<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended December 31, 1997
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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 867-4090
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of January 28, 1998, 1,097,902 shares of Common Stock, $.01 par value per
share, were outstanding.
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 1997
and June 30, 1997 3
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
</TABLE>
2
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,031 $ 139
Marketable securities held in escrow, at market value 400 900
Accounts receivable, net of reserves of $418 and $172 3,171 3,519
Current maturities of employee notes receivable - 100
Inventories 12,661 10,945
Other current assets 165 146
---------- ----------
Total current assets 18,428 15,749
---------- ----------
Property and equipment, net 1,593 1,475
---------- ----------
Other assets:
Marketable securities held in escrow, at market value 300 300
Employee notes receivable, less current maturities 208 208
Goodwill, net of amortization of $188 and $162 1,758 1,784
Deferred tax asset 630 630
Other noncurrent assets 219 235
---------- ----------
3,115 3,157
---------- ----------
$ 23,136 $ 20,381
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable and current maturities of long-term debt $ 8,466 $ 6,488
Current maturities of minority interest in subsidiary's preferred stock 781 900
Accounts payable 1,818 2,663
Accrued expenses 1,373 517
Deferred tax liability 630 630
---------- ----------
Total current liabilities 13,068 11,198
---------- ----------
Long-term debt, less current maturities 1,567 1,670
---------- ----------
Total liabilities 14,635 12,868
---------- ----------
Minority interest in subsidiary's preferred stock, less current maturities 805 805
---------- ----------
Minority interest in subsidiary's common stock 215 194
---------- ----------
Commitments and contingencies
Voting redeemable preferred stock, $.01 par value; 3,000,000 shares authorized; 72,757
and 75,678 shares of Series A at December 31, 1997 and June 30, 1997, respectively,
25,540 and 34,065 shares of Series B at December 31, 1997 and June 30, 1997,
respectively, 60,274 and 60,756 shares of Series C at December 31, 1997 and June 30,
1997, respectively, and 24,998 shares of Series D at December 31, 1997 and June 30,
1997 issued and outstanding 1 3
---------- ----------
Stockholders' equity:
Common stock, $.01 par value; 3,000,000 shares
authorized; 1,105,801 shares issued 11 11
Additional paid-in capital 159,762 159,762
Retained earnings (deficit) ( 152,263) ( 153,232)
Treasury stock at cost - 7,287 shares ( 30) ( 30)
---------- ----------
Total stockholders' equity 7,480 6,511
---------- ----------
$ 23,136 $ 20,381
========== ==========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except for share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 6,782 $ 4,941 $ 14,350 $ 10,248
Cost of goods sold 4,941 3,573 10,537 7,393
---------- ---------- ---------- ----------
Gross profit 1,841 1,368 3,813 2,855
Operating expenses:
Selling 943 729 1,766 1,427
General and administrative 483 528 1,032 976
Nonrecurring tax claim contingency
fee 480 - 480 -
Product development 170 151 341 277
---------- ---------- ---------- ----------
Operating income (loss) ( 235) ( 40) 194 175
---------- ---------- ---------- ----------
Other income (expense)
Investment and interest income 40 36 57 98
Interest expense ( 200) ( 166) ( 388) ( 350)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and minority ( 395) ( 170) ( 137) ( 77)
Income tax benefit (expense) 1,199 ( 8) 1,199 ( 22)
---------- ---------- ---------- ----------
Income (loss) before minority
interest 804 ( 178) 1,062 ( 99)
Minority interest 43 42 93 96
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 761 ($ 220) $ 969 ($ 195)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.69 ($ 0.20) $ 0.88 ($ 0.18)
========== ========== ========== ==========
Diluted $ 0.61 ($ 0.20) $ 0.78 ($ 0.18)
========== ========== ========== ==========
Weighted average shares:
Basic 1,108,032 1,101,188 1,103,273 1,102,842
========== ========== ========== ==========
Diluted 1,275,623 1,101,188 1,306,193 1,102,842
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 969 ($ 195)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 288 260
Changes in assets and liabilities:
Accounts receivable 348 ( 53)
Inventories ( 1,716) ( 229)
Other assets 493 ( 89)
Accounts payable ( 845) ( 97)
Accrued expenses 856 ( 351)
------ -------
Net cash provided by (used in) operating
activities 393 ( 754)
------ -------
Cash flows from investing activities:
Purchase of property and equipment ( 376) ( 132)
Purchase of marketable securities - ( 707)
Repurchase of ASI preferred stock ( 19) ( 260)
Repurchase of ARTL preferred stock ( 2) -
Sale of marketable securities - 5,760
Settlement of FDIC claim - ( 3,760)
Minority interest 21 2
------ -------
Net cash provided by (used in) investing
activities ( 376) 903
------ -------
Cash flows from financing activities:
Net borrowings under line of credit 2,099 980
Principal payments under note payable ( 224) ( 569)
Purchase of treasury stock - ( 22)
------ -------
Net cash provided by financing
activities 1,875 389
------ -------
INCREASE IN CASH AND CASH EQUIVALENTS 1,892 538
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 139 99
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,031 $ 637
====== =======
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Aristotle Corporation ("Aristotle") is a holding company for its
subsidiary, Aristotle Sub, Inc. ("ASI"). ASI is a holding company for The
Strouse, Adler Company ("Strouse"). Strouse designs, manufactures and markets
women's intimate apparel. Unless the context indicates otherwise, all references
herein to the "Company" include Aristotle, ASI and Strouse.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six months ended December 31, 1997 are not necessarily indicative of results
that may be expected for the year ending June 30, 1998. For further information,
refer to the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
2. Earnings per Common Share
The Company has adopted the provisions of SFAS 128, Earnings Per Share.
The prior three and six months ended December 31, 1996 have been restated as a
result of the adoption. For the three and six months ended December 31, 1997 and
1996, Basic and Diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Numerator:
Net income (loss) available to common
stockholders $ 760,643 ($ 220,051) $ 969,063 ($ 194,689)
----------- ------------ ----------- ------------
Denominator:
Weighted average common shares
outstanding 1,108,032 1,101,188 1,103,273 1,102,842
----------- ------------ ----------- ------------
$ .69 ($ .20) $ .88 ($ .18)
=========== ============ =========== ============
Diluted Earnings Per Share
Numerator:
Net income (loss) available to common
stockholders $ 760,643 ($ 220,051) $ 969,063 ($ 194,689)
Convertible preferred dividends 17,263 - 51,241 -
----------- ------------ ----------- ------------
777,906 ( 220,051) 1,020,304 ( 194,689)
----------- ------------ ----------- ------------
Denominator:
Weighted average common shares
outstanding 1,108,032 1,101,188 1,103,273 1,102,842
Convertible warrants 33,426 - 33,426 -
Weighted average convertible preferred
stock 134,165 - 169,494 -
----------- ------------ ----------- ------------
1,275,623 1,101,188 1,306,193 1,102,842
----------- ------------ ----------- ------------
Earnings per share $ .61 ($ .20) $ .78 ($ .18)
=========== ============ =========== ============
</TABLE>
6
<PAGE>
Options to purchase shares of common stock were outstanding during the
above periods but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares.
For the purposes of calculating diluted earnings per share for the
three and six months ended December 31, 1997, the weighted average convertible
preferred stock does not include $800,000 of the Company's preferred stock that
as of September 15, 1997 was no longer convertible and which was redeemed
January 1, 1998. In addition, for the three and six months ended December 31,
1996, the convertible warrants and convertible preferred stock were not included
in the computation of diluted earnings per share as the inclusion would be
antidilutive.
On January 2, 1998, Geneve Corporation purchased 489,131 shares of the
Company's 8% convertible preferred stock and 30,000 shares of common stock. Had
the transactions been outstanding for the three and six months ended December
31, 1997, the proforma earnings per share calculations would have been as
follows:
Three Months Six Months
Ended December 31, Ended December 31,
1997 1997
---- ----
Proforma
Numerator:
Income available to common stockholders:
Basic $ 715,273 $ 878,323
----------- -----------
Diluted $ 777,906 $1,020,304
----------- ----------
Denominator:
Weighted average shares:
Basic 1,138,032 1,133,273
--------- ---------
Diluted 1,794,754 1,825,324
--------- ---------
Earnings per share:
Basic $ .63 $ .78
============ ============
Diluted $ .43 $ .56
============ ============
3. Debt Agreement
In September 1997, Strouse and Bank of Boston, Connecticut (the "Bank
of Boston") entered into an amended Credit Agreement whereby the maximum
borrowing under Strouse's line-of-credit was increased to $10,000,000 from
$8,000,000. In addition, the overadvance limit under the line-of-credit was
adjusted, and $500,000 pledged by Aristotle to secure Aristotle's and ASI's
guarantee of Strouse's line-of-credit facility and term loan facility
(collectively, the "Credit Facilities") was released.
Borrowing under the line-of-credit is determined by a borrowing base
which is equal to the sum of 80% of eligible accounts receivable, 50% of
eligible raw material inventory, and 60% of eligible finished goods inventory,
with a maximum borrowing of $10,000,000. In addition, the line-of-credit
facility permits advances to exceed the borrowing base amount by up to
$1,000,000 through December 1997, $1,250,000 from January 1998 through March
1998, $1,000,000 during April 1998 and $500,000 thereafter through September
1999 (so long as the total line-of-credit is not more than the $10,000,000 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.
7
<PAGE>
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 floating annual rate equal to prime plus .75%, or Eurodollar
plus 2.5% or at a fixed annual rate equal to 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. 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.
As of February 6, 1998, the balance outstanding on the line-of-credit
was $7,622,000 and the balance outstanding on the term loan was $1,750,000. As
of February 6, 1998, the additional borrowing available on the overadvance was
$512,000.
During 1997, Aristotle entered into a line-of-credit agreement with
Citizens Bank for $300,000. The line-of-credit bears interest at prime and
matures on August 31, 1998. As of February 6, 1998, there was no balance
outstanding on the line-of-credit.
8
<PAGE>
THE ARISTOTLE CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended December 31, 1997 and 1996
The Company's net sales for the three months ended December 31, 1997
increased 37% to $6,782,000, compared to net sales of $4,941,000 for the three
months ended December 31, 1996. The increase was primarily generated by a
$1,250,000 sales volume increase in specialty brassiere products (reflecting
increased market demand for specialty brassieres), and a $591,000 sales volume
increase in shapewear products (primarily reflecting the recent introduction of
the "Slimlook" line), of which $51,000 represented a favorable impact from
increased prices from specialty brassieres and shapewear products.
The Company's gross profit for the three months ended December 31, 1997
increased 35% to $1,841,000 from $1,368,000 for the three months ended December
31, 1996, and the gross margin percentage decreased to 27.1% from 27.7%. The
increase in gross profit was primarily the result of the increase in sales. The
decrease in gross margin percentage was principally due to the increase in sales
derived from the expanded "Slimlook" line of shapewear, which line yields lower
margins.
Selling, general and administrative expenses for the three months ended
December 31, 1997 were $1,426,000, compared to $1,257,000 for the corresponding
three months ended December 31, 1996. The $169,000, or 13%, increase was
principally a result of increases in sales commissions and advertising costs.
Product development costs for the Company for the three months ended
December 31, 1997 were $170,000, compared to $151,000 for the three months ended
December 31, 1996. 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 $19,000, or
13%, increase in costs reflects Strouse's continued investment in the product
development process.
Investment and interest income was $40,000 and $36,000 for the three
months ended December 31, 1997 and 1996, respectively. The income for the three
months ended December 31, 1997 was principally generated by short-term cash
investments and the investment of funds held in an investment account (the
"Strouse Escrow Account") that was established in connection with the
acquisition of Strouse by Aristotle (the "Acquisition") and is subject to an
escrow and pledge agreement with the former Strouse stockholders (the "Former
Strouse Stockholders").
Interest expense for the three months ended December 31, 1997 increased
to $200,000 from $166,000 in the corresponding three months ended December 31,
1996. The increase in interest expense primarily resulted from increased
borrowing levels to support working capital needs and business growth.
The income tax benefit for the three months ended December 31, 1997 was
$1,199,000, compared to a provision of $8,000 for the three months ended
December 31, 1996. During the three months ended December 31, 1997, the Company
received a tax refund of $1,919,000 resulting from a tax loss carryback claim
related to its 1996 tax year. In connection therewith, the Company recorded an
income tax benefit of $1,199,000, which is net of a $720,000 reserve which is
included in accrued expenses in the accompanying consolidated balance sheet. In
addition, upon receipt of such refund, the Company was obligated to pay $480,000
as a result of a contingent fee arrangement entered into in connection with this
income tax refund claim. The income tax provision for the three months ended
December 31, 1996, reflected minimum state taxes, as any federal tax obligation
was sheltered by the utilization of net operating loss carryforwards.
9
<PAGE>
Minority interest expense was $43,000 and $42,000 for the three months
ended December 31, 1997 and 1996, respectively. The minority interest expense
was principally due to preferred dividends paid or accrued during the three
months on outstanding preferred stock of ASI (the "ASI Preferred Stock") issued
to the Former Strouse Stockholders in connection with the Acquisition.
Six Months Ended December 31, 1997 and 1996
The Company's net sales for the six months ended December 31, 1997
increased 40% to $14,350,000, compared to net sales of $10,248,000 for the six
months ended December 31, 1996. The increase was primarily generated by a
$2,293,000 sales volume increase in shapewear products (primarily reflecting the
introduction of the "Slimlook" line), a $1,809,000 sales volume increase in
specialty brassiere products (reflecting increased market demand for specialty
brassieres), of which $201,000 represented a favorable impact from increased
prices from specialty brassieres and shapewear products.
The Company's gross profit for the six months ended December 31, 1997
increased 34% to $3,813,000 from $2,855,000 for the six months ended December
31, 1996, and the gross margin percentage decreased to 26.6% from 27.9%. The
increase in gross profit was primarily the result of sales growth. The decrease
in gross margin percentage was principally due to the introduction of the
expanded "Slimlook" line of shapewear, which line yields lower margins.
Selling, general and administrative expenses for the six months ended
December 31, 1997 were $2,798,000, compared to $2,403,000 for the corresponding
six months ended December 31, 1996. The $395,000, or 16%, increase was
principally a result of increases in sales commissions and advertising costs.
Product development costs for the Company for the six months ended
December 31, 1997 were $341,000, compared to $277,000 for the six months ended
December 31, 1996. 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 $64,000, or
23%, increase in costs reflects Strouse's continued investment in the product
development process through increases in staffing in Strouse's design centers.
Investment and interest income was $57,000 and $98,000 for the six
months ended December 31, 1997 and 1996, respectively. The income for the six
months ended December 31, 1997 was principally generated by short-term cash
investments and the investment of funds held in the Strouse Escrow Account that
was established in connection with the Acquisition and was subject to an escrow
and pledge agreement with the Former Strouse Stockholders. The $41,000, or 42%,
reduction in investment and interest income was primarily a result of the
payment, in September 1996, of approximately $3,760,000 from two escrow accounts
(the "FDIC Escrow Accounts") in connection with a settlement between the Company
and the FDIC related to certain disputes between the FDIC, the Company and
others (the "FDIC Settlement").
Interest expense for the six months ended December 31, 1997 increased
to $388,000 from $350,000 in the corresponding six months ended December 31,
1996. The increase in interest expense primarily resulted from increased
borrowing levels to support working capital needs and business growth.
The income tax benefit for the six months ended December 31, 1997 was
$1,199,000, compared to a provision of $22,000 for the three months ended
December 31, 1996. During the three months ended December 31, 1997, the
Company received a tax refund of $1,919,000 resulting from a tax loss carryback
claim related to its 1996 tax year. In connection therewith, the Company
recorded an income tax benefit of $1,199,000, which is net of a $720,000 reserve
which is included in accrued expenses in the accompanying consolidated balance
sheet. In addition, upon receipt of such refund the Company was obligated to pay
$480,000 as a result of a contingent fee arrangement entered into in connection
with this income tax refund claim. The income tax provision for the six months
ended December 31, 1996, reflected minimum state taxes, as any federal tax
obligation was sheltered by the utilization of net operating loss carryforwards.
10
<PAGE>
Minority interest expense was $93,000 and $96,000 for the six months
ended December 31, 1997 and 1996, respectively. The minority interest expense
was principally due to preferred dividends paid or accrued during the six months
on outstanding ASI Preferred Stock issued to the Former Strouse Stockholders in
connection with the Acquisition.
Liquidity and Capital Resources
During the six months ended December 31, 1997, cash required to fund
the working capital needs of Strouse was supplied principally through a
line-of-credit facility and term loan facility with Bank of Boston, trade
credit, and internally generated funds. In September 1997, Strouse and Bank of
Boston entered into an amended Credit Agreement whereby the maximum borrowing
under Strouse's line-of-credit was increased to $10,000,000 from $8,000,000. The
amendment also adjusted the amount by which borrowings can exceed the formula
amounts and released the $500,000 pledge by Aristotle and ASI to secure the
guarantee of the Credit Facilities.
During the six months ended December 31, 1997, cash required to fund
the operations of Aristotle, the parent company, was supplied primarily through
earnings generated from the Strouse Escrow Account, short-term cash investments,
amounts payable to Aristotle pursuant to certain notes from certain officers of
Strouse, and amounts received from Strouse in connection with a tax sharing
agreement between Aristotle and Strouse.
The Company generated cash of $393,000 from operations for the six
months ended December 31, 1997 and utilized $754,000 to fund operations during
the six months ended December 31, 1996. During the six months ended December 31,
1997, the generation of cash from operations was principally the result of net
income from operations, depreciation and amortization and decreases in accounts
receivables and other assets and increases in accrued expenses, partially offset
by increases in inventory and decreases in accounts payable. During the six
months ended December 31, 1996, the utilization of cash from operations was
principally the result of increases in accounts receivables, inventories and
other assets and decreases in accounts payable and accrued expenses, partially
offset by depreciation and amortization.
The Company utilized $376,000 for investing activities for the six
months ended December 31, 1997 and generated $903,000 from investing activities
for the six months ended December 31, 1996. During the six months ended December
31, 1997, cash from investing activities was primarily utilized to purchase
$376,000 in property and equipment. During 1997, the Company also used $19,000
to fund the payment of the Put Right, as defined below, exercised by one of the
Former Strouse Stockholders. In exchange for the funding of the Put Right, the
Company received 1,928 shares of ASI Preferred Stock and 1,928 shares of
Aristotle Preferred Stock. During the six months ended December 31, 1996, the
primary generation of cash from investing activities was the $5,760,000 sale of
marketable securities that were withdrawn from the FDIC Escrow Accounts in
connection with the FDIC Settlement, offset by the payment of $3,760,000 to the
FDIC from the FDIC Escrow Accounts in connection with the FDIC Settlement.
During 1996, the Company also used $260,000 to fund the payment of the Put
Right, as defined below, $132,000 to purchase property and equipment, and
$707,000 to purchase marketable securities to fund the account pledged to the
Bank of Boston, which account secured Aristotle's guarantee of the Credit
Facilities and to restore the Strouse Escrow Account.
11
<PAGE>
The Company generated $1,875,000 and $389,000 from financing activities
for the six months ended December 31, 1997 and December 31, 1996, respectively.
Funds generated during the six months ended December 31, 1997 were primarily a
result of the Company drawing $2,099,000 from its line-of-credit, offset by
$224,000 payment of its lease and term notes payable. Funds generated during the
six months ended December 31, 1996 were primarily a result of the Company
drawing $980,000 from its line-of-credit, offset by the $569,000 payment of its
lease and term notes payable. In addition during 1996, the Company repurchased
6,000 shares of its Common Stock in the open market for approximately $22,000.
In connection with the Acquisition in April 1994, 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"). Under the charter
provisions in effect at the time of the Acquisition, the Former Strouse
Stockholders had the right to require that ASI repurchase each share of ASI
Preferred Stock for $10.00 per share, plus any accrued but unpaid dividends, at
various dates beginning in April 1996 (the "Put Right"). Prior to the Put Right
becoming exercisable, the ASI Preferred Stockholders are entitled to quarterly
dividends of 8.9% per annum. Once the Put Right is exercisable, the dividends
cease. In order to exercise the Put Right, a Former Strouse Stockholder must
also sell an equal number of shares of Aristotle Preferred Stock to Aristotle
for $.001 per share. The payment of the repurchase price pursuant to the Put
Right is secured by the Strouse Escrow Account. Subject to the previous exercise
of the Put Right, as of December 31, 1997, 158,571 shares of ASI Preferred Stock
and 183,569 shares of Aristotle Preferred Stock were currently outstanding.
In September 1997, the Company and certain of the Former Strouse
Stockholders who hold ASI Preferred Stock agreed to delay the exercise of the
remaining Put Rights and to modify certain other agreements entered into at the
time of the Acquisition (the "1997 Modification"). Under the 1997 Modification,
certain of the Former Strouse Stockholders surrendered to ASI 10,000 shares of
ASI Preferred Stock in exchange for the cancellation of an aggregate of $100,000
owed by these Former Strouse Stockholders to the Company under loans extended in
connection with the Acquisition (the "Acquisition Loans"). On January 1, 1998,
the Company was obligated to, and did redeem 78,072 shares of ASI Preferred
Stock which, when taken in conjunction with 1,928 shares redeemed in October
1997, resulted in the aggregate repurchase of 80,000 shares of ASI Preferred
Stock, for $10.00 per share, or an aggregate of $800,000. See Recent
Developments below. The Put Right for the remaining 80,499 shares of ASI
Preferred Stock has been postponed such that the Put Right with respect to
40,249 shares will be exercisable on January 1, 1999 and the Put Right with
respect to 40,250 shares will be exercisable on January 1, 2000.
Under the 1997 Modification, the maturity dates on the Acquisition
Loans were extended such that $104,000 of the outstanding balance will be due
and payable on January 1, 1999 and the remaining $104,000 will be due and
payable on January 1, 2000. Certain Former Strouse Stockholders also agreed to
release $400,000 from the Strouse Escrow Account on January 1, 1998 to be used
to fund the redemption of the ASI Preferred Stock required to be redeemed on
that date and to the release of $200,000 and $100,000 on January 1, 1999 and
January 1, 2000, respectively, to satisfy the Company's Put Right obligations.
Further, in consideration for the Former Strouse Stockholders agreeing to
postpone their Put Right, the number of shares of Aristotle Common Stock into
which each share of ASI Preferred Stock may be exchanged has been increased from
1.282 to 1.667 shares. Finally, the holders of ASI Preferred Stock were released
from their obligations under a pension escrow agreement.
The Company anticipates that there will be sufficient financial
resources to meet the Company's projected working capital and other cash
requirements for the next twelve months. See Recent Developments below.
12
<PAGE>
Recent Developments
On January 1, 1998, the Company redeemed 78,072 shares of ASI Preferred
Stock for $10.00 per share, or $781,000 and 78,072 shares of ARTL Preferred
Stock for $.001 per share.
On January 2, 1998, Aristotle Sub, Inc., a wholly owned subsidiary of
Aristotle, was merged into Aristotle. The name of the surviving corporation
remains "The Aristotle Corporation". As a result of the merger, the remaining
105,497 shares of Aristotle Preferred Stock have been repurchased by the Company
for $.001 per share and the remaining 80,499 shares of ASI Preferred Stock have
been converted to Aristotle Preferred Stock.
On January 2, 1998, the Company and Geneve Corporation ("Geneve")
consummated the transaction contemplated by the Preferred Stock Purchase
Agreement (the "Preferred Stock Purchase Agreement"), which provided for the
purchase of approximately 489,131 shares of the Company's Series E Convertible
Preferred Stock, $.01 par value per share (the "Series E Preferred Stock"),
representing approximately thirty percent (30%) of the issued and outstanding
capital stock of Aristotle, for an aggregate purchase price of approximately
$2,250,000, or a per share price of $4.60. As a result of the Series E Preferred
Stock redemption features, unless and until converted, the Series E Preferred
Stock will be reflected outside of stockholders' equity in the Company's
Consolidated Balance Sheet. Contemporaneously with the closing of the Preferred
Stock Purchase Agreement, Geneve purchased an additional 30,000 shares of common
stock, for an aggregate purchase price of $135,000, or a per share price of
$4.50.
Year 2000 Issue
In 1997, the Company began, for all of its computer systems, a year
2000 date conversion project to address all necessary code changes, testing and
implementation. Project completion is planned for early 1999. The Company
expects its year 2000 date conversion project to be completed on a timely basis.
However, there can be no assurance that the systems of other companies on which
the Company's systems rely also will be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
Certain Factors That May Affect Future Results of Operations
The Company believes that this report may contain forward-looking
statements within the meaning of the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include statements regarding the Company's liquidity and are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. 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, ability to achieve manufacturing and shipping quality
and time targets, the dependence by the Company on key customers, manufacturing
subcontractors, favorable resolution of tax claims 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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 30, 1997, Aristotle held its annual meeting of its
stockholders. The following matters were voted on at the annual meeting:
1. The election of Robert L. Fiscus, Betsy Henley-Cohn and John C.
Warfel to Aristotle's Board of Directors for three-year terms; and
2. The approval of the Company's 1997 Employee and Director Stock
Plan; and
3. The ratification of the appointment of Arthur Andersen LLP,
Independent Certified Public Accountants, as Aristotle's
independent auditors for the fiscal year ending June 30, 1998.
The following chart shows the number of votes cast for or against, as
well as the number of abstentions and broker nonvotes, as to each matter voted
on at the annual meeting:
<TABLE>
<CAPTION>
The The The The The
Election Election Election Approval of Appointment
of Of of the Company's of Arthur
Mr. Fiscus Ms. Henley-Cohn Mr. Warfel 1997 Stock Plan Andersen LLP
---------- --------------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
For 880,598 883,078 882,485 525,320 885,771
Against 24,476 21,996 22,589 83,220 17,397
Abstain 0 0 0 7,853 1,906
Broker Nonvotes 0 0 0 484,178 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the six months ended
December 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ARISTOTLE CORPORATION
/s/ John J. Crawford
--------------------
John J. Crawford
Its President, Chief Executive Officer
and Chairman of the Board
Date: February 13, 1998
/s/ Paul McDonald
-----------------
Paul McDonald
Its Chief Financial Officer
and Secretary
(principal financial and chief
accounting officer)
Date: February 13, 1998
15
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule
16
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,031
<SECURITIES> 400
<RECEIVABLES> 3,588
<ALLOWANCES> (143)
<INVENTORY> 12,661
<CURRENT-ASSETS> 18,428
<PP&E> 3,022
<DEPRECIATION> (1,429)
<TOTAL-ASSETS> 23,136
<CURRENT-LIABILITIES> 13,068
<BONDS> 0
1,586
0
<COMMON> 11
<OTHER-SE> 7,469
<TOTAL-LIABILITY-AND-EQUITY> 23,136
<SALES> 14,350
<TOTAL-REVENUES> 14,408
<CGS> 10,537
<TOTAL-COSTS> 3,619
<OTHER-EXPENSES> 93
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388
<INCOME-PRETAX> (137)
<INCOME-TAX> (1,199)
<INCOME-CONTINUING> 969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 969
<EPS-PRIMARY> .88
<EPS-DILUTED> .78
</TABLE>
