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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1995
__ 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.)
129 Church Street, Suite 717, New Haven, Connecticut 06510
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 867-4090
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 8, 1995, 1,105,204 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock outstanding of The Aristotle
Corporation held by nonaffiliates was approximately $4,175,852.
Documents Incorporated by Reference
Portions of the Registrant's 1995 definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the end of the Registrant's
fiscal year are incorporated by reference to Part III.
PART I
ITEM 1. BUSINESS.
GENERAL. 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.
PRODUCTS. The Company designs, manufactures and markets two specific
categories of women's intimate apparel: specialty brassieres and women's
shapewear. Specialty brassieres are specifically designed to provide support and
figure enhancement for women who are wearing apparel with backless, strapless or
halter features, such as strapless and/or low back line dresses and gowns,
halter tops and wedding gowns. The Company maintains a strong market position in
three particular categories of specialty brassieres: strapless, backless
strapless, and backless convertible/halter. Women's shapewear products provide
support and control for a woman's abdominal area in the same manner as the
traditional girdle. Such shapewear products include so-called "body briefers,"
medium control panties, and medium and heavy control bottoms that may extend
from the bottom of a woman's brassiere to just above her knee. For fiscal year
1995, approximately 41% of the Company's total net sales were attributable to
its lines of specialty brassieres, and the remaining 59% of total net sales were
attributable to its lines of women's shapewear.
The Company distributes its products under several brand names, including
Smoothie, Fleur de Lace, Smooth Advantage, Renaissance Rose, Sophistique, Waist
Eliminator and Does What Your Diet Doesn't. Its core brand names, Smoothie and
Fleur de Lace, are 40 and 18 years old, respectively. See the Consolidated
Financial Statements contained elsewhere in this report for financial
information relating to the Company's business.
BUSINESS STRATEGY. Aristotle's strategy is to acquire other companies,
including companies within the women's specialty intimate apparel field with
manufacturing processes and distribution channels which complement Strouse's
operations. Although Aristotle is not currently engaged in a search for an
acquisition, Aristotle intends to review any acquisition opportunities which
come to its attention. Strouse's strategy is to build on the strength of its
brand names with consumer-oriented marketing programs in its existing department
and specialty store channels of distribution and to expand its distribution on a
selective basis in the private label segment with specific product lines in
catalogs and national chains. Strouse attributes the strength of its private
label and brand names to the quality, price, fit and design of its products.
MARKETING AND DISTRIBUTION. The Company's products are marketed and
distributed throughout the United States to retailers. A network of 13 sales
executives, who are full-time employees of the Company, are responsible for
marketing the Company's products in the continental United States. These sales
executives are compensated by combinations of salary, commissions and other
incentives based upon net sales. Alfred A. Kniberg, President and Chief
Operating Officer of Strouse, oversees the sales executives and takes an active
role in supervising the marketing and distribution process.
The Company currently sells products under its brand names to the largest
department stores in the United States, including Macy's, May Company,
Dillard's, Bloomingdales, Dayton Hudson, Broadway, Nordstroms, Nieman Marcus and
Lord & Taylor, as well as to catalogs and other leading retailers such as
Spiegel. Since 1991, the Company has sold private label goods to accounts such
as Victoria's Secret, Dillard's and J.C. Penney. Two of the Company's customers
accounted for 24.6% of total net sales for fiscal 1995.
The Company believes that there has been a consolidation of retailers into
larger entities during the past few years. In addition, retailers have attempted
to consolidate the purchases of their products by reducing their number of
suppliers. The Company cannot predict what effect, if any, these trends will
have on its business.
The Company's sales are not substantially affected by seasonal consumption.
However, the Company generally experiences reduced sales during the months of
December and January.
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MANUFACTURING AND RAW MATERIALS. The Company conducts some manufacturing
operations consisting primarily of cutting, sewing (approximately 11% of sewing)
and packaging, at its facility located in New Haven, Connecticut. All other
manufacturing of the Company's products is subcontracted to manufacturers in the
Caribbean (primarily the Dominican Republic and Jamaica) and the continental
United States. Approximately 85% of the Company's products are manufactured and
sewn in the Caribbean, with approximately 60% of the Company's products
manufactured and sewn in the Dominican Republic. Accordingly, the Company's
operations may be adversely affected by political instability or other factors
which may occur from time to time in the Dominican Republic or elsewhere in the
Caribbean. This concentration of subcontractors in the Caribbean can also expose
Strouse to abnormal production cost increases. Strouse continues to seek to
develop multiple sources of manufacturing.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period. Management believes
that the lease agreement will help provide the capacity needed to support future
growth. Approximately 20% of the Company's products are manufactured and sewn in
Jamaica.
The design and manufacture of specialty brassieres and women's shapewear
are complex, requiring specialized and sophisticated machinery and tools. The
complex design and manufacturing process results in a higher per unit cost and a
lower volume of units being produced, as compared to the design and manufacture
of simpler garments.
The Company uses various synthetic fibers and natural materials, such as
cotton, in the manufacture of its products. These raw materials are generally
available from multiple sources; the Company purchases the majority of its raw
materials from sources within the United States.
COMPETITION. The women's intimate apparel industry is highly competitive.
The Company's products compete for customers with numerous manufacturers of
well-known brands of women's intimate apparel. With respect to specialty
brassieres, the Company's primary competition is from the Trueform, Warners,
Maidenform, Playtex and Vanity Fair lines of specialty brassieres; with
respect to shapewear, the Company competes primarily with the Olga, Vanity
Fair, Trueform, Playtex and Bali lines of shapewear.
The principal competitive factors in the intimate apparel market are
quality, price, fit and design of products, engineering, customer and brand
loyalty, and customer service (including maintenance of sufficient inventories
for timely delivery). Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more resources and effort
than the Company in areas such as marketing and product development.
EMPLOYEES. As of September 15, 1995, the Company employed 184 full time
personnel. None of the Company's employees are members of a union.
BANK FINANCING. On November 9, 1994, Strouse and Fleet Bank, National
Association (the "Bank") entered into a credit agreement (the "Credit
Agreement") that provides for a line-of-credit facility and two term loan
facilities (the "Credit Facilities"). The line-of-credit facility provides for
maximum borrowing of $8,500,000 through October 1995, $11,000,000 thereafter
through October 1996, and $13,000,000 thereafter through October 1997. The
principal amounts of the term loans are $2,500,000 and $225,000, respectively.
The Credit Agreement matures on October 31, 1997. Strouse uses the Credit
Facilities for working capital and other general corporate purposes.
Within the minimum limits set forth above, borrowing under the line-of-
credit (the "Borrowing Base") is limited to 80% of eligible accounts receivable,
plus the lesser of (i) the sum of 50% of eligible raw materials, 50% of eligible
finished goods, and 20% of eligible work-in-process, or (ii) the inventory cap
of $5,000,000 through October 1995, $6,000,000 thereafter through October 1996,
and $7,000,000 thereafter through October 1997. In addition, the Credit
Agreement permits advances to exceed the Borrowing Base amount ("Overadvances")
by up to $500,000 through June 1995, $1,000,000 thereafter through June 1996,
and $1,500,000 thereafter through October 1997 (so long as the total line-of-
3
credit is not more than the maximum borrowing allowed and Strouse reduces any
Overadvance to zero for a thirty day period in each July).
The line-of-credit bears interest at a rate per annum equal to either .25%
over the Bank's prime rate, the Bank's fixed rate, or 2.0% over LIBOR (London
Interbank Offer Rate), at the option of Strouse. The term loans bear interest at
a rate per annum equal to either .25% over the Bank's prime rate, the Bank's
fixed rate, or 2.5% over LIBOR, at the option of Strouse. Currently and through
October 1998, the interest rate on the line-of-credit is fixed at 8.3% per annum
for the first $3,500,000 and varies at .25% over the Bank's prime rate for the
remaining balance. The per annum interest rates on the $2,500,000 and $225,000
term loans were fixed until October 1998 at 8.55% and 7.25%, respectively.
The Credit Facilities are secured by a lien on all assets of Strouse. In
addition, ASI has guaranteed the Credit Facilities. To secure ASI's guarantee of
the Credit Facilities, ASI has pledged and recourse under the ASI guaranty is
limited to, all of the capital stock of Strouse that is owned by ASI.
Strouse must maintain certain financial ratios and satisfy various other
covenants in connection with the Credit Facilities (See Note 4 of Notes to
Consolidated Financial Statements). At June 30, 1995, Strouse was not in
compliance with certain of the covenants. On October 6, 1995, the Company and
the Bank executed a Letter of Intent (the "Letter of Intent") pursuant to which:
(i) they agreed in principle to a modification of certain terms of the Credit
Agreement; and (ii) the Bank waived Strouse's non-compliance with such covenants
through September 30, 1995.
Pursuant to such Letter of Intent, which is conditioned on a closing taking
place on or before October 31, 1995, the Bank and the Company have agreed: (i)
to modify the maturity date of the Credit Agreement to October 31, 1996; (ii) to
modify the maximum borrowing under the line-of-credit facility to $8,750,000
through October 31, 1996; (iii) to reduce the maximum amounts that the Bank will
advance against inventory to $5,000,000 through October 31, 1996; (iv) to reduce
the amount of Overadvances that are available to $1,000,000 through December
1995, and to $500,000 at all times thereafter; (v) that the interest rate on the
line-of-credit will be increased to 1.0% over the Bank's prime rate, or 3.0%
over LIBOR; (vi) that Aristotle and ASI will unconditionally guarantee the
$2,500,000 term loan; (vii) that the Company will make a prepayment on the Term
Loans of a portion of the amount, if any, of the tax refund received and
retained by the Company after the resolution of the Federal Deposit Insurance
Corporation's ("FDIC") claim that it is entitled to such tax refund. See "Legal
Proceedings-FDIC Tax Claim."
As of September 25, 1995, the balances outstanding on the line-of-credit
was $6,717,000 and the amounts outstanding under the term loans were $2,347,000
and $150,000, respectively. As of September 25, 1995, subject to the granting of
the Bank waiver, the additional borrowing available on the line-of-credit was
$448,000.
BACKGROUND REGARDING ARISTOTLE. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was Aristotle's only subsidiary and
which, on October 2, 1992, was seized by the FDIC. On April 11, 1994, Aristotle
acquired (the "Acquisition") Strouse pursuant to the terms of a Capital
Contribution Agreement and certain other agreements (collectively, the
"Acquisition Agreements"). As a result of the Acquisition, Aristotle currently
owns approximately 97% of the issued and outstanding common stock of ASI, which
in turn owns all of the outstanding capital stock of Strouse. Aristotle
therefore currently indirectly owns 97% of the issued and outstanding capital
stock of Strouse and Aristotle's business is the business of Strouse. In May
1994, the Company effectuated a one for ten reverse stock split.
Aristotle was organized in 1986 and is chartered in the State of Delaware.
On April 14, 1993, the Company changed its name from First Constitution
Financial Corporation to The Aristotle Corporation.
ITEM 2. PROPERTIES.
Strouse's principal facility is located in New Haven, Connecticut (the "New
Haven Facility"). Such facility is leased from New England Resources Limited
Partnership ("NERLP"), consists of approximately 117,500 square feet, and houses
Strouse's general administrative offices. In addition, the New Haven Facility is
used for manufacturing, packaging, storage, quality control, receiving and
distribution. The leases for the New Haven Facility expire on December 31, 1999
and provide for annual rent of approximately $3.83 per square foot in fiscal
1995. One of such leases, involving 11,650 square
4
feet, may be canceled upon six months prior notice from either party. NERLP is
affiliated with David S. Howell, a former director of the Company and the former
Chairman and Chief Executive Officer of Strouse, and Ann-Marie Howell, a former
Vice President and the former Secretary of Strouse.
On December 22, 1994, Strouse signed an agreement with its Jamaica
subcontractor, Maggie Manufacturing Company, Ltd., which began January 1, 1995
and provides for a three year lease of its manufacturing facility in Jamaica and
an option to purchase the facility during the lease period for $700,000. Under
the terms of the lease, Strouse makes quarterly payments of $81,250, $87,500,
and $93,750, for calendar years 1995, 1996 and 1997, respectively. Management
believes that the lease agreement will help provide the capacity needed to
support future growth. Approximately 20% of the Company's products are
manufactured and sewn in Jamaica.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to the following material legal proceedings:
The Stockholders Litigation. During 1990, two separate purported
stockholder class actions were commenced in the United States District Court for
the District of Connecticut and a consolidated complaint, captioned In Re: First
Constitution Stockholders Litigation, was filed on August 3, 1990 (the
"Stockholder Litigation"). The consolidated complaint alleges, among other
things, that during the purported class period (January 25, 1989 to April 5,
1990), the Company, a former director and certain former officers acted to
inflate the price of Common Stock of Aristotle (the "Common Stock") by issuing
materially false and misleading statements or omissions. The consolidated
complaint also alleges claims based on common law fraud and misrepresentation,
and seeks unspecified damages, as well as recovery of attorneys' fees. On
October 14, 1992, the court issued a stay of all proceedings in the Stockholder
Litigation as a result of the receivership proceedings concerning the Bank. On
November 15, 1993, the plaintiffs filed a motion with the court to vacate any
existing stay of proceedings. The Company filed a response on December 9, 1993,
opposing this request pending a decision on a motion for a reconsideration of
the denial of an earlier filed motion to dismiss. On January 13, 1994, the court
denied the plaintiffs' motion to vacate any existing stay of proceedings and
granted the Company's motion for reconsideration of the denial of an earlier
motion to dismiss. On November 2, 1994 defendants' renewed motion for
reconsideration was denied. The plaintiffs in the Stockholder Litigation have
not alleged a specific amount of damages in their claim. The Company is not able
to determine at this time what the outcome of such litigation will be or what
effect it may have upon the Company. Although the Company believes any liability
arising out of the Stockholder Litigation would be covered in whole or in part
by directors' and officers' insurance policies, the magnitude of any amount
which may be awarded or agreed to be paid in connection therewith could exceed
such insurance.
FDIC Tax Claim. On April 19, 1995, the FDIC filed a complaint related to
this matter captioned Federal Deposit Insurance Corporation vs. The Aristotle
Corporation, in the United States District Court for the District of Connecticut
(Civil No. 395CV00684TFGD). The FDIC is claiming entitlement to income tax
refunds previously received and yet to be received by Aristotle. Although
Aristotle believes that the FDIC is not entitled to the entire amount of the
refunds or to damages for Aristotle's refusal to pay the refunds to the Bank or
to the FDIC, Aristotle established a reserve of $3,982,000 for this potential
claim as of June 30, 1993. Currently, amounts equal to the refunds that have
been received by Aristotle, $3,982,000, have been deposited in a special escrow
account. Aristotle and the FDIC have agreed that certain future refunds,
including a refund of approximately $1,300,000, will also be deposited in a
separate escrow account. At this time, the Company is unable to predict the
outcome of this litigation. See Note 5 of the Notes to Consolidated Financial
Statements.
Caldrello Claim. On November 4, 1994, the Company received an amended
complaint (the "Amended Complaint") relating to a legal proceeding first filed
in 1993 and entitled Joseph M. Caldrello vs. Federal Deposit Insurance
Corporation, United States Federal District Court, District of Connecticut,
Civil No. 3:93CV-1560(AHN). In the Amended Complaint, the plaintiffs alleged,
among other things, that the Bank breached a contractual obligation to the
plaintiffs, breached a deposit account contract with the plaintiffs, acted in
bad faith and negligently mismanaged the plaintiffs' deposit accounts. Robert
Carney and John Crawford, as the former Chairman of the Board and President of
the Bank, respectively, were named as defendants for the first time in the
Amended Complaint. Mr. Crawford is currently the Chief Executive Officer and a
Director of Aristotle. Pursuant to the Company's Bylaws, Aristotle could have
been required to indemnify Mr. Carney and Mr. Crawford against expenses,
judgments and amounts paid in settlement of the claim. The
5
plaintiffs sought in excess of $38,000,000 in damages. On March 8, 1995, the
court dismissed this matter as barred by the statute of limitations.
FDIC Investigation Re: Certain Bank Loan Losses. The Company is aware that
the FDIC is preparing claims against certain former officers and directors of
the Bank based on alleged negligence in approving certain loans that the Bank
made and subsequently lost money on when the borrowers defaulted. Under Delaware
law and under Aristotle's bylaws, Aristotle may have an obligation to indemnify
these officers and directors for expenses and liabilities incurred by them in
connection with any action the FDIC may bring to enforce its claims. Due to the
fact that the FDIC has not yet defined its claims with precision, and given the
uncertainties of litigation, the Company is unable to determine what the outcome
of these claims will be or what effect, if any, these FDIC claims will have on
the financial condition of the Company.
If an amount awarded or paid in connection with any of the legal
proceedings described above (or any other event or circumstance) caused the net
worth of Aristotle to fall below $1,000,000 on or before April 11, 1999, then,
under certain circumstances, certain holders of the preferred stock of ASI have
the right to compel a partial unwinding of the Acquisition. See Note 1 of the
Notes to Consolidated Financial Statements.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The table below sets forth the high and low prices per share of Common
Stock for the periods indicated, adjusted to reflect a 1 for 10 reverse stock
split that was effective on May 11, 1994.
Market Price
--------------------------------
FISCAL YEAR ENDED JUNE 30, 1995: High Low
June 30 5 3/4 3
March 31 5 1/2 4
December 31 6 1/4 4
September 30 7 4 1/2
FISCAL YEAR ENDED JUNE 30, 1994:
June 30 6 4 1/2
March 31 6 7/8 4 3/8
December 31 8 3/4 3 1/8
September 30 9 1/16 4 3/8
The Common Stock is listed for trading on the Nasdaq SmallCap Market under
the symbol "ARTL." As of September 8, 1995, there were approximately 4,300
stockholders of record and 3,000 additional beneficial stockholders
(stockholders holding Common Stock in brokerage accounts). As of September 8,
1995, the last reported sale price per share of Common Stock was $4. It is
unlikely that the Company will pay any dividends with respect to its Common
Stock in the foreseeable future.
6
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following are selected consolidated financial data for the Company for
the fiscal years ended December 31, 1990, 1991 and 1992, the six-month periods
ended June 30, 1992 and 1993, and for the fiscal years ended June 30, 1994 and
1995. The selected consolidated financial data presented below should be read in
conjunction with the Consolidated Financial Statements of the Company, together
with the Notes to Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report.
Six-Months Ended Fiscal Years Ended
Fiscal Years Ended December 31, June 30, June 30,
(unaudited)
---------------------------------------------------------------------------------
1990 1991 1992(1) 1992 1993(2) 1994 1995
---------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ --- $ --- $ --- $ --- $ --- $ 5,538 $ 21,701
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Costs of goods sold --- --- --- --- --- 3,859 16,447
Operating expenses 1,954 1,729 1,484 444 651 1,977 5,481
Reserve for subsidiary litigation --- 1,510 (1,510) --- --- --- ---
Other income (expense) (9,202) 108 1,292 1,096 174 159 (435)
---------- --------- --------- --------- --------- --------- ----------
Income (loss) from continuing operations
before income taxes and minority interest (11,156) (3,131) 1,318 652 (477) (139) (662)
Income tax expense (benefit)(3) (566) 312 (1,481) (1,609) 4,287 (20) 25
Minority interest --- --- --- --- --- (60) (211)
--------- --------- --------- --------- --------- ---------- ----------
Income (loss) from continuing operations ( 10,590) ( 3,443) 2,799 2,261 ( 4,764) ( 179) ( 898)
Loss from discontinued operations ( 80,314) ( 53,172) ( 59,727) ( 34,278) --- --- ---
---------- ---------- ---------- ---------- --------- --------- ---------
Net loss ($ 90,904) ($ 56,615) ($ 56,928) ($ 32,017) ($ 4,764) ($ 179) ($ 898)
========== ========== ========== ========== ========== ========== ==========
Net earnings (loss) per share:
Continuing operations ($ 9.67) ($ 3.14) $ 2.55 $ 2.06 ($ 4.35) ($ 0.16) ($ 0.81)
Discontinued operations ( 73.34) ( 48.56) ( 54.51) ( 31.28) --- --- ---
---------- ---------- ---------- ---------- --------- --------- ---------
Net loss per share ($ 83.01) ($ 51.70) ($ 51.96) ($ 29.22) ($ 4.35) ($ 0.16) ($ .81)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares outstanding (4) 1,095,033 1,095,072 1,095,643 1,095,652 1,096,017 1,087,039 1,113,250
CONSOLIDATED BALANCE SHEET DATA:
Total assets 124,687 69,925 11,371 37,618 10,545 23,162 26,820
Stockholders' equity 124,435 67,827 10,897 35,810 6,159 5,805 4,996
Long-term debt -- -- -- -- -- 251 10,274
_________________________
(1) In October 1992, the FDIC was appointed receiver for the Bank. Substantially
all the Bank's operations have been shown as discontinued.
(2) Effective June 30, 1993, the Company changed its fiscal year end from
December 31 to June 30.
(3) Income tax expense for the six-months ended June 30, 1993 included a reserve
of $4,300 for a tax claim by the FDIC.
(4) The number of shares outstanding has been adjusted to reflect the one for
ten reverse stock split that was effective on May 11, 1994.
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SELECTED FINANCIAL DATA OF STROUSE
(AMOUNTS IN THOUSANDS)
The following are selected financial data for Strouse for the fiscal years
ended August 31, 1991 and 1992 and June 30, 1993, 1994 and 1995. The selected
financial data for the fiscal years ended June 30, 1993 and 1994 have not been
audited, but, in the opinion of the management of Strouse, all adjustments
necessary for a fair presentation have been included. All such adjustments are
of a normal, recurring nature. The selected financial data presented below
should be read in conjunction with the Consolidated Financial Statements of the
Company, together with the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Fiscal Years Ended Fiscal Years Ended June 30,
August 31, (unaudited) (unaudited)
------------------------ -------------------------------------
1991 1992 1993 1994 1995
------------------------ -------------------------------------
Statements of operations data:
Net sales $11,891 $13,019 $14,966 $18,267 $21,701
-------- -------- -------- -------- --------
Costs and expenses:
Costs of goods sold (1) 8,402 8,515 9,996 12,831 16,403
Product development 255 375 378 433 485
Selling, general and administrative (2) 2,825 3,051 3,428 4,362 4,134
Restructuring charge -- -- -- -- 219
Interest expense 450 387 395 486 823
-------- -------- -------- -------- --------
11,932 12,328 14,197 18,112 22,064
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes (41) 691 769 155 (363)
Income tax expense (benefit) -- 20 191 (98) (45)
-------- -------- -------- -------- --------
Net income (loss) ($ 41) $ 671 $ 578 $ 253 $ (318)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 714 $5,360 $5,429 $ 1,924 $ 10,604
Total assets 5,537 7,107 7,977 12,945 16,571
Long-term debt 823 4,863 4,551 251 10,274
Stockholders' equity 267 937 1,417 2,400 2,083
_________________________
(1) Costs of goods sold for the fiscal year ended June 30, 1994 includes $89 in
transaction costs incurred in connection with the Acquisition.
(2) Selling, general and administrative expenses for the fiscal year ended June
30, 1994 include $491 in transaction costs incurred in connection with the
Acquisition.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
CHANGES IN THE BUSINESS OF ARISTOTLE AND THE METHODOLOGY FOR MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Aristotle's business has changed substantially over the last three years.
See "Item 1. Business-Background Regarding Aristotle." Aristotle has been, and
continues to be, a holding company for its subsidiaries. From 1986 to 1992, its
sole subsidiary was the Bank. From the time the Bank was seized by the FDIC in
October 1992, until April 1994 when Aristotle acquired Strouse, Aristotle had no
operating subsidiaries. From April 1994 on, the assets of the Company primarily
consisted of the assets of Strouse, and the operations of the Company were
substantially comprised of the operations of Strouse.
This discussion and analysis of financial condition and results of
operations will discuss and analyze the results of operations of both the
Company, on a consolidated basis, and Strouse, on a stand alone basis. It will
also discuss and analyze the financial condition of the Company on a
consolidated basis. This discussion and analysis of financial condition and
results of operations have been derived from, and should be read in conjunction
with, the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained elsewhere in this report. Effective June 30, 1993, the
Company changed its fiscal year end from December 31 to June 30.
RESULTS OF OPERATIONS OF THE COMPANY
FISCAL YEAR ENDED JUNE 30, 1995 AS COMPARED TO THE YEAR ENDED JUNE 30, 1994
The Company's net sales for the fiscal year ended June 30, 1995 were
$21,701,000 versus net sales of $5,538,000 for the year ended June 30, 1994. The
increase reflects the operations of its main subsidiary, Strouse, for the entire
year ended June 30, 1995, but the fiscal year ended June 30, 1994 only included
the operations of Strouse for the period April 12, 1994 to June 30, 1994.
The Company's gross profit for the fiscal year ended June 30, 1995 was $
5,254,000 versus gross profit of $1,679,000 for the year ended June 30, 1994.
The increase reflects the operations of its main subsidiary, Strouse, for the
entire year ended June 30, 1995, but the fiscal year ended June 30, 1994 only
included the operations of Strouse for the period April 12, 1994 to June 30,
1994.
Operating expenses includes selling, general and administrative, product
development, and restructuring charges. Selling, general and administrative
expenses for the fiscal year ended June 30, 1995 were $4,777,000 versus
$1,875,000 for the year ended June 30, 1994. Expenses incurred at Aristotle were
$643,000 for the year ended June 30, 1995 versus $967,000 for the fiscal year
ended June 30, 1994, which mainly reflects reductions in compensation of
officers. Aristotle expenses included board of directors fees, corporate
insurance costs, stockholder expenses and professional fees. Expenses incurred
by Strouse for the fiscal year ended June 30, 1995 were $4,134,000 versus
$908,000 for the year ended June 30, 1994. The increase at Strouse reflects the
operations for the entire year ended June 30, 1995, but the fiscal year ended
June 30, 1994 only included the operations of Strouse for the period April 12,
1994 to June 30, 1994.
Product development costs for the Company for the fiscal year ended June
30, 1995 were $485,000 versus $102,000 for the year ended June 30, 1994. The
increase reflects the operations of its main subsidiary, Strouse, for the entire
year ended June 30, 1995, but the fiscal year ended June 30, 1994 only included
the operations of Strouse for the period April 12, 1994 to June 30, 1994.
Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflect the downsizing of the Strouse operations in New Haven, Connecticut and
the related costs of terminating employees.
Other income includes investment and interest income and expense.
Investment and interest income of $321,000 and $294,000 in fiscal year ended
June 30, 1995 and 1994, respectively was principally generated by two escrowed
9
investment accounts (the "Escrowed Accounts") with account balances totaling
$4,682,000 and $4,638,000 in fiscal year ended June 30, 1995 and 1994,
respectively.
The Company's interest expense for the fiscal year ended June 30, 1995 was
$756,000 versus $135,000 for the year ended June 30, 1994. The increase reflects
the operations of its main subsidiary, Strouse, for the entire year ended June
30, 1995, but the fiscal year ended June 30, 1994 only included the operations
of Strouse for the period April 12, 1994 to June 30, 1994.
Minority interest expense was $211,000 for the fiscal year ended June 30,
1995 versus $60,000 for the year ended June 30, 1994. The minority interest
expense is mainly due to dividends paid and accrued during the year on the ASI
preferred stock for the entire year of fiscal 1995, but the fiscal year ended
June 30, 1994 only included dividends for the period April 12, 1994 to June 30,
1994.
SIX MONTH INTERIM PERIOD ENDED JUNE 30, 1993 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1992
The Company's net loss for the six month interim period ended June 30, 1993
was $4,764,000, or $4.35 per share, compared with a net loss of $32,017,000, or
$29.22 per share, for the six months ended June 30, 1992.
The Company's investment and interest income for the six month interim
period ended June 30, 1993 was $174,000 compared with investment and interest
income of $648,000 for the same period in 1992. The decrease in investment and
interest income primarily resulted from a loss on the sale of securities of
$27,000 for the six month interim period ended June 30, 1993 compared to a gain
of $608,000 for the six months ended June 30, 1992. Interest and dividend income
for the six month interim period ended June 30, 1993 was $201,000 compared with
$40,000 for the corresponding period in 1992. This increase was the result of a
shift in investments into income producing securities.
During the six months ended June 30, 1992 the Company recognized $448,000
as other income through the establishment of a receivable for legal fees
expended which the Company believes are recoverable from the Company's insurance
carrier in the Stockholder Litigation.
Operating expenses for the six month interim period ended June 30, 1993
were $651,000 compared with $444,000 for the corresponding period in 1992. This
increase in operating expenses primarily resulted from an allocation from the
Bank to the Company of certain costs, principally insurance premiums of
$191,000, incurred by the Company. Compensation and benefits expenses were
$148,000 and $158,000 for the six month interim period ended June 30, 1993 and
for the six months ended June 30, 1992, respectively. Legal and professional
fees were $218,000 and $227,000 for the six month interim period ended June 30,
1993 and for the six months ended June 30, 1992, respectively.
The Company recorded a reserve of $4,287,000 during the June 30, 1993
period related to the claim of the FDIC, as receiver for the Bank, on federal
income tax refunds received or to be received by the Company.
As a result of the seizure of the Bank in October 1992, the operating
results of the Bank have been presented as the results from a discontinued
operation. During the six months ended June 30, 1992 the Company presented a
loss from discontinued operations of $34,278,000 which produced a loss per share
from discontinued operations of $31.28.
FISCAL YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1991
The Company's net loss for the fiscal year ended December 31, 1992 was
$56,928,000, or $51.96 per share, compared with a net loss of $56,615,000, or
$51.70 per share, for the fiscal year ended December 31, 1991. The losses in
both years were primarily due to the operations of the Bank.
The Company's investment and interest income for the fiscal year ended
December 31, 1992 was $844,000. This compared with investment and interest
income of $108,000 for fiscal year 1991. The increase in investment and interest
income primarily resulted from a gain on the sale of securities of $688,000 for
the fiscal year ended December 31, 1992.
10
During the fiscal year ended December 31, 1992 the Company recognized
$448,000 as other income through the establishment of a receivable for legal
fees expended which the Company believes are recoverable from the Company's
insurance carrier in the Stockholder Litigation.
Operating expenses for fiscal year 1992 were $1,484,000 compared with
$1,729,000 for fiscal year 1991. This decrease in operating expenses primarily
resulted from a decrease in professional fees from $1,167,000 in fiscal 1991 to
$531,000 in fiscal 1992. Significant professional fees were expended by the
Company in fiscal year 1991 in efforts to raise additional capital, in
discussions with regulatory bodies, and on accounting and tax issues.
Compensation and benefits expenses were $427,000 and $280,000 for the fiscal
years ended December 31, 1992 and 1991, respectively.
During the fiscal year ended December 31, 1992 the Company recognized a
loss from discontinued operations of $59,727,000 which related to the seizure of
the Bank and produced a loss per share from discontinued operations of $54.51.
During the fiscal year ended December 31, 1991 the Company presented a loss from
discontinued operations of $53,172,000 which related to the seizure of the Bank
which produced a loss per share from discontinued operations of $48.56. These
losses reflected the continuing deterioration of the Bank during these fiscal
years.
RESULTS OF OPERATIONS OF STROUSE
YEAR ENDED JUNE 30, 1995 AS COMPARED TO THE YEAR ENDED JUNE 30, 1994
Strouse's net sales for the year ended June 30, 1995 increased 19% to
$21,701,000 compared to net sales of $18,267,000 for the prior year. The
increase was generated by a $3,720,000 volume growth in shapewear products and a
$311,000 impact from increased prices, partially offset by a $581,000 volume
decrease in specialty brassiere products and increases in in-store markdowns and
discounts for sales events.
Strouse's price increases during the year ended June 30, 1995, expressed as
a percentage of total price, have been lower than the increase in the Consumer
Price Index for the corresponding period. Strouse's private label business which
began in 1991 has grown substantially since 1991, representing 21.8% of revenues
in the year ended June 30, 1995, compared to 0.4% in 1991. Since the principal
market for Strouse's products is the United States, continued expansion of the
economy of the United States is important to Strouse.
Gross profit for the year ended June 30, 1995 decreased to $5,298,000 from
$5,436,000 for the prior year, and gross margin decreased to 24.4% from 29.8%.
The decrease in gross margin is principally due to increased subcontracting
costs, higher production scrap, growth in the private label business (which
contributes comparable operating income margins comparable to the branded
business, but lower gross margins), costs incurred relating to the resourcing of
manufacturing operations, and extra costs incurred in response to delayed
deliveries from suppliers.
Selling, general and administrative expenses for the fiscal year ended June
30, 1995 were $4,134,000 compared to $4,362,000 for the corresponding period in
1994. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, customer service, accounting,
personnel, data processing, and administration departments, and professional
fees. The $228,000 decrease principally reflects transaction costs of $491,000
incurred in connection with the Acquisition in 1994 and decreased advertising
costs in 1995, partially offset by increased selling expenses of $276,000
resulting primarily from higher commissions and staffing for a new merchandiser
program.
Product development costs for the fiscal year ended June 30, 1995 were
$485,000, compared to $433,000 for the corresponding period in 1994. Product
development costs primarily included compensation of company personnel. 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.
Restructuring charges of $219,000 incurred for the year ended June 30, 1995
reflect the downsizing of operations in New Haven, Connecticut and the related
costs of terminating employees.
Interest expense for 1995 increased to $823,000 from $486,000 in the prior
year. The increase reflected higher borrowing rates and higher borrowing levels
to support working capital needs and business growth.
11
The provisions for income taxes for the year ended June 30, 1995 was a
benefit of $45,000, compared to a benefit of $98,000 in the prior year. The
benefit in 1995 results from the 1995 loss. The benefit in 1994 is primarily due
to the tax deduction of $620,000 generated by the exercise by management of
Strouse of certain options to purchase Strouse common stock prior to the
Acquisition and the payment of certain bonuses to management of Strouse equal,
in the aggregate, to the net tax savings realized by Strouse and attributable to
the disposition by such persons of certain Strouse stock acquired pursuant to
the exercise of such options and the payment of such bonus.
YEAR ENDED JUNE 30, 1994 AS COMPARED TO THE YEAR ENDED JUNE 30, 1993
The results of operations of Strouse, on a stand alone basis, for the year
ended June 30, 1994 include certain transaction costs incurred by Strouse in the
Acquisition, in addition to costs incurred by Strouse in the ordinary course of
its operating activities.
Strouse's net sales for the year ended June 30, 1994 increased 22% to
$18,267,000, compared to net sales of $14,966,000 for the prior year. The
increase was generated by a $2,200,000 volume growth in shapewear products, a
$1,200,000 volume growth in specialty brassiere products, and a $200,000 impact
from increased prices, partially offset by increases in in-store markdowns and
discounts for sales events.
Strouse's price increases during the year ended June 30, 1994, expressed as
a percentage of total price, have been lower than the increase in the Consumer
Price Index for the corresponding period. Strouse's private label business which
began in 1991 has grown substantially since 1991, representing 19.6% of revenues
in the year ended June 30, 1994, compared to 0.4% in 1991. Since the principal
market for Strouse's products is the United States, continued expansion of the
economy of the United States is important to Strouse.
Gross profit for the year ended June 30, 1994 increased to $5,436,000 from
$4,970,000 for the prior year, but gross margin decreased to 29.8% from 33.2%.
The decrease in gross margin is principally due to (i) growth in the private
label business which contributes operating income margins comparable to the
branded business, but lower gross margins, (ii) transaction costs of $89,000
related to the Acquisition, and (iii) increases in production costs.
Selling, general and administrative expenses for the fiscal year ended June
30, 1994 were $4,362,000, compared to $3,428,000 for the corresponding period in
1993. Selling, general, and administrative expenses were comprised mainly of
cooperative advertising, sales commissions, employee compensation for the
customer service, accounting, personnel, data processing, and administration
departments, and professional fees. The $934,000 increase was principally a
result of transaction costs of $491,000 incurred in connection with the
Acquisition, increased selling expenses of $270,000 resulting primarily from
commissions, staffing in customer service, and electronic data interchange, and
increased advertising costs of $90,000.
Product development costs for the fiscal year ended June 30, 1994 were
$433,000, compared to $378,000 for the corresponding period in 1993. Product
development costs primarily included compensation of company personnel. All
products are designed internally in Strouse's New Haven design center and a
design center maintained by Strouse in New York. The increase in costs reflects
Strouse's continued investment in the product development process.
Interest expense for 1994 increased to $486,000 from $395,000 in the prior
year. The increase reflected higher borrowing rates and higher borrowing levels
to support working capital needs and business growth.
The provisions for income taxes for the year ended June 30, 1994 was a
benefit of $98,000, compared to an expense of $191,000 in the prior year. The
benefit is primarily due to the tax deduction of $620,000 generated by the
exercise by management of Strouse of certain options to purchase Strouse common
stock prior to the Acquisition and the payment of certain bonuses to management
of Strouse equal, in the aggregate, to the net tax savings realized by Strouse
and attributable to the disposition by such persons of certain Strouse stock
acquired pursuant to the exercise of such options and the payment of such bonus.
12
Strouse's net income for the year ended June 30, 1994 was $253,000,
compared to net income of $578,000 for the year ended June 30, 1993. The
decrease in net income was principally due to transaction costs-net of taxes of
$430,000 related to the Acquisition, partially offset by income generated by the
increase in sales.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Substantially all of the Company's assets are either dedicated to support
Strouse's business needs (primarily inventory of $11,782,000 and accounts
receivable of $4,498,000) or are held in the Escrowed Accounts ($4,682,000).
Cash required to fund the working capital needs of Strouse is supplied
principally through the Credit Facilities with the Bank, trade credit, and
internally generated funds. At June 30, 1995, Strouse was not in compliance with
certain of the covenants in the Credit Agreement. On October 6, 1995, the
Company and the Bank executed the Letter of Intent pursuant to which the Bank
waived Strouse's non-compliance with such covenants through September 30, 1995.
Pursuant to such Letter of Intent, which is conditioned on a closing taking
place on or before October 31, 1995, the Bank and the Company have agreed to,
among other things, modify certain covenants, to modify the maturity date of the
Credit Agreement to October 31, 1996 and to modify the maximum borrowing under
the line-of-credit facility to $8,750,000 through October 31, 1996. See "Item 1.
Business-Financing" and Note 4 of the Notes to Consolidated Financial
Statements.
Cash required to fund the operations of Aristotle is supplied primarily
through earnings generated from the two Escrowed Accounts, amounts payable to
Aristotle pursuant to certain notes from certain officers of Strouse, and taxes
received from Strouse in connection with a tax sharing agreement between
Aristotle and Strouse. If earnings from the two Escrowed Accounts and taxes
received from Strouse are below current projections and no funds are generated
through the settlements of the Stockholder Litigation and the FDIC tax claim,
Aristotle's cash flow would not be sufficient to meet its operating expenses. If
the former stockholders of Strouse do not convert certain preferred stock of ASI
that was issued in connection with the Acquisition, and if the maximum
additional payments to the former stockholders of Strouse were earned and paid,
then Aristotle would have to pay up to $4,499,000 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 stockholders of Strouse could create a partial unwinding of the
Acquisition. See "Item 3. Legal Proceedings" and Note 1 of the Notes to
Consolidated Financial Statements.
In order to meet its projected capital requirements and potential
commitments to the former stockholders of Strouse, the Company believes that it
must either raise new equity capital or obtain additional financing or both.
There can, however, be no assurance that the Company will be able to raise new
equity capital or obtain additional financing.
DISCUSSION OF AUDITORS' REPORTS
KPMG Peat Marwick LLP's Auditor's Report on the Company's consolidated
financial statements for the period ended December 31, 1992 does not express an
opinion. Peat Marwick has indicated to the Company that this "disclaimer" of
opinion was not caused by any limitations on the scope of their audit engagement
or any departures from generally accepted accounting principles. The disclaimer
of opinion was caused by significant uncertainties (an unasserted claim by the
FDIC for the proceeds of a tax refund, and the Stockholders Litigation, both of
which raised a substantial doubt as to the Company's ability to continue as a
going-concern). KPMG Peat Marwick did perform an audit on the 1992 consolidated
financial statements. They concluded, based upon their review of circumstances
at that time, that there was sufficient uncertainty as to those matters that
they could not express an opinion on the consolidated financial statements. Such
disclaimer of opinion generally precludes the Company from undertaking a
securities offering under the Securities Act of 1933 until such time, generally
three years, as the disclaimed financial statements are no longer includable in
a filing.
Richard A. Eisner & Company, LLP audited the Company's financial statements
as of and for the six-month period ending June 30, 1993 and the fiscal year
ended June 30, 1994 and they did express an opinion. At June 30, 1993, the
Company had fully reserved for the potential tax refund claim. In addition, by
the date of Richard A. Eisner & Company, LLP's audit report, the FDIC had
asserted the tax refund claim, thus significantly reducing that uncertainty.
Richard A. Eisner & Company, LLP's auditor's report contains disclosures
relating to the continuing uncertainty of the Stockholders' Litigation and
expresses substantial doubt about whether the Company could continue as a going-
concern as a result of
13
actions, if any, which could be asserted arising from the Bank's activities. To
date, no action has been asserted, other than a claim for recovery of the tax
refund and an investigation as to whether a claim will be asserted by the FDIC
against the former officers and directors of the Bank. If such claims are
asserted, Aristotle may have an obligation to indemnify such former officers and
directors. See "Legal Proceedings". In addition, footnotes to the financial
statements include information about the uncertainties arising from the Bank's
operations.
Arthur Andersen LLP audited the Company's financial statements as of June
30, 1995 and they did express an unqualified opinion.
The Company believes that the audit reports of Arthur Andersen LLP, Richard
A. Eisner & Company, LLP and KPMG Peat Marwick LLP, taken as a whole, allow the
user to make an informed evaluation of the Company's financial statements.
INCOME TAXES
At June 30, 1995, the Company had federal and state tax carryforwards as
follows (excluding the re-attributed losses described in the second paragraph
below):
Federal net operating loss $2,000,000
Federal capital loss $4,800,000
State net operating loss $5,000,000
State capital loss $9,800,000
All federal net operating loss carryforwards expire by 2010 and all federal
capital loss carryforwards expire by 1999. State of Connecticut net operating
loss and capital loss carryforwards expire from 1995 to 1999.
In addition, for the tax return filed for the year ending December 31,
1992, the Company made elections under provisions set forth in regulations
proposed by the Internal Revenue Service in April of 1992 as guidance for the
application of Section 597 of the Internal Revenue Code of 1986, as amended (the
"Code") and under Section 1.1502-20(g)(1) of the Federal Income Tax Regulations.
The elections enabled the Company to disaffiliate from the Bank for federal
income tax purposes and to re-attribute certain losses of the Bank to the
Company. As a result of these elections, the Company expects to succeed to
federal net operating loss carryforwards of the Bank in amounts in excess of
$81,000,000.
The application of tax law with respect to the Company's election to
disaffiliate from the Bank and to re-attribute Bank tax losses to the Company is
not certain. Although the Company believes that the tax law permitted it to re-
attribute to itself the loss carryforwards of the Bank, there is no assurance
that any part of the net operating loss carryforwards of the Bank will be
available to be utilized by the Company. If the re-attributed Bank tax losses
are disallowed, such losses will not be available to offset future income of the
Company and its Subsidiaries. Even if the Company succeeds to any part of the
Bank's tax loss carryforwards, its ability to fully utilize such carryforwards
is dependent upon many factors including, (1) the realization of taxable income
by the Company, and (2) avoiding a 50 percent "ownership change" as defined in
Section 382 of the Code. If there is an "ownership change", utilization of the
tax loss carryforwards of the Company (including the re-attributed losses) would
be significantly reduced or eliminated. An ownership change occurs with respect
to a "loss corporation", such as the Company, if the percentage of stock owned
by one or more "5% stockholders" increases, during a rolling 3-year testing
period, by more than 50 percentage points over the lowest percentage of stock
owned by such stockholders at any time during the testing period.
The Company believes, assuming that the Strouse Stockholders currently own
the maximum number of shares of Common Stock they could acquire through the
exercise of their various rights and options in the Acquisition, that the
Company has not undergone an ownership change within the meaning of Section 382
of the Code. During the period which the Company has an unutilized federal net
operating loss carryforward, which may be for many years into the future,
particularly if the Company does succeed to a significant portion of the Bank's
net operating loss carryforward, it will be necessary for the Company to
determine whether an ownership change has occurred each time a new or existing
stockholder becomes a 5% stockholder or an existing 5% stockholder increases its
ownership interest. Except with respect to the Strouse Stockholders, the Company
does not know of any stockholders who currently own or would, upon the exercise
of options or warrants, own five percent or more of the Common Stock.
14
At a special meeting of stockholders held on April 8, 1994, the
stockholders voted to restrict certain share transfers because they could affect
the Company's ability to use its net operating losses under Section 382.For
state tax purposes the election to re-attribute the losses of the Bank to the
Company is not applicable and it is unlikely that the Company will obtain any
Connecticut tax loss carryforwards as a result of its disposition of the Bank.
During the first quarter of 1992, the Company adopted Financial Accounting
Statement Number 109, which had no material effect on the Company's financial
statements.
The FDIC is claiming entitlement to income tax refunds previously received
and yet to be received by Aristotle. See "Item 3. Legal Proceedings-FDIC Tax
Claim."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company and the Notes to
Consolidated Financial Statements and Supplementary Data, appear on Pages F-1
through F-28 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 3, 1994, the Board of Directors appointed Arthur Andersen LLP to
serve as independent accountants for the Company, subject to ratification of
such appointment by the stockholders. The information required by this Item 9
has been previously reported in the Company's current report on Form 8-K filed
with the Securities and Exchange Commission ("SEC") on October 21, 1994, as
amended.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item will be set forth under the section
entitled "Election of Directors" and "Executive Officers" in the Company's 1995
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Company's fiscal year, and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION.
Information required by this item will be set forth under the section
entitled "Executive Compensation" in the Company's 1995 definitive proxy
statement, and, except for the "Report on Executive Compensation" and the
"Performance Graph," is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item will be set forth under the section
entitled "Stock Owned by Management and Principal Stockholders" in the Company's
1995 definitive proxy statement, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item will be set forth under the section
entitled "Certain Transactions" in the Company's 1995 definitive proxy
statement, and is incorporated herein by reference.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following are filed as part of this Form 10-K:
(1) Financial Statements:
For a listing of financial statements which are filed as part of
this Form 10-K, see Page F-1.
(2) Financial Statement Schedules: Page
----
Reports of Independent Public Accountants F-1, F-1A and F-1B
Schedule I - Condensed Financial Information of the Registrant F-25
Schedule II - Valuation and Qualifying Accounts F-28
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements on notes thereto.
(3) Exhibits:
Exhibit 2.1- Capital Contribution Agreement dated as of November 19,
1993 by and among The Aristotle Corporation, Aristotle Sub, Inc.,
The Strouse, Adler Company and the Stockholders of Strouse.
Incorporated herein by reference to Exhibit 2.1 of The Aristotle
Corporation's Current Report on Form 8-K dated April 14, 1994, as
amended (the "1994 Current Report").
Exhibit 3.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendments thereto, and Certificate of
Correction thereto. Incorporated herein by reference to Exhibit 4.2
of the 1994 Current Report.
Exhibit 3.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation.
Incorporated herein by reference to Exhibit 4.3 of the 1994 Current
Report.
Exhibit 3.3- Bylaws. Incorporated herein by reference to Exhibit 3.2
of The Aristotle Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992, filed on March 31, 1993 (the
"1992 Form 10-K").
Exhibit 4.1- Restated Certificate of Incorporation of The Aristotle
Corporation, Certificates of Amendment thereto, and Certificate of
Correction thereto. See Exhibit 3.1 hereof.
Exhibit 4.2- Certificate of Designation, Preferences and Right of
Series A, B, C and D Preferred Stock of The Aristotle Corporation.
See Exhibit 3.2 hereof.
Exhibit 4.3- Amended and Restated Certificate of Incorporation of
Aristotle Sub, Inc., and amendment thereto. Incorporated herein by
reference to Exhibit 4.1 of the 1994 Current Report.
Exhibit 4.4- Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Aristotle Sub, Inc. filed August 30,
1995 is attached hereto as Exhibit 4.4.
Exhibit 4.5- Form of Stock Purchase Warrant Series A of The
Aristotle Corporation dated as of April 11, 1994. Incorporated
herein by reference to Exhibit 2.10 of the 1994 Current Report.
Exhibit 4.6- Form of Stock Purchase Warrant Series B of The
Aristotle Corporation dated as of April 11, 1994. Incorporated
herein by reference to Exhibit 2.11 of the 1994 Current Report.
17
Exhibit 10.1- Form of Option Agreement between Aristotle Sub, Inc.
and optionees dated as of April 11, 1994. Incorporated herein by
reference to Exhibit 2.2 of the 1994 Current Report.
Exhibit 10.2- 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 1994 Current
Report.
Exhibit 10.3- Letter Agreement by and among The Aristotle
Corporation, Aristotle Sub, Inc., Alfred Kniberg and David Howell
dated June 27, 1995 is attached hereto as Exhibit 10.3.
Exhibit 10.4- 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 1994 Current
Report.
Exhibit 10.5- Term Promissory Notes dated April 11, 1994 payable to
The Aristotle Corporation. Incorporated herein by reference to
Exhibit 2.12 of the 1994 Current Report.
Exhibit 10.6- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and David Howell. Incorporated herein by reference to
Exhibit 2.3 of the 1994 Current Report.
Exhibit 10.7- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Alfred Kniberg. Incorporated herein by reference
to Exhibit 2.4 of the 1994 Current Report.
Exhibit 10.8- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Joyce Baran. Incorporated herein by reference to
Exhibit 2.5 of the 1994 Current Report.
Exhibit 10.9- Employment Agreement dated as of April 11, 1994 by and
among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse,
Adler Company and Paul McDonald. Incorporated herein by reference to
Exhibit 2.6 of the 1994 Current Report.
Exhibit 10.10- Employment Agreement dated as of April 11, 1994 by
and among The Aristotle Corporation, Aristotle Sub, Inc., The
Strouse, Adler Company and Graeme Caulfield. Incorporated herein by
reference to Exhibit 2.7 of the 1994 Current Report.
Exhibit 10.11- Shareholder 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
1994 Current Report.
Exhibit 10.12- Stock Option Plan of The Aristotle Corporation, as
amended. Incorporated herein by reference to Exhibit 10.2 of the
1992 Form 10-K.
Exhibit 10.13- Form of Stock Option Agreement (for non-employee
directors). Incorporated herein by reference to Exhibit 10.3 of the
1992 Form 10-K.
Exhibit 10.14- Form of Incentive Stock Option Agreement (for
employees). Incorporated herein by reference to Exhibit 10.4 of the
1992 Form 10-K.
Exhibit 10.15- Lease dated October 4, 1991 by and between The
Strouse, Adler Company and New England Resources Limited Partnership
is attached hereto as Exhibit 10.15.
Exhibit 10.16- First Amendment to Lease dated April 11, 1994 by and
between New England Resources Limited Partnership is attached hereto
as Exhibit 10.16.
18
Exhibit 10.17- Second Amendment to Lease dated December 14, 1994 by
and between New England Resources Limited Partnership is attached
hereto as Exhibit 10.17.
Exhibit 10.18- First Amended and Restated Master Credit Agreement
dated as of November 9, 1994 by and between The Strouse, Adler
Company and Fleet Bank, National Association is attached hereto as
Exhibit 10.18.
Exhibit 10.19- Letter of Intent dated October 6, 1995 by and between
The Strouse, Adler Company, The Aristotle Corporation, Aristotle
Sub, Inc. and Fleet Bank, National Association is attached hereto as
Exhibit 10.19.
Exhibit 10.20- Option Agreement dated as of December 22, 1994 by and
among The Strouse, Adler Company, PBS Enterprises Ltd., Davedan
Properties Ltd. and Maggie Manufacturing Company Ltd. is attached
hereto as Exhibit 10.20.
Exhibit 10.21- Exclusive Subcontracting Agreement dated as of
December 22, 1994 by and among The Strouse, Adler Company, PBS
Enterprises Ltd., Davedan Properties Ltd. and Maggie Manufacturing
Company Ltd. is attached hereto as Exhibit 10.21.
Exhibit 10.22- Restrictive Covenant Agreement dated as of December
22, 1994 by and among The Strouse, Adler Company, PBS Enterprises
Ltd., Davedan Properties Ltd., Maggie Manufacturing Company Ltd.,
Peter Blair Shalleck and Sandy Shalleck is attached hereto as
Exhibit 10.22.
Exhibit 10.23- Specific Performance Agreement dated as of December
22, 1994 by and among The Strouse, Adler Company, Peter Blair
Shalleck and Sandy Shalleck is attached hereto as Exhibit 10.23.
Exhibit 21.1- Subsidiaries of The Aristotle Corporation is attached
hereto as Exhibit 21.1.
Exhibit 27- Financial Data is attached hereto as Exhibit 27.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed in the fourth quarter of the
Company's fiscal year ended June 30, 1995.
(c) See (a)(3) above.
(d) See (a)(2) above.
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: October 11, 1995
/s/ Paul M. McDonald
---------------------------
Paul M. McDonald
Its Chief Financial Officer
and Secretary
Date: October 11, 1995
20
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John J. Crawford President, Chief Executive October 11, 1995
- ----------------------- Officer, Chairman of the
John J. Crawford Board and Director
/s/ Paul McDonald Chief Financial Officer and October 11, 1995
- ----------------------- Secretary
Paul McDonald
/s/ Barry R. Banducci Director October 11, 1995
- -----------------------
Barry R. Banducci
/s/ Mary Jane Burt Director October 11, 1995
- -----------------------
Mary Jane Burt
/s/ Robert L. Fiscus Director October 11, 1995
- -----------------------
Robert L. Fiscus
/s/ Betsy Henley-Cohn Director October 11, 1995
- -----------------------
Betsy Henley-Cohn
/s/ Marcus R. McCraven Director October 11, 1995
- -----------------------
Marcus R. McCraven
/s/ Daniel J. Miglio Director October 11, 1995
- -----------------------
Daniel J. Miglio
/s/ Sharon M. Oster Director October 11, 1995
- -----------------------
Sharon M. Oster
/s/ Alfred A. Kniberg Director October 11, 1995
- -----------------------
Alfred A. Kniberg
/s/ John C. Warfel Director October 11, 1995
- -----------------------
John C. Warfel
21
INDEX OF FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report of Arthur Andersen LLP F-1
Independent Auditors' Report of Richard A. Eisner & Company, LLP F-1A
Independent Auditors' Report of KPMG Peat Marwick LLP F-1B
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-2
Consolidated Statements of Operations for the Twelve Months
Ended June 30, 1995and 1994, the Six Months Ended June 30,
1993 and the Twelve Months Ended December 31, 1992 F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Year Ended December 31, 1992, the Six Month Period
and the Years Ended Ended June 30, 1993, June 30, 1994 and 1995 F-4
Consolidated Statements of Cash Flows for the Twelve Months
Ended June 30, 1995 and 1994, the Six Months Ended June 30,
1993 and the Twelve Months Ended December 31, 1992 F-5
Notes to Consolidated Financial Statements F-6
i
[LETTERHEAD OF ARTHUR ANDERSEN LLP APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited the accompanying consolidated balance sheet of The Aristotle
Corporation (the "Company") and subsidiary as of June 30, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Aristotle Corporation and
subsidiary as of June 30, 1995, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/S/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New Haven, Connecticut
September 1, 1995
(except with respect to the
matter discussed in Note 4,
as to which the date is
October 6, 1995)
F-1
LETTER HEAD OF RICHARD A.EISNER & COMPANY, LLP APPEARS HERE
- --------------------------------------------------------------------------------
Accountants and Consultants
[LOGO OF RAE APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
The Aristotle Corporation
New Haven, Connecticut
We have audited the accompanying consolidated balance sheet of The
Aristotle Corporation (the "Company") and subsidiaries as of June 30, 1994, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended June 30, 1994 and the six months ended
June 30, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of The Aristotle
Corporation and subsidiaries present fairly, in all material respects, the
financial position of The Aristotle Corporation and subsidiaries as at June 30,
1994, and the results of their operations and their cash flows for the year
ended June 30, 1994 and the six months ended June 30, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 5 to the financial statements, in 1990 the Company
and certain of its former officers and directors were named in litigation
alleging certain securities law violations, amongst which were filing false and
misleading financial information, or omitting certain information. At the time
that the litigation was initiated, the Company's principal operation was
banking. In 1992, its bank operating subsidiary was seized by the Federal
Deposit Insurance Corporation (FDIC). At the time of the FDIC seizure the
stockholder litigation was stayed. The ultimate outcome of this litigation is
not presently determinable.
The Company cannot evaluate what claims, if any, could be asserted as a
result of its former subsidiary's banking activities (which, if successful,
could trigger a partial unwinding of the Company's major acquisition consummated
in April 1994). This uncertainty raises substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
adjustments, if any, which could result from this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
August 26, 1994
F-1A
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
The Aristotle Corporation:
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of The Aristotle Corporation (formerly First
Constitution Financial Corporation) for the year ended December 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on the results
of our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our report.
As discussed in Note 1 to the financial statements, the Company's prior
subsidiary, First Constitution Bank (the "Bank"), was seized by the Federal
Deposit Insurance Corporation on October 2, 1992. The loss of the Bank has been
presented as a discontinued operation in the accompanying financial statements,
which have been prepared assuming the Company will continue as a going concern.
As discussed in Note 5 to the financial statements, the Company received $4.0
million in refunded federal income taxes and has accrued for the receipt of an
additional $300,000 of federal income taxes refundable. The federal income tax
refunds have been retained and recorded by the Company based on management's
application of the tax sharing agreement between the Company and the Bank. The
Office of Thrift Supervision ("OTS"), which regulated the Company while the
Company owned the Bank, and to whom the Company has requested deregistration as
a savings and loan holding company, has informed the Company that it believes
the tax refunds are related to the Bank and therefore, payable to the Federal
Deposit Insurance Corporation ("FDIC"). While not presently asserted, the FDIC
as receiver of the Bank, may assert a claim for these federal income tax
refunds. The ultimate outcome of the OTS's assertion and the potential FDIC
claim, if asserted, cannot presently be determined. Accordingly, no liability
has been recorded in the accompanying financial statements.
As discussed in Note 5 to the financial statements, the Company and certain of
its present and former officers and directors are defendants in a lawsuit
alleging, among other things, that the Company and certain of its present and
former officers and directors issued false or misleading financial information
or omitted to issue certain information. Proceedings have been stayed pending a
court decision on the Company's motion to dismiss the lawsuit. The ultimate
outcome of the litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the accompanying financial statements.
F-1B
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the two preceding paragraphs,
the Company is presently involved in litigation and regulatory matters which at
December 31, 1992, raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Because of the significance of the uncertainties discussed above, we are unable
to express, and do not express, an opinion on the accompanying 1992 financial
statements.
/s/ KPMG Peat Marwick LLP
New Haven, Connecticut
March 3, 1993
F-1BB
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30, 1995 AND 1994
----------------------------
(dollars in thousands, except for share data)
1995 1994
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 188 $ 12
Accounts receivable, net of reserves
of $171 and $177 4,498 3,564
Inventories 11,782 10,071
Other current assets 867 1,197
--------- ---------
Total current assets 17,335 14,844
--------- ---------
Property and equipment, net 1,517 581
--------- ---------
Other assets:
Marketable securities held in escrow
at market value 4,682 4,638
Employee notes receivable 354 354
Patents and trademarks, net 88 98
Goodwill, net of amortization of $52 and $8 1,894 1,610
Deferred tax asset 725 901
Other noncurrent assets 225 136
--------- ---------
7,968 7,737
--------- ---------
$ 26,820 $ 23,162
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 548 $ 6,736
Accounts payable 2,367 1,904
Accrued expenses 1,304 1,090
Deferred tax liability 725 800
--------- ---------
Total current liabilities 4,944 10,530
--------- ---------
Long-term debt, less current maturities 10,274 251
Reserve for potential FDIC tax refund claim 3,982 3,982
--------- ---------
14,256 4,233
--------- ---------
Total liabilities 19,200 14,763
--------- ---------
Minority interest in subsidiary's preferred stock 2,454 2,454
--------- ---------
Minority interest in subsidiary's common stock 167 137
--------- ---------
Commitments and contingencies (Note 5)
Redeemable preferred stock, $.01 par value
3,000,000 shares authorized; 122,691
Series A, 61,345 Series B, 61,345
Series C and 24,998 Series D issued
and outstanding 3 3
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000
shares authorized, 1,105,801 shares
issued and outstanding 11 11
Additional paid-in capital 159,843 159,816
Retained earnings (deficit) (154,713) (153,815)
Treasury stock, at cost, 18,268 shares in
1995 and 21,610 shares in 1994 (151) (143)
Net unrealized investment gains (losses) 6 (64)
--------- ---------
Total stockholders' equity 4,996 5,805
--------- ---------
$ 26,820 $ 23,162
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(dollars in thousands, except for share data)
Twelve Six Twelve
Months Ended Months Ended Months Ended
------------
June 30, June 30, June 30, December 31,
1995 1994 1993 1992
---- ---- ---- ----
Net sales $21,701 $5,538 $ - $ -
Cost of goods sold 16,447 3,859 - -
------- ------ ------- --------
Gross profit 5,254 1,679
Operating expenses:
Selling 2,826 704 - -
General and administrative 1,951 1,171 651 1,484
Product development 485 102 - -
Restructuring charges 219 - - -
Reserve for subsidiary
litigation - - - (1,510)
------- ------ ------- --------
Operating income
(loss) (227) (298) (651) 26
------- ------ ------- --------
Other income (expense):
Investment and interest
income 321 294 174 844
Interest expense (756) (135) - -
Recoverable legal fees - - - 448
------- ------ ------- --------
(435) 159 174 1,292
------- ------ ------- --------
Income (loss) from
continuing operations
before income taxes
and minority interest (662) (139) (477) 1,318
Income tax expense (benefit) 25 (20) 4,287 (1,481)
------- ------ ------- --------
Income (loss) from
continuing
operations before
minority interest (687) (119) (4,764) 2,799
Minority interest (211) (60) - -
------- ------ ------- --------
Income (loss) from continuing
operations (898) (179) (4,764) 2,799
------- ------ ------- --------
Discontinued operations:
Loss from operations of
subsidiary prior to
seizure - - - (34,280)
Loss on write-off of
subsidiary upon
seizure - - - (25,447)
------- ------ ------- --------
Loss from discontinued
operations $ - $ - - (59,727)
------- ------ ------- --------
NET LOSS $ (898) $ (179) $(4,764) $(56,928)
======= ====== ======= ========
Income (loss) per share
from continuing operations $(.81) $(.16) $(4.35) $2.55
Loss per share from
discontinued operations - - - (54.51)
----- ----- ------ -------
Net loss per share $(.81) $(.16) $(4.35) $(51.96)
===== ===== ====== =======
Weighted average shares
outstanding 1,113,250 1,087,039 1,096,017 1,095,643
========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1992
----------------------------
SIX-MONTH PERIOD ENDED JUNE 30, 1993 AND
----------------------------------------
YEARS ENDED JUNE 30, 1994 AND 1995
----------------------------------
(dollars in thousands, except for share data)
Net
Additional Retained Unrealized
Common Paid-in Earnings Treasury Investment
Stock Capital (Deficit) Stock Losses Total
----- ------- --------- ----- ------ -----
Balance, December 31,
1991 $ 11,058 $150,313 $ (91,944) $ (1,600) $ - $ 67,827
Net loss - - (56,928) - - (56,928)
Purchase of treasury
stock - - - (2) - (2)
-------- -------- --------- -------- --- --------
Balance, December 31,
1992 11,058 150,313 (148,872) (1,602) - 10,897
Net loss - - (4,764) - - (4,764)
Issuance of treasury
stock to directors - (680) - 707 - 27
Purchase of treasury
stock - - - (1) - (1)
-------- -------- --------- -------- --- --------
Balance, June 30, 1993 11,058 149,633 (153,636) (896) - 6,159
Net loss - - (179) - - (179)
Net unrealized investment
loss - - - - (64) (64)
Issuance of treasury
stock to directors - (854) - 896 - 42
Purchase of treasury
stock - - - (143) - (143)
Ten to one reverse
stock split and change
in par value (11,047) 11,037 - - - (10)
-------- -------- --------- -------- --- --------
Balance, June 30, 1994 11 159,816 (153,815) (143) (64) 5,805
Net loss - - (898) - (898)
Purchase of treasury
stock - - - (11) - (11)
Issuance of treasury
stock to directors - 27 - 3 - 30
Net unrealized invest-
ment gain - - - - 70 70
-------- -------- --------- -------- --- --------
Balance, June 30, 1995 $ 11 $159,843 $(154,713) $ (151) $ 6 $ 4,996
======== ======== ========= ======== === ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(dollars in thousands)
Twelve
Months EndedSix Twelve
June 30, Months Ended Months Ended
-----------------
1995 1994 June 30, 1993 Dec 31, 1992
---- ---- ------------- ------------
Cash flows from operating activities:
Net loss $ (898) $ (179) $(4,764) $(56,928)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Loss from discontinued operations - - - 59,727
(Gain) loss on sale of
investments held for sale - 48 (11) (688)
Write-down of securities - - 38 -
Reserve for tax refund claim - - 4,287 -
Other - - 128 141
Depreciation and amortization 355 46 - -
Issuance of treasury stock
for services 30 42 - -
Changes in assets and
liabilities:
Accounts receivable (934) (687) - -
Inventories (1,711) 98 - -
Other assets 200 39 - -
Accounts payable 464 (400) - -
Accrued expenses 214 (420) - -
------- ------- ------- --------
Net cash provided
by (used in)
operating activities (2,280) (1,413) (322) 2,252
------- ------- ------- --------
Cash flows from investing activities:
Increase in notes from employees - (354) - -
Purchase of investments held for sale - (8,479) (4,077) -
Proceeds from sale of investments
held for sale 26 7,778 23 1,565
Purchase of property and equipment (640) (113) - -
Purchase of subsidiary, net of
acquired cash of $589 (184) (2,617) - -
Minority interest 29 12 - -
------- ------- ------- --------
Net cash provided by
(used in) investing
activities (769) (3,773) (4,054) 1,565
------- ------- ------- --------
Cash flows from financing activities:
Net borrowings (payments) under
line of credit 996 (479) - -
Borrowings under term notes 2,500 - - -
Principal debt payments (260) (12) - -
Purchase of treasury stock (11) (143) (1) (2)
Decrease in amounts due
from (to) subsidiary - - - (40)
------- ------- ------- --------
Net cash provided by
(used in) financing
activities 3,225 (634) (1) (42)
------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 176 (5,820) (4,377) 3,775
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 12 5,832 10,209 6,434
------- ------- ------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 188 $ 12 $ 5,832 $ 10,209
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 690 $ 137 $ - $ -
======= ======= ======= ========
Income taxes $ (216) $ (72) $ (24) $ 240
======= ======= ======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
THE ARISTOTLE CORPORATION AND SUBSIDIARY
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1995
-------------
1. Basis of Presentation and Nature of Business:
--------------------------------------------
The Aristotle Corporation ("Aristotle" or the "Company"), prior to October
2, 1992, was the holding company of First Constitution Bank (the "Bank"), a
thrift institution. On October 2, 1992, the Federal Deposit Insurance
Corporation (the "FDIC") was appointed by the Connecticut Superior Court -
District of New Haven as receiver of the Bank. Upon transfer of the Bank to
receivership, Aristotle wrote off its investment in the Bank of
$25,400,000. The banking operations are presented in the accompanying
financial statements as discontinued operations.
Effective June 30, 1993, Aristotle changed its fiscal year end from
December 31 to June 30.
On April 11, 1994, Aristotle, through a newly created subsidiary Aristotle
Sub., Inc. ("ASI"), acquired (the "Acquisition") 97.78% of the outstanding
common stock of The Strouse, Adler Company ("Strouse"). Strouse designs,
manufactures and markets women's intimate apparel. The Acquisition was
accounted for as a purchase.
Total acquisition cost to date is $5,990,000 (including expenses of the
Acquisition of $610,000) of which: (i) $2,454,000 represents the issuance
of 122,691 shares of 8.9% Series A, 61,345 shares of 8.9% Series B and
61,345 shares of 8.9% Series C preferred stock of ASI (collectively
referred to herein as the "ASI Preferred Stock"), valued at its redemption
value of $10 per share; (ii) $125,000 represents the value of 25,000 common
shares of ASI issued at the Acquisition (the "ASI Common Stock"); (iii)
$2,617,000 is cash paid at date of acquisition; and (iv) $184,000
represents the August 31, 1994 Additional EBIT Consideration (see below).
The excess of cost over the fair value of net assets acquired amounts to
$1,946,000, which is being amortized over forty years. The fair value of
assets purchased and liabilities assumed amounted to $14,934,000 and
$10,890,000, respectively.
The operating results of Strouse are included in the consolidated financial
statements since the date of the Acquisition.
Operating results for the year ended June 30, 1994 and 1993 on a pro forma
basis as though Strouse was acquired as of July 1, 1992 are:
(Dollars in Thousands
except share data)
June 30,
---------------------
1994 1993
---- ----
(Unaudited)
Net sales $18,267 $14,966
Net loss (132) (4,364)
Net loss per share $ (.12) $ (3.89)
F-6
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would
have occurred had the Acquisition been consummated as of the above dates,
nor are they necessarily indicative of the future operating results. The
pro forma adjustments include amortization of intangibles, decreased
interest income and expense, minority share and preferred dividend costs
and related income tax effects of the Acquisition.
The Acquisition agreements (the "Acquisition Agreements") provide that the
former stockholders of Strouse (the "Strouse Stockholders") may receive
additional consideration (the "Additional EBIT Consideration"), the amount
of which will be based upon the earnings before interest and income tax
("EBIT") of Strouse, calculated on an August 31 fiscal year through August
31, 1996, with the maximum amount of such consideration not to exceed
$1,854,000. The EBIT target will be increased by an amount equal to one-
half of the aggregate management bonuses paid pursuant to certain
Employment Agreements with some of the Strouse Stockholders (see Note 5).
Of each years Additional EBIT Consideration, if any, 80% will be paid in
cash and 20% will be paid in ASI Common Stock. The ASI Common Stock issued
as Additional EBIT Consideration is convertible into Common Stock of
Aristotle (the "Aristotle Common Stock").
Additional EBIT Consideration of $184,000 was paid to the Strouse
Stockholders for the fiscal period ended August 31, 1994. In accordance
with the Acquisition Agreements, $147,270 of the Additional EBIT
Consideration was paid in cash and $36,817 was paid through the issuance of
8,424 shares of ASI Common Stock. No Additional EBIT Consideration has been
recognized for this fiscal period ended August 31, 1995 as the EBIT target
is not expected to be met based on EBIT earned through June 30, 1995.
The 25,000 shares of ASI Common Stock issued at the date of Acquisition to
the Strouse Stockholders pursuant to the Acquisition represented 2.22% of
the outstanding ASI Common Stock. The Strouse Stockholders also received
options (the "ASI Options") to purchase 25,000 additional shares of ASI
Common Stock at $5.45 per share. The ASI Common Stock exercisable pursuant
to the ASI Options represented an additional 2.13% of the outstanding ASI
Common Stock at date of Acquisition, if exercised. After recognition of the
fiscal 1994 Additional EBIT Consideration, and the bonuses paid pursuant to
the Employment Agreements (see Note 5), the Strouse Stockholders hold
33,424 shares of ASI Common Stock (2.95% of the outstanding shares of ASI
Common Stock as of June 30, 1995) and ASI Options to purchase 35,208 shares
of ASI Common Stock (an additional 3.10% of the outstanding shares of ASI
Common Stock, if exercised, as of June 30, 1995).
The ASI Preferred Stock has a liquidation preference of $2,454,000 in the
aggregate, or $10 per share. Dividends at the rate of 8.9% per annum are
payable on the ASI Preferred Stock until the later of: (i) the dates on
which the Put Right (as defined below) commences (between April 11, 1996
and April 11, 2001); and (ii) the first date upon which Aristotle has
sufficient audited financial statements in order to satisfy the
requirements for filing a registration statement under the federal
securities laws pursuant to which the shares of Aristotle's Common Stock
issued to the Strouse Stockholders can be registered for sale. Aristotle
F-7
received an independent auditors' report containing a disclaimer of opinion
on the 1992 financial statements from a predecessor auditor relating to
uncertainties associated with its former banking activities, which may
preclude such registration from taking place before June 30, 1996.
Aristotle is obligated to pay the costs of such registration under the
Acquisition Agreements. The ASI Preferred Stock is redeemable by ASI.
Aristotle has issued to the Strouse Stockholders warrants (the "Warrants")
that permit the holders of the Warrants to exchange their ASI Preferred
Stock and/or ASI Common Stock for Aristotle Common Stock. After recognition
of the fiscal 1994 Additional EBIT Consideration and the bonuses paid
pursuant to the Employment Agreements (see Note 5), the Strouse
Stockholders hold warrants that entitle them to purchase 383,223 shares of
Aristotle Common Stock, which, if exercised, would represent 25.7% of the
outstanding Aristotle Common Stock as of June 30, 1995. If the Strouse
Stockholders do not exercise their Warrants and exchange their ASI
Preferred Stock for Aristotle Common Stock, they have the right to put such
shares of ASI Preferred Stock back to Aristotle (the "Put Right") for
$2,454,000, plus any accrued and unpaid dividends, beginning April 11,
1996. The Put Right during the period from April 11, 1996 to April 10, 1997
is limited to $700,000. Such $700,000 is in marketable securities, is held
in escrow to protect against various contingencies, may be available to
fund the Put Right and is contained within marketable securities held in
esc