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, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission file number 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1165854
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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 _____
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As of April 24, 1996, 1,104,011 shares of Common Stock were outstanding.
THE ARISTOTLE CORPORATION AND SUBSIDIARY
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1996
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Page
----
Condensed Consolidated Balance Sheets at March 31, 1996
and June 30, 1995 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the Nine Months Ended March 31, 1996 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 1996 and 1995 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 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
2
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except for share data)
March 31, June 30,
1996 1995
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 317 $ 188
Accounts receivable, net of reserves
of $154 and $171, respectively 3,418 4,498
Inventories 10,570 11,782
Other current assets 279 867
---------- ----------
Total current assets 14,584 17,335
---------- ----------
Property and equipment, net 1,691 1,517
---------- ----------
Other assets:
Marketable securities held in escrow
at market value 6,433 4,682
Employee notes receivable 354 354
Patents and trademarks, net 80 88
Goodwill, net of amortization of $89
and $52, respectively 1,857 1,894
Deferred tax asset 700 725
Other noncurrent assets 193 225
---------- ----------
9,617 7,968
---------- ----------
TOTAL $ 25,892 $ 26,820
========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY
-----------------------------------
Current liabilities:
Notes payable and current maturities
of long-term debt $ 9,012 $ 548
Accounts payable 1,603 2,367
Accrued expenses 541 1,304
Deferred tax liability 700 725
---------- ----------
Total current liabilities 11,856 4,944
---------- ----------
Long-term debt, less current maturities 323 10,274
---------- ----------
Reserve for potential FDIC tax refund
claim 5,733 3,982
---------- ----------
Minority interest in subsidiary's
preferred stock 2,454 2,454
---------- ----------
Minority interest in subsidiary's
common stock 179 167
---------- ----------
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) ( 154,447) ( 154,713)
Treasury stock at cost - 717 shares
and 18,268 shares, respectively ( 4) ( 151)
Net unrealized investment gains 18 6
---------- ----------
Total stockholders' equity 5,344 4,996
========== ==========
TOTAL $ 25,892 $ 26,820
========== ==========
3
The accompanying notes are an integral part of
these condensed consolidated financial statements.
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except for share data)
Three Months Nine Months
Ended March 31, Ended March 31,
1996 1995 1996 1995
---- ---- ---- ----
Net sales $ 5,390 $ 5,049 $ 18,147 $ 15,264
Cost of goods sold 4,040 3,927 13,467 11,149
---------- ---------- ---------- ----------
Gross profit 1,350 1,122 4,680 4,115
Operating expenses:
Selling 552 627 1,980 2,031
General and administrative 455 482 1,476 1,422
Product development 121 113 348 369
---------- ---------- ---------- ----------
Operating income (loss) 222 ( 100) 876 293
---------- ---------- ---------- ----------
Other income (expense):
Investment and interest income 80 81 248 244
Interest expense ( 210) ( 194) ( 663) ( 483)
---------- ---------- ---------- ----------
Income (loss) before income
taxes and minority interest 92 ( 213) 461 54
Income tax expense 12 - 18 22
---------- ---------- ---------- ----------
Income (loss) before minority
interest 80 ( 213) 443 32
Minority interest 58 52 177 169
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 22 $( 265) $ 266 $( 137)
========== ========== ========== ==========
Net income (loss) per share $ 0.02 $( 0.24) $ 0.24 $( 0.12)
========== ========== ========== ==========
Weighted average shares outstanding 1,138,510 1,114,282 1,128,340 1,110,661
========== ========== ========== ==========
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
NINE-MONTH PERIOD ENDED MARCH 31, 1996
(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 - - 266 - - 266
Issuance of treasury
stock to directors - ( 77) - 147 - 70
Net change in unrealized
investment gain s - - - - 12 12
------ ----------- ------------ ------------ --------- ----------
Balance - March 31, 1996 $ 11 $159,766 ($ 154,447) ($ 4) $ 18 $5,344
====== =========== ============ ============ ========== ==========
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)
Nine Months
Ended March 31,
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 266 $( 137)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 383 209
Changes in assets and liabilities:
Accounts receivable 1,080 242
Inventories 1,212 ( 2,071)
Other assets 624 ( 99)
Accounts payable ( 764) 77
Accrued expenses ( 788) ( 270)
Issuance of treasury stock for
services 61 30
------- --------
Net cash provided by (used in)
operating activities 2,074 ( 2,019)
------- --------
Cash flows from investing activities:
Purchase of property and equipment ( 470) ( 490)
Proceeds from IRS refund 1,751 -
Increase in escrow reserve ( 1,751) -
Minority interest 12 42
-------- --------
Net cash used in investing
activities ( 458) ( 448)
-------- --------
Cash flows from financing activities:
Net payments under line of credit ( 1,334) 255
Principal payments under note payable ( 228) ( 103)
Proceeds from issuance of long term
debt 75 2,500
Purchase of treasury stock - ( 11)
-------- ---------
Net cash provided by (used in)
financing activities ( 1,487) 2,641
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 129 174
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 188 12
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 317 $ 186
========= =========
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
nine months ended March 31, 1996 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 March 31, 1996, 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 limits 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)
the inventory cap of $5,000,000. In addition, the Credit Agreement permits
advances to exceed the Borrowing Base amount by up to $500,000 (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 Credit Facilities bear 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. 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 guaranty of the line-of-
credit is limited to, all of the capital stock of Strouse that is owned by ASI.
In addition, the Company will 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 May 1, 1996, the balances outstanding on the line-of-credit was
$6,027,000 and the term loans were $2,250,000 and $124,000, respectively. As of
May 1, 1996, the additional borrowing available on the line-of-credit was
$962,000.
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 March 31, 1996 and 1995
------------------------------------------
The Company's net sales for the three months ended March 31, 1996
increased 7% to $5,390,000, compared to net sales of $5,049,000 for the three
months ended March 31, 1995. The increase was primarily generated by a $116,000
volume growth in specialty brassiere products, offset by a $66,000 volume
reduction in shapewear products and a $256,000 impact from increased prices.
The Company's gross profit for the three months ended March 31, 1996
increased to $1,350,000 from $1,122,000 for the three months ended March 31,
1995, and gross margin percentage increased to 25.0% from 22.2%. The increase in
gross margin percentage was mainly a result of lower subcontracting costs and
lower production scrap, partially offset by 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
March 31, 1996 were $1,007,000, compared to $1,109,000 for the corresponding
three months ended March 31, 1995. The $102,000 decrease was principally a
result of a reduction in administrative personnel and reduced shareholder
expenses, partially offset by increases in professional fees. During the three
months ended March 31, 1996, approximately $100,000 in costs were incurred by
Aristotle during its negotiations to sell Strouse. The negotiations were
terminated in February 1996.
Product development costs for the Company for the three months ended
March 31, 1996 were $121,000, compared to $113,000 for the three months ended
March 31, 1995. Product development costs primarily included compensation of
company personnel and were incurred by Strouse.
Investment and interest income of $80,000 and $81,000 for the three
months ended March 31, 1996 and 1995, respectively, was principally generated by
two escrowed investment accounts with account balances totaling $4,682,000 for
both periods. In January 1996, the Company received a tax refund related to a
prior FDIC tax claim. This refund and related interest income totaling
$1,751,000, which is reflected in the accompanying condensed consolidated
balance sheet at March 31, 1996, has been placed in an escrow account pending
the resolution of certain contingencies.
Interest expense for the three months ended March 31, 1996 increased to
$210,000 from $194,000 in the corresponding three months ended March 31, 1995.
The increase reflected higher borrowing rates and higher borrowing levels to
support working capital needs and business growth.
The income tax provision reflects minimum state taxes, as any federal
tax obligation is sheltered by the utilization of net operating loss
carryforwards.
Minority interest expense of $58,000 and $52,000 for the three months
ended March 31, 1996 and 1995, respectively, was principally due to preferred
dividends paid or accrued during the corresponding period.
Nine Months Ended March 31, 1996 and 1995
-----------------------------------------
The Company's net sales for the nine months ended March 31, 1996
increased 19% to $18,147,000, compared to net sales of $15,264,000 for the nine
months ended March 31, 1995. The increase was primarily generated by a
$1,269,000 volume growth in shapewear products, a $943,000 volume growth in
specialty brassiere products and a $608,000 impact from increased prices.
9
The Company's gross profit for the nine months ended March 31, 1996
increased to $4,680,000 from $4,115,000 for the nine months ended March 31,
1995, and gross margin percentage decreased to 25.8% from 27.0%. 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 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 nine months ended
March 31, 1996 were $3,456,000, compared to $3,453,000 for the corresponding
nine months ended March 31, 1995. The $3,000 increase was principally a result
of increases in advertising and professional fees partially offset by a
reduction in administrative personnel and shareholder expenses. During the three
months ended March 31, 1996, approximately $100,000 in costs were incurred by
Aristotle during its negotiations to sell Strouse. The negotiations were
terminated in February 1996.
Product development costs for the Company for the nine months ended
March 31, 1996 were $348,000, compared to $369,000 for the nine months ended
March 31, 1995. Product development costs primarily included compensation of
company personnel and were incurred by Strouse.
Investment and interest income of $248,000 and $244,000 for the nine
months ended March 31, 1996 and 1995, respectively, was principally generated by
two escrowed investment accounts with account balances totaling $4,682,000 for
both periods. In January 1996, the Company received a tax refund related to a
prior FDIC tax claim. This refund and related interest income totaling
$1,751,000, which is reflected in the accompanying condensed consolidated
balance sheet at March 31, 1996, has been placed in an escrow account pending
the resolution of certain contingencies.
Interest expense for the nine months ended March 31, 1996 increased to
$663,000 from $483,000 in the corresponding nine months ended March 31, 1995.
The increase reflected higher borrowing rates and higher borrowing levels to
support working capital needs and business growth.
The income tax provision reflects minimum state taxes, as any federal
tax obligation is sheltered by the utilization of net operating loss
carryforwards.
Minority interest expense of $177,000 and $169,000 for the nine months
ended March 31, 1996 and 1995, respectively, was principally due to preferred
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 $10,570,000 and
accounts receivable of $3,418,000) or are held in three escrowed accounts
($6,433,000).
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 investment 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 Company is required to repurchase certain preferred
stock of ASI that was issued in connection with the acquisition to the former
stockholders 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 $4,335,000 during the next four fiscal years
to such stockholders as
10
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.
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, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.
In connection with the Acquisition, ASI issued to the former
stockholders of Strouse 245,381 shares of preferred stock (the "ASI Preferred
Stock") and Aristotle issued to the former stockholders of Strouse 270,379
shares of voting preferred stock of Aristotle (the "Aristotle Preferred Stock").
The former Stockholders of Strouse may require that ASI repurchase each share of
ASI Preferred Stock at various dates beginning in April 1996 for $10.00 per
share, plus any accrued but unpaid dividends (the "Put Right"). In order to
exercise the Put Right, a former Strouse stockholder must sell an equal number
of shares of Aristotle Preferred Stock to Aristotle for $.001 per share. In
April and May of 1996, four of the former Strouse stockholders, including three
executive officers of the Company, exercised their Put Right and received an
aggregate cash payment of $207,171 in exchange for 20,715 shares of ASI
Preferred Stock and 20,715 shares of Aristotle Preferred Stock.
11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On November 21, 1995, Aristotle held its annual meeting of its
stockholders. The following matters were voted on at the annual meeting:
1. The election of John J. Crawford, Alfred A. Kniberg and Sharon M.
Oster to Aristotle's Board of Directors for three year terms; and
2. 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, 1996.
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:
The The The The
election election election appointment
of of of of Arthur
Mr. Crawford Mr. Kniberg Ms. Oster Andersen LLP
--------------------------------------------------------
For 906,549 909,436 909,622 913,764
Against 17,618 14,731 14,545 5,597
Abstain 0 0 0 4,806
Broker Nonvotes 0 0 0 0
Item 5. Other Information
Aristotle had previously reported that it had been approached by a
large, publicly held company and, in response to such approach, was discussing
the possibility of the sale of Strouse. In February 1996, these discussions were
terminated.
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 three months ended
March 31, 1996.
12
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 15, 1996
/s/ Paul M. McDonald
--------------------
Paul M. McDonald
Its Chief Financial Officer
and Secretary
Date: May 15, 1996
13
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule
14