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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

THE ARISTOTLE CORPORATION

The accompanying notes are an integral part of these condensed consolidated financial statements.

(Unaudited)

1. Organization

The Aristotle Corporation ("Aristotle") and its subsidiaries (together with Aristotle, the "Company"), founded in 1986, and headquartered in Stamford, CT, is a leading manufacturer and global distributor of educational, health, medical technology and agricultural products. A selection of over 80,000 items is offered, primarily through catalogs carrying the brand of Nasco (founded in 1941), as well as those bearing the brands of Life/Form®, Whirl-Pak®, Simulaids, Triarco, Summit Learning, Hubbard Scientific, Scott Resources, Spectrum Educational Supplies, Haan Crafts and To-Sew. Products include educational materials and supplies for substantially all K-12 curricula, molded plastics, biological materials and items for the agricultural, senior care and food industries. In addition, the Company offers simulation kits and manikins used for training in cardiopulmonary resuscitation and the fire and emergency rescue and patient care fields. The Co mpany markets proprietary product lines that provide exclusive distribution rights throughout all of its catalogs. The proprietary product lines are developed internally through the Company's research and development efforts and acquired externally through licensing rights from third parties.

2. Financial Statement Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP 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 March 31, 2004 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2004. For further information, refer to the consolidated financial statements a nd notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

3. Principles of Consolidation

All significant intercompany balances and transactions have been eliminated in consolidation.

4. Recently Issued Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities ("Interpretation 46R"), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. Interpretation 46R replaces Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company will be required to apply Interpretation 46R to interests in variable interest entities ("VIE") created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under Interpretation 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be me asured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date Interpretation 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The adoption of Interpretation 46R did not have a material impact on the Company's financial statements for the three months ended March 31, 2004.

 

4

THE ARISTOTLE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

 

5. Business Combinations

On May 31, 2003, Aristotle purchased 100% of the outstanding capital stock of Haan Crafts Corporation ("Haan"). Haan is a manufacturer and catalog distributor of sewing kits used in middle school and junior high school family and consumer science classrooms. The acquisition has complemented the Company's current product lines in the educational segment. The results of Haan's operations have been included in the Company's consolidated financial statements since the date of such acquisition. The aggregate purchase price, net of cash acquired, was $5.3 million, including $3.5 million of cash and $1.8 million in seller financing, which was subsequently retired by the Company. The purchase price allocation resulted in goodwill of $3.9 million attributable to the educational segment. In connection with the acquisition of Haan, Aristotle entered into a $1.2 million capital lease with the seller on a building facility ("Haan Building Facility"). On Febru ary 12, 2004, the Company settled the capital lease on the Haan Building Facility for $1.1 million.

On May 31, 2003, Aristotle acquired 100% of the outstanding ownership interests in NHI, LLC ("NHI") from Nasco Holdings, Inc. ("Holdings"), a subsidiary of Geneve Corporation ("Geneve"), a privately-held diversified financial services company. Geneve and Holdings together held greater than 90% of Aristotle's outstanding voting stock at March 31, 2004. The sole purpose of NHI is the ownership and management of warehouse and office facilities, which had been leased to Aristotle. In connection with the purchase of NHI, Aristotle paid to Holdings an amount equal to the book value of NHI, which includes a $3.6 million mortgage related to the properties held by NHI.

6. Earnings (Loss) per Common Share

Basic earnings (loss) per common share is calculated by dividing net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share is calculated by dividing net earnings (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period and including each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.

Shares of Common Stock available for issue upon conversion of the 1,096,622 and 1,046,716 shares of Series I Preferred Stock outstanding at March 31, 2004 and 2003, respectively, and 135,258 shares related to stock options outstanding at March 31, 2003 were not dilutive and, therefore, have not been included in the computations of diluted earnings (loss) per common share amounts for the periods then ended.

7. Stockholders' Equity and Comprehensive Earnings

Changes in stockholders' equity for the three months ended March 31 are as follows (in thousands):

							2004		2003
Balance at January 1						$	59,844		55,718
Net earnings							3,045		1,952
Exercise of stock options							159		-
Tax benefit on exercise of stock options							84		-
Stock option compensation							125		131
Other comprehensive loss:
	Foreign currency translation adjustment						(167)		(22)
Preferred dividends							(2,163)		(2,150)
Balance at March 31						$	60,927		55,629

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THE ARISTOTLE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

 

Comprehensive earnings for the three months ended March 31 is as follows (in thousands):

						2004		2003
Net earnings					$	3,045		1,952
Foreign currency translation adjustment						(167)		(22)
Comprehensive earnings					$	2,878		1,930

8. Stock Options

The Company accounts for its stock options under the fair value-based recognition and measurement provisions of Statement of Financial Accounting Standards ("SFAS") No.123, Accounting for Stock-Based Compensation ("SFAS 123"), which requires the fair value of stock options granted to employees to be measured at the date of grant and recognized as an expense over the service period, which is usually the vesting period of the grant. Under SFAS 123, the Company recognizes the fair value of stock options as an expense within its Condensed Consolidated Statements of Earnings.

The Company has a 1997 Employee and Director Stock Plan ("1997 Plan") and 2002 Employee, Director and Consultant Stock Plan ("2002 Plan"). The Company does not currently intend to grant any additional options under the 1997 Plan. No stock options were granted during the three months ended March 31, 2004. The total fair value of the options granted under the 2002 Plan during the three months ended March 31, 2003 was $.4 million. The total fair value of options granted under the 2002 Plan is generally recognized as non-cash compensation expense over the three year vesting period for such options. The Company recorded compensation expense related to granted stock options of approximately $.1 million for the three months ended March 31, 2004 and 2003. The expected annual impact on 2004 earnings before income taxes of the options granted to date is a reduction of approximately $.5 million.

9. Defined Benefit Pension Plan

The Company has noncontributory defined benefit pension plans covering substantially all salaried and hourly employees. No contributions were made to the pension plans for the three months ended March 31, 2004. The Company contributed $.1 million to the pension plans for the three months ended March 31, 2003. The Company expects to contribute a total of $.9 million to the pension plans in 2004.

The following table presents the components of net periodic benefit cost for the three months ended March 31 (in thousands):

						2004		2003
	Service cost				$	157		137
	Interest cost					203		190
	Expected return on plan assets					(212)		(197)
	Amortization of transition asset					(7)		(10)
	Amortization of prior service cost					(1)		(1)
	Recognized net actuarial loss					54		39
		Net periodic benefit cost			$	194		158

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THE ARISTOTLE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

10. Segment Reporting

• increase in net sales and gross profit of 10.1% and 14.7%, respectively, as compared to the first quarter of 2003;
• 53.9% and 56.0% increase in earnings from operations and net earnings, respectively, as compared to the first quarter of 2003;
• EBITDA(1) increase of 48.3% to $5.7 million from $3.9 million in the comparable quarter in 2003;
• increase in cash retained in the Company to $1.5 million in first quarter of 2004 from $1.0 million in the comparable quarter in 2003 as a result of the increased utilization of Federal net operating tax loss carryforwards; and
• semi-annual payment of $4.3 million of dividends on the Company's Series I Preferred Stock and Series J Preferred Stock.