined by
Bank's or such holding company's reasonable allocation of such reduction of the
rate of return resulting from such event) then, upon written demand by Bank,
Borrower shall pay to Bank, from time to time as specified by Bank, such
additional amount or amounts which shall be sufficient to compensate Bank for
such reduction. A certificate as to such increased cost incurred by Bank as a
result of any event mentioned in this subsection (b), prepared in reasonable
detail (which shall
<PAGE>
-39-
include the method employed by Bank in determining the allocation of such costs
to Borrower) and otherwise in accordance with this subsection (b) submitted by
Bank to Borrower, shall be conclusive evidence, absent manifest error, as to the
amount thereof.
(c) Amounts payable by Borrower pursuant to this Section 2.6.1.
shall be payable within ten (10) Business Days of receipt by Borrower of a
certificate described in subsection (a) or (b) of this Section 2.6.1.
Section 2.6.2. Late Payment. Any payment of principal, interest,
------------
fees or expenses (other than payments of principal upon scheduled maturity or
upon acceleration) which is not paid within ten (10) days of the date specified
for payment shall be subject to a late penalty of five percent (5%) of the
amount due. The imposition or collection of a late fee shall not affect Bank's
right to exercise any of its rights and remedies upon the occurrence of an Event
of Default.
Section 2.6.3. Method of Payment. All payments and prepayments of
-----------------
principal and all payments of interest shall be made by Borrower to Bank at its
head office in immediately available funds, on or before 3:00 p.m. on the due
date thereof, free and clear of, and without any deduction or withholding for,
any taxes or other payments. Bank may, and Borrower hereby authorizes Bank to,
debit the amount of any payment not made by such time to the Loan Account.
SECTION 3. SECURITY FOR THE OBLIGATIONS
Section 3.1. Collateral Disclosure List. Borrower shall deliver to Bank
--------------------------
on the Closing Date a list identifying, inter alia, all of its properties and
assets and the locations thereof on a form provided by Bank (the "Collateral
Disclosure List").
Section 3.2. Security. The Obligations shall be secured by:
--------
Section 3.2.1. All properties and assets of Borrower, including
goods, accounts receivable, inventory, contract rights, accounts, documents,
instruments and chattel paper, business and financial records and general
intangible assets of Borrower as more particularly defined in the Security
Agreement.
Section 3.2.2. A limited guaranty agreement executed by Aristotle
with respect to that portion of the Obligations which relate to the Term
Loan in substantially the form attached hereto as Exhibit E-1 (the "Aristotle
Guaranty"), which guaranty shall be secured by a pledge to Bank of cash or
cash equivalents deposited in an account with Bank (the "Deposit Account") in
the amount of at least FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00)
pursuant to the Deposit Account Pledge.
Section 3.2.3. A limited guaranty agreement executed by Sub with
respect to the Obligations in substantially the form attached hereto as
Exhibit E-2 (the "Sub Guaranty").
- ------- ---
<PAGE>
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SECTION 4. REPRESENTATIONS AND WARRANTIES
In order to induce Bank to enter into this Agreement and to make any
Extension of Credit, Borrower makes the following representations and warranties
to Bank, which shall be deemed made as of the date hereof and, except as
otherwise provided in this Section 4., the date of each Extension of Credit. Any
knowledge acquired by Bank shall not diminish its rights to rely upon such
representations and warranties.
Section 4.1. Corporate Existence. Borrower is a corporation duly
-------------------
incorporated, validly existing and in good standing under the laws of its
state of incorporation and, to the best of its knowledge, is duly qualified in
all other jurisdictions in which the properties and assets owned, leased or
operated by it, or the nature of the business conducted by it, make such
qualification necessary and where failure to so qualify would have a Material
Adverse Effect.
Section 4.2. Corporate Authority. The execution, delivery and performance
-------------------
of this Agreement, the Notes and the Other Documents, the consummation of the
transactions herein and therein contemplated, the fulfillment of and compliance
with the terms and provisions hereof and thereof have been duly authorized by
all necessary corporate action of Borrower and are within its corporate power
and will not result in a violation of its Certificate of Incorporation or
Bylaws, if and as amended.
Section 4.3. Binding Obligations. This Agreement, the Notes and the Other
-------------------
Documents constitute the legal, valid and binding obligations of Borrower,
enforceable against it in accordance with their respective terms.
Section 4.4. Noncontravention. The execution, delivery and performance by
----------------
Borrower of this Agreement, the Notes and the Other Documents will not violate
any existing law, ordinance, rule, regulation or order of any Governmental
Authority or result in a breach of any of the terms of, or constitute a default
under, any contractual obligation to which Borrower is a party or by which it or
any of its properties or assets are bound or result in or require the imposition
of any Encumbrances on any of Borrower's properties or assets.
Section 4.5. Permits. Borrower possesses all material permits,
-------
authorizations, licenses, approvals, waivers and consents, without unusual
restrictions or limitations, the failure of which to possess would have a
Material Adverse Effect, all of which are in full force and effect.
Section 4.6. No Consents. The execution, delivery and performance of
-----------
this Agreement, the Notes and the Other Documents does not require any approval,
consent or waiver under any Contractual Obligation. No approval, authorization,
consent, waiver or order of, or registration, application or filing with, any
Governmental Authority is required in connection with the transactions
contemplated by this Agreement, the Notes and the Other Documents.
<PAGE>
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Section 4.7. Financial Statements. Borrower has provided to Bank its
--------------------
Financial Statements dated as of June 30, 1995 and related footnotes, audited
and certified by Arthur Andersen & Co. Borrower has also provided to Bank its
internally prepared Financial Statements dated as of June 30, 1996, certified by
the chief financial officer of Borrower but subject, however, to normal,
recurring year-end adjustments that shall not in the aggregate be material in
amount. All Financial Statements of Borrower heretofore provided to Bank present
fairly in all material respects the financial condition and results of business
operations of Borrower for the periods indicated in accordance with GAAP.
Borrower has no direct or contingent liabilities, liabilities for taxes, unusual
commitments or unrealized or unanticipated losses not disclosed in such
Financial Statements. Since the date of the latest dated balance sheet included
in the Financial Statements, there has been no material adverse change in the
business operations or financial condition of Borrower from that set forth in
the balance sheet contained in such Financial Statements and no Dividends have
been declared or made to stockholders, nor have any shares of its capital stock
(or any warrant to purchase, options to acquire or notes convertible, in whole
or in part, into any shares of its capital stock) been purchased or acquired by
any Person in any manner nor has Borrower made any Investment except as set
forth on Schedule 4.7. attached hereto.
-------------
Section 4.8. Financial Forecasts. Borrower has provided to Bank forecasted
-------------------
Financial Statements together with appropriate supporting details and a
statement of the underlying assumptions, ranges and limitations, prepared on a
quarterly basis covering the Fiscal Year commencing on July 1, 1996 (the
"Forecasts"). The Forecasts have been prepared in good faith and represent the
good faith opinion of Borrower and its senior management as to the most probable
course of Borrower's business operations for the periods covered thereby and
have a reasonable basis.
Section 4.9. Financial Information. All written data, reports and
---------------------
information which Borrower has supplied to Bank or caused to be so supplied by a
third party on its behalf in connection with this Agreement are complete and
accurate and contain no material omission or misstatement except such as have
been corrected in a writing delivered to Bank.
Section 4.10. Business Relationships. There exists no actual or threatened
----------------------
termination, cancellation or limitation of, or any modification or change in,
the business relationship of Borrower with any customer or group of customers
whose purchases individually or in the aggregate are material to Borrower's
business operations, or with any material supplier (other than in the ordinary
course of business where one supplier is replaced by another offering terms
which are no less favorable to Borrower).
Section 4.11. Brokers. No broker or finder has brought about the
-------
obtaining, making or closing of, and no broker's or finder's fees or commissions
will be payable by Borrower to any Person in connection with, the transactions
contemplated by this Agreement.
<PAGE>
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Section 4.12. Use of Proceeds. Borrower is not an "investment company," or
---------------
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended (15 U.S.C. (SS)(SS)80(a)(1) et seq.). No Extension of Credit,
the application of the proceeds and repayment thereof by Borrower or the
performance of the transactions contemplated by this Agreement will violate any
provision of said Act, or any rule, regulation or order issued by the Securities
and Exchange Commission thereunder. Borrower does not own any margin security as
that term is defined in Regulation U of the Board of Governors of the Federal
Reserve System and the proceeds of each Extension of Credit will be used only
for the purposes set forth in this Agreement. None of the proceeds of any
Extension of Credit will be used, or have been used, directly or indirectly, for
the purpose of purchasing or carrying any margin security or for the purpose of
reducing or retiring any Indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might constitute
such Extension of Credit a "purpose credit" within the meaning of said
Regulation U or Regulations G or X of the Federal Reserve Board. Borrower will
not take, or permit any Person acting on its behalf to take, any action which
might cause this Agreement or any document or instrument delivered pursuant
hereto to violate any regulation of the Federal Reserve Board.
Section 4.13. Statutory Compliance. Borrower is in compliance with all
--------------------
material laws, ordinances, rules, regulations and orders of any Governmental
Authority applicable to it, its properties and assets and the business conducted
by it, including, without limitation, ERISA, the United States Occupational
Safety and Health Act of 1970 and all Environmental Laws except where non-
compliance would not have a Material Adverse Effect.
Section 4.14. Commitments. Borrower has no fixed, contingent or other
-----------
obligations to issue any shares, or rights exercisable into shares, of its
capital stock.
Section 4.15. Events of Default. No Default or Event of Default has
-----------------
occurred and is continuing.
Section 4.16. Other Defaults. Borrower is not in material default in the
--------------
performance, observance or fulfillment of any material Contractual Obligation.
Section 4.17. Taxes. Borrower has filed all tax returns and reports
-----
required to be filed by it with any Governmental Authority and has paid in full,
or made adequate provisions or established adequate reserves for, the payment of
all taxes, interest, penalties, assessments or deficiencies shown to be due or
claimed to be due on or in respect to such tax returns and reports.
Section 4.18. Ownership of Borrower. Sub is the holder of
---------------------
all of the issued and outstanding shares of capital stock of Borrower and no
other Person has any rights and/or claim to any issued or unissued shares of
such capital stock except for a pledge of 59% of its capital stock pursuant to a
certain stock pledge and escrow agreement dated April 11, 1994.
<PAGE>
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Section 4.19. Solvency. Borrower is currently Solvent; and Borrower is
--------
not contemplating either the filing of a petition by it under Bankruptcy Code or
any state bankruptcy or insolvency law or the liquidating of all or a major
portion of its properties and assets, and Borrower has no knowledge of any
Person contemplating the filing of any such petition against it.
Section 4.20. Business Name. Borrower conducts its business solely
-------------
through the names set forth on Schedule 12 of the Collateral Disclosure List,
without the use of any trade name, or the intervention of or through any other
Person. Borrower has not, except as set forth in the Collateral Disclosure List,
during the preceding five (5) years, conducted its business through any other
name or trade name or been the surviving corporation in a merger or
consolidation or acquired all or substantially all of the assets of any other
Person.
Section 4.21. Affiliate Contracts. All contracts and transactions between
-------------------
Borrower and any Affiliate or Subsidiary of Borrower have been executed or will
be executed on such terms as would be contained in an agreement executed at
arms' length with an unrelated third party.
Section 4.22. Capitalization. The outstanding shares of capital stock of
--------------
Borrower have been duly issued and are fully paid and non-assessable.
Section 4.23. Litigation. Except as set forth on Schedule 4.23. attached
---------- -------------
hereto, there are no actions, suits or proceedings by or before any Governmental
Authority or any arbitration or alternate dispute resolution proceeding, pending
or, to the knowledge of Borrower or any of Borrower's officers, threatened
against Borrower or its properties and assets, which if adversely determined,
would have a Material Adverse Effect.
Section 4.24. Title to Properties. Each of Borrower and its Subsidiaries
-------------------
has good and marketable title to all of the properties, assets and rights of
every name and nature now purported to be owned by it, including, without
limitation, such properties, assets and rights as are reflected in the Financial
Statements referred to in Section 4.7. (except such properties, assets or rights
as have been disposed of in the ordinary course of business since the date
thereof), free from all Encumbrances except Permitted Encumbrances or those
Encumbrances disclosed in Schedule 4.24. attached hereto, and, free from all
defects of title that might have a Material Adverse Effect. Borrower's
properties, assets and rights are sufficient to permit Borrower to conduct the
business in which it is presently engaged. Borrower possesses all trademarks,
service marks, trade names, trade service styles, copyrights and patents that
may be necessary to own its properties and assets, and to conduct its business
as it is presently conducted or as Borrower intends to conduct it hereafter,
without any infringement or conflict with the rights of any other Person or any
violation of law.
<PAGE>
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Section 4.25. Labor Relations. Borrower is not a party to any collective
---------------
bargaining or other agreement with any union and there are no material
grievances, disputes or controversies with any union or other organization of
Borrower's employees, or threats of strikes, work stoppages or demands by any
union or such other organization.
Section 4.26. Guarantees. Except as set forth on Schedule 4.26. attached
---------- -------------
hereto, Borrower is not a party to any Guarantee or other similar type of
agreement, and it has not offered its endorsement to any Person which would in
any way create a contingent liability (except by endorsement of negotiable
instruments payable at sight for deposit or collection or similar banking
transactions in Borrower's ordinary course of business).
Section 4.27. Subsidiaries. As of the date of this Agreement, all of
------------
the Subsidiaries and Affiliates of Borrower are set forth on Schedule 14 of
-----------
the Collateral Disclosure List. Borrower or a Subsidiary of Borrower is the
owner (subject to specified minority interests) free and clear of all Encum-
brances, of all of the issued and outstanding capital stock of each Subsidiary.
All shares of such capital stock have been validly issued and are fully paid
and nonassessable, and no rights to subscribe to any additional shares have
been granted, and no options, warrants or similar rights are outstanding.
Borrower is not engaged in any joint venture, partnership or other business
arrangement with any other Person except as described on said Schedule 14.
-----------
Section 4.28. ERISA. Borrower and each member of the Controlled Group
-----
have fulfilled their obligations under the minimum funding standards of ERISA
and the Code with respect to each Plan and are in compliance in all material
respects with the applicable provisions of ERISA and the Code, and have not
incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no
"prohibited transaction" or "reportable event" (as such terms are defined in
ERISA) has occurred with respect to any Plan.
Section 4.29. Environmental Protection. Except as set forth on
------------------------
Schedule 4.29. attached hereto:
- -------- ----
(a) The business operations of Borrower comply in all material
respects with all Environmental Laws.
(b) Borrower has not received (i) any notice or claim to the
effect that it is or may be liable to any Person as a result of the Release or
threatened Release of any Hazardous Materials or (ii) any letter or request for
information under CERCLA or any other Environmental Laws, and, to the best of
Borrower's knowledge, based upon reasonable investigation, the operations of
Borrower are not the subject of any investigation by any Governmental Authority
evaluating whether any remedial action is needed to respond to a Release or
threatened Release of any Hazardous Material or claim, or threatened lawsuit or
claim arising under or related to any Environmental Law.
(c) Borrower and its properties, assets and operations are not
subject to any outstanding written order or agreement with any Governmental
Authority or private party respecting any Environmental Laws.
<PAGE>
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(d) Borrower has not filed any notice under any Environmental Law
indicating past or present treatment or disposal of Hazardous Materials, and
none of the operations of Borrower involves the generation, transportation,
treatment, storage or disposal of Hazardous Materials.
(e) To the best of Borrower's knowledge, based upon reasonable
investigation, no Hazardous Material exists on, under or about any of the
properties or assets of Borrower, real or personal, in a manner that could give
rise to any claim or suit against Borrower, and Borrower has not filed any
notice or report of a Release of any Hazardous Materials that could give rise to
any such claim or suit against Borrower.
Section 4.30. Accounts Receivable. All of Borrower's Accounts Receivable
-------------------
(i) are and shall be based on an actual and bona fide sale and delivery of goods
or the rendition of services to Account Debtors; (ii) are and shall be made by
Borrower in the ordinary course of its business; (iii) result from goods and
Inventory being sold which are the exclusive property of Borrower; (iv) are the
exclusive property of Borrower; (v) are not subject to any Encumbrance other
than Permitted Encumbrances; and (vi) are represented by invoices or statements
issued in the name of Borrower.
Section 4.31. Investments. Except as set forth on Schedule 4.31. attached
----------- -------------
hereto, Borrower has no Investment in any Person other than existing Investments
in Subsidiaries and Qualified Investments.
SECTION 5. CONDITIONS TO OBLIGATION OF BANK
Bank shall have no obligation under this Agreement to make any Extension
of Credit unless and until it is satisfied, in its sole and absolute discretion,
that all of the following conditions shall have been satisfied prior to or on
the Closing Date:
Section 5.1. Representations and Warranties True. The representations and
-----------------------------------
warranties contained in Section 4 are true and correct, and Borrower, by its
President, shall have so certified to Bank.
Section 5.2. Delivery of Documents. Borrower shall have duly executed and
---------------------
delivered to Bank, in form and substance satisfactory to Bank and its legal
counsel, this Agreement, the Notes, the Other Documents and all further
documents as Bank may request to evidence the Obligations or to create, perfect
or continue any security interest or mortgage lien contemplated by this
Agreement and the Other Documents. In addition, Bank shall have received or
agreed in writing to waive or delay the receipt of:
Section 5.2.1. Copies of all corporate action taken by Borrower to
authorize the execution and delivery of this Agreement, the Notes and the Other
Documents, together with a certificate of the corporate secretary of Borrower
certifying that the same are true, correct and complete as of the Closing Date.
<PAGE>
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Section 5.2.2. Copies of Borrower's Certificate of Incorporation
and Bylaws, if and as amended, together with a certificate of the Secretary of
Borrower certifying that the same are true, correct and complete as of the
Closing Date.
Section 5.2.3. INTENTIONALLY LEFT BLANK.
Section 5.2.4. A certificate issued by the office of the Secretary
of State of the state of Borrower's incorporation to the effect that Borrower is
legally existing and in good standing under the laws of such states.
Section 5.2.5. A certificate issued by the office of the Secretary
of State of each state in which Borrower is qualified as a foreign corporation
to the effect that Borrower is duly qualified and in good standing as a foreign
corporation under the laws of such states.
Section 5.2.6. A certificate of the Secretary of Borrower
certifying to the incumbency and signatures of all officers of Borrower who are
authorized to execute this Agreement, the Notes and the Other Documents.
Section 5.2.7. Objective evidence satisfactory to Bank and its
legal counsel of the payment of all taxes and assessments due or claimed to be
due to any Governmental Authority with respect to the Collateral.
Section 5.2.8. A UCC-11 Request for Information certified by the
Office of the Secretary of State of the State of Connecticut (or an acceptable
equivalent thereto) for each name set forth on the Collateral Disclosure List
listing the filings against Borrower as debtor under such names at such offices.
Section 5.2.9. Such UCC-1 Financing Statements as Bank deems
necessary to perfect any security interests contemplated by this Agreement or
the Other Documents.
Section 5.2.10. Insurance policies and certificates evidencing
adequate insurance coverage on Borrower's properties and assets which insurance
policies shall name Bank as an additional insured/loss payee.
Section 5.2.11. An environmental certificate and indemnity
agreement executed by Borrower, satisfactory in form and substance to Bank and
its legal counsel (the "Environmental Certificate").
Section 5.2.12. Such cash management, lockbox and similar
agreements required by Bank to administer the Line of Credit.
Section 5.2.13. Aristotle and Sub, as applicable, shall have
executed and delivered the Aristotle Guaranty, the Sub Guaranty, the
Subordination Agreements and the Pledge Agreement.
<PAGE>
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Section 5.2.14. Such further documents, instruments and agreements
as Bank shall reasonable request, all satisfactory in form and substance
satisfactory to Bank and its legal counsel.
Section 5.3. Validity of Liens. All Encumbrances in the Collateral shall
-----------------
have been created in favor of Bank, which Encumbrances shall constitute legal,
valid and enforceable and, unless otherwise consented to by Bank, first security
interests in and liens upon the Collateral. All filings, recordings, deliveries
of instruments and other actions necessary or desirable in the sole and absolute
discretion of Bank and its legal counsel to create said Encumbrances shall have
been made, taken and/or effected.
Section 5.4. Opinion of Counsel. Bank shall have received from counsel for
------------------
Borrower a written opinion, satisfactory in form and substance to Bank and its
legal counsel.
Section 5.5. Payment of Fees. Borrower shall have paid any applicable fees
---------------
and expenses due to Bank at closing, including the fees and expenses of Bank's
legal counsel.
Section 5.6. Legal Matters. All legal matters incident to the transactions
-------------
hereby contemplated shall be satisfactory to Bank and its legal counsel.
SECTION 6. CONDITIONS TO EXTENSION OF CREDIT
Bank shall have no obligation to make any Extension of Credit unless and
until, it is satisfied, in its sole and absolute discretion, that all of the
following conditions shall have been fulfilled prior to or contemporaneously
with the making of such Extension of Credit.
Section 6.1. Notice of Borrowing. Bank shall have received, in a timely
-------------------
manner, a Notice of Borrowing in a form satisfactory to Bank.
Section 6.2. Borrowing Base Certificate. Bank shall have received a
--------------------------
Borrowing Base Certificate satisfactory in form and substance to Bank showing
that the Borrowing Base is sufficient to permit Bank to make the requested
Extension of Credit.
Section 6.3. No Material Adverse Change. There has been no change in the
--------------------------
financial condition or business operations of Borrower or its Subsidiaries since
the date of the last Financial Statements or other financial reports delivered
to Bank which has a Material Adverse Effect.
Section 6.4. Truth of Representations and Warranties. All of the
---------------------------------------
representations and warranties set forth in Section 4 of this Agreement are
either true and correct or, in the case of any such representations and
warranties which by their nature relate to the Closing Date or any other
specific date, restated as of the date on which the requested Extension of
Credit is made.
Section 6.5. No Default. No Default or Event of Default shall have
----------
occurred and be continuing or shall occur as a result of the requested Extension
of Credit.
<PAGE>
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Section 6.6. Payment of Fees. Borrower shall have paid any applicable fees
---------------
and expenses due to Bank, including any fees and expenses of Bank's legal
counsel.
Section 6.7. Corporate Action. The corporate action of Borrower referred
----------------
to in Section 5.2.1. shall remain in full force and effect and the incumbency
of officers shall be as stated in the certificates of incumbency delivered
pursuant to Section 5.2.6. or as subsequently reflected in a new certificate
of incumbency delivered to Bank in connection with the requested Extension of
Credit.
Section 6.8 Legal Matters. All legal matters incident to the transactions
-------------
contemplated by the requested Extension of Credit shall be satisfactory to Bank
and its legal counsel and no change shall have occurred in any law or regulation
or interpretation thereof, which, in the opinion of Bank and its legal counsel,
would make it illegal or against the policy of any governmental body, agency or
instrumentality for Bank to make the requested Extension of Credit.
SECTION 7. AFFIRMATIVE COVENANTS OF BORROWER
Borrower covenants and agrees that from the date hereof until the payment
and performance in full of the Obligations, unless Bank otherwise consents in
writing:
7.1. Financial Statements and Reporting Requirements. Borrower shall
-----------------------------------------------
furnish to Bank:
Section 7.1.1. As soon as available, but in no event later than
ninety (90) days after the end of each Fiscal Year, Financial Statements for
such year, audited and certified by Arthur Andersen & Co. (or other indepen-
dent certified public accountants acceptable to Bank) in the case of such
consolidated statements, and certified by the chief financial officer of
Borrower in the case of such consolidating statements; and, concurrently with
the delivery of such Financial Statements, a copy of said certified public
accountants' management report, if any.
Section 7.1.2. As soon as available, but in no event later than
twenty (20) days after the end of each month, internally prepared Financial
Statements, prepared in accordance with GAAP on year-to-date and month-to-
date basis and internally prepared copies of the following financial reports:
(i) aging of accounts receivable and accounts payable and (ii) summary of
Inventory, all prepared in accordance with GAAP.
Section 7.1.3. As soon as available, but in no event later than
three (3) Business Days after the end of each calendar week, a certificate in
substantially the form of Exhibit F attached hereto setting forth (i) Borrower's
---------
then existing Eligible Inventory or, if requested by Bank, particular items,
types or categories thereof; (ii) Borrower's then existing Eligible Accounts
Receivable; (iii) such other information in respect of Inventory, Accounts
Receivable, Equipment and other Collateral as Bank may reasonably request;
and (iv) a calculation of Borrowing Base and borrowing availability as of
<PAGE>
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the date of said certificate (the "Borrowing Base Certificate").
Section 7.1.4. As soon as available, but in no event later than
sixty (60) days following the end of each Fiscal Year, forecasted Financial
Statements prepared in accordance with the standards set forth in Section 4.8.
hereof, showing a most likely scenario and including collateral availability and
usage under the Line of Credit and in such further reasonable detail as Bank may
request for each of the forthcoming twelve (12) months, month by month, together
with such appropriate supporting details and statements or assumptions.
Section 7.1.5. As soon as available, but in no event later than
forty-five (45) days after the end of each Fiscal Year , a report in
substantially the form of Exhibit G attached hereto signed on behalf of Borrower
---------
by its chief financial officer.
Section 7.2. Fire and Hazard Insurance. Borrower shall keep its properties
-------------------------
and assets insured against fire and other hazards (so called "All Risk
Coverage") in amounts and with companies satisfactory to Bank to the same extent
and covering such risks as is customary in the state or similar business, but in
no event in an aggregate amount less than the Obligations, which policies shall
name Bank as first loss payee as its interest may appear. Borrower shall also
maintain public liability coverage against claims for personal injuries or
death, business interruption, worker's compensation, employment or similar
insurance with coverage and in amounts satisfactory to Bank and as may be
required by applicable law. Such all risk policy shall provide for a minimum of
thirty (30) days' written cancellation notice to Bank. Borrower agrees to
deliver copies of all of the aforesaid insurance policies to Bank. In the event
of any loss or damage to the Collateral, Borrower shall give immediate written
notice to Bank and to its insurers of such loss or damage and shall promptly
file proof of loss with its insurers.
Section 7.3. Maintenance of Existence. Borrower shall preserve and
------------------------
maintain its corporate existence, rights, franchises and privileges, including
its corporate name, in the jurisdiction of its incorporation, and qualify and
remain qualified as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable.
Section 7.4. Preservation of Collateral. Borrower shall preserve and
--------------------------
maintain the Collateral in good repair, working order and operating condition
and Borrower shall immediately notify Bank of any event causing material loss or
unusual depreciation in the value of the Collateral.
Section 7.5. Taxes and Other Assessments. Borrower shall pay and
---------------------------
discharge, and maintain adequate reserves for the payment and discharge of, all
taxes, assessments, government charges or levies, or claims for labor, supplies,
rent or other obligations made against it or its properties and assets which, if
unpaid, might become an Encumbrance against Borrower or its properties and
assets, except liabilities which are being contested in good faith in
appropriate proceedings. Borrower shall file all Federal, state and local tax
returns and other reports that it is required by law to file.
<PAGE>
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Borrower shall promptly notify or cause notice to be given to Bank of any
pending or future audits of its income tax returns by the Internal Revenue
Service or by any state in which Borrower conducts business operations and the
results of each such audit.
Section 7.6. Inspection. Borrower shall permit Bank or its designees
----------
to (i) visit and inspect the properties and assets of Borrower and its
Subsidiaries; (ii) examine and make copies of and take abstracts from the books
and records of Borrower and its Subsidiaries; and (iii) discuss the affairs,
finances and accounts of Borrower and its Subsidiaries with their appropriate
officers, employees and accountants. In handling such information Bank shall
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types, to maintain the confidentiality of
any non-public information thereby received or received pursuant to Section 7.1.
hereof except that disclosure of such information may be made (i) to Bank
Affiliates in connection with their present or prospective business relations
with Borrower; (ii) to prospective transferees or purchasers of an interest in
the Obligations; (iii) as required by law, regulation, rule or order, subpoena,
judicial order or similar order; and (iv) as may be required in connection with
the examination, audit or similar investigation of Bank. Borrower shall permit
Bank (or any of its officers, agents, attorneys or accountants) for the purpose
of ascertaining whether or not each and every provision of this Agreement or the
Other Documents is being performed or for the purpose of examining the
Collateral and the records relating thereto, to enter the offices and business
premises of Borrower and its Subsidiaries, and to conduct an audit of the
Collateral and/or Borrower's financial and business records on three (3)
occasions during each twelve (12) month period at such times as Bank may select
in its sole and absolute discretion; provided, however, that Bank shall have the
-------- -------
right to conduct such an audit on more than three (3) occasions if a Default or
Event of Default shall have occurred and be continuing for such services. Any
such audit shall be conducted at Borrower's expense at Bank's then current rates
per man day plus expenses to a maximum of SIX THOUSAND AND NO/100 DOLLARS
($6,000.00) per fiscal year; provided, however, that such maximum shall not
-------- -------
apply if a Default or an Event of Default shall have occurred or be continuing.
Any charges and expenses relating to such audits shall be directly debited by
Bank from the Loan Account.
Section 7.7. Notices. Borrower shall promptly upon becoming aware of the
-------
occurrence of a Default or Event of Default notify Bank thereof in writing.
Borrower shall also promptly advise Bank of:
(a) any labor controversy resulting in or threatening to result in
a strike or work stoppage against Borrower or its Subsidiaries; or
(b) any change of independent public accountants, notice that such
change has occurred together with the name of the new accountants.
Section 7.8. Litigation. Borrower shall promptly inform Bank of any
----------
action, suit, or proceeding by or before any Government Authority
<PAGE>
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or arbitration or alternate dispute resolution proceeding, which might have a
Material Adverse Effect.
Section 7.9. Maintenance of Books and Records. Each of Borrower and its
--------------------------------
Subsidiaries shall keep adequate books and records of account, in which true and
complete entries will be made reflecting all of its business and financial
transactions, and such entries will be made in accordance with GAAP including
the maintenance of adequate reserves for depreciation of property, if such
reserves are required by GAAP. Each of Borrower and its Subsidiaries shall
maintain duplicate copies of all such books and records (i) on-site at all times
and (ii) off-site updated on a monthly basis.
Section 7.10. Maintenance of Permits. Borrower shall obtain and/or
----------------------
maintain in full force and effect all material permits, authorizations,
licenses, approvals, waivers and consents which it presently possesses or which
may may become necessary in the future to conduct its business operations.
Section 7.11. Use of Proceeds. Borrower will use the proceeds of any
---------------
Extension of Credit solely for the purposes set forth in this Agreement.
Section 7.12. Payment of Indebtedness. Borrower shall promptly pay and
-----------------------
discharge when due and payable (or within applicable grace periods) all
Indebtedness due to any Person from Borrower, except when the amount thereof is
being contested in good faith by appropriate proceedings and with reserves
therefor being established as a current liability on the books of Borrower as
required by GAAP.
Section 7.13. Additional Offices. Borrower shall give Bank written notice
------------------
of each additional facility or office of Borrower to be opened after the Closing
Date. Except to the extent set forth in any such notice, the chief executive
office of Borrower and all records relating to the Collateral shall be located
at the locations set forth in the Collateral Disclosure List.
Section 7.14. Access to Collateral. With respect to each location at which
--------------------
the Collateral is now or hereafter located, Borrower will obtain such lien
waivers, estoppel certificates or subordination agreements as Bank may
reasonably require to insure the priority of its security interest in, and its
ability to take possession of, the Collateral situated at such locations.
Section 7.15. Compliance with Laws. Borrower shall comply with the
--------------------
requirements of all applicable laws, ordinances, rules, regulations and orders
of any Government Authority.
Section 7.16. ERISA. Borrower shall: (i) make prompt payments of
-----
contributions required to meet the minimum funding standards set forth under
ERISA with respect to each and every Plan and, promptly after the filing
thereof, furnish to Bank copies of each annual report required to be filed under
ERISA in connection with each and every Plan for each and every Plan year; (ii)
notify Bank immediately of any fact, including, but not limited to, any
"reportable event", arising in connection with any Plan which might constitute
grounds for the
<PAGE>
-52-
termination thereof by the PBGC or for the appointment by the appropriate United
States district court of a trustee to administer the Plan; (iii) promptly after
the issuance thereof, furnish to Bank a copy of any notice of any "reportable
event" given to the PBGC with respect to any Plan; (iv) promptly after receipt
thereof, furnish to Bank a copy of any notice received from the PBGC relating to
the intention of the PBGC to terminate any Plan or to appoint a trustee to
administer any Plan; and (v) furnish to Bank, promptly upon its request
therefor, such additional information concerning each and every Plan as may be
reasonably requested.
Section 7.17. Compliance with Environmental Laws.
----------------------------------
(a) Borrower shall, from time to time, if requested by Bank upon
reasonable cause, retain, at Borrower's expense, an independent professional
consultant to prepare a report relating to Hazardous Materials and to conduct an
investigation of any or all of the properties and assets of Borrower. Borrower
agrees also that Bank (or its agents) may, from time to time retain at
Borrower's expense, an independent professional consultant to advise Bank as to
any such report relating to Hazardous Materials. Borrower hereby grants to Bank,
its agents, employees, consultants and contractors the right to enter into or
onto Borrower's business premises to perform such tests as are reasonably
necessary to conduct such a review and/or investigation.
(b) Borrower shall promptly advise Bank in writing and in
reasonable detail of (i) any Release of any Hazardous Material required to be
reported to any Governmental Authority under any applicable Environmental Laws;
(ii) any and all written communications with respect to claims or suits under
such laws or any Release of Hazardous Materials required to be reported to any
Governmental Authority, instrumentality or agency; (iii) any remedial action
taken by Borrower or any other Person in response to (A) any Hazardous Materials
on, under or about the properties or assets of Borrower, the existence of which
could have a Material Adverse Effect or (B) any claim or suit resulting in a
material adverse change of Borrower's business operations or financial
condition; (iv) Borrower's discovery of any occurrence or condition on any real
property adjoining or in the vicinity of Borrower's business premises that could
cause such premises or any part thereof to be classified as "border-zone
property" or to be otherwise subject to any restrictions on the ownership,
occupancy, transferability or use thereof under any Environmental Laws; and (v)
any request for information from any Governmental Authority that indicates such
authority, instrumentality or agency is investigating whether Borrower may be
potentially responsible for a Release of Hazardous Materials.
(c) Borrower shall, at its own expense, provide copies of such
documents or information as Bank may reasonably request in relation to any
matters disclosed pursuant to this Section 7.17.
(d) Borrower shall comply with all Environmental Laws and
establish and maintain policies and procedures to ensure and monitor continued
compliance with all Environmental Laws. Borrower shall promptly take any and all
necessary remedial action in connection with
<PAGE>
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the presence, storage, use, disposal, transportation or Release of any Hazardous
Materials on, under or about its business premises. If Borrower undertakes any
remedial action with respect to any Hazardous Materials on, under or about its
business premises, Borrower shall conduct and complete such remedial action in
compliance with the policies, orders and directives of any Governmental
Authority except when and only to the extent that Borrower's liability for such
presence, storage, use, disposal, transportation or discharge of any Hazardous
Material is being contested in good faith by Borrower.
Section 7.18. Operating Accounts. Borrower shall establish and maintain
------------------
all of its operating accounts, including its payroll account, with Bank.
SECTION 8. NEGATIVE COVENANTS
Borrower covenants and agrees that from the date hereof until the payment
and performance in full of the Obligations, unless Bank otherwise consents in
writing:
Section 8.1. Limitation on Indebtedness. Neither Borrower nor any of its
--------------------------
Subsidiaries shall create, incur, assume, guarantee or be or remain liable with
respect to any Indebtedness other than the following ("Permitted Indebtedness"):
(a) Indebtedness of Borrower or any of its Subsidiaries to Bank
or any Bank Affiliates;
(b) Indebtedness existing as of the date of this Agreement and
disclosed on Schedule 8.1. attached hereto or in the Financial Statements
-------------
referred to in Section 4.7. hereof;
(c) Subordinated Indebtedness incurred with the prior written
consent of Bank;
(d) Indebtedness secured by Permitted Encumbrances;
(e) Indebtedness incurred or arising as a result of the re-
classification of Borrower's option, lease and subcontracting relationship for
its Jamaica manufacturing facility; and
(f) other Indebtedness of Borrower in an aggregate outstanding
principal amount not exceeding SEVENTY FIVE THOUSAND AND NO/100 DOLLARS
($75,000.00) in any one (1) instance or ONE HUNDRED FIFTY THOUSAND AND NO/100
DOLLARS ($150,000.00) in the aggregate during any twelve (12) month period; and
(g) trade payables incurred in accordance with the ordinary
course of business and the Borrower's historic business operations.
Section 8.2. Contingent Liabilities. Neither Borrower nor any of its
----------------------
Subsidiaries shall create, incur, assume, guarantee or remain liable with
respect to any Guarantees other than the following:
(a) Guarantees in favor of Bank or any Bank Affiliates;
<PAGE>
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(b) Guarantees existing on the date of this Agreement and
disclosed on Schedule 4.26. attached hereto or in the Financial Statements
--------------
referred to in Section 4.7. hereof;
(c) Guarantees resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business;
(d) Guarantees with respect to surety, appeal, performance and
return-of-money and other similar obligations incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money) not
exceeding ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) in the aggregate
at any one time;
(e) Guarantees in support of Borrower's sub-contractors in an
amount not to exceed FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) in
the aggregate at any one time; and
(e) Guarantees of normal trade debt relating to the acquisition of
goods and supplies.
Section 8.3. Sale and Leaseback. Neither Borrower nor any of its
------------------
Subsidiaries shall enter into any arrangement, directly or indirectly, whereby
it shall sell or transfer any property owned by it in order to lease such
property or lease other property that Borrower or any such Subsidiary intends to
use for substantially the same purpose as the property being sold or
transferred.
Section 8.4. Encumbrances. Neither Borrower nor any of its Subsidiaries
------------
shall create, incur, assume or suffer to exist any Encumbrance, or assign or
otherwise convey any right to receive income, including the Accounts Receivable,
with or without recourse, except the following ("Permitted Encumbrances"):
(a) Encumbrances in favor of Bank or any Bank Affiliates;
(b) Encumbrances existing as of the date of this Agreement and
disclosed in Schedule 4.24. attached hereto;
--------------
(c) liens for taxes, fees, assessments and other governmental
charges to the extent that payment of the same may be postponed or is not
required in accordance with the provisions of Section 8.4. hereof;
(d) landlords' and lessors' liens in respect of rent not in
default or liens in respect of pledges or deposits under worker's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen's and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;
<PAGE>
-55-
(e) judgment liens that shall not have been in existence for a
period longer than thirty (30) days after the creation thereof or, if a stay of
execution shall have been obtained, for a period longer than thirty (30) days
after the expiration of such stay;
(f) rights of lessors under Capital Leases;
(g) Encumbrances in respect of any purchase money obligations for
tangible property used in its business that at any time shall not exceed SEVENTY
FIVE THOUSAND AND NO/100 DOLLARS ($75,000.00) in any one (1) instance or ONE
HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($150,000.00) in the aggregate during
any twelve (12) month period; provided, however, that any such Encumbrances
-------- -------
shall not extend to properties and assets of Borrower or any such Subsidiary not
financed by such purchase money obligation;
(h) easements, rights of way, restrictions and other similar
charges or Encumbrances relating to real property and not interfering in a
material way with the ordinary conduct of its business; and
(i) Encumbrances on its property or assets created in connection
with the refinancing of Indebtedness secured by Permitted Encumbrances on such
property; provided, however, that the amount of Indebtedness secured by any such
-------- -------
Encumbrance shall not be increased as a result of such refinancing and no such
Encumbrance shall extend to property and assets of Borrower or any such
Subsidiary not encumbered prior to any such refinancing.
Section 8.5. Merger; Consolidation; Sale or Lease of Assets. Neither
----------------------------------------------
Borrower nor any of its Subsidiaries shall sell, lease or otherwise dispose of
properties or assets (valued at the lower of cost or market), other than sales
of Inventory in the ordinary course of business or Equipment as permitted under
Section 10.3.5. hereof; or liquidate, merge or consolidate into or with any
other Person; provided, however, that any Subsidiary of Borrower may merge or
-------- -------
consolidate into or with (i) Borrower if no Default or Event of Default has
occurred and is continuing or would result from such merger and if Borrower is
the surviving company, or (ii) any other wholly-owned Subsidiary of Borrower.
Section 8.6. Additional Stock Issuance. Borrower shall not permit any of
-------------------------
its Subsidiaries to issue any additional shares of its capital stock or other
equity securities, any options therefor or any securities convertible thereto
other than to Borrower. Neither Borrower nor any of its Subsidiaries shall sell,
transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except (i) to Borrower or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section 8.5.
Section 8.7. Dividends. Borrower shall not pay any Dividends on any
---------
class of its capital stock or make any other distribution or payment on account
of or in redemption, retirement or purchase of such capital stock. This Section
8.7. shall not apply to (i) the issuance, delivery or distribution by Borrower
of shares of its capital stock pro rata to its existing shareholders and (ii)
the purchase or
<PAGE>
-56-
redemption by Borrower of its capital stock with the proceeds of the issuance of
additional shares of capital stock.
Section 8.8. Investments. Neither Borrower nor any of its Subsidiaries
-----------
shall make or maintain any Investments other than (i) existing Investments in
Subsidiaries and (ii) Qualified Investments.
Section 8.9. ERISA. Neither Borrower nor any member of the Controlled
-----
Group shall permit any plan maintained by it to (i) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code); (ii) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or
not waived; or (iii) terminate any Plan in a manner that could result in the
imposition of an Encumbrance on the property and assets of Borrower or any of
its Subsidiaries pursuant to Section 4068 of ERISA.
Section 8.10. Change in Terms and Prepayment of Subordinated
----------------------------------------------
Indebtedness. Borrower shall not:
- ------------
(a) effect or permit any change in or amendment to (i) the terms
by which any Subordinated Indebtedness purports to be subordinated to the
payment and performance of the Obligations or (ii) the terms relating to the
repayment of any Subordinated Indebtedness; or
(b) directly or indirectly, make any payment of principal,
interest, fees or other amounts in respect of or in redemption, retirement or
repurchase of any Subordinated Indebtedness except in accordance with the terms
of any documents, agreements or instruments which serve to subordinate such
Indebtedness to the Obligations.
Section 8.11. Change in Management. Borrower shall not make nor suffer a
--------------------
change in the overall composition of its present executive management which
would have a Material Adverse Effect.
Section 8.12. Change Name or Location. Borrower shall not change its
-----------------------
corporate name or conduct its business under any name other than those set forth
in the Collateral Disclosure List or change its chief executive office, place of
business or location of the Collateral or records relating to the Collateral
from the locations set forth in the Collateral Disclosure List unless it has
given Bank at least thirty (30) days prior written notice.
Section 8.13. Contracts. Borrower shall not enter into any contract
---------
other than on such terms as would be contained in an agreement executed at arms'
length with an unrelated third party.
Section 8.14. Compliance with Environmental Laws. Borrower shall not
----------------------------------
generate, handle, use, store or treat any Hazardous Materials except in
compliance with Environmental Laws.
Section 8.15. Lines of Business. Borrower shall not make a material
-----------------
change in or discontinue its existing lines of business nor enter into any new
line or lines of business except as set forth in the Forecasts.
<PAGE>
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Section 8.16. Fiscal Year. Borrower shall not change its existing Fiscal
-----------
Year.
Section 8.17. Capital Expenditures. Borrower shall not make or become
--------------------
liable for Capital Expenditures in excess of FIVE HUNDRED THOUSAND NO/100
DOLLARS ($500,000.00) during any Fiscal Year.
SECTION 9. FINANCIAL COVENANTS.
Borrower covenants and agrees that from the date hereof, until the payment
and performance in full of the Obligations, unless Bank otherwise consents in
writing:
Section 9.1. Profitability. At the end of each Fiscal Quarter,
-------------
commencing with the Fiscal Quarter ending September 30, 1996, Borrower shall
have net income (as such term is defined by GAAP) of at least ONE DOLLAR
($1.00), calculated on a rolling basis by reference to the Fiscal Quarter then
ending and the three (3) previous Fiscal Quarters; provided, however, that
Borrower shall not be in compliance with this Section 9.1. if Borrower is
unprofitable in more than two (2) of the four (4) applicable Fiscal Quarters or
if during such period Borrower incurs losses in any two (2) consecutive Fiscal
Quarters greater than ten percent (10%) of Net Worth.
Section 9.2. Debt Service Coverage. Borrower shall not permit the
---------------------
ratio of its EBITDA minus Cash Taxes and Capital Expenditures to its Total Debt
Service to be less than 1.10 to 1.0 at the end of any Fiscal Quarter commencing
with the Fiscal Quarter ending March 31, 1997. Borrower's compliance with this
covenant shall be calculated on a rolling basis by reference to the Fiscal
Quarter then ending and the three (3) previous Fiscal Quarters
Section 9.3. Total Debt to Net Worth Ratio. Borrower shall not
-----------------------------
permit the ratio of its Total Debt to its Net Worth shall not be greater than
the following ratios as of the end of the following Fiscal Quarters.
Ratio Fiscal Quarter
----- --------------
6.00 to 1.0 Fiscal Quarter Ending
September 30, 1996
5.00 to 1.0 Each Subsequent Fiscal
Quarter Through
the Fiscal Quarter Ending
December 31, 1997
4.5 to 1.0 Each Subsequent Fiscal
Quarter Through
the Fiscal Quarter Ending
December 31, 1998
4.0 to 1.0 Each Subsequent Fiscal
Quarter Through
the Fiscal Quarter Ending
December 31, 1999
Section 9.4. Interest Coverage. Borrower shall not permit the ratio
-----------------
of its EBIT to its Total Interest to be less than 1.75 to 1.0 as of the end of
any Fiscal Quarter commencing with the Fiscal
<PAGE>
-58-
Quarter ending March 31, 1997. Borrower's compliance with this Section 9.4.
shall be calculated on a rolling basis by reference to the Fiscal Quarter then
ending and the three (3) previous Fiscal Quarters.
SECTION 10. SPECIAL COVENANTS RELATING TO COLLATERAL
Borrower covenants and agrees that from the date hereof until the payment
and performance in full of the Obligations, unless Bank otherwise consents in
writing:
Section 10.1. Accounts Receivable. With respect to its Accounts
-------------------
Receivable:
Section 10.1.1. Borrower shall deposit all payments received from
or on behalf of an Account Debtor into an account established with Bank and
Borrower shall direct or otherwise cause all Account Debtors to pay all monies
due under their respective Accounts Receivable to a lockbox account (the
"Lockbox Account") maintained by Bank in Borrower's name at Borrower's expense
and, to the extent Borrower receives such payments directly, all remittances
received by Borrower on account of Accounts Receivable shall be held as Bank's
property by Borrower as trustee of an express trust for Bank's benefit, and
Borrower will immediately deliver to Bank the identical checks, moneys or other
forms of payment received. Borrower hereby constitutes Bank, or any
representative whom Bank may designate, as Borrower's attorney-in-fact (i) to
endorse the name on any notes, acceptances, checks, drafts, money orders or
other evidence of payment or security interest that may come into Bank's
possession, and (ii) following the occurrence of an Event of Default, to sign
Borrower's name on any invoice or bill of lading relating to Accounts
Receivable, on drafts against customers, assignments and certificates of
Accounts Receivable, and notices to customers. Bank retains the right at all
times after the occurrence of an Event of Default to notify Account Debtors that
their respective Accounts Receivable have been assigned to Bank and to collect
Accounts Receivable directly in its own name and to charge the collection costs
and expenses, including reasonable attorneys' fees to, the Loan Account. Bank
has no duty to protect, insure, collect or realize upon the Accounts Receivable
or other collateral or preserve rights in them other than to act in a
commercially reasonable manner. Borrower releases Bank from any liability for
any act or omission relating to the Obligations, the Accounts Receivable or
other Collateral or this Agreement, except Bank's failure to act in a
commercially reasonable manner, willful misconduct or gross negligence. All
amounts received by Bank in payment in Accounts Receivable assigned to it are to
be credited to the Borrower's Account upon receipt by Bank, conditioned upon
collection by Bank of good funds in respect thereof.
Section 10.1.2. Following the occurrence of an Event of Default
and in connection with any audit conducted under Section 7.6. hereof, and in all
other instances following written notice to Borrower, any of Bank's officers,
employees, or agents shall have the right, in Bank's name or in the name of
Borrower, to request the verification of the validity, amount or any other
matter relating to any Account Receivable by mail, telephone, facsimile
transmission, telegraph, or other communication to Account Debtors.
<PAGE>
-59-
Section 10.1.3. Borrower shall keep accurate and complete records
of its Accounts Receivable and accounts payable, and upon demand by Bank shall
deliver to Bank copies of proof of delivery and the original copy of all
documents, including, without limitation, repayment histories and present status
reports, relating to Borrower's Accounts Receivable and accounts payable and
such other matters and information relating to the status of the Accounts
Receivable and accounts payable as Bank shall reasonably request.
Section 10.1.4. Borrower shall promptly advise Bank:
(a) of any material delay in Borrower's performance of any of its
obligations to any Account Debtor or the assertion of any claim, offset or
setoff by any Account Debtor in excess of ONE HUNDRED THOUSAND AND NO/100
DOLLARS ($100,000.00); or
(b) in the event that any Eligible Account Receivable becomes
ineligible for reasons other than lapse of time in payment and the reasons
therefor; or
(c) of the receipt of any Government Contract which is subject to
the Federal Assignment of Claims Act of 1940; or
(d) of the receipt of any cancellation or termination of, or the
delivery of notice of default under, any Government Contract.
Section 10.1.5. Borrower shall promptly execute any assignment and
take any action requested or required by Bank with respect to any Account
Receivable, , which arises out of a Government Contract which is subject to the
Federal Assignment of Claims Act of 1940.
Section 10.1.6. Borrower shall maintain all Accounts Receivable
free of all Encumbrances other than those in favor of Bank and Permitted
Encumbrances.
Section 10.2. Inventory. With respect to its Inventory:
---------
Section 10.2.1. Borrower shall maintain all Inventory free of all
Encumbrances other than those in favor of Bank.
Section 10.2.2. Borrower shall not store or deposit any Inventory
with a bailee, warehouseman, or similar party without Bank's prior written
consent and, if Bank gives such consent, Borrower will concurrently therewith
cause any such bailee, warehouseman, or similar party to issue and deliver to
Bank, in form and substance acceptable to Bank and its legal counsel, warehouse
receipts for such Inventory in Bank's name or a warehouseman's waiver and
agreement.
Section 10.2.3. If any Inventory is in the possession or control
of any third party other than a purchaser in the ordinary course of business or
a warehouseman where the warehouse receipt is in the name of or held by Bank or
whom has executed a warehouseman's waiver and consent in favor of Bank, Borrower
shall notify such Person of Bank's security interest therein and, upon request,
instruct such
<PAGE>
-60-
Person or Persons to hold all such Inventory for the account of Bank and subject
to Bank's instructions.
Section 10.3. Equipment. With respect to its Equipment:
---------
Section 10.3.1. Borrower shall maintain the Equipment used in the
ordinary course of business in good operating condition and repair, and make all
necessary replacements of and repairs thereto so that the value and operating
efficiency of the Equipment shall be maintained and preserved.
Section 10.3.2. The Equipment, other than when being used in the
ordinary course of business, is located or stored at the locations described in
Schedule 3 of the Collateral Disclosure List (other than Equipment being
- ----------
temporarily stored for purposes of repair or maintenance), and Borrower shall
promptly notify Bank, in writing, in the event Borrower shall store or locate
the Equipment at any location other than the locations specified in said
Schedule 3.
- ----------
Section 10.3.3. Borrower, immediately on demand therefor by Bank,
shall deliver to Bank any and all evidence of ownership, if any, of any of the
Equipment Borrower purports to own (including, without limitation, certificates
of title and applications for title).
Section 10.3.4. Borrower shall maintain accurate, itemized
records, itemizing and describing the kind, type, quality, quantity and value of
its Equipment and shall furnish Bank with a current schedule containing the
foregoing information at Bank's reasonable request.
Section 10.3.5. Borrower shall not sell, lease, or otherwise
dispose of or transfer any interest in any of its Equipment or any part thereof
in excess of TEN THOUSAND AND NO/100 DOLLARS ($10,000.00) in any one (1)
instance or FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) in the aggregate
during any fiscal year without the prior written consent of Bank, unless (a) no
Default or Event of Default shall exist at the time of such sale, lease or
disposition, (b) such sale, lease or disposition is made in the ordinary course
of Borrower's business, and (c) the net proceeds of such sale, lease or
disposition are used for the purchase of additional Equipment on which Bank will
have a first priority security interest. Where Borrower is permitted to dispose
of any Equipment under this Agreement or by any consent thereto hereafter given
by Bank, it shall do so at arm's length, in good faith and by obtaining the
maximum amount of recovery practicable therefor and without impairing the
operating integrity of the remaining Equipment.
Section 10.3.6 Borrower shall, if requested by Bank with due
cause, provide to Bank a forced and orderly liquidation value appraisal of
Borrower's Equipment performed by an appraiser acceptable to Bank and at
Borrower's expense.
SECTION 11. DEFAULT
Section 11.1. The occurrence of any of the following events shall
constitute a default under this Agreement, the Notes and the Other Documents (an
"Event of Default"):
<PAGE>
-61-
(a) Borrower shall fail to pay (i) any outstanding principal
amount of the Line of Credit when due, (ii) any Reimbursement Obligations when
due, or (iii) any outstanding principal amount of the Term Loan, any accrued and
unpaid interest on the Loans or any fees or expenses payable under this
Agreement, the Notes or the Other Documents within fifteen (15) days of the due
date therefor; or
(b) Borrower shall fail to perform any term, covenant or agreement
contained in Sections 7.1., 7.6., 8.7., 8.11. or 10 of this Agreement or fail to
reduce the balance of Overadvances to zero (O) as required by Section 2.1.2. of
this Agreement; or
(c) Borrower shall fail to perform any act, duty, obligation or
other agreement contained in this Agreement, the Notes or Other Documents and
not otherwise constituting an Event of Default hereunder and shall fail to cure
such non-performance within thirty (30) calendar days following the receipt of
written notice of such default from the Bank; or
(d) any representation or warranty of Borrower made in this
Agreement, the Notes or the Other Documents or in any certificate or report
delivered hereunder or thereunder shall prove to have been false in any material
respect upon the date when made or deemed to have been made; or
(e) Borrower or any of its Subsidiaries shall fail to pay at
maturity (unless disputed in good faith), or within any applicable period of
grace, any Indebtedness or obligations for the use of real or personal property
in excess of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) in the
aggregate or fail to observe or perform any term, covenant or agreement
evidencing or securing such Indebtedness, or obligations for the use of real or
personal property, or relating to such use of real or personal property, the
result of which failure is to permit (i) the holder or holders of such
Indebtedness or obligations to cause the same to become due prior to its stated
maturity or (ii) the lessor of such real or personal property to terminate
Borrower or any Subsidiary's use thereof prior to the specified term therefor;
or
(f) Borrower or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar official of itself or of all or a
substantial part of its properties and assets; (ii) be generally not paying its
debts as such debts become due; (iii) make a general assignment for the benefit
of its creditors; (iv) commence a voluntary case under the Bankruptcy Code; (v)
take any action or commence any case or proceeding under any law relating to
bankruptcy, insolvency, reorganization, winding-up or composition or adjustment
of debts, or any other law providing for the relief of debtors; (vi) fail to
contest in a timely or appropriate manner, or acquiesce in writing to, any
petition filed against it in an involuntary case under Bankruptcy Code or other
law; (vii) take any action under the laws of its jurisdiction of incorporation
or organization similar to any of the foregoing; or (viii) take any corporate
action for the purpose of effecting any of the foregoing; or
<PAGE>
-62-
(g) a proceeding or case shall be commenced, without the
application or consent of Borrower or any of its Subsidiaries in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization,
dissolution, winding up, or composition or readjustment of its debts; (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
of all or any substantial part of its properties and assets; or (iii) similar
relief in respect of it, under any law relating to bankruptcy, insolvency,
reorganization, winding-up or composition or adjustment of debts or any other
law providing for the relief of debtors, or an order for relief shall be entered
in an involuntary case under the Bankruptcy Code, against Borrower or such
Subsidiary; or action under the laws of the jurisdiction of incorporation or
organization of Borrower or any of its Subsidiaries similar to any of the
foregoing shall be taken with respect to Borrower or such Subsidiary; or
(h) a judgment or order for the payment of money shall be entered
against Borrower or any of its Subsidiaries by any court, or a warrant of
attachment or execution or similar process shall be issued or levied against
property of Borrower or such Subsidiary and such judgment, order, warrant or
process shall continue undischarged or unstayed for sixty (60) days; or
(i) Borrower or any member of the Controlled Group shall fail to
pay when due an amount or amounts that it shall have become liable to pay to the
PBGC or to a plan under Title IV of ERISA; intent to terminate a plan or plans
shall be filed under Title IV of ERISA by Borrower, any member of the Controlled
Group, any plan administrator or any combination of the foregoing; or the PBGC
shall institute proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such plan or plans or a proceeding
shall be instituted by a fiduciary of any such plan or plans against Borrower
and such proceedings shall not have been dismissed within sixty (60) days
thereafter; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any such plan or plans must be
terminated; or
(j) Borrower shall fail to meet any financial covenant set
forth in Section 9.1. hereof; or
(k) Borrower's independent certified public accountants shall
refuse to deliver an opinion with no Qualification with respect to any Financial
Statements required to be delivered under Section 7.1.1. of this Agreement; or
(l) The failure of Borrower to execute, deliver or address, or
cause to be executed, delivered and addressed, the matters set forth on Schedule
--------
11.1. attached hereto within thirty (30) days after the Closing Date (the "Post
- -----
Closing Matters"); or
(m) Any Government Authority shall condemn, seize or otherwise
appropriate, or take custody or control of, or file a lien, levy or assessment
in respect of, all or any substantial portion of the properties or assets of
Borrower; or
<PAGE>
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(n) Any Governmental Authority or other Person shall garnish,
seize or levy or execute upon any monies of Borrower on deposit with or
otherwise in the custody of Bank or any Bank affiliate; or
(o) If Sub,, Aristotle, Borrower or the holders of any of Sub's
$10.00 par value Preferred Stock (the "Preferred Stock") or any other Person
should contest the right of the holders of the Preferred Stock to compel a
Partial Unwinding (as such term is defined in Section 8.2. of that certain
Capital Contribution Agreement dated November 19, 1993 and amended as of April
14, 1994 by and among Aristotle, Sub, Borrower and the Covered Employees; or
(p) If Aristotle or Sub shall default under the Aristotle Guaranty
and the Sub Guaranty, as applicable; or
(q) If Borrower shall fail to make the mandatory prepayment in
respect of the Term Loan in accordance with Section 2.3.6. hereof.
SECTION 12. REMEDIES
Section 12.1. Remedies. Upon the occurrence of an Event of Default, and
--------
at any time thereafter while such Event of Default is continuing, immediately
and automatically in the case of an event of Default specified in Section
11.1(f) or 11.1.(g), and in all other cases, at Bank's option and upon Bank's
declaration:
(a) Bank's obligation to make any Extension of Credit shall
terminate;
(b) the unpaid principal amount of the Loans, and all
Reimbursement Obligations together with accrued interest thereon, and all other
Obligations shall become immediately due and payable without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived;
(c) Bank may exercise any right of setoff granted to Bank pursuant
to Section 13.2.4 hereof;
(d) Bank may reduce any advance rate in respect of Borrower's
Accounts Receivable or Inventory as set forth in Sections 1.122. and 1.123. of
this Agreement; and
(e) Bank may exercise any and all other rights and remedies it has
under this Agreement, the Notes or the Other Documents or at law or in equity,
and proceed to protect and enforce Bank's rights by any action at law, in equity
or other appropriate proceeding.
SECTION 13. MISCELLANEOUS
Section 13.1. Cross Default, Cross Collateral and Cross Pay-out. Borrower
-------------------------------------------------
acknowledges and agrees that the occurrence of an Event of Default under this
Agreement, the Notes or the Other Documents shall constitute a default under the
documents and instruments evidencing or securing any other loan now existing or
hereafter made by Bank to Borrower, and a default under any of said existing or
future loans shall constitute an Event of Default under this Agreement, the
Notes
<PAGE>
-64-
and the Other Documents. The security interests, liens and other rights and
interests in and relative to any collateral now or hereafter granted to Bank by
Borrower by or in any instrument or agreement, including but not limited to this
Agreement and the Other Documents, shall serve as security for any and all
liabilities of Borrower to Bank, including but not limited to the liabilities
described in this Agreement, the Notes and the Other Documents, and, for the
repayment thereof, Bank may resort to any security held by it in such order and
manner as it may elect. Notwithstanding the terms of any of the documents and
instruments evidencing or securing the Obligations, Borrower hereby acknowledges
and agrees that if Borrower elects to terminate the Line of Credit at any time
prior to the Revolving Credit Termination Date, then then any remaining portion
of the Obligations shall be immediately due and payable without notice or demand
by Bank to Borrower.
Section 13.2. Waivers.
-------
Section 13.2.1. In General. Borrower waives presentment, demand,
----------
notice, protest, notice of acceptance, notice of loans made, credit extended,
collateral received or delivered or other action taken in reliance hereon and
all other demands and notices of any description. With respect both to the
Obligations and the Collateral, Borrower assents to any extension or
postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of the Collateral, to the addition or release
of any party or Person primarily or secondarily liable therefor, to the
acceptance of partial payments thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as Bank
may deem advisable in its sole and absolute discretion. Bank shall have no duty,
other than to act in a commercially reasonable manner, as to the collection or
protection of the Collateral or any income thereon, as to the preservation of
rights or remedies against prior parties, or as to the preservation of any
rights and remedies pertaining thereto. Bank may exercise its rights and
remedies with respect to the Collateral without resorting or regard to other
collateral or sources of reimbursement for liability. Bank shall not be deemed
to have waived any of its rights and remedies with respect to the Obligations or
the Collateral unless such waiver be in writing and signed by Bank. No delay or
omission on the part of Bank in exercising any right or remedy shall operate as
a waiver of such right or remedy or any other right or remedy. A waiver on any
one occasion shall not be construed as a bar to any subsequent enforcement by
Bank. All rights and remedies of Bank with respect to the Obligations or the
Collateral shall be cumulative and may be exercised singularly or concurrently.
Section 13.2.2. PREJUDGMENT REMEDY. BORROWER ACKNOWLEDGES THAT THE
------------------
TRANSACTION OF WHICH THIS AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION AND
HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE
CONNECTICUT GENERAL STATUTES OR BY OTHER APPLICABLE LAW WITH RESPECT TO ANY
PREJUDGMENT REMEDY WHICH BANK MAY DESIRE TO USE.
Section 13.2.3. JURY TRIAL. BORROWER HEREBY WAIVES TRIAL BY JURY
----------
IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING OR ANY MATTER ARISING IN
CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTION OF
<PAGE>
-65-
WHICH THIS AGREEMENT IS A PART AND/OR IN THE ENFORCEMENT BY BANK OF ANY OF ITS
RIGHTS AND REMEDIES HEREUNDER OR UNDER APPLICABLE LAW. BORROWER ACKNOWLEDGES
THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF
THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEY.
Section 13.2.4. Lien and Setoff. Regardless of the adequacy of any
---------------
collateral or other means of obtaining repayment of the Obligations, any
deposits (general or special, time or demand, provisional or final), balances or
other sums credited by or due from Bank or any Bank Affiliate to Borrower (other
than payroll, pension, trust and tax deposit accounts) may, at any time and from
time to time after the occurrence of an Event of Default, without notice to
Borrower or compliance with any other condition precedent now or hereafter
imposed by statute, rule of law, or otherwise (all of which are hereby expressly
waived) be setoff, appropriated, and applied by Bank or any Bank Affiliate
against any and all obligations of Borrower to Bank or any Bank Affiliate in
such manner as Bank or any Bank Affiliate in their sole and absolute discretion
may determine, and Borrower hereby grants Bank a continuing security interest in
such deposits, balances or other sums for the payment and performance of all
such obligations. The rights provided to Bank and any Bank Affiliate in this
Section 13.2.4. shall be in addition to and shall not limit any common law right
of setoff available to Bank or any Bank Affiliate.
Section 13.2.5. Claims. Borrower does hereby (i) waive any claim
------
in tort, contract or otherwise which Borrower may have against Bank, a Bank
Affiliate or any Bank Agents which may arise out of the relationship between
Borrower and Bank or any Bank Affiliate prior to the Closing Date; and (ii)
absolutely and unconditionally release and discharge Bank and any Bank Affiliate
or Bank Agents from any and all claims, causes of action, losses, damages or
expenses which may arise out of any relationship between it and Bank or any Bank
Affiliate which Borrower may have as of the Closing Date. Borrower acknowledges
that it makes this waiver and release knowingly, voluntarily and only after
considering the ramifications of this waiver and release with its attorney.
Section 13.3. Notices. All notices, requests, demands or other
-------
communications required by this Agreement shall be made in writing, and unless
otherwise specifically provided herein, shall be deemed to have been duly given
when delivered by hand or mailed first class mail postage prepaid, or, in the
case of telecopy or facsimile notice, when transmitted, answer back received,
addressed as follows, or to such other address as either party may designate in
writing:
If to Bank:
Bank of Boston Connecticut
127 Church Street
New Haven, CT 06510
Attn: Steven M. Moran, Vice President
<PAGE>
-66-
with a copy to:
Updike, Kelly & Spellacy, P.C.
One State Street
P.O. Box 231277
Hartford, CT 06123-1277
Attn: John F. Wolter, Esq.
If to Borrower:
The Strouse, Adler Company
78 Olive Street
New Haven, CT 06507
Attn: Paul McDonald, Chief Financial Officer
with a copy to:
Brenner, Saltzman & Wallman
271 Whitney Avenue
New Haven, CT 06507-1746
Attn: Wayne A. Martino, Esq.
Section 13.4. Fees and Expenses. Borrower will pay on demand all expenses
-----------------
incurred by Bank in connection with (i) the preparation, execution and delivery
of this Agreement, the Notes or the Other Documents, (ii) the administration of
Bank's obligations under this Agreement or (iii) Bank's exercise, preservation
or enforcement of any of its rights and remedies thereunder, including, without
limitation, reasonable fees and expenses of outside legal counsel or the
allocated costs of in-house legal counsel, accounting, appraisal, auditing,
consulting, brokerage or other similar professional fees or expenses, and any
fees or expenses associated with any travel or other costs relating to any
appraisals or examinations conducted in connection with the Obligations or the
Collateral.
Section 13.5. Term of Agreement. This Agreement shall continue in force
-----------------
and effect so long as Bank has any commitment to extend credit or any of the
Obligations shall be outstanding.
Section 13.6. Stamp Tax. Borrower will pay any stamp, franchise or other
---------
recording tax which becomes payable in respect of this Agreement, the Notes or
the Other Documents.
Section 13.7. Schedules and Exhibits. The schedules and exhibits which are
----------------------
attached hereto are and shall constitute a part of this Agreement.
Section 13.8. Governing Law; Consent to Jurisdiction. This Agreement, the
--------------------------------------
Notes and the Other Documents, and the rights and obligations of the parties
hereunder and thereunder, shall be governed by and construed and interpreted in
accordance with, the laws of the State of Connecticut. Borrower agrees that any
suit for the enforcement of this Agreement, the Notes or the Other Documents may
be brought in the courts of the State of Connecticut or any federal court
sitting therein and consents to the non-exclusive jurisdiction of such court and
to service of process in any such suit being made upon
<PAGE>
-67-
Borrower by mail at the address referred to Section 13.3. hereof. Borrower
hereby waives any objection that Borrower may now or hereafter have to the venue
of any such suit or any such court or that such suit is brought in an
inconvenient court.
Section 13.9. Survival of Representations. All representations,
---------------------------
warranties, covenants and agreements contained in this Agreement, the Notes or
the Other Documents shall survive the Closing Date and continue in full force
and effect until the payment and the performance of the Obligations in full.
Section 13.10. Amendments. No modification or amendment of this Agreement,
----------
the Notes or the Other Documents shall be effective unless the same shall be in
writing and signed by the parties hereto.
Section 13.11. Binding Effect of Agreement. This Agreement shall be
---------------------------
binding upon and inure to the benefit of Borrower and Bank and their respective
successors and assigns; provided, however, that Borrower may not assign or
-------- -------
transfer its rights or obligations hereunder. Bank may sell, transfer or grant
participations in the obligations without the prior written consent of Borrower
(but after obtaining an agreement to maintain the confidentiality of any
financial and business information of Borrower), and Borrower agrees that any
transferee or participant shall be entitled to the benefits of this Agreement to
the same extent as if such transferee or participant were Bank; provided,
--------
further, that notwithstanding any such transfer or participation, Borrower may,
- -------
for all purposes of this Agreement, treat Bank as the Person entitled to
exercise all rights and remedies under this Agreement and under the Notes and
the Other Documents and to receive all payments with respect to the Obligations.
Section 13.12. Interest Rate. If the rate of interest payable by Borrower
-------------
under this Agreement, the Notes or the Other Documents shall be or become
usurious or otherwise unlawful under laws applicable thereto, the interest rate
shall be reduced to the maximum lawful rate and any amount paid by Borrower in
excess of the maximum lawful rate shall be considered a payment in reduction of
principal or, at the sole election of Bank, shall be returned to Borrower.
Section 13.13. Counterparts. This Agreement may be signed in any number of
------------
counterparts with the same effect as if the signatures hereto and thereto were
upon one and the same instrument.
Section 13.14. No Agency Relationship. Bank is not the agent, fiduciary or
----------------------
representative of Borrower nor is Borrower the agent, fiduciary or
representative of Bank and this Agreement shall not make Bank liable to any
third party, including but not limited to, Borrower's shareholders, directors,
officers, creditors or any other person.
Section 13.15. Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
<PAGE>
-68-
Section 13.16. Headings. All article, section and subsection headings in
--------
this Agreement, the Notes and the Other Documents are included for convenience
of reference only and shall not constitute a part of this Agreement, the Notes
or the Other Documents for any other purpose.
Section 13.17. Reinstatement. This Agreement shall continue to be
-------------
effective or be reinstated, as the case may be, if at any time any amount
received by Bank in respect of the Obligations is rescinded or must otherwise be
restored or returned by Bank upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of Borrower or upon the appointment of any
intervenor or conservator of, or trustee or similar official for, Borrower or
any substantial part of its properties or assets, or otherwise, all as though
such payments had not been made.
Section 13.18. Interpretation and Construction. The following rules shall
-------------------------------
apply to the interpretation and construction of this Agreement, the Notes and
the Other Documents unless the context requires otherwise: (a) the singular
includes the plural and the plural includes the singular; (b) words importing
any gender include the other genders; (c) references to statutes are to be
construed as including all statutory provisions consolidating, amending or
replacing the statute to which reference is made and all regulations promulgated
pursuant to such statutes; (d) references to "writing" shall include printing,
photocopy, typing, lithography and other means of reproducing words in a
tangible, visible form; (e) the words "including", "includes" and "include"
shall be deemed to be followed by the words "without limitation"; (f) references
to the introductory paragraph, preliminary statements, articles, sections (or
subdivisions of sections), exhibits or schedules are to those of this Agreement
unless otherwise indicated; (g) references to agreements and other contractual
instruments shall be deemed to include all subsequent amendments and other
modifications to such instruments, but only to the extent that such amendments
and other modifications are permitted or not prohibited by the terms of this
Agreement; (h) references to Persons include their respective permitted
successors and assigns; and (i) "or" is not exclusive.
Section 13.19. Relation to Other Documents. Nothing in this Agreement
---------------------------
shall be deemed to amend, or relieve Borrower of its obligations under, any of
the Other Documents and to the extent that the provisions of any of the Other
Documents allow Borrower to take certain actions, or not take certain actions,
with regard for example to the granting of liens, transfers of properties or
assets, maintenance of financial ratios and similar matters, Borrower
nevertheless shall be fully bound by the provisions of this Agreement.
IN WITNESS WHEREOF, Bank and Borrower have executed this Agreement as of
the date first above written.
BANK OF BOSTON CONNECTICUT
By: /s/ Steve M. Moran
---------------------------
Name: Steve M. Moran
Title: Vice President
<PAGE>
-69-
THE STROUSE, ADLER COMPANY
By: /s/ Paul McDonald
---------------------------
Name: Paul McDonald
Title: Vice President
<PAGE>
Exhibit 10.22
-------------
SETTLEMENT AND RELEASE AGREEMENT
--------------------------------
This Settlement and Release Agreement ("Agreement") is made as of this 29th
day of May, 1996, by, between, and among the following undersigned parties: the
Federal Deposit Insurance Corporation as receiver of First Constitution Bank
(the "FDIC"); The Federal Deposit Insurance Corporation in its corporate
capacity (the Federal Deposit Insurance Corporation as receiver of First
Constitution Bank and in its corporate capacity are hereinafter collectively
referred to as the Federal Deposit Insurance Corporation); First Constitution
Financial Service Corporation ("First Service Corporation"); First Hamden
Corporation ("First Hamden"); Walter R. Miller, Jr.; John J. Crawford; Stuart J.
Danoff; Bernard A. Pellegrino, solely in his capacity as a former director of
First Constitution Bank and of First Constitution Financial Corporation;
Elizabeth P. Rich; Lawton G. Sargent, Jr.; Harry Burn, III; Marcus R. McCraven;
Claire Mellitz, solely in her capacity as Executrix for the Estate of Jacob
Mellitz; Martha Shattuck; Robert F. Carney; Robert L. Fiscus; Daniel Miglio;
Thomas C. Marron; and Sharon M. Oster (the foregoing individuals collectively
are referred to herein as the "settling Parties"); and The Aristotle Corporation
f/k/a First Constitution Financial Corporation ("Aristotle").
<PAGE>
RECITALS
--------
WHEREAS:
Prior to October 2, 1992, First Constitution Bank (the "Bank") was a state
chartered depository institution organized and existing under the laws of the
State of Connecticut;
From about 1986 to the present First Hamden has been a corporation
organized and existing under the laws of the State of Connecticut. Throughout
its existence and continuing to the present, First Hamden was and is a wholly
owned subsidiary of First Service Corporation, which was and is a wholly owned
subsidiary of the Bank;
On October 2, 1992, the Superior Court of the State of Connecticut, upon
application of the Commissioner of Banking for the State of Connecticut,
declared the Bank insolvent and, pursuant to 12 U.S.C. (S) 1821(c), the FDIC was
appointed receiver. In accordance with 12 U.S.C. (S) 1821(d), the FDIC
succeeded to all rights, titles, powers and privileges of the Bank, including
those with respect to its assets;
Among the assets to which the FDIC as receiver succeeded were any and all
of the Bank's claims, demands, and causes of actions against its former
directors, officers, employees, attorneys and other professionals arising from
the performance, nonperformance and manner of performance of their respective
functions, duties and acts as directors and/or officers and/or employees and/or
attorneys of the Bank;
-2-
<PAGE>
Following the FDIC's appointment as the Bank's receiver, the FDIC removed
and replaced First Hamden's directors and officers, and First Hamden has since
requested that the FDIC act on its behalf with respect to the prosecution of
First Hamden's claims, demands, and causes of actions against its former
directors, officers, employees, attorneys and other professionals arising from
the performance, nonperformance and manner of performance of their respective
functions, duties and acts as directors and/or officers and/or employees and/or
attorneys of First Hamden;
The Federal Deposit Insurance Corporation and First Hamden have asserted
claims against certain of the Settling Parties, who served at various times as
directors and/or officers of the Bank and/or First Hamden or as attorneys
representing the Bank or First Hamden;
The FDIC has brought suit against Aristotle and others seeking declaratory
and other relief with respect to certain monies presently held in two escrow
accounts at Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch")
totalling in principal and accrued interest thereon in excess of $5.744 million
as of May 31, 1996 (the "Escrowed Funds"). The Escrowed Funds are held in
Merrill Lynch accounts numbered 812-07H26 and 812-07F31. The FDIC's claims with
respect to the Escrowed Funds are now pending in the United States District
Court for the District of Connecticut in Federal Deposit Insurance Corporation,
--------------------------------------
as Receiver of First Constitution Bank v. The Aristotle Corporation. et al.,
- ---------------------------------------------------------------------------
3:95 CV 00684 (TFGD) (the "Escrowed Funds
-3-
<PAGE>
Action"). Aristotle has asserted counterclaims against the FDIC in the Escrowed
Funds Action;
Article IX of Aristotle's Amended By-Laws provides for Aristotle to
indemnify some or all of the Settling Parties (the "Indemnity") according to the
terms, provisions and conditions of the Indemnity. Some or all of the Settling
Parties have made claims under the Indemnity;
American Casualty Company of Reading, Pennsylvania ("American Casualty")
issued Directors' and Officers' Liability Insurance Policy Including Bank
Reimbursement number ZEA 201587098 (the "D&O Policy"), which insured the
directors and officers of the Bank according to the terms, provisions and
conditions of the D&O Policy. Some or all of the Settling Parties have made
claims under the D&O Policy. On February 27, 1996, American Casualty filed a
Second Amended Complaint against the FDIC, certain of the Settling Parties and
Aristotle seeking a declaration of American Casualty's rights and obligations
under the D&O Policy with regard to the FDIC's claims. That action is now
pending in the United States District Court for the District of Connecticut in
American Casualty Company of Reading, Pennsylvania v. The Aristotle Corporation,
- --------------------------------------------------------------------------------
et al., 3:95 CV 02569 (RNC) (the "Coverage Action"); and
- ------
The undersigned parties deem it in their best interest to enter into this
Agreement to avoid the uncertainty, trouble, and expense of further litigation.
-4-
<PAGE>
NOW, THEREFORE, in consideration of the promises, undertakings, payments,
and releases stated herein, the sufficiency of which consideration is hereby
acknowledged, the undersigned parties agree, each with the other, as follows:
SECTION I: Payments to the FDIC
A. As an essential covenant and condition to this Agreement the parties
hereto agree that, upon the execution of an original, or originals in
counterpart, by Aristotle and the Federal Deposit Insurance Corporation, the
Federal Deposit Insurance Corporation and Aristotle shall cause the sum of
$2,000,000 to be distributed from the Escrowed Funds and paid to Aristotle by
wire transfer, together with an amount equal to all interest and dividend income
earned as of the disbursement date on account number 812-07F31.
B. As an essential covenant and condition to this Agreement the parties
hereto agree that, upon the execution of an original, or originals in
counterpart, by Aristotle and the Federal Deposit Insurance Corporation, the
Federal Deposit Insurance Corporation and Aristotle shall cause all of the
remaining monies in the Escrowed Funds, in the approximate amount of $3,744,000,
to be distributed therefrom and paid to the FDIC by wire transfer.
-5-
<PAGE>
SECTION II: Stipulations of Dismissal
As an essential covenant and condition to this Agreement, contemporaneously
with execution of this Agreement by each of the undersigned parties and
distribution and receipt of the Escrowed Funds in accordance with Section I.
hereof, the FDIC and Aristotle shall each dismiss the Escrowed Funds Action as
against the other, and the undersigned parties shall obtain the dismissal of the
Coverage Action. The undersigned parties agree to have stipulations entered
providing that the dismissals set forth above shall be with prejudice as to the
Settling Parties and Aristotle, with each party to bear its own costs as they
were originally incurred.
SECTION III: Releases
A. Release of the Settling Parties by the Federal Deposit Insurance
----------------------------------------------------------------
Corporation, First Service Corporation and First Hamden.
- -------------------------------------------------------
Effective upon distribution and receipt of the Escrowed Funds pursuant to
Section I. hereof and dismissals of the Escrowed Funds Action and Coverage
Action pursuant to Section II. hereof, and except as provided in Section III.E.
below, the Federal Deposit Insurance Corporation, First Service Corporation and
First Hamden, for themselves and their successors and assigns, hereby release
and discharge the Settling Parties and their heirs, executors, administrators,
representatives, successors and assigns, from any and all claims, demands,
-6-
<PAGE>
obligations, damages, actions, and causes of action, direct or indirect, in law
or in equity, belonging to the Federal Deposit Insurance Corporation and/or to
First Service Corporation and/or to First Hamden, that arise from or relate to,
the performance, nonperformance, or manner of performance of the Settling
Parties' respective functions, duties and actions as officers and/or directors
of the Bank and/or of any subsidiary of the Bank, including, without limitation,
First Service Corporation and First Hamden; provided, however, that
--------
notwithstanding the foregoing or any other provision of this Agreement, the
release set forth in this paragraph in no way releases or discharges Bernard A.
Pellegrino and his heirs, executors, administrators, representatives, successors
and assigns, and/or the Pellegrino Law Firm, P.C. or any of its present or
former members, shareholders or employees, from those claims and causes of
action arising out of or relating to the performance, non-performance or manner
of performance of their respective functions, duties and actions as counsel to
the Bank and/or to any subsidiary of the Bank, including, without limitation,
First Service Corporation and First Hamden, and shall have no effect thereon.
B. Release of the Federal Deposit Insurance Corporation, First Service
-------------------------------------------------------------------
Corporation and First Hamden by the Settling Parties.
- ----------------------------------------------------
Effective simultaneously with the release granted in Section III.A. above,
the Settling Parties, on behalf of themselves individually, and their respective
heirs, executors,
-7-
<PAGE>
administrators, agents, representatives, successors and assigns, hereby release
and discharge the Federal Deposit Insurance Corporation, First Service
Corporation and First Hamden, and their employees, officers, directors,
representatives, successors and assigns, from any and all claims, demands,
obligations, damages, actions, and causes of action, direct or indirect, in law
or in equity, that arise from or relate to the Bank and/or to First Service
Corporation and/or to First Hamden or to the performance, nonperformance, or
manner of performance of the Settling Parties' respective functions, duties and
actions as officers and/or directors of the Bank and/or of any subsidiary of the
Bank, including, without limitation, First Service Corporation and First Hamden.
C. Release of Aristotle by the Federal Deposit Insurance Corporation,
------------------------------------------------------------------
First Service Corporation and First Hamden.
- ------------------------------------------
Effective simultaneously with the releases granted in Section III.A. and
III.B. above, the Federal Deposit Insurance Corporation, First Service
Corporation and First Hamden, on behalf of themselves and their successors and
assigns, hereby release and discharge Aristotle, its parents, subsidiaries and
affiliates, and their respective employees, officers, directors, agents,
representatives, successors and assigns from any and all claims, demands,
obligations, damages, actions, and causes of action, direct or indirect, in law
or in equity, that arise from or relate to the Bank and/or to First Service
Corporation and/or to First Hamden, with the exception of claims by or against
the
-8-
<PAGE>
United States Internal Revenue Service and arising out of any tax years not
the subject of the Escrowed Funds Action.
D. Release of the Federal Deposit Insurance Corporation, First Service
-------------------------------------------------------------------
Corporation and First Hamden by Aristotle.
- -----------------------------------------
Effective simultaneously with the release granted in Section III.C. above,
Aristotle, for itself and for its employees, officers, directors, agents,
representatives, successors and assigns, and on behalf of its parents,
affiliates and subsidiaries and their successors and assigns, hereby releases
and discharges the Federal Deposit Insurance Corporation and First Hamden and
their employees, officers, directors, representatives, successors and assigns,
from any and all claims, demands, obligations, damages, actions, and causes of
action, direct or indirect, in law or in equity, that arise from or relate to
the Bank and/or to First Service Corporation and/or to First Hamden, with the
exception of claims by or against the United States Internal Revenue Service and
arising out of any tax years not the subject of the Escrowed Funds Action.
E. Express Reservations From Releases by the Federal Deposit Insurance
-------------------------------------------------------------------
Corporation, First Service Corporation and First Hamden.
- -------------------------------------------------------
1. Notwithstanding any other provision hereof, by this Agreement, the
Federal Deposit Insurance Corporation, First Service Corporation and First
Hamden do not release, and expressly preserves fully and to the same extent as
if the Agreement had not been executed, any claims or causes of action:
-9-
<PAGE>
a. against the Settling Parties or Aristotle or any other person or
entity for liability, if any, incurred as the maker, endorser or guarantor of
any promissory note or indebtedness payable or owed by them to the Federal
Deposit Insurance Corporation, the Bank, other financial institutions, or any
other person or entity, including without limitation any claims acquired by the
Federal Deposit Insurance Corporation as successor-in-interest to the Bank or
any person or entity other than the Bank;
b. against any person or entity not expressly released in this
Agreement; and
c. which are not expressly released in Sections III.A. and III.C.
above.
2. Notwithstanding any other provision hereof, nothing in this Agreement
shall be construed or interpreted as limiting, waiving, releasing or
compromising the ability of the Federal Deposit Insurance Corporation to use any
act or omission of all or some of the Settling Parties in considering or taking
any supervisory, administrative, and/or enforcement action against any or all of
the Settling Parties in any proceeding related to any insured depository
institution other than the Bank.
3. Notwithstanding any other provision hereof, this Agreement does not
purport to waive, or intend to waive, any claims which could be brought by the
United States through either the Department of Justice, the United States
Attorney's Office
-10-
<PAGE>
for the District of Connecticut or any other federal judicial
district.
F. Potential Bar Order.
--------------------
If at any time after the execution of this Agreement, a third-party claim
for contribution or indemnification, or any other claim seeking to allocate or
apportion damages against the Settling Parties, has been asserted against any of
the Settling Parties, the FDIC shall not oppose a motion by a Settling Party for
a bar order. The FDIC and its successors and assigns understand and hereby
agree that such a motion would seek an order that the settlement embodied in
this Agreement is in good faith within the meaning of the law of the state in
which the bar order is sought, or federal common law, or any other applicable
law, and that all claims against the Settling Party which have been, or could
have been or could be asserted against the Settling Party arising under federal
or state law based on, relating to or arising from the Settling Party's role as
an officer and/or director of the Bank, or any of its subsidiaries, including,
without limitation, claims for contribution, indemnity, reimbursement or any
other form of monetary relief, are extinguished, discharged, satisfied, and/or
otherwise barred and unenforceable; provided, however, that notwithstanding the
--------
foregoing, the order referenced herein shall not in any way release or discharge
or otherwise bar and/or extinguish any claims and causes of action against
Bernard A. Pellegrino and his heirs, executors, administrators, representatives,
successors and
-11-
<PAGE>
assigns, and/or the Pellegrino Law Firm, P.C. or any of its
present or former members, shareholders or employees, which arise out of or
relate to the performance, non-performance or manner of performance of their
respective functions, duties and actions as counsel to the Bank and/or to any
subsidiary of the Bank, including, without limitation, First Service Corporation
and First Hamden, and said order shall have no effect thereon. The FDIC further
understands and agrees that the Settling Party moving for such an order will
submit a copy of this Agreement in support of that motion. The FDIC further
agrees that if, subsequent to the execution of this Agreement, a judgment is
entered in favor of the FDIC against any of the Settling Parties with respect to
any of the matters within the scope of the release of the Settling Parties
contained in this Agreement, the FDIC will forbear from exercising its rights of
recovery from the Settling Parties pursuant to such judgment.
SECTION IV: Waiver of Dividends and Withdrawals
of Proofs of Claim
A. To the extent, if any, that any or all of the Settling Parties are or
were shareholders of the Bank and by virtue thereof are or may have been
entitled to a dividend, payment, or other pro rata distribution upon resolution
of the receivership of the Banks they hereby knowingly assign to the FDIC any
and all rights, titles and interest in and to any and all such dividends,
payments or other pro rata distributions.
-12-
<PAGE>
B. To the extent, if any, that any or all of the Settling Parties filed
Proofs of Claim with or in any other manner asserted claims against the Federal
Deposit Insurance Corporation, any and all such Proofs of Claim and/or claims
are hereby deemed withdrawn in their entirety and shall be of no further force
or effect, regardless of whether any such proofs of claims or claims had been
previously allowed or otherwise approved.
SECTION V: Representations and Acknowledgments
A. No Admission of Liability. The undersigned parties each
-------------------------
acknowledge and agree that the matters set forth in this Agreement constitute
the settlement and compromise of disputed claims, and that this Agreement is not
an admission or evidence of liability by any of them regarding any claim.
B. Execution in Counterparts. This Agreement may be executed
-------------------------
in counterparts by one or more of the parties named herein and all such
counterparts when so executed shall together constitute the final Agreement, as
if one document had been signed by all parties hereto; and each such
counterpart, upon execution and delivery, shall be deemed a complete original,
binding the party or parties subscribed thereto upon the execution by all
parties to this Agreement.
C. Binding Effect. Each of the undersigned persons represents and
--------------
warrants that they are a party hereto or are authorized to sign this Agreement
on behalf of the respective
-13-
<PAGE>
party, and that they have the full power and authority to bind such party to
each and every provision of this Agreement. This Agreement shall be binding upon
and inure to the benefit of the undersigned parties and their heirs, executors,
administrators, representatives, successors and assigns.
D. Choice of Law. This Agreement shall be interpreted, construed
-------------
and enforced according to applicable federal law.
E. Entire Agreement and Amendments. This Agreement constitutes
-------------------------------
the entire agreement and understanding between and among the undersigned parties
concerning the matters set forth herein. This Agreement may not be amended or
modified except by another written instrument signed by the party or parties to
be bound thereby, or by their respective authorized attorney(s) or other
representative(s).
F. Reasonable Cooperation.
----------------------
The undersigned parties agree to cooperate in good faith to effectuate all
the terms and conditions of this Agreement, including doing or causing their
agents and attorneys to do, whatever is reasonably necessary to effectuate the
signing, delivery, execution, filing, recording, and entry, of any documents
necessary to conclude the Escrowed Funds Action and the Coverage Action, to
effect the payments and distribution of funds set forth in Section I. hereof, to
effect the withdrawal of the Proofs of Claims described in Section IV. hereof
and to otherwise perform the terms of this Agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by each of them or their duly authorized representatives on the dates
hereinafter subscribed.
FEDERAL DEPOSIT INSURANCE
CORPORATION as receiver of
First Constitution Bank and in
its corporate capacity
By: /s/ Catherine Topping
------------------------------------
Title: Counsel
---------------------------------
Print Name:
----------------------------
Date: August 20, 1996
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FIRST CONSTITUTION FINANCIAL
SERVICE CORPORATION
By: /s/ W. Jerry Dano
-----------------------------------
Title: President
---------------------------------
Print Name:
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Date: August 15, 1996
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FIRST HAMDEN CORPORATION
By: /s/ W. Jerry Dano
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Title: President
---------------------------------
Print Name:
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Date: August 15, 1996
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<PAGE>
THE ARISTOTLE CORPORATION
By: /s/ John J. Crawford
------------------------------------
Title: Chairman
---------------------------------
Print Name:
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Date: August 14, 1996
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/s/ Walter R. Miller, Jr.
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WALTER R. MILLER, JR.
/s/ John J. Crawford
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JOHN J. CRAWFORD
/s/ Stuart J. Danoff
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STUART J. DANOFF
/s/ Bernard A. Pellegrino
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BERNARD A. PELLEGRINO, solely
in his capacity as a former
director of First Constitution
Bank and of First Constitution
Financial Corporation
/s/ Elizabeth P. Rich
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ELIZABETH P. RICH
/s/ Lawton G. Sargent, Jr.
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LAWTON G. SARGENT, JR.
/s/ Harry Burn, III
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HARRY BURN, III
/s/ Marcus R. McCraven
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MARCUS R. MCCRAVEN
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<PAGE>
/s/ Claire Mellitz
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CLAIRE MELLITZ, solely in her capacity
as Executrix for the Estate of Jacob
Mellitz
/s/ Martha Shattuck
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MARTHA SHATTUCK
/s/ Robert F. Carney
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ROBERT F. CARNEY
/s/ Robert L. Fiscus
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ROBERT L. FISCUS
/s/ Daniel Miglio
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DANIEL MIGLIO
/s/ Thomas C. Marron
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THOMAS C. MARRON
/s/ Sharon M. Oster
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SHARON M. OSTER
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<PAGE>
Exhibit 10.23
-------------
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
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)
IN RE FIRST CONSTITUTION ) MASTER FILE NO.
SHAREHOLDERS LITIGATION ) N-90-111 (GLG)
)
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)
THIS DOCUMENT RELATES TO: )
ALL ACTIONS ) May 28, 1996
)
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STIPULATION AND AGREEMENT OF SETTLEMENT
---------------------------------------
Plaintiffs (as that term is defined below), on their behalf and on behalf
of all members of the Settlement Class (as that term is defined below), and
defendants Aristotle Corporation (formerly known as First Constitution Financial
Corporation) ("First Constitution" or the "Company"), Walter R. Miller, Jr.
("Miller"), Josiah B. Venter ("Venter"), George H. Brooks-Gonyer ("Brooks-
Gonyer"), and John A. Rourke ("Rourke"), by and through their respective
counsel, hereby enter into the following Stipulation and Agreement of Settlement
(the "Stipulation" or "Settlement Agreement") dated as of the 28 day of May,
1996, pursuant to the terms and conditions set forth below and subject to the
approval of the United States District Court for the District of Connecticut
(the "Court").
WHEREAS the parties acknowledge that:
A. The terms below shall have the following meanings for the purpose of
this Stipulation:
<PAGE>
(1) "Defendants" shall refer to First Constitution, Miller, Venter,
Brooks-Gonyer and Rourke;
(2) "Individual Defendants" means Miller, Venter, Brooks-Gonyer and
Rourke;
(3) "Settlement Administrator" shall mean David Berdon & Company or
such other person or entity as Plaintiffs' Executive Committee may determine to
retain to administer the proposed settlement herein;
(4) "Settlement Class" shall be all persons who purchased First
Constitution's common stock during the Class Period. Excluded from the
Settlement Class are: (a) Defendants; (b) Officers and directors of First
Constitution and its subsidiaries (as of the Class Period defined below); (c)
Members of the immediate families of any of the Individual Defendants; and (d)
Any employee, representative, subsidiary, affiliate or controlled person of
First Constitution and its subsidiaries;
(5) "Settlement Class Period" or "Class Period" shall be January 25,
1989 through and including April 5, 1990;
(6) "Settlement Class Member" or "Member of the Settlement Class" or
"Class Member" means a person who falls within the definition of Settlement
Class as set forth in (P)A(4) of this Stipulation;
(7) "Class Representatives" and "Plaintiffs" shall mean Norman
Silverberg, Lee Weiner, Saul Abrams and Laura R. DiBiase;
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<PAGE>
(8) "Eligible Claim" shall be a valid claim filed by a Class Member in
connection with the proposed Settlement;
(9) "Litigation" refers to the Consolidated Action captioned In re
-----
First Constitution Shareholders Litigation, Civil Action No. 3:90CV111 (GLG),
- ------------------------------------------
pending in the United States District Court for the District of Connecticut and
each separate action consolidated thereunder;
(10) "Settlement" shall be the terms and conditions set forth in this
Stipulation;
(11) "Released Parties" means collectively, each and all of the
Defendants, or any of them, or any of their present or former officers,
directors, managing directors, employees, agents, attorneys, financial advisors,
insurers, representatives, affiliates, associates, parents, subsidiaries,
general and limited partners and partnerships, heirs, executors, administrators,
successors and assigns;
(12) "Released Claims" shall collectively mean any and all claims or
causes of action that have been or could have been asserted by the Plaintiffs or
the Settlement Class Members, or any of them, against the Released Parties based
upon or related to any of the acts, transactions or occurrences alleged in the
Consolidated Complaint;
(13) "Class Counsel" or "Plaintiffs' Counsel" means the law firms
Koskoff Koskoff & Bieder, P.C., Lowey Dannenberg Bemporad & Selinger, P.C., Law
Firm of Harvey Greenfield, Warren P. Joblin, Barrack Rodos & Bacine, and Abbey &
Ellis;
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<PAGE>
(14) "Consolidated Complaint" means the consolidated complaint filed
on August 3, 1990;
(15) "Plaintiffs' Executive Committee" means the law firms Koskoff
Koskoff & Bieder, P.C., Lowey Dannenberg Bemporad & Selinger, P.C., Law Firm of
Harvey Greenfield, and Warren P. Joblin;
(16) "Settling Parties" means Plaintiffs and Defendants.
B. On March 8, 1990, Silverberg v. First Constitution, Inc., et al., No.
----------------------------------------------
N-90-111-WWE was commenced in the United States District Court for the District
of Connecticut. Subsequently, Weiner v. First Constitution, et al., No. B-90-
------------------------------------
165-WWE was commenced on April 6, 1990 (the "Complaints"). On August 3, 1990,
plaintiffs Silverberg and Weiner, joined by two additional plaintiffs, filed a
Consolidated Complaint against the Defendants.
C. Among other things, the Consolidated Complaint alleges that at the
commencement of and during the Class Period, Defendants concealed First
Constitution's actual financial condition from shareholders and prospective
investors by making repeated false and misleading statements regarding, among
other things, increases in First Constitution's loan loss provisions, the
adequacy of its reserves, the terms and conditions of First Constitution's
proposed merger with the WFRR Limited Partnership and the GHKM Corp., and the
Company's prospects for profitability. Among other things, the Consolidated
Complaint
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<PAGE>
alleges that Defendants' purported conduct constitutes violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and
Rule 1Ob-5 promulgated thereunder, and of the common law. Among other things,
plaintiffs allege in the Consolidated Complaint that as a result of these
alleged misrepresentations and omissions, the market price of First
Constitution's common stock was artificially inflated during the Settlement
Class Period, causing damage to persons and entities who purchased First
Constitution common stock during such period.
D. On September 10, 1990, Defendants collectively moved to dismiss the
Consolidated Complaint on the grounds that it failed to state a claim upon which
relief could be granted, failed to plead fraud with particularity and for lack
of subject matter jurisdiction over pendent state claims.
E. Judge Eginton denied the defendants' motion to dismiss on September 13,
1991. Defendants then filed a motion for reconsideration that was denied
without prejudice on March 30, 1993 by Judge Cabranes.
F. On February 14, 1994, pursuant to order of the Court, a second motion
for reconsideration was filed by Defendants. After being fully briefed, this
second motion was denied by Judge Cabranes on November 2, 1994.
G. On December 5, 1994, Defendants served and filed an Answer to the
Consolidated Complaint, wherein Defendants denied any and all allegations of
wrongdoing and asserted affirmative defenses thereto.
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<PAGE>
H. In response to an invitation from Defendants' Counsel to explore the
possibility of settlement, Plaintiffs' Counsel made an initial demand for
settlement on March 19, 1992 and discussions between the parties were held.
Following the denial of Defendants' second motion for reconsideration, and
continuing through much of 1995, Plaintiffs' Counsel engaged in intensive arms-
length negotiations with the various counsel for Defendants with respect to the
settlement of the Released Claims against all of the Released Parties.
I. Plaintiffs' Counsel state that they have made a thorough study of the
legal principles applicable to the Released Claims and have carefully reviewed
the entire case, and have determined that it is fair, reasonable, adequate and
in the best interests of the Settlement Class to settle the Released Claims
against the Released Parties in this Litigation on the terms and conditions
hereinafter set forth. Plaintiffs' Counsel believe that the claims asserted in
the Consolidated Complaint have merit. In evaluating the proposed settlement
provided for herein, Plaintiffs and their counsel have considered the expense
and length of continued proceedings necessary to prosecute the litigation
through trial, the stage of the proceedings the parties are currently in, the
uncertainties of the outcome of this complex litigation, First Constitution's
liquidation, the difficulty in proving damages, the fact that resolution,
whenever and however determined, of the Released Claims would likely be
submitted for appellate review as a consequence of which it may
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<PAGE>
be many years until there would be a final adjudication of the claims and
defenses asserted, and the substantial benefit provided by the proposed
Settlement Agreement. Based upon these considerations, Plaintiffs and their
counsel have concluded that it is in the best interests of the Settlement Class
to settle the Litigation on the terms set forth herein.
J. Defendants have denied and continue to deny each and all of the
material allegations in the Consolidated Complaint. Defendants expressly have
denied and continue to deny all charges of wrongdoing or liability arising out
of any of the conduct, statements, acts or omissions alleged, or that could have
been alleged, against them in the Litigation. Defendants, while denying all
wrongdoing of any kind whatsoever and denying all liability to Plaintiffs or the
Settlement Class, also consider it desirable that the Litigation be dismissed on
the terms set forth herein in order to avoid further expense, to dispose of
burdensome and protracted litigation.
K. Class Counsel have analyzed the evidence, including documents produced
by Defendants in discovery, consulted with an expert on damages and researched
the applicable law with respect to the claims of Plaintiffs and the Class
against the Defendants and the potential defenses thereto.
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among Plaintiffs,
on behalf of themselves and the members of the Settlement Class, and Defendants,
acting through their respective counsel, and subject to all of the terms and
conditions set forth
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<PAGE>
herein and the approval of the Court pursuant to Rule 23(e) of the Federal Rules
of Civil Procedure, that the Litigation as well as any and all of the Released
Claims against any of the Released Parties be, and hereby are, compromised,
settled and dismissed with prejudice upon and subject to the terms and
conditions hereinafter set forth:
DISCLAIMER
----------
1. Neither this Stipulation nor any of its provisions, nor any of the
negotiations or proceedings connected with it, nor the Settlement when and if
consummated, nor any action taken in accordance with the terms set forth herein
shall be construed as or deemed to be evidence of (a) a lack of merit to the
Litigation, or (b) any liability or wrongdoing whatsoever. Each of the
Defendants hereby expressly denies and disclaims any liability or wrongdoing
whatsoever. Neither this Stipulation, nor the fact of its execution, nor any of
its provisions, nor any of the negotiations or proceedings connected with it,
nor the Settlement when and if consummated, nor any action taken in accordance
with the terms set forth herein shall be offered or received in evidence in any
litigation or proceeding of any nature, or otherwise referred to or used in any
manner in any court or other tribunal, except to enforce the terms hereof.
EFFECTIVE DATE
--------------
2. The Settlement Agreement shall not become effective until the first
date (the "Effective Date") that each and every
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<PAGE>
one of the following conditions has been satisfied, unless one or more of such
conditions are expressly waived in writing by
Defendants:
(a) The entry by the Court of the Order of Preliminary Approval
substantially in the form annexed hereto as Exhibit A (the "Preliminary Approval
Order") and as more fully described in Paragraph 11 below;
(b) The approval by the Court of the Settlement, following notice to
Settlement Class Members and a hearing as prescribed by Rule 23 of the Federal
Rules of Civil Procedure;
(c) Approval and Final Judgment and Order of Dismissal substantially
in the form annexed hereto as Exhibit E (the "Final Approval Order and
Judgment") and as more fully described in Paragraph 12 below;
(d) The Final Approval Order and Judgment shall have become a final
judgment, that is, not reversed or substantially modified on appeal and no
longer subject to further review either by the expiration of the time to appeal
therefrom without any appeal having been taken or, if an appeal is taken, by the
determination of the appeal by the highest court to which such appeal may be
taken in such a manner as to permit the consummation of the Settlement embodied
herein in accordance with the terms and conditions of this Stipulation. For
purposes of this subparagraph, an "appeal" shall include any petition for a writ
of certiorari that may be filed in connection with approval or disapproval of
this Settlement; and
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<PAGE>
(e) Defendants receive confirmation that members of the Class
constituting more than a certain number of shares traded during the Class
Period, which number is specified in a separate document, have not properly
requested exclusion from the Class.
3. In the event that the Settlement does not become effective because any
of the conditions set forth in Paragraph 2 above is not satisfied or is waived,
or for any other reason, or in the event that the Court modifies or refuses to
approve any material part of the Stipulation, or if, on appeal, an appellate
court materially modifies the Final Approval Order and Judgment or the terms of
the Stipulation, unless all parties hereto promptly agree in writing to proceed
with the Settlement effected by this Stipulation as and if modified after the
determination of the Court or an appellate court, then: (a) this Stipulation
shall become null and void, and of no further force and effect; (b) this
Stipulation and all negotiations, statements, releases, communications and
proceedings relating thereto shall be without prejudice to the rights of any and
all parties hereto, shall not be used for any purpose whatsoever in any
subsequent proceeding in the action or in any other litigation in any court or
tribunal, and shall not be construed to be an admission or concession by any
party hereto; and (c) the Settling Parties shall be restored to their respective
positions existing prior to the execution of this Stipulation except as provided
in Paragraph 5 below. Neither a modification by the Court, nor a reversal on
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<PAGE>
appeal, of any award of attorneys' fees and reimbursement of expenses to
Plaintiff's Counsel, or of any proposed plan of allocation of the Settlement
Fund, as hereinafter defined, among the Settlement Class members, shall be
deemed to be a modification of a material part of this Stipulation.
TERMS OF SETTLEMENT
-------------------
4. The Settlement Fund is comprised of cash in the amount of $2,250,000
(the "Settlement Consideration") plus interest payable thereon ("Gross
Settlement Consideration"). Within ten (10) business days of the execution of
this Stipulation, the Gross Settlement Consideration will be deposited on behalf
of the Defendants in an interest bearing escrow account ("Escrow Account") with
the Settlement Administrator designated as Escrow Agent pending Court approval
of the Settlement. Any interest accrued shall be included in the Gross
Settlement Consideration. The escrow account shall be paid to Koskoff Koskoff &
Bieder P.C., as Chairman of Plaintiffs' Executive Committee, within three (3)
business days following the Effective Date. In the event that the Settlement
does not become effective as is described in Paragraph 3, the amounts then
remaining in the Escrow Account shall be returned to the person or entity
depositing the funds.
5. Upon entry of the Preliminary Approval Order, Defendants' Counsel shall
cause to be deposited from the Escrow Account, the sum of $50,000.00 into an
account designated by Plaintiffs' Counsel (the "Settlement Notice and
Administration
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<PAGE>
Fund"). Plaintiffs' Counsel shall be permitted to use the Settlement Notice and
Administration Fund to pay costs incurred in connection with administration of
the Settlement and for giving notice to the Settlement Class Members in
accordance with the terms of the Preliminary Approval Order; provided, however,
that prior to entry of a Final Order and Judgment by the Court, Plaintiffs'
Counsel shall submit to the Court an Affidavit in which Plaintiffs' Counsel
shall provide a detailed accounting of any expenditures from the Settlement
Notice and Administration Fund, and such expenditures shall be approved by the
Court as reasonable. If, for any reason, the Effective Date does not occur, then
any remaining monies paid by depositing parties pursuant to this subparagraph
shall be immediately returned to the depositing parties.
6. Plaintiffs' Counsel may file an application for an award of attorneys'
fees and reimbursement of expenses (the "Fee Petition") to be considered by the
Court at the time of the final hearing by the Court to approve the Settlement
("Final Settlement Hearing"). Plaintiffs' Counsel shall apply for fees not to
exceed 30 percent of the Gross Settlement Consideration, as set forth herein,
plus reimbursement of costs and expenses. Any such fees and expenses as awarded
by the Court shall be payable within five (5) business days after an Order or
Judgment of the Court approving such payment has become final and no longer
subject to appellate review. The attorneys' fees, costs and disbursements
awarded by the court shall accrue interest from the date the
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<PAGE>
Settlement Fund is established until it is paid out to Plaintiffs' Counsel at
the same rate as the Settlement Fund earned interest, unless otherwise provided
by the Court.
7. Except for the deposit into the Settlement Notice and Administration
Fund pursuant to Paragraph 5, Defendants shall have no responsibility for any
settlement administration costs, or for Plaintiffs' Counsel's attorneys' fees,
costs or expenses, of any sort whatsoever. Defendants shall have no
responsibility or liability with respect to the administration of claims,
including without limitation, determinations as to the claims of Settlement
Class Members and distributions pursuant thereto.
8. If this Stipulation is terminated or any material part thereof is not
approved, or becomes null and void, or if approval is reversed on appeal, or if
any material part of the Stipulation or Judgment is modified by the Court or an
appellate court or if the Settlement does not become effective for any other
reason, including but not limited to the reasons set forth in Paragraph 2, all
consideration paid by Defendants in any form, and any interest, less the amount
representing the costs of notice of the Settlement or other administrative costs
necessarily disburse or owing prior to the Settlement's not receiving final
approval, shall be returned to the depositing party.
9. After the Effective Date, Koskoff Koskoff & Bieder, P.C. shall have the
authority and obligation as a fiduciary to maintain, and make distributions
from, the Settlement Fund in accordance with this Stipulation and orders of the
Court.
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<PAGE>
10. After the Effective Date, the Settlement Fund shall be used to make
payment on the claims submitted by Settlement Class members calculated in
accordance with the methodology set out in Paragraph 15 hereof, and on the
attorneys' fees and costs awarded.
PRELIMINARY APPROVAL AND NOTICE
-------------------------------
11. Promptly following execution of this Stipulation, Plaintiffs' Counsel
and Defendants' Counsel shall jointly apply to the Court for the entry of the
Preliminary Approval Order in the form attached hereto as Exhibit A, which
shall:
(a) Grant preliminary approval of the Settlement;
(b) Certify, preliminarily, the Class for
settlement purposes only;
(c) Set the time and date of the Final Settlement Hearing to rule on:
(i) whether the proposed Settlement should be approved as fair, reasonable and
adequate as to Settlement Class Members; and (ii) the Fee Petition.
(d) Approve as to form and content the proposed Notice of Pendency
and Settlement of Class Action, attached hereto as Exhibit B (the "Notice"); the
Summary Notice of Class Action Determination and Hearing on Class Action
Settlement attached hereto as Exhibit C (the "Summary Notice"); and the Proof of
Claim and Release form attached hereto as Exhibit D;
(e) Direct the mailing of the Notice to the Class Members by first
class mail;
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<PAGE>
(f) Direct the publication of the Summary Notice once in the national
edition of The Wall Street Journal;
-----------------------
(g) Determine that the manner of notice set forth in the Preliminary
Approval Order complies with the requirements of Rules 23(c) (2) and 23(e) of
the Federal Rules of Civil Procedure and due process, and constitutes the best
notice practicable under the circumstances;
(h) Prescribe a period of time during which Settlement Class Members
may file requests to be excluded from the Settlement Class;
(i) Prescribe a period of time during which Settlement Class Members
may serve written objections to the Settlement and the Fee Petition;
(j) Prescribe a period of time during which Settlement Class Members
must file Proof of Claim and Release forms in order to participate in
distribution of the Settlement Fund;
(k) Provide that members of the Settlement Class shall be barred from
any claims against Defendants; and
(l) Prohibit Settlement Class Members from instituting or commencing
any claim which has been or could have been asserted in the Litigation, pending
further order of the Court.
FINAL APPROVAL
--------------
12. If the Court approves this Settlement, then the Settling Parties shall
seek entry of the Final Approval Order and Judgment, substantially in the form
set forth in Exhibit E hereto, which shall include provisions:
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<PAGE>
(a) Approving the Settlement and its terms as being a fair, reasonable
and adequate settlement of the Litigation and directing consummation pursuant to
its terms;
(b) Dismissing the Consolidated Complaint, with prejudice and in full
and final discharge of any and all Released Claims as against each of the
Defendants;
(c) Reserving jurisdiction over all further proceedings concerning the
administration and consummation of this Settlement;
(d) Permanently barring and enjoining the institution and prosecution,
either directly or representatively, of any other action in any court in any
jurisdiction asserting any Class Claims.
SETTLEMENT ADMINISTRATION
-------------------------
13. Plaintiffs' Counsel have retained a Settlement Administrator for the
purpose of administering the Settlement and determining the amount and validity
of the claims of Settlement Class Members. The expenses of the Settlement
Administrator shall be paid only from the Settlement Fund.
14. For the purpose of determining the extent to which a Settlement Class
Member asserting a claim ("Claimant" and "Claim") shall be entitled to receive
payment or distribution from the Settlement Fund, a Proof of Claim and Release
in the form attached as Exhibit D hereto shall be timely filed by each Claimant.
Each Claimant shall execute a release in form and content substantially as set
out in the Proof of Claim and
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<PAGE>
Release (the "Release"). The Release shall be effective as of the Effective
Date.
15. All Claims shall be submitted to the Settlement Administrator, who
shall make the initial determination as to the validity of each Claim ("Eligible
Shares"). The Settlement Administrator will calculate the eligible amount for
each valid Claim in accordance with the following procedures and criteria:
(a) the eligible amount of each Claim shall be determined by
subtracting from the purchase price, net of any commissions or fees, of each
Claimant's Eligible Shares the amount received on the sale of Eligible Shares,
net of any commissions or fees, that were sold on or before April 5, 1990. For
shares purchased during the Class Period and held after April 5, 1990, a value
of $5.50 will be used as the subtracting amount. If the eligible amount of any
claim is less than zero, the holder of such Claim shall not be considered a
Claimant and cannot participate in the Settlement Fund.
(b) In processing Claims, the first-in, first-out basis ("FIFO") will
be applied to both purchases and sales. The sales of Eligible Shares will be
matched in chronological order against the purchases of Eligible Shares during
the Class Period. Resulting match-ups which show a gain will be omitted in
calculating the eligible amount of each Claim.
(c) Each Claimant shall receive a proportionate share of the Net
Settlement Fund determined by the ratio that each
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<PAGE>
Claimant's aggregate eligible amount bears to the aggregate of all Claimants'
eligible amounts.
(d) The determinations of the Settlement Administrator shall be
subject to review and approval by the Court, as part of the Court's review and
approval of a proposed Order of Distribution as provided in Paragraph 19 hereof.
Neither Defendants nor their counsel or insurers shall have any responsibility
or liability with respect to the administration of Claims by the Settlement
Administrator, nor shall they have any right to challenge any Claims.
ADMINISTERING CLAIMS OF AUTHORIZED CLAIMANTS
--------------------------------------------
16. For purposes of determining the extent, if any, to which any person
shall be entitled to be treated as an Authorized Claimant pursuant to this
Stipulation, the following conditions shall apply:
(a) Each person claiming to be an Authorized Claimant shall be
required to submit a separate Proof of Claim signed under penalty of perjury and
supported by such documents as are specified in the Proof of Claim.
(b) All Proofs of Claim must be delivered or postmarked no later than
the date set forth in the Hearing Order, unless such date shall be extended by
the Federal Court. Any member of the Class from whom a Proof of Claim is not
timely received shall forever be barred from receiving any payments pursuant to
this Stipulation, but will in all other respects be subject to the provisions of
the Stipulation and the Final
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<PAGE>
Judgment of Dismissal entered in accordance with this Stipulation.
(c) Each Proof of Claim shall be submitted to and reviewed by the
Claims Administrator, who shall determine in accordance with this Stipulation
the extent, if any, to which each claim shall be allowed, subject to review by
the Court pursuant to paragraph 16(d) of this Stipulation.
(d) Proofs of Claim that do not meet the filing requirements shall be
rejected. Prior to the rejection of a Proof of Claim, the Claims Administrator
shall communicate with Claimants in order to afford them an opportunity to
remedy deficiencies in Proofs of Claims submitted. The Claims Administrator
shall notify, in a timely fashion and in writing, all Claimants whose Proofs of
Claims it proposes to reject, in whole or in part, setting forth the reasons
therefor, and shall indicate in such notice that the Claimant whose claim is to
be rejected has the right to a review by the Court if the Claimant so desires
and complies with the requirements of paragraph 16(e) of this Stipulation.
(e) If any Claimant whose claim has been rejected in whole or in part,
desires to contest such rejection, the Claimant must, within twenty (20) days
after the date of mailing of the notice required in paragraph 16(d) of this
Stipulation, serve upon the Claims Administrator a notice and statement of
reasons indicating the Claimant's grounds for contesting the rejection along
with any supporting documentation, and requesting a review
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<PAGE>
thereof by the Court. If a dispute concerning a claim cannot be otherwise
resolved, the Chairman of the Executive Committee of plaintiffs' Counsel or his
designee shall thereafter present the request for review to the Court.
17. For purposes of determining the validity of a Proof of Claim:
(a) A purchase or sale of First Constitution shares shall be deemed to
have occurred on the "contract" or "trade" date as opposed to the "settlement"
or "payment" date.
(b) Brokerage commissions and transaction charges incurred shall not
be included in the purchase or sale prices used for purposes of calculating an
Authorized Claimant's Recognized Loss.
18. No Person shall have any claim against Plaintiffs' Counsel or any
Claims Administrator or other agent designated by Plaintiffs' Counsel, or
Defendants or their counsel, in connection with the claims administration,
processing, or distributions made substantially in accordance with this
Stipulation and the Settlement contained herein, or further Orders of the Court.
DISTRIBUTION
------------
19. After the Effective Date of the Settlement, and after all the Claims
have been resolved by the Settlement Administrator to the extent possible,
Plaintiffs' Counsel shall submit to the Court for approval a proposed order of
distribution of the Settlement Fund ("Order of Distribution") to those Claimants
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<PAGE>
eligible to receive such distribution. Plaintiffs' Counsel shall also bring to
the attention of the Court at that time the unresolved disputes, if any, as to
the Claims, and shall ask the Court to resolve any such disputes.
20. No distribution of the Settlement Fund pursuant to the Order of
Distribution shall be made until the Effective Date.
RELEASE
-------
21. Upon the Effective Date of this Settlement, as defined in Paragraph 2
above, the Plaintiffs and all Members of the Settlement Class who have not
properly and timely excluded themselves from the Settlement Class, on behalf of
themselves, their agents, heirs, executors and administrators, successors and
assigns, for good and sufficient consideration, shall be deemed to have released
and forever discharged as by an instrument under seal, each and all of the
Released Parties from any and all Released Claims; provided however that this
release is not intended to release Defendants from their obligations under this
Stipulation.
OTHER MATTERS
-------------
22. The parties hereto and their attorneys agree to cooperate fully with
one another in seeking Court approval of this Stipulation and to use their best
efforts to effect the consummation of this Stipulation and the Settlement
provided for herein.
23. The Settling Parties and the Settlement Administrator agree to take
all steps necessary to qualify the Settlement Fund
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<PAGE>
at all material times as a "qualified settlement fund" within the meaning of
Treas. Reg. Section 1.468B-1. In addition, the Settlement Administrator, and as
required, the Settling Parties, shall jointly and timely make the "relation back
election" (as defined in Treas. Regs. Section 1.468B-1) back to the earliest
permitted date as is necessary or advisable to carry out the provisions of this
paragraph. Such election shall be made in compliance with the procedures and
requirements contained in such regulations.
(a) For the purpose of Treas. Regs. Section 1.468B-1, the Settlement
Administrator shall oversee the timely and proper filing of all appropriate
information and other tax returns on behalf of the Settlement Fund, including
without limitation, the returns described in Treas. Reg. Section 1.468B-2(k).
Such returns shall reflect that all taxes (including any interest or penalties)
on the income earned by the Settlement Amount shall be paid out of the
Settlement Fund.
(b) All taxes, including any interest or penalties, arising with
respect to the income earned by the Settlement Fund ("Taxes") and all reasonable
expenses and costs incurred in connection with the operation and implementation
of this paragraph, including without limitation, reasonable expenses of
preparation, such as tax attorneys' and accountants' fees, reasonable mailing
and distribution costs, and reasonable expenses related to filing the returns
described in this paragraph ("Tax Expenses") shall be paid out of the Settlement
-22-
<PAGE>
Fund; in all events, the Defendants and their insurers shall have no liability
or responsibility for the Taxes or the Tax Expenses. Further, the Taxes and the
Tax Expenses shall be treated as, and considered to be, a cost of administration
of the Settlement and shall be timely paid out of the Settlement Fund without
prior order of the Court.
(c) The Settlement Administrator shall be authorized and responsible
for (notwithstanding anything herein to the contrary) withholding from
distribution to Settlement Class Members any funds necessary to pay all Taxes
and Tax Expenses. The Settlement Administrator is also authorized and
responsible for withholding and depositing with the appropriate taxing
authorities any amounts that may be required to be withheld under Treas. Regs.
Section 1.468B-2(1)(2), and the Defendants shall have no responsibility
therefor. Amounts withheld and deposited with respect to any Plaintiff or
Settlement Class Member pursuant to the foregoing sentence shall be accounted
for as a distribution to such Plaintiff or Class Member. The Settling Parties
agree to cooperate with the Settlement Administrator and their respective tax
attorneys and accountants to the extent reasonably necessary to carry out the
provisions of the paragraph.
24. This Stipulation, including the Exhibits hereto, shall be binding on
and inure to the benefit of the parties hereto, including all Settlement Class
Members, and their respective heirs, successors, assigns, executors and
administrators, and
-23-
<PAGE>
upon any corporation or other entity into or with which any party hereto may
merge or consolidate.
25. All of the Exhibits attached hereto are incorporated herein by
reference as if set forth verbatim, and the terms of all Exhibits are expressly
made a part of this Stipulation.
26. The waiver by any party hereto of any breach of this Stipulation shall
not be deemed or construed as a waiver of any other breach, whether prior,
subsequent, or contemporaneous, of this Stipulation.
27. This Stipulation may be executed in counterparts.
28. This Stipulation and the Settlement is not a concession or admission
of wrongdoing or liability by any person, and shall not be used or construed as
an admission of any fault, omission, liability, or wrongdoing on the part of any
party hereto in any statement, release, or written document, or financial report
issued, filed or made. Neither this Stipulation, nor the Exhibits hereto, nor
the fact of settlement, nor any settlement negotiations or discussions, nor the
judgment entered in the Actions, nor any related document shall be offered or
received in evidence as an admission, concession, presumption, or inference
against any party hereto in any proceeding other than such a proceeding as may
be necessary to consummate or enforce this Stipulation and the Settlement.
29. In the event of any dispute or disagreement with respect to the
meaning, effect, or interpretation of the Stipulation or an attached Exhibit, or
in the event of a claimed
-24-
<PAGE>
breach of this Stipulation or an attached Exhibit, the parties hereto agree that
such dispute will be adjudicated only in the United States District Court for
the District of Connecticut (the "Federal Court"). The Final Judgment of
Dismissal shall provide that the Federal Court shall retain jurisdiction for the
purposes, among other things, of administering the Settlement and resolving any
dispute hereunder and awarding Plaintiffs' Counsel attorneys' fees and
reimbursing their expenses.
30. This Stipulation, the attached Exhibits, and the Supplemental
Agreement referred to herein, represent the entire agreement between the parties
hereto, supersede any prior agreements, orders of Court or understandings
between the parties with respect to the subject matter hereof, and shall not be
modified unless in writing.
31. This Stipulation and any of the Exhibits hereto my be amended or
modified by a written instrument signed by Plaintiffs' Counsel and Defendants'
Counsel, with the consent of the Court, without further notice to the Class
unless the Court requires such notice.
32. This Stipulation, including releases provided for herein, shall be
governed by the laws of the State of Connecticut without regard to its conflicts
of laws principles.
-25-
<PAGE>
Dated: May 28, 1996
THE PLAINTIFFS
--------------
BY: /s/ Richard A. Bieder
----------------------------
Richard A. Bieder (ot# 04208)
KOSKOFF KOSKOFF & BIEDER, P.C.
350 Fairfield Avenue
Bridgeport, CT 06604
(203) 336-4421
Plaintiffs' Executive Committee Chairman
Richard Bemporad
LOWEY DANNENBERG BEMPORAD
& SELINGER, P.C.
747 Third Avenue
New York, NY 10017
(212) 759-1504
Harvey Greenfield
LAW FIRM OF HARVEY GREENFIELD
10 East 40th Street,
44th Floor
New York, NY 10017
WARREN P. JOBLIN
164 Kings Highway North
Westport, CT 06880
(203) 226-7774
Plaintiffs' Executive Committee Members
Leonard Barrack
Gerald J. Rodos
Jeffrey W. Golan
BARRACK RODOS & BACINE
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
(215) 963-0600
- and -
-26-
<PAGE>
Mark C. Gardy
ABBEY & ELLIS
212 East 39th Street
New York, NY 10016
(212) 889-3700
Counsel for Plaintiffs
and the Class
THE DEFENDANTS
WALTER R. MILLER, JR.,
JOSIAH B. VENTER,
GEORGE H. BROOKS-GONYER,
AND JOHN A. ROURKE
BY: /s/ Timothy G. Ronan
------------------------------
Timothy G. Ronan (ct# 06310)
Stephen J. Curley (ct# 09821)
Cummings & Lockwood
Four Stamford Plaza
P.O. Box 120
Stamford, CT 06904
(203) 351-4362
THE DEFENDANT ARISTOTLE CORPORATION
formerly known as
FIRST CONSTITUTION
FINANCIAL CORPORATION
BY: /s/ Edward V. O'Hanlan
------------------------------
Edward V. O'Hanlan (ct# 00522)
O'ROURKE & O'HANLAN
27 Pine Street
New Canaan, CT 06840
(203) 966-6664
OF COUNSEL:
Jay B. Kasner (ct# 05025)
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
919 Third Avenue
New York, NY 10022
(212) 735-3000
-27-
<PAGE>
Exhibit 21.1
Subsidiaries of The Aristotle Corporation
Aristotle Sub, Inc.
The Strouse, Adler Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
statements of operations and consolidated balance sheets and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 99
<SECURITIES> 6,253
<RECEIVABLES> 3,076
<ALLOWANCES> (101)
<INVENTORY> 9,478
<CURRENT-ASSETS> 19,023
<PP&E> 2,423
<DEPRECIATION> (739)
<TOTAL-ASSETS> 23,795
<CURRENT-LIABILITIES> 12,736
<BONDS> 0
2,247
0
<COMMON> 11
<OTHER-SE> 6,519
<TOTAL-LIABILITY-AND-EQUITY> 23,795
<SALES> 24,062
<TOTAL-REVENUES> 24,374
<CGS> 18,393
<TOTAL-COSTS> 5,043
<OTHER-EXPENSES> 231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 865
<INCOME-PRETAX> 73
<INCOME-TAX> (1,626)
<INCOME-CONTINUING> 1,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,468
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.17
</TABLE>
