UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________
Commission file number 0-14669
The Aristotle Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27 Elm Street, New Haven, Connecticut
(Address of principal executive offices)
06-1165854
(I.R.S. Employer
Identification No.)
06510
(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 February 10, 2000, 1,225,618 shares of Common Stock, $.01 par value
per share, were outstanding.
THE ARISTOTLE CORPORATION
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED DECEMBER 31, 1999
Page
----
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31,
1999 and June 30, 1999................................................3
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended December 31, 1999 and 1998.............4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1999 and 1998.......................5
Simulaids Historical Balance Sheet at December 31, 1998 ..............6
Simulaids Historical Statement of Operations for the
Three and Six Months Ended December 31, 1998..........................7
Simulaids Historical Statement of Cash Flows for the
Six Months Ended December 31, 1998....................................8
Notes to Condensed Consolidated Financial Statements..................9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................13
Item 3 - Quantitative and Qualitative Disclosure About Market Risk............17
Part II - Other Information
Item 1 - Legal Proceedings....................................................19
Item 2 - Changes in Securities................................................19
Item 3 - Defaults Upon Senior Securities......................................19
Item 4 - Submission of Matters to a Vote of Security Holders..................19
Item 5 - Other Information....................................................19
Item 6 - Exhibits and Reports on Form 8-K.....................................19
Signatures....................................................................20
Exhibit Index.................................................................21
2
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
December 31, June 30,
1999 1999
--------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ........................................................... $ 4,108 $ 5,849
Marketable securities ............................................................... 300 702
Marketable securities and cash equivalents held in escrow, at market value .......... 214 157
Accounts receivable, net ............................................................ 396 299
Inventories ......................................................................... 945 989
Tax receivable ...................................................................... 215 1,150
Other current assets ................................................................ 293 187
--------- ---------
Total current assets .................................................... 6,471 9,333
--------- ---------
Property and equipment, net ............................................................. 1,430 1,478
--------- ---------
Other assets:
Marketable securities, at market value .............................................. 1,282 1,386
Marketable securities, held in escrow, at market value .............................. 481 552
Goodwill, net of amortization of $153 and $39 at December 1999 and June 1999 ........ 5,570 5,685
Other noncurrent assets ............................................................. 37 51
--------- ---------
7,370 7,674
--------- ---------
$ 15,271 $ 18,485
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings ............................................................... $ -- $ 5,000
Current maturities of long term debt ................................................ 251 25
Current maturities of Series F, G and H Preferred Stock ............................. 799 799
Accounts payable .................................................................... 95 143
Accrued expenses .................................................................... 717 829
Accrued tax reserves ................................................................ 720 720
--------- ---------
Total current liabilities ....................................................... 2,582 7,516
--------- ---------
Long term debt, net of current maturities ............................................... 1,797 111
--------- ---------
Commitments and contingencies
Series E Redeemable Preferred Stock ..................................................... 2,250 2,250
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized, 1,240,727
shares issued ..................................................................... 13 13
Additional paid-in capital .......................................................... 160,403 160,403
Retained earnings (deficit) ......................................................... (151,384) (151,600)
Treasury stock, at cost, 12,109 shares in December 1999 and 7,609 shares in June 1999 (69) (47)
Net unrealized investment losses .................................................... (321) (161)
--------- ---------
Total stockholders' equity .............................................. 8,642 8,608
--------- ---------
$ 15,271 $ 18,485
========= =========
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
3
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales .............................................................. $ 1,687 $ -- $ 3,333 $ --
Cost of goods sold ..................................................... 979 -- 1,954 --
------- ----- ------- -----
Gross profit .............................................. 708 -- 1,379 --
------- ----- ------- -----
Selling expenses ....................................................... 129 -- 232 --
General and administrative expenses .................................... 404 232 764 403
Goodwill amortization .................................................. 57 -- 114 --
------- ----- ------- -----
Operating income (loss) .................................... 118 (232) 269 (403)
------- ----- ------- -----
Other income (expense):
Investment and interest income ................................. 95 208 171 383
Interest expense ............................................... (45) -- (85) --
------- ----- ------- -----
Income (loss) from continuing operations before income taxes 168 (24) 355 (20)
Provision for income taxes ............................................ -- -- 30 --
------- ----- ------- -----
Income (loss) from continuing operations ................... 168 (24) 325 (20)
Loss on sale of discontinued operations ................................ -- -- -- (48)
------- ----- ------- -----
Net income (loss) .......................................... 168 (24) 325 (68)
Preferred dividends .................................................... 54 61 109 124
------- ----- ------- -----
Net income (loss) applicable to common shareholders ........ $ 114 $ (85) $ 216 $(192)
======= ===== ======= =====
Basic earnings per common share:
Continuing operations .......................................... $ .09 $(.07) $ .18 $(.12)
Loss on sale of discontinued operations ........................ -- -- -- (.04)
------- ----- ------- -----
Net income (loss) .......................................... $ .09 $(.07) $ .18 $(.16)
======= ===== ======= =====
Diluted earnings per common share:
Continuing operations .......................................... $ .09 $(.07) $ .17 $(.12)
Loss on sale of discontinued operations ........................ -- -- -- (.04)
------- ----- ------- -----
Net income (loss) .......................................... $ .09 $(.07) $ .17 $(.16)
======= ===== ======= =====
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
4
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Three Months Ended
September 30,
----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 325 $ (68)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Goodwill amortization ............................................... 114 --
Depreciation and amortization ....................................... 97 1
Changes in assets and liabilities:
Accounts receivable ............................................. (97) --
Inventories ..................................................... 44 --
Tax Receivable .................................................. 935 --
Other assets .................................................... (92) 346
Accounts payable ................................................ (49) --
Accrued expenses ................................................ (111) (266)
------- --------
Net cash provided by operating activities .................... 1,166 13
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption (purchase) of marketable securities ....................... 360 (1,886)
Payments of transaction costs from disposal of discontinued operations -- (704)
Purchase of property and equipment ................................... (49) (8)
------- --------
Net cash provided by (used in) investing activities .......... 311 (2,598)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving loan ......................................... (5,000) --
Proceeds from credit agreement ...................................... 2,000 --
Principal debt payments ............................................. (75) --
Repayment of capital lease obligations .............................. (12) --
Proceeds from exercise of stock options ............................. -- 156
Purchase of treasury stock .......................................... (22) (17)
Payment of dividends on preferred stock ............................. (109) (124)
------- --------
Net cash (used in) provided by financing activities .......... (3,218) 15
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS ................................... (1,741) (2,570)
CASH AND CASH EQUIVALENTS, beginning of period .......................... 5,849 12,271
------- --------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 4,108 $ 9,701
======= ========
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
5
SIMULAIDS, INC.
CONDENSED BALANCE SHEET
(Unaudited)
As of December 31, 1998
(dollars in thousands, except for share data)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 499
Accounts receivable, net ........................................ 222
Inventories ..................................................... 987
Other current assets ............................................ 50
------
Total current assets ......................................... 1,758
------
Property and equipment, net ......................................... 1,235
------
Other assets ........................................................ 220
------
$3,213
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt ............................ $ --
Accounts payable ................................................ 75
Accrued expenses ................................................ 57
------
Total current liabilities .................................... 132
------
Stockholders' equity:
Common stock, $1 par value, 2,000 shares authorized, 100 shares
issued and outstanding ........................................ 1
Additional paid-in capital ...................................... 5
Retained earnings ............................................... 3,075
------
Total stockholders' equity ................................... 3,081
------
$3,213
======
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
6
SIMULAIDS, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(dollars in thousands)
Three Months Six Months
Ended Ended
December 31, December 31,
1998 1998
------------ ------------
Net sales ........................................ $ 1,191 $ 2,977
Cost of goods sold ............................... 730 1,625
------- -------
Gross profit ............................... 461 1,352
------- -------
Selling expenses ................................. 67 146
General and administrative expenses .............. 309 580
------- -------
Operating income ........................... 85 626
------- -------
Other income (expense):
Investment and interest income ............... 6 9
Interest expense ............................. (4) (7)
------- -------
Income before income taxes ................. 87 628
Provision for income taxes ....................... 5 10
------- -------
Net income ................................. $ 82 $ 618
======= =======
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
7
SIMULAIDS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended December 31, 1998
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 136
Changes in assets and liabilities:
Accounts receivable ...................................... 173
Inventories .............................................. (152)
Other assets ............................................. (64)
Accounts payable ......................................... (6)
Accrued expenses ......................................... (13)
-----
Net cash provided by operating activities ............ 692
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................. (65)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders .................................. (512)
Payments on long-term debt ..................................... (117)
-----
Net cash used in financing activities ................ (629)
-----
DECREASE IN CASH AND CASH EQUIVALENTS ............................. (2)
CASH AND CASH EQUIVALENTS, beginning of period .................... 501
-----
CASH AND CASH EQUIVALENTS, end of period .......................... $ 499
=====
The accompanying notes are an integral part of these
condensed consolidated finanical statements.
8
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
1. Nature of Operations
The Aristotle Corporation ("Aristotle") is a holding company which,
through its wholly-owned subsidiary, Simulaids, Inc. ("Simulaids"), currently
conducts business in one segment, the health and medical educational products
market. Simulaids' primary products include manikins, and simulation kits used
for training in CPR, emergency rescue and patient care fields. Simulaids'
products are sold throughout the United States and internationally via
distributors and catalogs to end users such as fire and emergency medical
departments and nursing and medical schools.
Unless the context indicates otherwise, all references herein to the
"Company" for the three and six months ended December 31, 1998 include only
Aristotle and S.A. Subsidiary, and all other references herein to the "Company"
include Aristotle, Simulaids, and S-A Subsidiary.
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 and six months ended December 31, 1999 are not necessarily indicative of
results that may be expected for the year ending June 30, 2000. For further
information, refer to the consolidated financial statements and notes included
in Aristotle's Annual Report on Form 10-K for the year ended June 30, 1999.
2. Debt Agreement
On September 27, 1999, Simulaids and Citizens Bank of Connecticut entered
into a $2.5 million Credit Agreement. The credit agreement was comprised of
three facilities ("Credit Facilities"):
(1) $1,200,000 Seven-Year Term Loan - Principal payments are scheduled on a
seven year straight-line amortization. The interest rate is charged at the
rate of Libor plus 200 basis points on a 30, 60, 90 or 180 day Libor rate
at the Company's election.
(2) $800,000 Seven-Year Mortgage - Principal payments are scheduled on a
fifteen year straight-line amortization, with a balloon payment at the
seven-year maturity. The interest rate is charged at the rate of Libor
plus 200 basis points on a 30, 60, 90 or 180 day Libor rate at the
Company's election.
(3) $500,000 Two-Year Revolving Line of Credit - Borrowing availability under
the line of credit is determined by a borrowing base which is equal to the
sum of 80% of eligible accounts receivable and 50% of eligible inventory,
with a maximum borrowing of $500,000. There are no scheduled principal
payments. The interest rate is charged at the rate of Libor plus 175 basis
points on a 30, 60, 90 or 180 day Libor rate at the Company's election.
The Credit Facilities are secured by a lien on all assets of Simulaids.
Aristotle has guaranteed the Credit Facilities with recourse under the guaranty
limited to $1,000,000, to be reduced by an amount equal to the principal
payments made on the term loan. Simulaids must maintain certain financial ratios
and satisfy various other covenants in connection with the Credit Facilities.
9
As of February 10, 2000, the balance outstanding on the term loan was
$1,128,571 and the balance outstanding on the mortgage was $777,778. As of
February 10, 2000, there was no balance outstanding on the line of credit. As of
February 10, 2000, recourse under the Aristotle guaranty is limited to $928,571.
3. Earnings per Common Share
The Company calculates earnings per share in accordance with the
provisions of SFAS 128, "Earnings Per Share". For the three months and six
months ended December 31, 1999 and 1998, Basic and Diluted earnings per share
are calculated as follows:
Three Months Ended December 31
(in thousands of dollars, except share and per share data)
1999 1998
----------- -----------
Basic Earnings per share:
Numerator
Income from continuing operations ...................... $ 168 $ (24)
Preferred dividends .................................... (54) (61)
----------- -----------
Net income (loss) applicable to common shareholders $ 114 $ (85)
=========== ===========
Denominator
Weighted average shares outstanding .................... 1,230,160 1,233,118
=========== ===========
Basic Earnings Per Share Per Common Shareholder
Net income (loss) ................................. $ .09 $ (.07)
=========== ===========
Diluted Earnings per Share:
Numerator
Income from continuing operations ...................... $ 168 $ (24)
Preferred dividends .................................... (54) (61)
----------- -----------
Net income (loss) applicable to common shareholders $ 114 $ (85)
=========== ===========
Denominator
Weighted average shares outstanding .................... 1,296,215 1,233,118
=========== ===========
Diluted Earnings Per Share Per Common Shareholder
Net income (loss) ................................. $ .09 $ (.07)
=========== ===========
10
Six Months Ended December 31
(in thousands of dollars, except share and per share data)
1999 1998
----------- -----------
Basic Earnings per share:
Numerator
Income from continuing operations ....................... $ 325 $ (20)
Preferred dividends ..................................... (109) (124)
----------- -----------
Income (loss) from continuing operations
applicable to common shareholders .................... 216 (144)
Loss on sale of discontinued operations ................. -- (48)
----------- -----------
Net income (loss) applicable to common shareholders $ 216 $ (192)
=========== ===========
Denominator
Weighted average shares outstanding ..................... 1,231,639 1,219,094
=========== ===========
Basic Earnings Per Share Per Common Shareholder
Continuing operations ................................... $ .18 $ (.12)
Loss on sale of discontinued operations ................. -- (.04)
----------- -----------
Net income (loss) .................................. $ .18 $ (.16)
=========== ===========
Diluted Earnings per Share:
Numerator
Income from continuing operations ....................... $ 325 $ (20)
Preferred dividends ..................................... (109) (124)
----------- -----------
Income (loss) from continuing operations
applicable to common shareholders ..................... 216 (144)
Loss on sale of discontinued operations ................. -- (48)
----------- -----------
Net income (loss) applicable to common shareholders $ 216 $ (192)
=========== ===========
Denominator
Weighted average shares outstanding ..................... 1,297,694 1,219,094
=========== ===========
Diluted Earnings Per Share Per Common Shareholder
Continuing operations ................................... $ .17 $ (.12)
Loss on sale of discontinued operations ................. -- (.04)
----------- -----------
Net income (loss) .................................. $ .17 $ (.16)
=========== ===========
11
4. Comprehensive Income
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which discloses changes in equity that result from
transactions and economic events from non-owner sources. Comprehensive income
(loss) for the three months and six months ended December 31, 1999 and 1998 is
as follows:
Three Months Ended
December 31,
(unaudited)
(in thousands of dollars)
1999 1998
---- ----
Net income (loss) ................................... $ 168 $(24)
Net unrealized investment gain (loss) ............... (105) (3)
----- ----
Comprehensive income (loss) ......................... $ 63 $(27)
===== ====
Six Months Ended December 31,
(unaudited)
(in thousands of dollars)
1999 1998
---- ----
Net income (loss) ................................... $ 325 $(68)
Net unrealized investment gain (loss) ............... (160) 4
----- ----
Comprehensive income (loss) ......................... $ 165 $(64)
===== ====
5. Subsequent Events
On January 3, 2000, a holder of Series H Preferred Stock of the Company
exercised his right to put 13,617 shares of Series H Preferred Stock, with an
aggregate value of $136,170, to the Company in exchange for $90,110 in cash and
the cancellation of a loan from the Company to him in the amount of $46,060.
On February 9, 2000, Geneve Corporation elected to convert 545,940 shares
of Series E, F, G, and H Preferred Stock, with an aggregate value of $2,818,090,
into 583,813 shares of Common Stock and a promissory note issued by the Company
in the amount of $330,000 due December 31, 2001. The Preferred Stock Purchase
Agreement entered into October 22, 1997 was modified primarily to state that
voting restrictions would lapse with respect to the election of Directors and
the appointment of auditors on December 31, 2001.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
This discussion and analysis of financial condition and results of
operations will review the results of operations of the Company, on a
consolidated basis, for the three months and six months ended December 31, 1999,
as compared to the three months and six months ended December 31, 1998. This
discussion and analysis of financial condition and results of operations have
been derived from, and should be read in conjunction with, the unaudited
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained elsewhere in this report.
As of April 30, 1999, Aristotle acquired all of the outstanding stock of
Simulaids, Inc. ("Simulaids"), a manufacturer of health and education teaching
aids. Simulaids is currently Aristotle's only operating subsidiary.
Results of Operations of the Company
Three Months Ended December 31, 1999 As Compared to the Three Months Ended
December 31, 1998
The Company's net sales of $1,687,000 for the three months ended December
31, 1999 represent the net sales of Simulaids. There were no net sales in the
same period last year which was prior to the acquisition of Simulaids.
Gross profit of $708,000 for the three months ended December 31, 1999
represents the gross profit of Simulaids. There was no gross profit in the same
period last year which was prior to the acquisition of Simulaids.
Selling expense of $129,000 for the three months ended December 31, 1999
represents the selling expenses of the Simulaids' operation. There were no
selling expenses in the same period last year which was prior to the acquisition
of Simulaids.
The Company's general and administrative expenses for the three months
ended December 31, 1999 increased 74.1% to $404,000 compared to $232,000 for the
comparable 1998 fiscal quarter. The increase was primarily due to the inclusion
of the operating expenses of Simulaids.
Investment and interest income was $95,000 and $208,000 for the three
months ended December 31, 1999 and 1998, respectively. The decrease in 1999 was
mainly due to lower investment balances, reflecting the utilization of
investment balances in the purchase of Simulaids.
Interest expense for the three months ended December 31, 1999 was $45,000
versus no interest expenses in the prior year period. The increase reflected
interest expense on the borrowed funds utilized in the acquisition of Simulaids.
13
Preferred dividends were $54,000 for the three months ended December 31,
1999 compared to $61,000 for the three months ended December 31, 1998. The
decrease was principally due to the end of the payment of dividends on 39,634
shares of Preferred Stock issued in connection with the original acquisition of
Strouse.
Six Months Ended December 31, 1999 As Compared to the Six Months Ended
December 31, 1998
The Company's net sales of $3,333,000 for the six months ended December
31, 1999 represent the net sales of Simulaids. There were no net sales in the
same period last year, which was prior to the acquisition of Simulaids.
Gross profit of $1,379,000 for the six months ended December 31, 1999
represents the gross profit of Simulaids. There was no gross profit in the same
period last year, which was prior to the acquisition of Simulaids.
Selling expense of $232,000 for the six months ended December 31, 1999
represents the selling expenses of the Simulaids' operation. There were no
selling expenses in the same period last year, which was prior to the
acquisition of Simulaids.
The Company's general and administrative expenses for the six months ended
December 31, 1999 increased 89.6% to $764,000 compared to $403,000 for the
comparable 1998 fiscal quarter. The increase was primarily due to the inclusion
of the operating expenses of Simulaids.
Investment and interest income was $171,000 and $383,000 for the six
months ended December 31, 1999 and 1998, respectively. The decrease in 1999 was
mainly due to lower investment balances, reflecting the utilization of
investment balances in the purchase of Simulaids.
Interest expense for the six months ended December 31, 1999 was $85,000
versus no interest expenses in the prior year period. The increase reflected
interest expense on the borrowed funds utilized in the acquisition of Simulaids.
Preferred dividends were $109,000 for the six months ended December 31,
1999 compared to $124,000 for the six months ended December 31, 1998. The
decrease was principally due to the end of the payment of dividends on 39,634
shares of Preferred Stock issued in connection with the original acquisition of
Strouse.
The income tax provision for the six months ended December 31, 1999 was
$30,000 compared to no provision for the six months ended September 30, 1998.
The tax provision for the current period represents state taxes.
Loss on discontinued operations results from the final purchase price
adjustment related to the June 1998 sale of the assets of Strouse resulting in a
decrease in the gain previously recorded.
14
Results of Operations of Simulaids on a stand alone basis
Three Months Ended December 31, 1999 As Compared to the Three Months Ended
December 31, 1998
Simulaids' net sales of $1,687,000 for the three months ended December 31,
1999 were 41.6% higher than the net sales of $1,191,000 recorded in the three
months ended December 31, 1998. The increase primarily reflected increased
mankin sales to distributors.
Simulaids' gross profit for the three months ended December 31, 1999
increased to $708,000 from $461,000 for the prior year, and the gross margin
percentage increased to 41.9% from 38.7%. The increase in gross profit and gross
margin percentage was principally due to the sales increase partially offset by
increases in raw material prices and labor costs.
Operating expenses include selling and administration costs. Operating
expenses for the three months ended December 31, 1999 were $377,000 versus
$376,000 for the three months ended December 31, 1998.
Investment and interest income was $11,000 and $6,000 for the three months
ended December 31, 1999 and 1998, respectively. Fluctuations in investment and
interest income generated each year were a direct result of the cash balances
maintained.
Interest expense for the three months ended December 31, 1999 increased to
$45,000 from $4,000 in the prior year. The increase in interest expense
primarily resulted from the $2,000,000 in bank borrowings.
Six Months Ended December 31, 1999 As Compared to the Six Months Ended
December 31, 1998
Simulaids' net sales of $3,333,000 for the six months ended December 31,
1999 were 11.9% higher than the net sales of $2,977,000 recorded in the six
months ended December 31, 1998. The increase principally reflected increased
manikin sales to distributors.
Simulaids' gross profit for the six months ended December 31, 1999
increased to $1,379,000 from $1,352,000 for the prior year, and the gross margin
percentage decreased to 41.4% from 45.4%. The increase in gross profit was a
result of the sales increase and the decrease in gross margin percentage was
principally due to increases in raw material prices and labor costs.
Operating expenses include selling and administration costs. Operating
expenses for the six months ended December 31, 1999 were $697,000 versus
$726,000 for the three months ended December 31, 1998. The $29,000, or 4.0%,
decrease was principally a result of decreases in administrative compensation.
Investment and interest income was $12,000 and $9,000 for the six months
ended December 31, 1999 and 1998, respectively. Fluctuations in investment and
interest income generated each year were a direct result of the cash balances
maintained in the business.
15
Interest expense for the six months ended December 31, 1999 increased to
$85,000 from $7,000 in the prior year. The increase in interest expense
primarily resulted from the $2,000,000 in bank borrowings.
Liquidity and Capital Resources
Aristotle ended the December 31, 1999 quarter with $4,108,000 in cash and
cash equivalents versus cash and cash equivalents of $5,849,000 at June 30,
1999. Cash consumed during the quarter was principally used to reduce bank debt
by $3,000,000 which was partially offset by the receipt of a tax refund of
$900,000. The overall decrease in cash and cash equivalents of $1,741,000 is
detailed below.
The Company generated cash of $1,166,000 from operations during the six
months ended December 31, 1999 and generated cash of $13,000 from operations
during the six months ended December 31, 1998. During the six month period ended
December 31, 1999, the generation of cash from operations was principally the
result of the receipt of a tax refund of $900,000 and net income of $325,000.
During the six month period ended December 31, 1998, the generation of cash from
operations was principally the result of a decrease in other assets partially
offset by a decrease in accrued expenses.
The Company generated cash of $311,000 from investing activities during
the six months ended December 31, 1999, and utilized cash of $2,598,000 in
investing activities during the six months ended December 31, 1998. During the
six month period ended December 31, 1999, the generation of cash was principally
due to the redemption of marketable securities of $360,000 partially offset by
capital expenditures of $49,000. During the six month period ended December 31
1998, the utilization of cash was principally due to the purchase of marketable
securities and the payments of transaction costs related to the Strouse Sale
that were accrued for in June 1998.
The Company utilized cash of $3,218,000 in financing activities during the
six months ended December 31, 1999, and generated cash of $15,000 from financing
activities during the six months ended December 31, 1998. Funds utilized in the
six month period ended December 31, 1999 primarily reflected the reduction of
debt by $3,087,000. Funds provided during the six month period ended December
1998 were generated from proceeds received from the exercise of stock options,
partially offset by the purchase of treasury stock and the payment of dividends.
Capital resources in the future are expected to be used in the development
of the Simulaids business and to acquire additional companies in the health and
medical education field. Other potential uses of cash relate to the payment of
up to $799,000 to holders of the Series F, G, and H Preferred Stock if such
holders exercise the put rights. In the meantime, Aristotle anticipates that
there will be sufficient financial resources to meet Aristotle's projected
working capital and other cash requirements for the next twelve months.
16
Item 3. Quantitative & Qualitative Disclosures About Market Risk
As described below, credit risk and interest rate risk are the primary
sources of market risk to the Company in its marketable securities and
short-term borrowings.
Qualitative
Interest Rate Risk: Changes in interest rates can potentially impact the
Company's profitability and its ability to realize assets and satisfy
liabilities. Interest rate risk is resident primarily in the Company's
marketable securities and short-term borrowings which have fixed coupon or
interest rates.
Credit Risk: The Company's marketable securities are invested in
investment grade corporate bonds and closed-end bond funds, both domestic and
international, which have various maturities.
Quantitative
The Company's marketable securities and long-term borrowings as of
December 31, 1999 are as follows:
Maturity less Maturity greater
than one year than one year
------------- -------------
Marketable securities held in escrow
Cost value $ 214 $ 574
Weighted average return 5.4% 7.8%
Fair market value $ 214 $ 481
Marketable securities
Cost value $ 310 $ 1,499
Weighted average return 7.6% 7.8%
Fair market value $ 300 $ 1,282
Long-term borrowings
Amount $ 251 $ 1,797
Weighted average interest rate 7.8% 7.8%
Fair market value $ 251 $ 1,797
17
Year 2000 Issue
The Year 2000 Issue arose as a result of computer programs that were
written using two digits rather than four to define the year. There was concern
that information technology systems and other systems using such programs that
have date sensitive software would recognize a date using "00" as the year 1900
rather than the year 2000. Accordingly, computer systems and software used by
many companies and governmental agencies needed to be upgraded to comply with
Year 2000 requirements or risk system failure or miscalculations causing
disruptions of operations.
The Company completed its Year 2000 conversion efforts in 1999. Based on
these efforts, prior to December 31, 1999, the Company believed that its
principal information systems were Year 2000 compliant.
In addition, prior to December 31, 1999, the Company contacted its
significant suppliers, customers and critical business partners to determine the
Year 2000 readiness of these parties and to determine the extent to which it
would be vulnerable in the event these parties were not Year 2000 compliant.
Based on these communications, prior to December 31, 1999, the Company was not
aware of any significant exposure in this regard.
Subsequent to December 31, 1999, the Company has not experienced any
significant problems associated with the Year 2000 compliance of its own
operating and information systems and it has not experienced any problems with
the Year 2000 compliance of third parties, including its significant suppliers,
customers and critical business partners or any governmental agencies and
service providers. The Company does not expect to experience any significant
problems associated with the Year 2000 Issue in the future.
Certain Factors That May Affect Future Results of Operations
Aristotle 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 Aristotle'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. Aristotle 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: (i) the
ability of Aristotle to obtain financing and additional capital to fund its
business strategy on acceptable terms, if at all; (ii) the ability of Aristotle
on a timely basis to find, prudently negotiate and consummate one or more
additional acquisitions; (iii) the ability of Aristotle to retain and take
advantage of its net operating tax loss carryforward position; (iv) Aristotle's
ability to manage Simulaids and any other acquired or to be acquired companies;
and (v) general economic conditions. As a result, Aristotle's future development
efforts and operations involve a high degree of risk. For further information,
refer to the more specific risks and uncertainties discussed throughout this
report.
18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
None
Item 2 - Changes in Securities.
See Footnote 5 - "Subsequent Events" to the Condensed Consolidated
Financial Statements accompanying tbis form 10-Q.
Item 3 - Defaults Upon Senior Securities.
None
Item 4 - Submission of Matters to a Vote of Security Holder.
None
Item 5 - Other Information.
None
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 filed in the three months ended
December 31, 1999
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 14, 2000
/s/ Paul McDonald
-------------------------------------------------
Paul McDonald
Its Chief Financial Officer and Secretary
(principal financial and chief accounting officer)
Date: February 14, 2000
20
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of The Aristotle Corporation,
incorporated herein by reference to Exhibit 3.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
3.2 Amended and Restated Bylaws of the Registrant, incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1997.
4.1 Restated Certificate of Incorporation of The Aristotle Corporation and
Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are incorporated
into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above.
4.2 Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and other Special Rights of the Series E
Convertible Preferred Stock of the Registrant, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
4.3 Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and other Special Rights of the Series F, G and H
Convertible Preferred Stock of the Registrant, incorporated herein by
reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
4.4 Registration Rights Agreement dated as of April 11, 1994 between the
Registrant and the shareholders listed on Exhibit A thereto, incorporated
by reference to an exhibit to the Registrant's Registration Statement on
Form S-3 (File No. 333-4185).
4.5 Registration Rights Agreement dated as of October 22, 1997 between The
Aristotle Corporation and Geneve Corporation, incorporated herein by
reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997.
4.6 Letter Agreement dated as of September 15, 1997 among The Aristotle
Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated
herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1997
4.7 Letter Agreement dated as of February 9, 2000 between The Aristotle
Corporation and the Geneve Corporation regarding certain limitations on
voting and the acquistion of additional shares of common stock.
10.1 Pledge and Escrow Agreement dated as of April 11, 1994 by and among
Aristotle Sub, Inc. and certain other parties, incorporated herein by
reference to Exhibit 2.8 of the of the Registrant's Current Report on Form
8-K dated April 14, 1994, as amended.
21
10.2 Security Agreement dated as of April 11, 1994 by and among The Strouse,
Adler Company and certain other parties, incorporated herein by reference
to Exhibit 2.9 of the of the Registrant's Current Report on Form 8-K dated
April 14, 1994, as amended.
10.3 Term Promissory Notes dated April 11, 1994 payable to The Aristotle
Corporation, incorporated herein by reference to Exhibit 2.12 of the of
the Registrant's Current Report on Form 8-K dated April 14, 1994, as
amended.
10.4 Employment Agreement dated as of December 1, 1998 by and between The
Aristotle Corporation and Paul McDonald, incorporated herein by reference
to Exhibit 10.1 of the Registrant's Registration Statement on Form S-3
filed on December 16, 1998.
10.5 Stockholder Loan Pledge Agreements dated as of April 11, 1994 by and
between certain parties and The Aristotle Corporation, incorporated herein
by reference to Exhibit 2.13 of the Registrant's Current Report on Form
8-K dated April 14, 1994, as amended.
10.6 Letter Agreement by and among The Aristotle Corporation, Aristotle Sub,
Inc., Alfred Kniberg and David Howell dated June 27, 1995, incorporated
herein by reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995.
10.7 Letter Agreement dated October 27, 1995 Re: Amended Put Rights,
incorporated herein by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1995.
10.8 Stock Option Plan of The Aristotle Corporation, as amended, incorporated
herein by reference to Exhibit 10.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
10.9 Form of Stock Option Agreement (for non-employee directors), incorporated
herein by reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1992.
10.10 Form of Incentive Stock Option Agreement (for employees), incorporated
herein by reference to Exhibit 10.4 of the Registrant's Annual Report for
the fiscal year ended June 30, 1992.
27 Financial Data Schedule is attached hereto as Exhibit 27.
22