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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14669
----------------
THE ARISTOTLE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1165854
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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 April 29, 1998, 1,201,118 shares of Common Stock, $.01 par value per
share, were outstanding.
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THE ARISTOTLE CORPORATION
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1998
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1998 and June 30,
1997................................................................... 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 1998 and 1997................................... 4
Condensed Consolidated Statements of Changes in Stockholders' Equity for
the Nine Months Ended March 31, 1998................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1998 and 1997.......................................... 6
Notes to Condensed Consolidated Financial Statements.................... 7
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 11
PART II--OTHER INFORMATION
Item 6--Exhibits and Reports on Form 8-K.................................. 16
Signatures................................................................ 17
Exhibit Index............................................................. 18
2
THE ARISTOTLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
MARCH 31, JUNE 30,
1998 1997
----------- ---------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 1,355 $ 139
Restricted cash and cash equivalents................... 1,079 --
Marketable securities held in escrow, at market value.. 200 900
Accounts receivable, net of reserves of $282 and $172.. 3,548 3,519
Current maturities of employee notes receivable........ 104 100
Inventories............................................ 13,469 10,945
Other current assets................................... 335 146
--------- ---------
Total current assets................................. 20,090 15,749
--------- ---------
Property and equipment, net............................. 1,667 1,475
--------- ---------
Other assets:
Marketable securities held in escrow, at market value.. 100 300
Employee notes receivable, less current maturities..... 104 208
Long-term investments.................................. 150 --
Restricted long-term investments....................... 721 --
Goodwill, net of amortization of $201 and $162......... 1,745 1,784
Deferred tax asset..................................... 630 630
Other noncurrent assets................................ 206 235
--------- ---------
3,656 3,157
--------- ---------
$ 25,413 $ 20,381
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable and current maturities of long-term
debt.................................................. $ 9,016 $ 6,488
Current maturities of minority interest in
subsidiary's preferred stock.......................... -- 900
Current maturities of Series F, G and H preferred
stock................................................. 402 --
Accounts payable....................................... 2,008 2,663
Accrued expenses....................................... 1,298 517
Deferred tax liability................................. 630 630
--------- ---------
Total current liabilities............................ 13,354 11,198
Long-term debt, less current maturities................. 1,539 1,670
--------- ---------
Total liabilities.................................... 14,893 12,868
--------- ---------
Minority interest in subsidiary's preferred stock, less
current maturities..................................... -- 805
--------- ---------
Minority interest in subsidiary's common stock.......... -- 194
--------- ---------
Voting redeemable preferred stock....................... -- 3
--------- ---------
Series E preferred stock................................ 2,250 --
--------- ---------
Series F, G and H preferred stock, net of current
maturities............................................. 403 --
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 3,000,000 shares
authorized; 1,209,028 and 1,105,801 shares issued at
March 31, 1998 and June 30, 1997, respectively........ 12 11
Additional paid-in capital............................. 160,247 159,762
Retained earnings (deficit)............................ (152,356) (153,232)
Treasury stock at cost--7,296 shares................... (30) (30)
Net unrealized investment losses....................... (6) --
--------- ---------
Total stockholders' equity........................... 7,867 6,511
--------- ---------
$ 25,413 $ 20,381
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
THE ARISTOTLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales.......................... $ 5,826 $ 5,105 $ 20,176 $ 15,352
Cost of goods sold................. 4,254 3,701 14,792 11,093
--------- --------- --------- ---------
Gross profit................... 1,572 1,404 5,384 4,259
Operating expenses:
Selling.......................... 793 599 2,559 2,026
General and administrative....... 526 422 1,557 1,398
Nonrecurring tax claim
contingency fee................. -- -- 480 --
Product development.............. 140 167 481 444
--------- --------- --------- ---------
Operating income............... 113 216 307 391
--------- --------- --------- ---------
Other income (expense)
Investment and interest income... 52 34 109 133
Interest expense................. (196) (171) (585) (522)
--------- --------- --------- ---------
Income (loss) before income
taxes and minority interest... (31) 79 (169) 2
Income tax benefit (expense)....... -- (6) 1,199 (28)
--------- --------- --------- ---------
Income (loss) before minority
interest...................... (31) 73 1,030 (26)
Minority interest.................. -- (43) (92) (139)
--------- --------- --------- ---------
Net income (loss).................. (31) 30 938 (165)
Preferred dividends--Series E, F, G
and H............................. (62) -- (62) --
--------- --------- --------- ---------
Net income (loss) available for
common shareholder................ $ (93) $ 30 $ 876 $ (165)
========= ========= ========= =========
Net income (loss) per share:
Basic............................ $ (0.08) $ 0.03 $ 0.77 $ (0.15)
========= ========= ========= =========
Diluted.......................... $ (0.08) $ 0.03 $ 0.67 $ (0.15)
========= ========= ========= =========
Weighted average shares:
Basic............................ 1,200,421 1,098,514 1,134,772 1,101,426
========= ========= ========= =========
Diluted.......................... 1,200,421 1,131,940 1,474,107 1,101,426
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
THE ARISTOTLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE-MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NET
ADDITIONAL RETAINED UNREALIZED
COMMON PAID-IN EARNINGS TREASURY INVESTMENT
STOCK CAPITAL (DEFICIT) STOCK LOSSES TOTAL
------ ---------- --------- -------- ---------- ------
Balance--June 30, 1997.. $11 $159,762 $(153,232) $(30) $-- $6,511
Net income.............. -- -- 876 -- -- 876
Issuance of common stock
for:
Directors' services... -- 136 -- -- -- 136
Geneve Purchase
Agreement............ -- 135 -- -- -- 135
ASI minority interest. 1 214 -- -- -- 215
Net unrealized
investment gain........ -- -- -- -- (6) (6)
--- -------- --------- ---- --- ------
Balance--March 31, 1998. $12 $160,247 $(152,356) $(30) $(6) $7,867
=== ======== ========= ==== === ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
THE ARISTOTLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------- -------
Cash flows from operating activities:
Net income (loss).......................................... $ 876 $ (165)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................ 442 397
Issuance of common stock for services.................... 136 --
Changes in assets and liabilities:
Accounts receivable.................................... (29) (873)
Inventories............................................ (2,524) (623)
Other assets........................................... (173) 140
Accounts payable....................................... (655) 810
Accrued expenses....................................... 781 (454)
------- -------
Net cash used in operating activities................ (1,146) (768)
------- -------
Cash flows from investing activities:
Purchase of property and equipment......................... (587) (186)
Purchase of investment..................................... (150) --
Purchase of restricted investment.......................... (721) --
Restriction of cash........................................ (1,079) --
Purchase of marketable securities.......................... -- (707)
Repurchase of ASI preferred stock.......................... (800) (260)
Repurchase of ARTL preferred stock......................... (3) --
Sale of marketable securities.............................. 900 5,760
Settlement of FDIC claim................................... -- (3,760)
Minority interest.......................................... 20 7
------- -------
Net cash provided by (used in) investing activities.. (2,420) 854
------- -------
Cash flows from financing activities:
Net borrowings under line of credit........................ 2,561 987
Principal payments under note payable...................... (164) (678)
Issuance of common stock................................... 135 --
Proceeds from issuance of preferred stock.................. 2,250 --
Purchase of treasury stock................................. -- (22)
------- -------
Net cash provided by financing activities............ 4,782 287
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS........................ 1,216 373
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 139 99
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 1,355 $ 472
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
THE ARISTOTLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On January 2, 1998, Aristotle Sub, Inc. ("ASI"), a wholly-owned subsidiary
of The Aristotle Corporation ("Aristotle"), was merged into Aristotle (the
"ASI Merger"). The name of the surviving corporation remains "The Aristotle
Corporation". Aristotle 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" for the three months ended March 31, 1998 include only Aristotle and
Strouse and all other references herein to the "Company" include Aristotle,
ASI and Strouse. See "Recent Developments" below regarding the definitive
agreement entered into for the sale of Strouse to Sara Lee Corporation.
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 nine months ended March 31, 1998 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/A for the year
ended June 30, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Restricted Cash and Investments. In January 1998, the Company sold 489,131
shares of the Company's Series E Convertible Preferred Stock for $2,250,000 to
Geneve Corporation as part of a preferred stock purchase agreement (the
"Preferred Stock Purchase Agreement") (See Note 5). In accordance with the
terms of the Preferred Stock Purchase Agreement, the proceeds from such sale
of preferred stock cannot be used to fund the operations of Strouse.
Accordingly, included in the accompanying balance sheet is $1,079,000 of
restricted cash and $721,000 of restricted long-term investments. Restricted
investments are carried at market value and consist of corporate bonds with
maturities of generally more than one year.
7
THE ARISTOTLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. EARNINGS PER COMMON SHARE
The Company has adopted the provisions of SFAS 128, Earnings Per Share. The
prior three and nine months ended March 31, 1997 have been restated as a
result of the adoption. For the three and nine months ended March 31, 1998 and
1997, Basic and Diluted earnings per share are calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE
DATA)
BASIC EARNINGS PER SHARE
Numerator:
Net income (loss) available to
common stockholders............... $ (93) $ 30 $ 876 $ (165)
--------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding....................... 1,200,421 1,098,514 1,134,772 1,101,426
--------- --------- --------- ---------
Earnings per share................... $ (.08) $ .03 $ .77 $ (.15)
========= ========= ========= =========
DILUTED EARNINGS PER SHARE
Numerator:
Net income (loss) available to
common stockholders............... $ (93) $ 30 $ 876 $ (165)
Convertible preferred dividends.... -- -- 113 --
--------- --------- --------- ---------
(93) 30 989 (165)
--------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding....................... 1,200,421 1,098,514 1,134,772 1,101,426
Convertible warrants............... -- 33,426 22,567 --
Weighted average convertible
preferred stock................... -- -- 316,768 --
--------- --------- --------- ---------
1,200,421 1,131,940 1,474,107 1,101,426
--------- --------- --------- ---------
Earnings per share................... $ (.08) $ .03 $ .67 $ (.15)
========= ========= ========= =========
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 nine
months ended March 31, 1998, 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 nine months ended March 31, 1997, the convertible
warrants and convertible preferred stock were not included in the computation
of diluted earnings per share as the inclusion would be antidilutive.
4. DEBT AGREEMENT
In September 1997, Strouse and BankBoston NA, (successor by merger to Bank
of Boston Connecticut) ("BankBoston") amended the 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
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
8
THE ARISTOTLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
inventory, with a maximum borrowing of $10,000,000. In February 1998, Strouse
and BankBoston, Connecticut ("BankBoston") amended the credit agreement such
that the line-of-credit facility now permits advances to exceed the borrowing
base amount by up to $1,250,000 through April 1998, $1,000,000 during May
1998, $750,000 during June 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
original Credit Agreement permitted the advances to exceed the borrowing base
amounts by up to $1,250,000 through March 1998, $1,000,000 during April 1998
and $500,000 thereafter through September 1999. 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 floating annual rate equal to prime plus .75%, or
Eurodollar plus 2.5% or at a fixed annual rate equal to BankBoston'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 has 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 Aristotle without BankBoston's prior
written consent. Strouse must maintain certain financial ratios and satisfy
various other covenants in connection with the Credit Facilities.
As of April 28, 1998, the balance outstanding on the line-of-credit was
$8,831,000 and the balance outstanding on the term loan was $1,700,000. As of
April 28, 1998, the additional borrowing available on the overadvance was
$432,000.
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 April 28, 1998, there was no balance outstanding on the
line-of-credit.
5. PREFERRED STOCK
On January 2, 1998, ASI was merged into Aristotle. As a result of the
merger, all of the remaining 105,497 shares of Series A, B, C and D Aristotle
preferred stock owned by the former Strouse stockholders (the "Former Strouse
Stockholders") were repurchased by the Company for $.001 per share and all of
the remaining 80,499 shares of ASI preferred stock (the "ASI Preferred Stock")
were converted into Series F, G and H Aristotle preferred stock. As was the
case with the ASI Preferred Stock, the Series F, G and H Aristotle preferred
stock is entitled to quarterly dividends of 8.9% per annum. The Series F, G
and H Aristotle preferred stock is also entitled to one vote per share, with
respect to matters other than the election of directors and selection of an
auditor. As of March 31, 1998, a total of 80,499 shares of Series F, G and H
Aristotle preferred stock were outstanding. Pursuant to the Series F, G and H
Aristotle preferred stock redemption features, 40,249 shares of Series F, G
and H Aristotle preferred stock will be redeemable on January 1, 1999, at
$10.00 per share, and 40,250 shares of Series F, G and H Aristotle preferred
stock will be redeemable on January 1, 2000, at $10.00 per share. Accordingly,
the January 1, 1999 obligation of $402,000 is reflected as a current
obligation in the accompany Condensed Consolidated Balance Sheet and the
January 1, 2000 obligation of $403,000 is reflected outside of stockholders'
equity in the accompanying Condensed Consolidated Balance Sheet.
On January 2, 1998, the Company and Geneve Corporation ("Geneve")
consummated a transaction, which provided for the purchase of 489,131 shares
of Aristotle's Series E Convertible Preferred Stock, $.01 par value per share,
representing approximately thirty percent (30%) of the issued and outstanding
capital stock of Aristotle, for an aggregate purchase price of $2,250,000, or
a per share price of $4.60. Geneve is entitled to
9
receive quarterly dividends of 8.0% per annum on the Series E Preferred Stock.
Pursuant to the Series E preferred stock redemption features, the Company is
obligated to redeem all or part of the Series E preferred stock on January 1,
2002, at $4.60 per share. Unless and until converted, the Series E preferred
stock is reflected outside of stockholders' equity in the Company's Condensed
Consolidated Balance Sheet. Contemporaneously with the purchase of the Series
E preferred stock, 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.
10
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 MARCH 31, 1998 AND 1997
The Company's net sales for the three months ended March 31, 1998 increased
14% to $5,826,000, compared to net sales of $5,105,000 for the three months
ended March 31, 1997. The increase was primarily generated by a sales volume
increase of $706,000 in shapewear products (primarily reflecting the recent
introduction of the "Slimlook" line) and a sales volume increase of $15,000 in
specialty brassiere products. Included in the above sales volume increase is
$53,000 which represented a favorable impact from increased prices from
shapewear products and specialty brassieres.
The Company's gross profit for the three months ended March 31, 1998
increased 12% to $1,572,000 from $1,404,000 for the three months ended March
31, 1997, and the gross margin percentage decreased to 27.0% from 27.5%. 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
March 31, 1998 were $1,319,000, compared to $1,021,000 for the corresponding
three months ended March 31, 1997. The $298,000, or 29%, increase was
principally a result of increases in advertising costs to support current and
future growth, sales commissions and professional fees.
Product development costs for the Company for the three months ended March
31, 1998 were $140,000, compared to $167,000 for the three months ended March
31, 1997. Product development costs primarily include compensation of Company
personnel and are incurred by Strouse. All products are designed internally in
Strouse's New Haven and New York design centers. The $27,000, or 16%, decrease
in costs reflects a reduction of personnel in the design team.
Investment and interest income was $52,000 and $34,000 for the three months
ended March 31, 1998 and 1997, respectively. The income for the three months
ended March 31, 1998 was principally generated by short-term cash investments,
restricted and unrestricted long-term investments in corporate bonds 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 certain former Strouse stockholders (the "Former Strouse
Stockholders"). The $18,000, or 53%, increase in investment and interest
income resulted from higher levels of investments during the three months
ended March 31, 1998.
Interest expense for the three months ended March 31, 1998 increased to
$196,000 from $171,000 in the corresponding three months ended March 31, 1997.
The $25,000, or 15% increase in interest expense primarily resulted from
increased borrowing levels to support working capital needs and business
growth.
There was no minority interest for the three months ended March 31, 1998,
due to the ASI Merger pursuant to which all remaining outstanding shares of
ASI preferred stock (the "ASI Preferred Stock") were converted into Series F,
G, and H Aristotle preferred stock. Minority interest expense was $43,000 for
the three months ended March 31, 1997. The minority interest expense was
principally due to preferred dividends paid or accrued during the three months
on outstanding ASI Preferred Stock issued to the Former Strouse Stockholders
in connection with the Acquisition.
11
Preferred dividends were $62,000 for the three months ended March 31, 1998.
Preferred dividends represent dividends paid or accrued during the three
months on outstanding Series E, F, G and H Aristotle preferred stock. The
Series E preferred stock was issued in connection with the Preferred Stock
Purchase Agreement. The Series F, G and H Aristotle preferred stock was issued
in connection with the ASI Merger.
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
The Company's net sales for the nine months ended March 31, 1998 increased
31% to $20,176,000, compared to net sales of $15,352,000 for the nine months
ended March 31, 1997. The increase was primarily generated by a $3,000,000
sales volume increase in shapewear products (primarily reflecting the
introduction of the "Slimlook" line), a $1,824,000 sales volume increase in
specialty brassiere products (reflecting increased market demand for specialty
brassieres). Included in the above sales volume increase is $254,000 which
represented a favorable impact from increased prices from shapewear products
and specialty brassieres.
The Company's gross profit for the nine months ended March 31, 1998
increased 26% to $5,384,000 from $4,259,000 for the nine months ended March
31, 1997, and the gross margin percentage decreased to 26.7% from 27.7%. 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 nine months ended March
31, 1998 were $4,116,000, compared to $3,424,000 for the corresponding nine
months ended March 31, 1997. The $692,000, or 20%, increase was principally a
result of increases in sales commissions, advertising costs to support current
and future growth and professional fees.
Product development costs for the Company for the nine months ended March
31, 1998 were $481,000, compared to $444,000 for the nine months ended March
31, 1997. Product development costs primarily include compensation of Company
personnel and are incurred by Strouse. All products are designed internally in
Strouse's New Haven and New York design centers. The $37,000, or 8%, increase
in costs reflects Strouse's continued investment in the product development
process in Strouse's design centers.
Investment and interest income was $109,000 and $133,000 for the nine months
ended March 31, 1998 and 1997, respectively. The income for the nine months
ended March 31, 1998 was principally generated by short-term cash investments,
restricted and unrestricted long-term investments in corporate bonds 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 $24,000, or 18%, 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 nine months ended March 31, 1998 increased to
$585,000 from $522,000 in the corresponding nine months ended March 31, 1997.
The $63,000, or 12% increase in interest expense primarily resulted from
increased borrowing levels to support working capital needs and business
growth.
The income tax benefit for the nine months ended March 31, 1998 was
$1,199,000, compared to a provision of $28,000 for the nine months ended March
31, 1997. During the nine months ended March 31, 1998, 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 nine months ended
March 31, 1997, reflected minimum state taxes, as any federal tax obligation
was sheltered by the utilization of net operating loss carryforwards.
12
Minority interest expense was $92,000 and $139,000 for the nine months ended
March 31, 1998 and 1997, respectively. The minority interest expense was
principally due to preferred dividends paid or accrued on outstanding ASI
Preferred Stock issued to the Former Strouse Stockholders in connection with
the Acquisition during the nine months ended March 31, 1998 and the nine
months ended March 31, 1997. There was no minority interest for the three
months ended March 31, 1998, due to the ASI Merger pursuant to which all
remaining outstanding shares of ASI Preferred Stock were converted into Series
F, G, and H Aristotle preferred stock.
Preferred dividends were $62,000 for the nine months ended March 31, 1998.
Preferred dividends represent dividends paid or accrued during the nine months
on outstanding Series E, F, G and H Aristotle preferred stock. The Series E
Aristotle preferred stock was issued in connection with the Preferred Stock
Purchase Agreement. The Series F, G and H Aristotle preferred stock was issued
in connection with the ASI Merger.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended March 31, 1998, cash required to fund the
working capital needs of Strouse was supplied principally through a line-of-
credit facility and term loan facility with BankBoston, trade credit, and
internally generated funds. In September 1997, Strouse and BankBoston 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 to secure the guarantee of the
Credit Facilities. In February 1998, Strouse and BankBoston amended the credit
agreement whereby the line-of-credit facility permits advances to exceed the
borrowing base amount by up to $1,250,000 through April 1998, $1,000,000
during May 1998, $750,000 during June 1998 and $500,000 thereafter through
September 1999.
During the nine months ended March 31, 1998, cash required to fund the
operations of Aristotle, the parent company, was supplied primarily through
earnings generated from the Preferred Stock Purchase Agreement, the Internal
Revenue Service ("IRS") tax refund, 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 utilized cash of $1,146,000 and $768,000 to fund operations
during the nine months ended March 31, 1998 and 1997, respectively. During the
nine months ended March 31, 1998, the utilization of cash from operations was
principally the result of increases in accounts receivables, inventories and
other assets and decreases in accounts payable, partially offset by net income
from operations, depreciation and amortization, issuance of common stock for
services and increases in accrued expenses. During the nine months ended
March 31, 1997, the utilization of cash from operations was principally the
result of net loss from operations and increases in accounts receivables and
inventories and decreases in accrued expenses, partially offset by
depreciation and amortization and decreases in other assets and increases in
accounts payable.
The Company utilized $2,420,000 for investing activities for the nine months
ended March 31, 1998 and generated $854,000 from investing activities for the
nine months ended March 31, 1997. During the nine months ended March 31, 1998,
the primary utilization of cash from investing activities resulted from the
restriction of cash of $1,079,000 and the purchase of restricted investments
of $721,000 related to the Preferred Stock Purchase Agreement, the $150,000
purchase of investments, and the $587,000 purchase of property and equipment.
In addition, during the nine months ended March 31, 1998, the Company used
$800,000 to fund the payment of the Put Right, as defined below. In exchange
for the funding of the Put Right, the Company received 80,000 shares of ASI
Preferred Stock and 80,000 shares of Series A, B and C Aristotle preferred
stock. The utilization during the nine months ended March 31, 1998 was offset
by the generation of $900,000 from the sale of marketable securities. During
the nine months ended March 31, 1997, 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 fiscal 1997,
the Company also used $260,000 to fund
13
the payment of the Put Right, $186,000 to purchase property and equipment, and
$707,000 to purchase marketable securities to fund the account pledged to
BankBoston, which account secured Aristotle's guarantee of the Credit
Facilities and to restore the Strouse Escrow Account.
The Company generated $4,782,000 and $287,000 from financing activities for
the nine months ended March 31, 1998 and 1997, respectively. Funds generated
during the nine months ended March 31, 1998 were primarily a result of the
Company drawing $2,561,000 from its line-of-credit, proceeds of $2,250,000
from the Preferred Stock Purchase Agreement with Geneve Corporation, and the
purchase of an additional 30,000 shares of common stock by Geneve Corporation
for $135,000, offset by $164,000 payment of its leases and term notes payable.
Funds generated during the nine months ended March 31, 1997 were primarily a
result of the Company drawing $987,000 from its line-of-credit, offset by the
$678,000 payment of its lease and term notes payable. In addition, during
fiscal 1997, 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 Series A, B, C and
D preferred stock of Aristotle. 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 Series A, B and C 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.
In September 1997, the Company and certain of the Former Strouse
Stockholders who held 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. 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 had 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.
On January 2, 1998, ASI was merged into Aristotle. The name of the surviving
corporation remains "The Aristotle Corporation". As a result of the merger,
all of the remaining 105,497 shares of Series A, B, C and D Aristotle
preferred stock owned by the Former Strouse Stockholders were repurchased by
the Company for $.001 per share and all of the remaining 80,499 shares of ASI
Preferred Stock were converted into Series F, G and H Aristotle preferred
stock. As of March 31, 1998, a total of 80,499 shares of Series F, G and H
Aristotle preferred stock were currently outstanding.
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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.
RECENT DEVELOPMENTS
On March 4, 1998, the Company announced that it had entered into a
definitive agreement for the sale of Strouse to Sara Lee Corporation for an
aggregate purchase price of $21,500,000, subject to adjustment. The
transaction has been structured as a purchase of certain assets and an
assumption of selected liabilities. The purchase price includes a lump sum
non-competition payment to Aristotle and is subject to adjustment upon
determination of certain balance sheet items. The transaction is subject to
the satisfaction of several conditions, including approval of Aristotle's
shareholders.
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 consummation of the sale of The Strouse, Adler
Company to Sara Lee Corporation, the dependence by the Company on key
customers, 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.
15
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K:
On March 6, 1998, the Company filed a Form 8-K to report under Item 5 that
the Company had entered into a definitive agreement for the sale of the
business conducted by its sole operating subsidiary, The Strouse, Adler
Company, to Sara Lee Corporation for an aggregate purchase price of $21.5
million, subject to adjustment. No financial statements were filed with the
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ARISTOTLE CORPORATION
/s/ John J. Crawford
_____________________________________
John J. Crawford
Its President, Chief Executive
Officer and Chairman of the Board
Date: May 7, 1998
/s/ Paul McDonald
_____________________________________
Paul McDonald
Its Chief Financial Officer and
Secretary (principal financial and
chief accounting officer)
Date: May 7, 1998
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
10.1 Second Amendment dated February 25, 1998 to Master Credit Agreement
dated September 19, 1997 by and between The Strouse, Adler Company
and BankBoston NA (successor by merger to Bank of Boston
Connecticut) is attached hereto as Exhibit 10.1.
27.1 Financial Data Schedule
18