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
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ACT OF 1934
For the quarterly period ended September 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
Commission file number 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
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(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 October 31, 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 SEPTEMBER 30, 1996
Page
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Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 1996
and June 30, 1996 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
2
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
September 30, June 30,
1996 1996
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(Unaudited)
ASSETS
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Current assets:
Cash and cash equivalents $ 1,897 $ 99
Marketable securities held in escrow,
at market value - 6,253
Accounts receivable, net of reserves
of $213 and $242 3,085 2,834
Inventories 9,502 9,478
Other current assets 339 359
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Total current assets 14,823 19,023
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Property and equipment, net 1,630 1,684
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Other assets:
Marketable securities held in escrow,
at market value 700 -
Employee notes receivable 354 354
Goodwill, less amortization of $113
and $101 1,833 1,845
Deferred tax asset 630 630
Other noncurrent assets 240 259
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3,757 3,088
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$ 20,210 $ 23,795
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Notes payable and current maturities
of long-term debt $ 6,119 $ 6,055
FDIC tax refund claim payable - 3,760
Accounts payable 1,456 1,372
Accrued expenses 995 919
Deferred tax liability 630 630
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Total current liabilities 9,200 12,736
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Long-term debt, less current maturities 2,030 2,097
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Total liabilities 11,230 14,833
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Minority interest in subsidiary's 2,247 2,247
preferred stock --------- ---------
Minority interest in subsidiary's 185 182
common stock --------- ---------
Commitments and contingencies
Redeemable preferred stock, $.01 par
value; 3,000,000 shares authorized;
101,976 Series A, 61,345 Series B,
61,345 Series C and 24,998 Series D
issued and outstanding 3 3
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Stockholders' equity:
Common stock, $.01 par value;
3,000,000 shares authorized; 1,105,801
shares issued and outstanding 11 11
Additional paid-in capital 159,762 159,762
Retained earnings (deficit) ( 153,220) (153,245)
Treasury stock at cost - 1,287 shares ( 8) ( 8)
Net unrealized investment gains - 10
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Total stockholders' equity 6,545 6,530
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$ 20,210 $ 23,795
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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
Ended September 30,
1996 1995
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Net sales $ 5,306 $ 5,969
Cost of goods sold 3,818 4,400
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Gross profit 1,488 1,569
Operating expenses:
Selling 698 674
General and administrative 448 540
Product development 127 118
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Operating income 215 237
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Other income (expense)
Investment and interest income 62 79
Interest expense ( 185) ( 219)
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Income before income taxes
and minority interest 92 97
Income tax expense 14 -
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Income before minority
interest 78 97
Minority interest 53 57
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NET INCOME $ 25 $ 40
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Net income per share $ 0.02 $ 0.04
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Weighted average shares outstanding 1,137,940 1,120,960
========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
THE ARISTOTLE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Three Months
Ended September 30,
1996 1995
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Cash flows from operating activities:
Net income $ 25 $ 40
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 147 131
Changes in assets and liabilities:
Accounts receivable ( 251) 1,050
Inventories ( 24) 64
Other assets 27 19
Settlement of FDIC claim ( 3,759) -
Accounts payable 92 ( 303)
Accrued expenses 67 ( 54)
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Net cash provided by operating activities ( 3,676) 947
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Cash flows from investing activities:
Purchase of property and equipment ( 79) ( 112)
Purchase of marketable securities ( 207) -
Minority interest 3 2
Sale of marketable securities 5,760 -
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Net cash used in investing activities 5,477 ( 110)
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Cash flows from financing activities:
Net payments under line of credit 64 ( 780)
Principal payments under note payable ( 67) ( 92)
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Net cash used in financing activities ( 3) ( 872)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,798 ( 35)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 99 188
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,897 $ 153
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The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
THE ARISTOTLE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
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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
three months ended September 30, 1996 are not necessarily indicative of results
that may be expected for the year ending June 30, 1997. 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, 1996.
2. Earnings per Common Share
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Weighted average shares outstanding are primary; treasury stock has
not been included. At September 30, 1996, the weighted average shares include
33,424 shares of common stock equivalents.
3. Debt Agreement
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On October 3, 1996, Strouse and Bank of Boston, Connecticut (the
"Bank") entered into a credit agreement that provides for a line-of-credit
facility and a term loan facility (the "Credit Facilities"). Borrowing under the
line-of-credit is determined by a borrowing base which is equal to the sum of
80% of eligible accounts receivable, as defined, plus 50% of eligible raw
material inventory, as defined, plus 60% of eligible finished goods inventory,
as defined, with a maximum borrowing of $8,000,000 at any one time. In addition,
the line-of-credit facility permits advances to exceed the borrowing base amount
by up to $750,000 through September 1997, and $500,000 thereafter through
September 1999 (so long as the total line-of-credit is not more than the
$8,000,000 and the overadvance is reduced to zero for 30 consecutive days per
annum). The principal amount of the term loan is $2,000,000. The credit
agreement matures in September 1999. Strouse uses the Credit Facilities for
working capital and other general corporate purposes.
The interest on the line-of-credit will vary from prime to prime plus
1.0% or Eurodollar plus 1.75% to Eurodollar plus 3.0% per annum based on the
financial performance of Strouse. The term loan bears interest at the option of
the Company at a rate per annum equal to prime plus .75%, Eurodollar plus 2.5%
or at a fixed rate of Bank of Boston's cost of funds plus 2.25%. The term loan
has a three year term and requires principal payments to reduce the amount
outstanding based on a ten year amortization.
6
The Credit Facilities are secured by a lien on all assets of Strouse.
Aristotle and ASI have unconditionally guaranteed the Credit Facilities.
Recourse under each guaranty is limited to $2,000,000. To secure Aristotle's
guarantee of the Credit Facilities, Aristotle has pledged $500,000. The credit
agreement further provides that Strouse may not pay dividends to ASI or
Aristotle without Bank of Boston's prior written consent. Strouse must maintain
certain financial ratios and satisfy various other covenants in connection with
the Credit Facilities.
As of November 1, 1996, the balance outstanding on the line-of-credit
was $5,882,000 and the balance outstanding on the term loan was $2,000,000. As
of November 1, 1996, the additional borrowing available on the overadvance was
$729,000.
7
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
The Company's net sales for the first quarter ended September 30, 1996
decreased 11% to $5,306,000, compared to net sales of $5,969,000 for the first
quarter ended September 30, 1995. The decrease was primarily generated by a
$883,000 volume decrease in specialty brassiere products, and a $79,000 volume
decrease in shapewear products, offset by a $299,000 impact from increased
prices.
The Company's gross profit for the first quarter ended September 30, 1996
decreased to $1,488,000 from $1,569,000 for the first quarter ended September
30, 1995, and gross margin percentage increased to 28.0% from 26.3%. The
decrease in gross profit was primarily a result of the reduction in sales. The
increase in gross margin percentage was principally a result of reduced overhead
expenses, lower production costs resulting from a reduction in production rates
charged by the Company's Dominican subcontractor and a consolidation of
production to locations with lower costs.
Selling, general and administrative expenses for the first quarter ended
September 30, 1996 were $1,146,000, compared to $1,214,000 for the corresponding
quarter ended September 30, 1995. The $68,000 decrease was principally a result
of a reduction in administrative personnel, shareholder expenses and
professional fees, partially offset by increases in advertising costs.
Product development costs for the Company for the first quarter ended
September 30, 1996 were $127,000, compared to $118,000 for the first quarter
ended September 30, 1995. Product development costs primarily included
compensation of Company personnel and were incurred by Strouse. All products are
designed internally in Strouse's New Haven and New York design centers. The
increase in costs reflects Strouse's continued investment in the product
development process.
Investment and interest income was $62,000 and $79,000 for the first
quarter ended September 30, 1996 and 1995, respectively. This income was
principally generated by (i) one investment account (the "Interest-bearing FDIC
Escrow Account") related to the Federal Deposit Insurance Corporation
(the"FDIC") tax dispute and subject to an escrow agreement with the FDIC or its
affiliates, and (ii) one investment account (the "Strouse Escrow Account")
established in connection with the acquisition (the "Acquisition") and subject
to an escrow and pledge agreement with the former Strouse stockholders (the
"Former Strouse Stockholders"). In August 1996, the Interest-bearing FDIC Escrow
Account was converted into cash in anticipation of the settlement of the FDIC's
claims against the Company.
Interest expense for the first quarter ended September 30, 1996 decreased
to $185,000 from $219,000 in the corresponding prior year period. The decrease
in interest expense primarily resulted from a reduction in inventory, which
reduced borrowing levels.
Minority interest expense of $53,000 and $57,000 for the first quarter
ended September 30, 1996 and 1995, respectively, was principally due to
preferred dividends paid or accrued during the first quarter on outstanding
preferred stock of ASI (the "ASI Preferred Stock") issued to the Former Strouse
Stockholders in connection with the Acquisition. The preferred dividends
decreased for the first quarter ended September 30, 1996 as a result of the
exercise of the Put Right, as defined below.
8
Liquidity and Capital Resources
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 on the Strouse Escrow Account, amounts payable to Aristotle
pursuant to certain notes from certain officers of Strouse, and taxes received
from Strouse in connection with a tax sharing agreement between Aristotle and
Strouse. In addition, the Company has historically received earnings from the
Interest-bearing FDIC Escrow Account. In August 1996, the Company withdrew the
funds in the Interest-bearing FDIC Escrow Account and in a certain other escrow
account related to the Company's tax dispute with the FDIC. On September 26,
1996, pursuant to a settlement agreement with the FDIC, the Company paid
$3,759,000 plus accrued interest on a portion of the accounts to the
FDIC and retained the balance of the accounts. Accordingly, since September 26,
1996, funds required to fund the operations of Aristotle have also been supplied
through cash and cash equivalents from the retained balance of the escrow
accounts.
In connection with the Acquisition, ASI issued to the Former Strouse
Stockholders 245,381 shares of ASI Preferred Stock and Aristotle issued to the
Former Strouse Stockholders 270,379 shares of voting preferred stock of
Aristotle (the "Aristotle Preferred Stock"). The Former Strouse Stockholders may
require that ASI repurchase each share of ASI Preferred Stock at various dates
beginning in April 1996 for $10.00 per share, plus any accrued but unpaid
dividends (the "Put Right"). Prior to the vesting of the Put Right, the ASI
Preferred Stock is 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 sell an equal number of shares of
Aristotle Preferred Stock to Aristotle for $.001 per share. The Put Right is
secured by the Strouse Escrow Account.
If the Former Strouse Stockholders exercise their Put Right with respect to
the ASI Preferred Stock, then Aristotle would have to pay up to $2,247,000
during the next four fiscal years to such Stockholders as part of the
Acquisition. It is not anticipated that current amounts of capital will be
sufficient to satisfy potential commitments related to the Acquisition. Any
default in the payments due to the Former Strouse Stockholders could create a
partial unwinding of the Acquisition in which the Former Strouse Stockholders
would be entitled to receive 59% of the capital stock of Strouse, in exchange
for certain consideration previously paid to them by Aristotle in connection
with the Acquisition.
In order to meet its projected capital requirements and potential
commitments to the Former Strouse Stockholders, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.
Recent Developments
In October 1996, two of the Former Strouse Stockholders, including one
former executive officer of the Company, exercised their Put Right enabling them
to receive an aggregate cash payment of $88,629 in exchange for 8,862 shares of
ASI Preferred Stock and 8,862 shares of Aristotle Preferred Stock.
In order to conserve funds, in November 1996, the Company offered to
postpone the Put Right with respect to 163,321 shares of ASI Preferred Stock
from dates in April 1996 and April 1997 to October 1997. In exchange, ASI
offered to continue to pay the 8.9% dividend until October 1997 to the holders
of the ASI Preferred Stock who postpone the Put Right. The holders of the ASI
Preferred Stock must accept or reject ASI's offer before December 15, 1996.
9
In October 1996, the Company repurchased 2,000 shares of its Common Stock
in the open market. The Company intends to pay its directors' annual retainer
with these treasury shares, valued at the average fair market value of the
shares on the ten days preceding the payment date.
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 are
based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. The Company cautions
investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including, but not
limited to, the following: the availability of financing and additional capital
to fund the Company's business strategy on acceptable terms, if at all, market
responses to pricing actions, continued competitive factors and pricing
pressures, changes in product mix, the timely acceptance of new products,
inventory risks due to shifts in market demand, the dependence by the Company on
key customers, and general economic conditions. As a result, the Company's
future development efforts involve a high degree of risk. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.
PART II - OTHER INFORMATION
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
September 30, 1996.
10
SIGNATURES
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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
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John J. Crawford
Its President, Chief Executive Officer
and Chairman of the Board
Date: November 14, 1996
/s/ Paul McDonald
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Paul McDonald
Its Chief Financial Officer
and Secretary
(principal financial and chief
accounting officer)
Date: November 14, 1996
11
EXHIBIT INDEX
Exhibit Description
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27.1 Financial Data Schedule