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, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______
Commission file number 0-14669
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THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1165854
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
78 Olive Street, New Haven, Connecticut 06511
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 867-4090
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of April 28, 1997, 1,097,902 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, 1997
Page
----
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1997
and June 30, 1996 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II - Other Information
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
(dollars in thousands, except for share data)
March 31, June 30,
1997 1996
---- ----
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 472 $ 99
Marketable securities held in escrow, at market value - 6,253
Accounts receivable, net of reserves of $142 and $242 3,707 2,834
Inventories 10,101 9,478
Other current assets 213 359
--------- ---------
Total current assets 14,493 19,023
--------- ---------
Property and equipment, net 1,517 1,684
--------- ---------
Other assets:
Marketable securities held in escrow, at market value 1,200 -
Employee notes receivable 354 354
Goodwill, net of amortization of $138 and $101 1,796 1,845
Deferred tax asset 630 630
Other noncurrent assets 248 259
--------- ---------
4,228 3,088
--------- ---------
$ 20,238 $ 23,795
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable and current maturities of long-term debt $ 6,691 $ 6,055
FDIC tax refund claim payable - 3,760
Accounts payable 2,182 1,372
Accrued expenses 465 919
Deferred tax liability 630 630
--------- ---------
Total current liabilities 9,968 12,736
--------- ---------
Long-term debt, less current maturities 1,770 2,097
--------- ---------
Total liabilities 11,738 14,833
--------- ---------
Minority interest in subsidiary's preferred stock 1,975 2,247
--------- ---------
Minority interest in subsidiary's common stock 189 182
--------- ---------
Commitments and contingencies
Redeemable preferred stock, $.01 par value; 3,000,000 shares authorized; 76,014
and 101,976 Series A at March 31, 1997 and June 30, 1996, respectively,
60,756 and 61,345 Series B at March 31, 1997 and June 30, 1996, respectively,
60,756 and 61,345 Series C at March 31, 1997 and June 30, 1996, respectively
and 24,998 shares Series D at March 31, 1997 and June 30, 1996 issued and
outstanding 3 3
--------- ---------
Stockholders' equity:
Common stock, $.01 par value; 3,000,000 shares authorized; 1,105,801 shares at
March 31, 1997 and June 30, 1996 issued and outstanding 11 11
Additional paid-in capital 159,762 159,762
Retained earnings (deficit) (153,410) (153,245)
Treasury stock at cost - 7,287 and 1,287 shares at March 31, 1997 and June 30,
1996, respectively (30) (8)
Net unrealized investment gains - 10
--------- ---------
Total stockholders' equity 6,333 6,530
--------- ---------
$ 20,238 $ 23,795
========= =========
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 Nine Months
Ended March 31, Ended March 31,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 5,105 $ 5,390 $ 15,352 $ 18,147
Cost of goods sold 3,701 4,040 11,093 13,467
----------- ---------- ----------- -----------
Gross profit 1,404 1,350 4,259 4,680
Operating expenses:
Selling 599 552 2,026 1,980
General and administrative 422 455 1,398 1,476
Product development 167 121 444 348
----------- ---------- ----------- -----------
Operating income 216 222 391 876
----------- ---------- ----------- -----------
Other income (expense)
Investment and interest income 34 80 133 248
Interest expense ( 171) ( 210) ( 522) ( 663)
----------- ---------- ----------- -----------
Income before income
taxes and minority interest 79 92 2 461
Income tax expense 6 12 28 18
----------- ---------- ----------- -----------
Income (loss) before minority
interest 73 80 ( 26) 443
Minority interest 43 58 139 177
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ 30 $ 22 ($ 165) $ 266
=========== ========== =========== ===========
Net income (loss) per share $ 0.03 $ 0.02 ($ 0.15) $ 0.24
=========== ========== =========== ===========
Weighted average shares outstanding 1,131,940 1,138,510 1,134,852 1,128,340
=========== ========== =========== ===========
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)
Nine Months
Ended March 31,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) ($ 165) $ 266
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 397 383
Changes in assets and liabilities:
Accounts receivable ( 873) 1,080
Inventories ( 623) 1,212
Other assets 140 624
Accounts payable 810 ( 764)
Accrued expenses ( 454) ( 788)
Issuance of treasury stock - 61
----------- -----------
Net cash provided by (used in) operating
activities ( 768) 2,074
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ( 186) ( 470)
Proceeds from IRS refund - 1,751
Increase in escrow reserve - ( 1,751)
Purchase of marketable securities ( 707) -
Minority interest 7 12
Repurchase of ASI preferred stock ( 260) -
Sale of marketable securities 5,760 -
Settlement of FDIC claim ( 3,760) -
----------- -----------
Net cash provided by (used in) investing
activities 854 ( 458)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit 987 ( 1,334)
Principal payments under note payable ( 678) ( 228)
Purchase of treasury stock ( 22) -
Proceeds from issuance of long-term debt - 75
----------- -----------
Net cash provided by (used in) financing
activities 287 ( 1,487)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 373 129
CASH AND CASH EQUIVALENTS, beginning of period
99 188
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 472 $ 317
=========== ===========
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
---------------------
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, 1997 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
-------------------------
Weighted average shares outstanding are primary; treasury stock has
not been included. At March 31, 1997, the weighted average shares include 33,424
shares of common stock equivalents.
3. Debt Agreement
--------------
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
Strouse at a rate per annum equal to prime plus .75%, Eurodollar plus 2.5% or at
a fixed rate of the Bank'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 "Account
Pledged to the Bank") which is included in marketable securities held in escrow
in the accompanying balance sheet. The credit agreement further provides that
Strouse may not pay dividends to ASI or Aristotle without the Bank'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, 1997, the balance outstanding on the line-of-credit
was $6,466,000 and the balance outstanding on the term loan was $1,900,000. As
of April 28, 1997, the additional borrowing available on the overadvance was
$534,000.
During the third quarter ended March 31, 1997, Aristotle entered into
a line-of-credit agreement with The Bank of New Haven for $300,000 (the "BNH
Line of Credit"). The line-of-credit bears interest at a rate of prime plus 1.5%
and is payable on demand. The line-of-credit is secured by the collateral
assignment of a demand promissory note executed by Strouse. As of April 28,
1997, the balance outstanding on the line-of-credit was $75,000.
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
Three Months Ended March 31, 1997 and 1996
------------------------------------------
The Company's net sales for the three months ended March 31, 1997
decreased 5% to $5,105,000, compared to net sales of $5,390,000 for the three
months ended March 31, 1996. The decrease was primarily generated by a $288,000
volume decrease in shapewear products, and a $152,000 volume decrease in
specialty brassiere products, offset by a $155,000 impact from increased prices.
The decreases reflect increased competition in the shapewear market and softness
in the specialty bra market in the beginning of the quarter which began to
strengthen during February and March 1997.
The Company's gross profit for the three months ended March 31, 1997
increased 4% to $1,404,000, compared to gross profit of $1,350,000 for the three
months ended March 31, 1996. Gross margin percentage increased to 27.5% from
25.0%. The increase in gross profit and gross margin percentage was principally
a result of lower per unit costs resulting from increases in production levels
primarily relating to the implementation of new product lines, the stabilization
of raw material and production costs versus increases in prices of product and a
reduction in the private label business (which contributes operating income
margins comparable to Strouse's branded business, but at lower gross margins).
Selling, general and administrative expenses for the three months
ended March 31, 1997 were $1,021,000, compared to $1,007,000 for the
corresponding three months ended March 31, 1996. The $14,000, or 1%, increase
was principally a result of increases in advertising and selling costs,
partially offset by a reduction in shareholder expenses.
Product development costs for the Company for the three months ended
March 31, 1997 were $167,000, compared to $121,000 for the three months ended
March 31, 1996. Product development costs primarily included compensation of
Company personnel and were incurred by Strouse. All products are designed
internally in Strouse's New Haven and New York design centers. The $46,000, or
38%, increase in costs reflects Strouse's continued investment in the product
development process through increases in staffing in Strouse's design centers.
Investment and interest income was $34,000 and $80,000 for the three
months ended March 31, 1997 and 1996, respectively. Investment and interest
income for the three months ended March 31, 1997 was principally generated by an
investment account (the "Strouse Escrow Account"), which was established in
connection with the acquisition of Strouse by Aristotle (the "Acquisition") and
is subject to an escrow and pledge agreement with the former Strouse
stockholders (the "Former Strouse Stockholders"), the Account Pledged to the
Bank and cash on-hand. Investment and interest income for the three months ended
March 31, 1996 was principally generated by the Strouse Escrow Account and two
special escrow accounts (the "FDIC Escrow Accounts"). The FDIC Escrow Accounts
contained approximately $5,760,000 in tax refunds received by the Company that
the Federal Deposit Insurance Corporation ("FDIC") claimed. The $46,000
reduction in investment and interest income for the three months ended March 31,
1997 was primarily a result of the payment to the FDIC of approximately
$3,760,000 from the FDIC Escrow Accounts in the first quarter of 1996 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").
8
Interest expense for the three months ended March 31, 1997 decreased
to $171,000 from $210,000 in the corresponding three months ended March 31,
1996. The decrease in interest expense primarily resulted from reduced borrowing
levels under the Credit Facilities due to lower average inventory levels in 1997
versus 1996.
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 $43,000 and $58,000 for the three months
ended March 31, 1997 and 1996, respectively, was principally due to preferred
dividends paid or accrued during the corresponding period 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 as a result of the exercise of the Put Right, as defined in the
Liquidity and Capital Resources section, which resulted in fewer shares of ASI
Preferred Stock being outstanding during 1997.
Nine Months Ended March 31, 1997 and 1996
-----------------------------------------
The Company's net sales for the nine months ended March 31, 1997
decreased 15% to $15,352,000, compared to net sales of $18,147,000 for the nine
months ended March 31, 1996. The decrease was primarily generated by a $923,000
volume decrease in shapewear products, and a $2,520,000 volume decrease in
specialty brassiere products, offset by a $648,000 impact from increased prices.
The decrease in net sales for the nine months ended March 31, 1997 was primarily
a result of increased competition and some softness in certain market segments
plus an inability to supply all orders received due to production problems which
have all shown improvement during the last three months ended March 31, 1997.
The Company's gross profit for the nine months ended March 31, 1997
decreased 9% to $4,259,000, compared to gross profit of $4,680,000 for the nine
months ended March 31, 1996. Gross margin percentage increased to 27.7% from
25.8%. 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
stable raw material costs, lower production costs resulting from a reduction in
production rates charged by the Company's Dominican subcontractor and a
consolidation of Strouse's production to locations with lower costs.
Selling, general and administrative expenses for the nine months
ended March 31, 1997 were $3,424,000, compared to $3,456,000 for the
corresponding nine months ended March 31, 1996. The $32,000, or 1%, decrease was
principally a result of a reduction in administrative personnel, sales
commissions and shareholder expenses, partially offset by an increase in
advertising.
Product development costs for the Company for the nine months ended
March 31, 1997 were $444,000, compared to $348,000 for the nine months ended
March 31, 1996. Product development costs primarily included compensation of
Company personnel and were incurred by Strouse. All products are designed
internally in Strouse's New Haven and New York design centers. The $96,000, or
28%, increase in costs reflects Strouse's continued investment in the product
development process through increases in staffing in Strouse's design centers.
Investment and interest income was $133,000 and $248,000 for the nine
months ended March 31, 1997 and 1996, respectively. This income was principally
generated by the FDIC Escrow Accounts, the Strouse Escrow Account, the Account
Pledged to the Bank and cash on-hand. The $115,000 reduction in investment and
interest income for the nine months ended March 31, 1997 was primarily a result
of the payment to the FDIC of approximately $3,760,000 from the FDIC Escrow
Accounts in the first quarter of 1996 in connection with the FDIC Settlement.
9
Interest expense for the nine months ended March 31, 1997 decreased
to $522,000 from $663,000 in the corresponding nine months ended March 31, 1996.
The decrease in interest expense primarily resulted from reduced borrowing
levels under the Credit Facilities due to lower average inventory levels in 1997
versus 1996.
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 $139,000 and $177,000 for the nine
months ended March 31, 1997 and 1995, respectively, was principally due to
preferred dividends paid or accrued during the corresponding period on
outstanding ASI Preferred Stock. The preferred dividends decreased for the nine
months ended March 31, 1997 as a result of the exercise of the Put Right by the
Former Strouse Stockholders throughout fiscal 1997, which resulted in fewer
shares of ASI Preferred Stock being outstanding.
Liquidity and Capital Resources
The Company utilized cash of $768,000 for operations during the nine
months ended March 31, 1997 and generated cash of $2,074,000 from operations for
the nine months ended March 31, 1996. 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, inventories and
accounts payable, partially offset by depreciation and amortization and a
decrease in accrued expenses. During the nine months ended March 31, 1996, the
generation of cash from operations was principally the result of net income from
operations and decreases in accounts receivables, inventories, other assets,
accrued expenses and accounts payable.
The Company generated $854,000 from investing activities for the
nine months ended March 31, 1997 and utilized $458,000 for investing activities
for the nine months ended March 31, 1996. In 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 from the FDIC Escrow Accounts in connection with the FDIC Settlement.
The Company also used $260,000 to fund the payment of the Put Right, as defined
below, exercised by three of the Former Strouse Stockholders, including one
executive officer and one former executive officer of the Company. In exchange
for the funding of the Put Right, the Company received 25,962 shares of ASI
Series A Preferred Stock and 25,962 shares of Aristotle Preferred Stock. During
1997, the Company also utilized $707,000 of its cash from investing activities
to purchase marketable securities to fund the Account Pledged to the Bank, which
secures Aristotle's guarantee of the Credit Facilities, and to restore the
Strouse Escrow Account. During both periods, the Company used cash from
investing activities to purchase property and equipment.
The Company generated $287,000 from financing activities for the nine
months ended March 31, 1997. The Company utilized $1,487,000 for financing
activities during the nine months ended March 31, 1996. 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
notes payable. In addition, the Company repurchased 6,000 shares of its Common
Stock in the open market for approximately $22,000. The Company intends to pay
its directors' annual retainer with these treasury shares. During the third
quarter ended March 31, 1997, Aristotle entered into the BNH Line of Credit for
$300,000, which bears interest at a rate of prime plus 1.5%.
10
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
$1,975,000 during the next four fiscal years to such Stockholders. It is not
anticipated that current amounts of capital will be sufficient to satisfy
potential commitments related to the Acquisition. However, there is $700,000
held in the Strouse Escrow Account and $354,000 in employee notes receivable to
satisfy a portion of the requirements of the Put Rights, if exercised. In
addition, there is $560,000 from Strouse intercompany loans that are pledged to
the Bank of New Haven and $500,000 held in the Account Pledged to the Bank which
may be used, but are not readily available, to fulfill the exercise of the Put
Right. 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 conserve funds, in November 1996, the Company requested
that the holders of the ASI Preferred Stock postpone the Put Right with respect
to 101,976 shares of ASI Series A Preferred Stock and 61,345 shares of ASI
Series B 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. In addition, the Company offered to delay the repayment of certain loans
made by Aristotle to certain Former Strouse Stockholders (the "Acquisition
Loans") in connection with the Acquisition from April 1997 until October 1997 if
such Stockholders postpone their Put Rights.
In October 1996, pursuant to terms of an employment agreement between
a former executive officer of Strouse and the Company, upon the voluntary
termination of such officer's employment, the former executive officer was
obligated to sell to the Company for nominal consideration 589 shares of ASI
Series B Preferred Stock and 589 shares of ASI Series C Preferred Stock. As
mentioned above, in November and December of 1996, three Former Strouse
Stockholders exercised their Put Right with respect to 25,962 shares of ASI
Series A Preferred Stock and 25,962 shares of Aristotle Preferred Stock for a
cash payment of $260,000.
After repurchases of ASI Preferred Stock pursuant to the foregoing
employment agreement and exercise of Put Rights, the offer resulted in the
holders of 73,604 shares of ASI Series A Preferred Stock and 31,842 shares of
ASI Series B Preferred Stock postponing their Put Right until October 1997 with
the remaining 2,410 shares of ASI Series A Preferred Stock continuing to be
exercisable. In addition, there are 28,914 shares of ASI Series B Preferred
Stock that will be exercisable beginning April 1997. The offer also resulted in
the delay of the repayment of $131,000 principal amount of Acquisition Loans to
October 1997, with $46,000 principal amount of Acquisition Loans remaining
payable in April 1997. There are 60,756 shares of ASI Series C Preferred Stock
that will be exercisable beginning April 1998.
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.
11
Recent Developments
In April 1997, two of the Former Strouse Stockholders exercised their
Put Right enabling them to receive an aggregate cash payment of $224,122 in
exchange for 22,410 shares of ASI Preferred Stock and 22,410 shares of Aristotle
Preferred Stock.
In connection with the Acquisition, a former executive officer
borrowed $92,330 from Aristotle. This employee note receivable was secured by a
pledge agreement between the former executive officer and Aristotle. The loan
provided that $46,165 in principal was due to Aristotle on April 11, 1997. The
principal payment was satisfied by the assignment of 336 shares of Series A
Preferred Stock of ASI and 4,281 shares of Series B Preferred Stock.
Effect of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share," which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. The Company plans to adopt SFAS No. 128.
As of March 31, 1997, SFAS No. 128 had no material impact on Earnings Per Share.
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, 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
March 31, 1997.
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, 1997
/s/ Paul McDonald
-----------------
Paul McDonald
Its Chief Financial Officer
and Secretary
(principal financial and chief
accounting officer)
Date: May 15, 1997
13
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of The Aristotle
Corporation.
3.2 Amended and Restated Bylaws of The Aristotle Corporation.
27.1 Financial Data Schedule.
14