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, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission file number 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1165854
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(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
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 19, 1996, 1,104,581 shares of Common Stock were outstanding.
THE ARISTOTLE CORPORATION AND SUBSIDIARY
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1995
Page
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Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
December 31, 1995 and June 30, 1995 3
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended December 31, 1995 and 1994 4
Condensed Consolidated Statements of Changes
in Stockholders' Equity for the
Six Months Ended December 31, 1995 5
Condensed Consolidated Statements of
Cash Flows for the Six Months
Ended December 31, 1995 and 1994 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information
Item 1 - Legal Proceedings 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
2
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except for share data)
December 31, June 30,
1995 1995
---------------- --------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 176 $ 188
Accounts receivable, net of reserves
of $247 and $171, respectively 3,228 4,498
Inventories 10,567 11,782
Other current assets 886 867
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Total current assets 14,857 17,335
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Property and equipment, net 1,650 1,517
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Other assets:
Marketable securities held in escrow
at market value 4,682 4,682
Employee notes receivable 354 354
Patents and trademarks, net 83 88
Goodwill, net of amortization of $77
and $52, respectively 1,869 1,894
Deferred tax asset 725 725
Other noncurrent assets 232 225
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7,945 7,968
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TOTAL $ 24,452 $ 26,820
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable and current maturities
of long-term debt $ 6,965 $ 548
Accounts payable 1,220 2,367
Accrued expenses 1,017 1,304
Deferred tax liability 725 725
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Total current liabilities 9,927 4,944
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Long-term debt, less current maturities 2,567 10,274
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Reserve for potential FDIC tax refund
claim 3,982 3,982
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Minority interest in subsidiary's
preferred stock 2,454 2,454
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Minority interest in subsidiary's
common stock 176 167
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Commitments and contingencies
Redeemable preferred stock, $.01 par
value; 3,000,000 shares authorized;
122,691 Series A, 61,345 Series B,
61,345 Series C and 24,998 Series D
issued and outstanding 3 3
---------- ----------
Stockholders' equity:
Common stock, $.01 par value;
3,000,000 shares authorized;
1,105,801 shares issued and outstanding 11 11
Additional paid-in capital 159,766 159,843
Retained earnings (deficit) ( 154,469) ( 154,713)
Treasury stock at cost - 717 shares
and 18,268 shares, respectively ( 4) ( 151)
Net unrealized investment gains 39 6
---------- ----------
Total stockholders' equity 5,343 4,996
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TOTAL $ 24,452 $ 26,820
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except for share data)
Three Months Six Months
Ended December 31, Ended December 31,
1995 1994 1995 1994
-------------- ------------- ------------- -------------
Net sales $ 6,787 $ 5,110 $ 12,756 $ 10,215
Cost of goods sold 5,026 3,677 9,426 7,222
---------- ---------- ---------- ----------
Gross profit 1,761 1,433 3,330 2,993
Operating expenses:
Selling 783 760 1,457 1,404
General and administrative 439 491 979 940
Product development 110 128 228 256
---------- ---------- ---------- ----------
Operating income 429 54 666 393
---------- ---------- ---------- ----------
Other income (expense):
Investment and interest income 77 82 157 163
Interest expense ( 235) ( 149) ( 454) ( 289)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and minority interest 271 ( 13) 369 267
Income tax expense 6 --- 6 22
---------- ---------- ---------- ----------
Income (loss) before minority
interest 265 ( 13) 363 245
Minority interest 62 56 119 117
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 203 $( 69) $ 244 $ 128
========== ========== ========== ==========
Net income (loss) per share $0.18 $( 0.06) $0.22 $0.12
========== ========== ========== ==========
Weighted average shares outstanding 1,124,184 1,108,621 1,123,310 1,108,739
========== ========== ========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX-MONTH PERIOD ENDED DECEMBER 31, 1995
(Unaudited)
(dollars in thousands)
Net
Additional Retained Unrealized
Common Paid-in Earnings Treasury Investment
Stock Capital (Deficit) Stock Gains Total
------ -------------- ----------- --------- ---------- -------
Balance - June 30, 1995 $ 11 $ 159,843 ($ 154,713) ($ 151) $ 6 $ 4,996
Net income - - 244 - - 244
Issuance of treasury stock
to directors as compensation
for services - ( 77) - 147 - 70
Net change in unrealized
investment gains - - - - 33 33
------ ----------- ---------- -------- ---------- ------
Balance - December 31, 1995 $ 11 $ 159,766 ($ 154,469) ($ 4) $ 39 $5,343
====== =========== ========== ======== ========== ======
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months
Ended December 31,
1995 1994
--------------- ----------------
Cash flows from operating activities:
Net income $ 244 $ 128
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities:
Depreciation and amortization 262 139
Changes in assets and liabilities:
Accounts receivable 1,270 479
Inventories 1,215 ( 1,162)
Other assets 15 ( 138)
Accounts payable ( 1,147) 242
Accrued expenses ( 287) ( 311)
Issuance of treasury stock 61 -
-------- --------
Net cash provided by (used in)
operating activities 1,633 ( 623)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ( 364) ( 314)
Minority interest 9 8
-------- --------
Net cash used in investing
activities ( 355) ( 306)
-------- --------
Cash flows from financing activities:
Net payments under line of credit ( 1,240) ( 1,521)
Principal payments under note payable ( 125) ( 50)
Proceeds from issuance of long term 75 2,500
debt
Purchase of treasury stock - ( 3)
-------- --------
Net cash provided by (used in)
financing activities ( 1,290) 926
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ( 12) ( 3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 188 12
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 176 $ 9
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
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, 1995 are not necessarily indicative of results
that may be expected for the year ending June 30, 1996. 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, 1995.
2. Earnings per Common Share
-------------------------
Weighted average shares outstanding are primary; treasury stock has not
been included. At December 31, 1995, the weighted average shares include 33,424
shares of common stock equivalents.
3. Debt Agreement
--------------
On November 3, 1995, Strouse and Fleet Bank, National Association (the
"Bank") entered into a credit agreement (the "Credit Agreement") that provides
for a line-of-credit facility and two term loan facilities (the "Credit
Facilities"). The line-of-credit facility provides for maximum borrowing of
$8,750,000. The principal amounts of the term loans are $2,500,000 and $225,000,
respectively. The Credit Agreement matures on October 31, 1996. Strouse uses
the Credit Facilities for working capital and other general corporate purposes.
Within the maximum limit set forth above, borrowing under the line-of-
credit (the "Borrowing Base") is limited to 80% of eligible accounts receivable,
plus the lesser of (i) the sum of 50% of eligible raw materials, 50% of
eligible finished goods, and 20% of eligible work-in-process, or (ii)
$5,000,000 based on eligible inventory. In addition, the Credit Agreement
permits advances to exceed the Borrowing Base amount by up to $1,000,000 through
December 1995, and to $500,000 at all times thereafter (so long as the total
line-of-credit is not more than the maximum borrowing allowed and Strouse
reduces any overadvance to zero for any thirty day period between November 3,
1995 and July 31, 1996).
The line-of-credit bears interest at a rate per annum equal to either 1.0%
over the Bank's prime rate, the Bank's fixed rate, or 3.0% over LIBOR (London
Interbank Offer Rate), at the option of Strouse. The term loans bear interest at
a rate per annum equal to either 1% over the Bank's prime rate, the Bank's fixed
rate, or 3% over LIBOR, at the option of Strouse. Currently and through October
1996, the interest rate on the line-of-credit is fixed at 8.3% per annum for the
first $3,500,000 and varies at 1% over the Bank's prime rate for the remaining
balance. The per annum interest rates on the $2,500,000 and $225,000 term loans
are fixed until October 1996 at 8.55% and 7.25%, respectively.
7
The Credit Facilities are secured by a lien on all assets of Strouse.
Aristotle and ASI have unconditionally guaranteed the $2,500,000 term loan and
ASI has guaranteed the line-of-credit. To secure ASI's guarantee of the line-of-
credit, ASI has pledged, and recourse under the ASI guarantee of the line-of-
credit is limited to, all of the capital stock of Strouse that is owned by ASI.
In addition, the Company is required to make a prepayment on the Term Loans of a
portion of the amount, if any, of the tax refund received and retained by the
Company after the resolution of the Federal Deposit Insurance Corporation's
("FDIC") claim that it is entitled to such tax refund. The Credit Agreement
further provides that Strouse may not pay dividends to ASI or Aristotle without
the Bank's prior written consent.
As of January 19, 1996, the balance outstanding on the line-of-credit was
$5,694,000 and the amounts outstanding under the term loans were $2,292,000 and
$135,000, respectively. As of January 19, 1996, the additional borrowing
available on the line-of-credit was $1,217,000.
8
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, 1995 and 1994
---------------------------------------------
The Company's net sales for the three months ended December 31, 1995
increased 33% to $6,787,000, compared to net sales of $5,110,000 for the three
months ended December 31, 1994. The increase was primarily generated by a
$797,000 volume growth in shapewear products, a $606,000 volume growth in
specialty brassiere products and $266,000 due to increased prices.
The Company's gross profit for the three months ended December 31, 1995
increased to $1,761,000 from $1,433,000 for the three months ended December 31,
1994, and gross margin percentage decreased to 25.9% from 28.0%. The increase in
gross profit was mainly a result of the sales growth, while the decrease in the
gross margin percentage was mainly a result of increased subcontracting costs,
higher production scrap, and growth in the private label business (which
contributes operating income margins comparable to the branded business, but
lower gross margins).
Selling, general and administrative expenses for the three months ended
December 31, 1995 were $1,222,000, compared to $1,251,000 for the corresponding
three months ended December 31, 1994. The $29,000 decrease was principally a
result of a reduction in administrative personnel and reduced shareholder
expenses, partially offset by increases in advertising.
Product development costs for the Company for the three months ended
December 31, 1995 were $110,000, compared to $128,000 for the three months ended
December 31, 1994. Product development costs primarily included compensation of
the Company's personnel.
Investment and interest income of $77,000 and $82,000 for the three months
ended December 31, 1995 and 1994, respectively, was principally generated by two
escrowed investment accounts with account balances totaling $4,682,000 for both
periods.
Interest expense for the three months ended December 31, 1995 increased to
$235,000 from $149,000 in the corresponding three months ended December 31,
1994. The increase reflected higher borrowing rates and higher borrowing levels
to support working capital needs and business growth.
Minority interest expense of $62,000 and $56,000 for the three months ended
December 31, 1995 and 1994, respectively, was principally due to Preferred Stock
dividends paid or accrued during the corresponding period.
Six Months Ended December 31, 1995 and 1994
-------------------------------------------
The Company's net sales for the six months ended December 31, 1995
increased 25% to $12,756,000, compared to net sales of $10,215,000 for the six
months ended December 31, 1994. The increase was primarily generated by a
$1,336,000 volume growth in shapewear products, a $826,000 volume growth in
specialty brassiere products and $353,000 due to increased prices.
The Company's gross profit for the six months ended December 31, 1995
increased to $3,330,000 from $2,993,000 for the six months ended December 31,
1994, and gross margin percentage decreased to 26.1% from 29.3%. The increase in
gross profit was mainly a result of the sales growth, while the decrease in the
gross margin percentage was mainly a result of increased subcontracting
9
costs, higher production scrap, and growth in the private label business (which
contributes operating income margins comparable to the branded business, but
lower gross margins).
Selling, general and administrative expenses for the six months ended
December 31, 1995 were $2,436,000, compared to $2,344,000 for the corresponding
six months ended December 31, 1994. The $92,000 increase was principally a
result of increases in advertising and professional fees, partially offset by a
reduction in administrative personnel and shareholder expenses.
Product development costs for the Company for the six months ended December
31, 1995 were $228,000, compared to $256,000 for the six months ended December
31, 1994. Product development costs primarily included compensation of the
Company's personnel.
Investment and interest income of $157,000 and $163,000 for the six months
ended December 31, 1995 and 1994, respectively, was principally generated by two
escrowed investment accounts with account balances totaling $4,682,000 for both
periods.
Interest expense for the six months ended December 31, 1995 increased to
$454,000 from $289,000 in the corresponding six months ended December 31, 1994.
The increase reflected higher borrowing rates and higher borrowing levels to
support working capital needs and business growth.
Minority interest expense of $119,000 and $117,000 for the six months ended
December 31, 1995 and 1994, respectively, was principally due to Preferred Stock
dividends paid or accrued during the corresponding period.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's assets are either dedicated to support
Strouse's business needs (primarily inventory of $10,567,000 and accounts
receivable of $3,228,000) or are held in two escrowed accounts ($4,682,000).
Cash required to fund the working capital needs of Strouse is supplied
principally through the Credit Facilities with the Bank, trade credit, and
internally generated funds. See Note 3 of Notes to Condensed Consolidated
Financial Statements.
Cash required to fund the operations of Aristotle is supplied primarily
through earnings generated from the two escrowed accounts, amounts payable to
Aristotle pursuant to certain notes from certain officers of Strouse, and taxes
received from Strouse in connection with a tax sharing agreement between
Aristotle and Strouse. If earnings from the two escrowed accounts and taxes
received from Strouse are below current projections and no funds are generated
through the settlements of the pending stockholder litigation and the FDIC tax
claim, Aristotle's cash flow would not be sufficient to meet its operating
expenses. If the former stockholders of Strouse do not convert certain preferred
stock of ASI that was issued in connection with the acquisition of Strouse (the
"Acquisition"), and if the maximum additional payments to the former
stockholders of Strouse were earned and paid, then Aristotle would have to pay
up to $4,390,000 during the next four fiscal years to such stockholders as part
of the Acquisition. It is not anticipated that current amounts of capital will
be sufficient to satisfy potential commitments related to the Acquisition. Any
default in the payments due to the former stockholders of Strouse could create a
partial unwinding of the Acquisition. For a description of the stockholder
litigation and the Acquisition, see the Company's Annual Report on Form 10-K for
the year ended June 30, 1995. For a description of the FDIC tax claim, see "Part
II, Item I - Litigation" of this Form 10-Q.
In order to meet its projected capital requirements and potential
commitments to the former stockholders of Strouse, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can be no assurance, however, that the Company will be able to raise new
equity capital or obtain additional financing.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
FDIC Tax Claim. As previously reported, on April 19, 1995, the FDIC filed a
complaint against the Company related to the matter captioned Federal Deposit
Insurance Corporation vs. The Aristotle Corporation, United States District
Court for the District of Connecticut (Civil No. 395CV00684TFGD). The FDIC is
claiming entitlement to income tax refunds previously received and yet to be
received by Aristotle. Although Aristotle believes that the FDIC is not entitled
to the entire amount of the refunds or to damages for Aristotle's refusal to pay
the refunds to the FDIC, Aristotle established a reserve of $3,982,000 for this
potential claim as of June 30, 1993. As of June 30, 1995, amounts equal to the
refunds that had been received by Aristotle, $3,982,000, had been deposited in
a special escrow account. Aristotle also previously reported that it and the
FDIC had agreed that certain future refunds, including a refund of approximately
$1,300,000, would also be deposited in a separate escrow account. In January
1996, the FDIC and the Company jointly received such expected refund, in an
amount of approximately $1,700,000, and deposited it in a special escrow
account. At this time, the Company is unable to predict the outcome of this
litigation.
Item 5. Other Information
On January 2, 1996, Aristotle announced that it had been approached by a
large, publicly held company and, in response to such an approach, is discussing
the possible sale of its subsidiary, Strouse. The identity of the potential
acquiror was not disclosed. No agreement has been reached and there is no
assurance that an agreement will, in fact, be reached. The ability of the
parties to reach an agreement is dependent upon further negotiations between the
parties and upon various other contingencies.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Letter Agreement dated October 27, 1995 Re: Amended Put Rights
10.2 Second Amended and Restated Master Credit Agreement dated as of
November 3, 1995
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
11
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 1, 1996
/s/ Paul M. McDonald
--------------------
Paul M. McDonald
Its Chief Financial Officer
and Secretary
Date: February 1, 1996
12