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UNITED STATES
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, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________
Commission file number 0-14669
The Aristotle Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27 Elm Street, New Haven, Connecticut
(Address of principal executive offices)
06-1165854
(I.R.S. Employer
Identification No.)
06510
(Zip Code)
Registrant's telephone number, including area code:
(203) 867-4090
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, 2000, the aggregate market value of the Common Stock
outstanding of The Aristotle Corporation held by nonaffiliates (without
admitting that any person whose shares are not included in such calculation is
an affiliate) was approximately $4,889,949, based on the closing price as
reported by the Nasdaq Stock Market.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement dated October 2, 2000 are
incorporated by reference into Part III of this Report on Form 10-K.
THE ARISTOTLE CORPORATION
2000 ANNUAL REPORT
TABLE OF CONTENTS
Selected Consolidated Financial Data ...................................... 2
Management's Discussion and Analysis ...................................... 4
Consolidated Financial Statements ......................................... 13
1
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 Aristotle
Corporation ("Aristotle"), Aristotle Sub, Inc. ("ASI"), and The Strouse, Adler
Company ("Strouse") on a consolidated basis for the fiscal years ended June 30,
1996, 1997 and 1998 and also include Simulaids, Inc. ("Simulaids") for the
fiscal years ended June 30, 1999 and 2000. Aristotle formed ASI in 1993 and
acquired Strouse (the "Strouse Acquisition") in 1994. On January 2, 1998, ASI
was merged into Aristotle (the "ASI Merger"). On June 30, 1998, Aristotle
consummated the sale of substantially all of the assets and certain of the
liabilities of Strouse to Sara Lee Corporation (the "Strouse Sale"). On July 2,
1998, Strouse changed its name to "S-A Subsidiary, Inc." On April 30, 1999,
Aristotle acquired all of the outstanding stock of Simulaids, a manufacturer of
health and education teaching aids. All references herein to the "Company"
include Aristotle, Strouse, ASI and Simulaids. 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.
FISCAL YEARS ENDED JUNE 30,
---------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Consolidated statements of operations data:
Net sales ...................................... $ -- $ -- $ -- $ 947 $ 6,713
Costs and expenses:
Costs of goods sold ..................... -- -- -- 770 3,775
Selling, general and administrative ..... 609 649 685 1,250 2,168
Goodwill amortization ................... -- -- -- 39 228
Nonrecurring tax claim contingency fee .. -- -- 480 -- --
----------- ----------- ----------- ----------- -----------
Operating gain (loss) .............. (609) (649) (1,165) (1,112) 542
Other income (expense):
Investment and interest income ............... 312 146 151 725 337
Interest expense ............................. (4) (9) (5) (32) (174)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes
and minority interest ........................ (301) (512) (1,019) (419) 705
(Provision for) benefit from income taxes (1) .. 1,626 (32) 1,182 (89) (31)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations before
minority interest ............................ 1,325 (544) 163 (508) 674
Minority interest .............................. 215 175 72 -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations ... 1,110 (719) 91 (508) 674
Discontinued operations:
Income from operations of
The Strouse Adler Company .................. 358 732 624 -- --
Gain on sale of The Strouse, Adler Company ... -- -- 873 911 --
----------- ----------- ----------- ----------- -----------
Net income ................................ 1,468 13 1,588 403 674
Preferred dividends ............................ -- -- 126 233 109
----------- ----------- ----------- ----------- -----------
Net income applicable to common shareholders $ 1,468 $ 13 $ 1,462 $ 170 $ 565
=========== =========== =========== =========== ===========
Diluted earnings per common share:
Continuing operations ........................ $ 0.92 $ (0.65) $ (0.03) $ (0.60) $ .37
Discontinued operations ...................... 0.25 0.66 0.54 -- --
Gain on sale of discontinued operations ...... -- -- 0.75 0.74 --
----------- ----------- ----------- ----------- -----------
Net income ................................... $ 1.17 $ 0.01 $ 1.26 $ 0.14 $ .37
=========== =========== =========== =========== ===========
Weighted average shares ...................... 1,440,274 1,100,700 1,151,920 1,226,144 1,834,968
Consolidated balance sheet data:
Total assets ................................... $ 23,795 $ 20,381 $ 14,582 $ 18,485 $ 15,211
Stockholders' equity ........................... 6,530 6,511 8,455 8,608 11,947
Long-term debt ................................. 2,097 1,670 -- 111 1,672
- -----------
(1) Income tax benefit for the year ended June 30, 1996 includes a $1,650
benefit related to the settlement of the Federal Deposit Insurance
Corporation's claims. Income tax benefit for the year ended June 30, 1998
includes a tax refund received resulting from a tax loss carryback claim.
2
SELECTED FINANCIAL DATA OF SIMULAIDS
(Amounts in thousands)
The following are selected financial data for Simulaids, on a stand alone
basis, for the fiscal years ended December 31, 1997 and 1998 and June 30, 1998,
1999, and 2000. The selected financial data for the fiscal years ended June 30,
1998 and 1999 have not been audited. The financial data is presented on a
historic basis of accounting and does not reflect adjustments resulting from the
acquisition or costs associated with the acquisition. 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
DECEMBER 31, JUNE 30,
------------ --------
(unaudited) (unaudited)
1997 1998 1998 1999 2000
------- ------- ------- ------- -------
Consolidated statements of operations data:
Net sales ....................................... $ 5,478 $ 5,860 $ 5,527 $ 5,822 $ 6,713
Costs and expenses:
Costs of goods sold ........................ 2,965 3,266 3,121 3,259 3,775
Selling, general and administrative ........ 1,458 1,433 1,418 1,486 1,502
Goodwill amortization ...................... -- -- -- 39 228
------- ------- ------- ------- -------
Operating income ...................... 1,055 1,161 988 1,038 1,208
Other income (expense):
Interest and other income-net ................. 42 27 40 12 13
Interest expense .............................. (14) (11) (13) (12) (165)
------- ------- ------- ------- -------
Income from continuing operations
before income taxes ........................... 1,083 1,177 1,015 1,038 1,056
Provision for income taxes ...................... (8) (14) (9) (101) (492)
------- ------- ------- ------- -------
Net income ............................ $ 1,075 $ 1,163 $ 1,006 $ 937 $ 564
======= ======= ======= ======= =======
Consolidated balance sheet data:
Total assets .................................... $ 3,227 $ 3,213 $ 3,139 8,743 $ 9,208
Stockholders' equity ............................ 2,943 3,081 2,871 8,350 6,885
Long-term debt .................................. $ 106 $ -- $ 96 $ 111 1,672
- -----------------------
Interest and other income-net includes the Video Store business of Simulaids
through April 30, 1999 even though the Video Store business was not purchased by
Aristotle. The Video Store Business and related assets were distributed to the
former stockholder of Simulaids on April 30, 1999.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
General
This discussion and analysis of financial condition and results of
operations will review the results of operations of the Company, on a
consolidated basis, for the fiscal year ended June 30, 2000, as compared to the
year ended June 30, 1999, and the fiscal year ended June 30, 1999, as compared
to the year ended June 30, 1998. 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.
On April 30, 1999, Aristotle acquired all of the outstanding stock of
Simulaids, Inc. ("Simulaids"), a manufacturer of health and education teaching
aids. Simulaids was Aristotle's only operating subsidiary during the period
ended June 30, 2000. On September 14, 2000, Aristotle acquired 80% of the
outstanding stock of Safe Passage International, Inc. ("Safe Passage"), a
privately-held, Rochester, New York-based company that develops and sells
computer based training products to government and industry clients (see "Recent
Developments"). Except for references in the discussion under the heading
"Recent Developments" and in the Note - "Subsequent Events" in the Consolidated
Financial Statements, or unless otherwise indicated, this Report does not
include or otherwise describe the acquisition of Safe Passage or its business,
financial condition or financial performance.
Results of Continuing Operations of the Company
Fiscal Year Ended June 30, 2000 as Compared to the Year Ended June 30, 1999
The Company's net sales of $6,713,000 for the fiscal year ended June 30,
2000 increased by $5,766,000 as compared to net sales of $947,000 for the fiscal
year ended June 30, 1999. The increase in sales reflects twelve months of sales
for Simulaids in the current fiscal year versus two months of sales for
Simulaids in the prior year.
Gross profit for the current fiscal year of $2,938,000 increased by
$2,761,000 versus gross profit for the prior fiscal year of $177,000. The
increase in gross profit reflects twelve months of gross profit for Simulaids in
the current fiscal year versus two months of gross profit for Simulaids in the
prior year. In addition, the gross margin in fiscal 1999 reflects a nonrecurring
impact of the application of purchase accounting at the date of the acquisition
which resulted in a $259,000 fair value adjustment to the purchased inventory.
This purchase accounting adjustment was expensed in the period ended June 30,
1999 as the corresponding inventory was sold.
The Company's selling, general and administrative expenses for the fiscal
year ended June 30, 2000 increased by $918,000 to $2,168,000 compared to
$1,250,000 for the prior fiscal year. The increase principally reflects twelve
months of expenses for Simulaids in the current fiscal year versus two months of
expenses for Simulaids in the prior year, partially offset by a reduction in
professional fees.
Goodwill amortization for the current fiscal year of $228,000 increased by
$189,000 versus goodwill amortization for the prior fiscal year of $39,000. The
increase in goodwill
4
amortization reflects twelve months of amortization in the current fiscal year
versus two months of amortization in the prior year.
Investment and interest income was $337,000 and $725,000 for the twelve
months ended June 30, 2000 and 1999, respectively. The decrease in fiscal year
2000 mainly reflects a redemption of marketable securities in which the proceeds
were used to partially finance the acquisition of Simulaids in April 1999. The
income for the twelve months ended June 30, 2000 and 1999 was principally
generated by short-term cash investments and corporate bonds.
Interest expense for the twelve months ended June 30, 2000 increased to
$174,000 from $32,000 in the corresponding twelve months ended June 30, 1999.
The increase reflected interest expense on the bank funds used in the
acquisition of Simulaids which were utilized for twelve months in the current
fiscal year versus two months in the prior year.
The income tax provision for the twelve months ended June 30, 2000 was
$31,000 compared to $89,000 for the twelve months ended June 30, 1999. During
the twelve months ended June 30, 2000, the Company recorded a tax provision
related to state taxes. During the twelve months ended June 30, 1999, the
Company recorded a tax provision related to state taxes and a provision for
taxes due on the built-in gain on assets purchased in the acquisition of
Simulaids.
Preferred dividends were $109,000 for the twelve months ended June 30,
2000 compared to $233,000 for the twelve months ended June 30, 1999. The
decrease was principally due to the conversion of all shares of Aristotle
Preferred Stock into shares of Common Stock from February 2000 to May 2000.
Preferred dividends represented dividends paid or accrued on outstanding Series
E, F, G and H Aristotle Preferred Stock. The shares of Series E Aristotle
Preferred Stock were issued to Geneve Corporation, Aristotle's principal
shareholder, in January 1998, and shares of the Series F, G and H Aristotle
Preferred Stock were issued in 1998 in connection with the acquisition of
Strouse, which company was subsequently sold to The Sara Lee Corporation in June
1998.
Results of Discontinued Operations of the Company
Fiscal Year Ended June 30, 2000 as Compared to the Year Ended June 30, 1999
Gain on the sale of Strouse of $911,000 for the year ended June 30, 1999
reflects adjustments which resulted from a $48,000 charge related to a final
purchase price adjustment based on the net book value of net assets acquired by
Sara Lee, a $41,000 charge related to additional transaction costs in excess of
management's original estimate and $1,000,000 of additional gain resulting from
the final determination of the ultimate tax obligations resulting from the sale.
Results of Continuing Operations of the Company
Fiscal Year Ended June 30, 1999 as Compared to the Year Ended June 30, 1998
The Company's net sales of $947,000 for the fiscal year ended June 30,
1999 represents the net sales of Simulaids for the two months ended June 30,
1999.
Gross profit for the 1999 fiscal year of $177,000 represents the
operations of Simulaids for the two months ended June 30, 1999. The gross margin
reflects a nonrecurring impact of the
5
application of purchase accounting at the date of the acquisition which resulted
in a $259,000 fair value adjustment to the purchased inventory. This purchase
accounting adjustment was expensed in the period ended June 30, 1999 as the
corresponding inventory was sold.
The Company's selling, general and administrative expenses for the fiscal
year ended June 30, 1999 increased 82% to $1,250,000 compared to $685,000 for
the prior fiscal year. The increase was primarily due to the operating expenses
of Simulaids of $227,000 for the two months ended June 30, 1999, increased
professional fees primarily incurred in connection with tax matters and
potential acquisitions, and increases in administrative and directors'
compensation.
The Company's goodwill amortization of $39,000 for the fiscal year ended
June 30, 1999 represents amortization of goodwill for the two months ended June
30, 1999 resulting from the April 30, 2000 acquisition of Simulaids.
The Company incurred a contingency fee of $480,000 for the fiscal year
ended June 30, 1998 which resulted from an agreement entered into in connection
with the income tax refund received during the fiscal year ended June 30, 1998.
See the income tax discussion below.
Investment and interest income was $725,000 and $151,000 for the twelve
months ended June 30, 1999 and 1998, respectively. The increase in 1999 mainly
reflects the additional investment and interest income generated from the
proceeds of the Strouse Sale in June 1998. The income for the twelve months
ended June 30, 1999 and 1998 was principally generated by short-term cash
investments and corporate bonds.
Interest expense for the twelve months ended June 30, 1999 increased to
$32,000 from $5,000 in the corresponding twelve months ended June 30, 1998. The
increase reflected interest expense on the bank funds utilized in the
acquisition of Simulaids.
The income tax provision for the twelve months ended June 30, 1999 was
$89,000 compared to a benefit of $1,182,000 for the twelve months ended June 30,
1998. During the twelve months ended June 30, 1999, the Company recorded a tax
provision related to state taxes. During the twelve months ended June 30, 1998,
the Company received a tax refund of $1,919,000 resulting from a tax loss
carryback claim related to its 1996 tax year. In connection therewith, the
Company recorded an income tax benefit of $1,199,000, which is net of a $720,000
reserve which is included in accrued expenses in the accompanying consolidated
balance sheet, less minimum state provisions.
Minority interest expense of $72,000 for the twelve months ended June 30,
1998 was due to preferred dividends paid or accrued on outstanding minority
interest Preferred Stock issued to the Former Strouse Stockholders in connection
with the Strouse Acquisition. In January 1998, the minority interest Preferred
Stock was converted into Series F, G and H Aristotle Preferred Stock.
Preferred dividends were $233,000 for the twelve months ended June 30,
1999 compared to $126,000 for the twelve months ended June 30, 1998. The
increase was principally due to the payments of dividends on shares of the
Series E Aristotle Preferred Stock for the entire 1999 fiscal year versus for
half of the 1998 fiscal year. Preferred dividends represent dividends paid or
accrued during the twelve months on outstanding shares of Series E, F, G and H
Aristotle Preferred Stock.
6
Results of Discontinued Operations of the Company
Fiscal Year Ended June 30, 1999 as Compared to the Year Ended June 30, 1998
Income from the operations of Strouse was $624,000 for the twelve months
ended June 30, 1998 reflecting the performance of the business during the year
before the sale in June 1998.
Gain on the sale of Strouse of $911,000 for the year ended June 30, 1999
reflects adjustments which resulted from a $48,000 charge related to a final
purchase price adjustment based on the net book value of net assets acquired by
Sara Lee, a $41,000 charge related to additional transaction costs in excess of
management's original estimate and $1,000,000 of additional gain resulting from
the final determination of the ultimate tax obligations resulting from the sale.
The gain of $873,000 recorded in the year ended June 30, 1998 reflected gross
proceeds of $21,500,000 offset by the net book value of acquired assets and
liabilities of $18,397,000 and estimated taxes and transaction costs of
$2,230,000.
Results of Operations of Simulaids, on a stand alone basis
Twelve Months Ended June 30, 2000 as Compared to the Twelve Months Ended June
30, 1999
Simulaids' net sales for the twelve months ended June 30, 2000 increased
15.3% to $6,713,000, compared to net sales of $5,822,000 for the prior year. The
increase was primarily due to higher volume of manikin sales to existing
domestic and international distributors.
Simulaids' gross profit for the twelve months ended June 30, 2000
increased to $2,938,000 from $2,563,000 for the prior year (a 14.6% increase),
and the gross margin percentage decreased to 43.8% from 44.0%. The increase in
gross profit was principally due to the sales increase.
Operating expenses include selling, general and administrative and product
development expenses. Operating expenses for the twelve months ended June 30,
2000 were $1,502,000 versus $1,486,000 for the twelve months ended June 30,
1999. The $16,000, or 1.1%, increase was principally a result of increases in
advertising, sales promotion, and selling compensation partially offset by
reductions in administrative compensation.
Goodwill amortization for the current fiscal year of $228,000 increased by
$189,000 versus goodwill amortization for the prior fiscal year of $39,000. The
increase in goodwill reflects twelve months of amortization in the current
fiscal year versus two months of amortization in the prior year.
Investment and interest income was $13,000 and $12,000 for the twelve
months ended June 30, 2000 and 1999, respectively. Fluctuations in investment
and interest income generated each year were a direct result of the cash
balances maintained in the business.
Interest expense for the twelve months ended June 30, 2000 increased to
$165,000 from $12,000 in the prior year. The increase in interest expense
primarily resulted from increased borrowing levels under bank loans established
as part of the acquisition of Simulaids.
The provision for income taxes for the twelve months ended June 30, 2000
was $492,000 versus $101,000 for the prior year. Income taxes represent
provisions made pursuant to the tax sharing agreement with its parent, The
Aristotle Corporation. The increase in the income tax
7
provision reflects twelve months with a tax sharing agreement with its parent
for the current fiscal year versus two months with a tax sharing agreement with
its parent and ten months as a "S" Corporation in the prior year.
Twelve Months Ended June 30, 1999 as Compared to the Twelve Months Ended June
30, 1998
Simulaids' net sales for the twelve months ended June 30, 1999 increased
5.3% to $5,822,000, compared to net sales of $5,527,000 for the prior year. The
increase was primarily due to higher sales of custom products partially offset
by lower volume of manikin sales.
Simulaids' gross profit for the twelve months ended June 30, 1999
increased to $2,563,000 from $2,406,000 for the prior year, and the gross margin
percentage increased to 44.0% from 43.5%. The increase in gross profit was
principally due to the sales increase and the increase in the gross margin
percentage was principally a result of increased efficiencies resulting from the
increased level of production.
Operating expenses include selling, general and administrative, and
product development expenses. Operating expenses for the twelve months ended
June 30, 1999 were $1,486,000 versus $1,418,000 for the twelve months ended June
30, 1998. The $68,000, or 4.8%, increase was principally a result of increases
in administrative compensation.
Goodwill amortization of $39,000 for the fiscal year ended June 30, 1999
represents amortization of goodwill for the two months ended June 30, 1999
resulting from the April 30, 2000 acquisition of Simulaids.
Investment and interest income was $12,000 and $40,000 for the twelve
months ended June 30, 1999 and 1998, respectively. Fluctuations in investment
and interest income generated each year were a direct result of the cash
balances maintained in the business.
The provision for income taxes for the twelve months ended June 30, 1999
was $101,000, which reflected state taxes on income.
Liquidity and Capital Resources
Aristotle ended the June 30, 2000 fiscal year with $4,951,000 in cash and
cash equivalents. Cash consumed during the year was principally used for the
repayment of short-term borrowings partially offset by cash earnings from
operations, the receipt of tax refunds and the redemption of marketable
securities. The overall decrease in cash and cash equivalents of $898,000 is
detailed below.
The Company generated cash of $1,757,000 from operations during the fiscal
year ended June 30, 2000 and deployed net cash of $761,000 in operations for the
fiscal year ended June 30, 1999. During fiscal 2000, the generation of cash from
operations was principally the result of earnings plus depreciation and
amortization of $1,100,000 and the receipt of tax refunds totaling $1,027,000.
During fiscal 1999, the use of cash from operations was principally the result
of a loss from continuing operations of $508,000 and the overpayment of
refundable taxes of $1,150,000 partially offset by reductions in other assets of
$482,000 and inventories of $203,000.
8
The Company generated $910,000 from investing activities for the fiscal
year ended June 30, 2000 and deployed $10,558,000 in investing activities in the
fiscal year ended June 30, 1999. During fiscal 2000, the generation of cash
principally reflected the redemption of marketable securities of $991,000.
During fiscal 1999, the utilization of cash was principally for the acquisition
of Simulaids, the purchase of marketable securities and the payment of Strouse
transaction costs resulting from the June 1998 sale.
Financing activities utilized cash of $3,565,000 for the fiscal year ended
June 30, 2000 and provided cash of $4,897,000 for the fiscal year ended June 30,
1999. Funds used in fiscal 2000 were primarily for the repayment of borrowings
of $3,212,000, the repurchase of shares of Aristotle Preferred Stock of $136,000
and the payment of dividends on Aristotle Preferred Stock of $163,000. Funds
generated in fiscal 1999 were primarily due to the short-term bank borrowings of
$5,000,000 partially offset by dividends on Aristotle Preferred Stock of
$233,000.
Capital resources in the future are expected to be used for the
development of the Simulaids business and to acquire additional companies.
Aristotle anticipates that there will be sufficient financial resources to meet
Aristotle's projected working capital and other cash requirements for the next
twelve months.
Recent Developments
On September 14, 2000, Aristotle acquired 80% of the outstanding shares of
common stock of Safe Passage International, Inc., a privately-held Rochester,
New York-based company, pursuant to a Stock Purchase Agreement dated as of
September 13, 2000 between Aristotle and the Safe Passage shareholders (the
"Sellers") for an aggregate purchase price of $1.8 million in cash plus possible
additional future consideration of up to a maximum of $2.3 million based on
management's performance during calendar years 2000 and 2001. Safe Passage
develops and sells computer based training products to government and industry
clients.
Income Taxes
At June 30, 2000, Aristotle had $50,600,000 of federal net operating loss
carryforwards, which expire through 2011, and $1,600,000 of state net operating
loss carryforwards, which expire through 2004.
In September 1996, the Company filed an amended Federal income tax return
for the year ending December 31, 1992 claiming a worthless stock deduction of
approximately $54,000,000 with respect to its stock in the First Constitution
Bank (the "Bank") which previously was Aristotle's only subsidiary and which, on
October 2, 1992, was seized by the FDIC. As a result of such amended return, the
Company has also claimed tax refunds of approximately $10,000,000 resulting from
the carryback of the Company's net operating loss from 1992 to prior years.
Pending final review by the Internal Revenue Service, the Company has not
recorded the $10,000,000 refund claim in its consolidated financial statements.
After consideration of such carryback claim, the Company's remaining Federal net
operating loss carryforward related to the worthless stock deduction would be
approximately $30,800,000 and the Company's aggregate Federal net operating loss
carryforwards would be reduced from $50,600,000 to $28,600,000.
During 1997, the Company filed a carryback claim related to its 1996 tax
year. In connection therewith, the Company received $1,919,000 for which the
Company recorded an income tax benefit of $1,199,000, which is net of a $720,000
reserve. In addition, upon receipt of
9
such refund, the Company was obligated to pay $480,000 as a result of a
contingent fee arrangement entered into in connection with this income tax
refund claim.
On its return for 1992 as originally filed, the Company made elections
under provisions set forth in regulations proposed by the Internal Revenue
Service in April 1992 as guidance for the application of Section 597 of the
Internal Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1) of
the Federal Income Tax Regulations to (i) disaffiliate from the former Bank for
Federal income tax purposes and (ii) reattribute net operating losses of the
former Bank in excess of $81,000,000 to the Company. The application of the tax
law with respect to the Company's election to disaffiliate from the former Bank
and to reattribute the former Bank's net operating losses to the Company is not
certain and, therefore, there is no assurance that the Company could succeed to
any of the former Bank's net operating losses. Moreover, the reattribution to
the Company of the former Bank's net operating losses may be limited if the
position taken by the Company on its amended returns is allowed.
As anticipated and as discussed in the Company's Annual Report on Form
10-K for the year ended June 30, 1999, the Company received from the Internal
Revenue Service a letter disallowing the two carryback claims filed on its
amended 1992 return and on its 1996 return. This disallowance at the field
examination level was not unexpected by the Company. The Company continues to
believe the claims have merit and, therefore, the Company will continue to
pursue its case at the Internal Revenue Service Appellate level. The ultimate
outcome of this proceeding is uncertain at this time. Notwithstanding, the
Company being entitled to a net operating loss carryforward arising from, or
with respect to its interest in, the former Bank, its ability to utilize such
carryforward is dependent upon many factors including (i) the realization of
taxable income by the Company, and (ii) avoiding a fifty percent "ownership
change" as defined in Section 382 of the Internal Revenue Code. If there is an
"ownership change," the tax loss carryforwards available to the Company would be
significantly reduced or eliminated. Accordingly, neither the refund claim nor
the future benefit of these remaining net operating loss carryforwards have been
reflected as tax assets in the accompanying consolidated financial statements.
The Company believes, assuming that the Former Strouse Stockholders
currently own the maximum number of shares of Common Stock of Aristotle they
could acquire through the exercise of their various rights and options and that
Geneve Corporation currently owns the maximum number of shares of Common Stock
it could acquire, 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 former 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
Former Strouse Stockholders and Geneve Corporation, the Company does not know of
any stockholders who currently own or would own, upon the exercise of options or
warrants, 5% or more of the Common Stock. 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.
10
Quantitative & Qualitative Disclosures About Market Risk
As described below, credit risk and interest rate risk are the primary
sources of market risk to the Company in its marketable securities and
short-term borrowings.
Qualitative
Interest Rate Risk: Changes in interest rates can potentially impact the
Company's profitability and its ability to realize assets and satisfy
liabilities. Interest rate risk is resident primarily in the Company's
marketable securities and short-term borrowings which have fixed coupon or
interest rates.
Credit Risk: The Company's marketable securities are invested in
investment grade corporate bonds and closed-end bond funds, both domestic and
international, which have various maturities.
Quantitative
The Company's marketable securities and short-term borrowings as of June
30, 2000 are as follows:
Maturity less Maturity greater
than one year than one year
------------- -------------
Marketable securities
Cost value $ -- $ 2,074
Weighted average return -- 7.3%
Fair market value $ -- $ 1,806
Short-term borrowings
Amount $ 253 $ 1,672
Weighted average interest rate 8.2% 8.2%
Fair market value $ 253 $ 1,672
Year 2000 Issue
The Year 2000 Issue arose as a result of computer programs that were
written using two digits rather than four to define the year. There was concern
that information technology systems and other systems using such programs that
have date sensitive software would recognize a date using "00" as the year 1900
rather than the year 2000. Accordingly, computer systems and software used by
many companies and governmental agencies needed to be upgraded to comply with
Year 2000 requirements or risk system failure or miscalculations causing
disruptions of operations.
Subsequent to December 31, 1999, the Company has not experienced any
significant problems associated with the Year 2000 compliance of its own
operating and information systems and it has not experienced any problems with
the Year 2000 compliance of third parties, including its significant suppliers,
customers and critical business partners or any governmental agencies and
service providers. The Company does not expect to experience any significant
problems associated with the Year 2000 Issue in the future.
11
Certain Factors That May Affect Future Results of Operations
Aristotle believes that this report may contain forward-looking statements
within the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements regarding Aristotle's liquidity and are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Aristotle cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: (i) the
ability of Aristotle to obtain financing and additional capital to fund its
business strategy on acceptable terms, if at all; (ii) the ability of Aristotle
on a timely basis to find, prudently negotiate and consummate one or more
additional acquisitions; (iii) the ability of Aristotle to retain and take
advantage of its net operating tax loss carryforward position; (iv) Aristotle's
ability to manage Simulaids, Safe Passage and any other acquired or to be
acquired companies; and (v) general economic conditions. As a result,
Aristotle's future development efforts and operations involve a high degree of
risk. For further information, refer to the more specific risks and
uncertainties discussed throughout this report.
12
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND 1999
TOEGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
13
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30, 2000 and 1999
(dollars in thousands, except for share data)
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 4,951 $ 5,849
Marketable securities, at market value 1,806 702
Marketable securities and cash equivalents held
in escrow, at market value -- 157
Accounts receivable 465 299
Current maturities of notes receivable -- 102
Inventories, net 928 989
Tax receivable, net 123 1,150
Other current assets 128 85
--------- ---------
Total current assets 8,401 9,333
--------- ---------
Property, plant and equipment, net 1,365 1,478
--------- ---------
Other assets:
Marketable securities, at market value -- 1,386
Marketable securities held in escrow, at market value -- 552
Goodwill, net of accumulated amortization of $267 and $39 in 2000
and 1999, respectively 5,428 5,685
Other noncurrent assets 17 51
--------- ---------
5,445 7,674
--------- ---------
$ 15,211 $ 18,485
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 5,000
Current maturities of long-term debt 225 --
Current maturities of capital lease obligations 28 25
Current maturities of Series F, G and H Preferred Stock -- 799
Accounts payable 127 143
Accrued expenses 492 829
Accrued tax reserves 720 720
--------- ---------
Total current liabilities 1,592 7,516
--------- ---------
Long-term debt, net of current maturities 1,589 --
Capital lease obligations, net of current maturities 83 111
--------- ---------
Total long-term liabilities 1,672 111
--------- ---------
Commitments and contingencies
Series E Redeemable Preferred Stock -- 2,250
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized;
1,904,613 and 1,240,727 shares issued in 2000 and 1999,
respectively 19 13
Additional paid-in capital 163,324 160,403
Accumulated deficit (151,035) (151,600)
Treasury stock, at cost, 17,834 shares and 7,609 shares in
2000 and 1999, respectively (93) (47)
Net unrealized investment losses (268) (161)
--------- ---------
Total stockholders' equity 11,947 8,608
--------- ---------
$ 15,211 $ 18,485
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
14
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 2000, 1999 and 1998
(dollars in thousands, except per share data)
2000 1999 1998
Net sales $ 6,713 $ 947 $ --
Cost of goods sold 3,775 770 --
------- ------- -------
Gross profit 2,938 177 --
------- ------- -------
Selling expenses 454 46 --
General and administrative expenses 1,714 1,204 685
Nonrecurring tax claim contingency fee -- -- 480
Goodwill amortization 228 39 --
------- ------- -------
Operating income (loss) 542 (1,112) (1,165)
------- ------- -------
Other income (expense):
Investment and interest income 337 725 151
Interest expense (174) (32) (5)
------- ------- -------
Income (loss) from continuing operations before
income taxes and minority interest 705 (419) (1,019)
Provision for (benefit from) income taxes 31 89 (1,182)
------- ------- -------
Income (loss) from continuing operations
before minority interest 674 (508) 163
Minority interest -- -- 72
------- ------- -------
Income (loss) from continuing operations 674 (508) 91
Discontinued operations:
Income from operations of The Strouse, Adler Company -- -- 624
Gain on sale of The Strouse, Adler Company -- 911 873
------- ------- -------
Net income 674 403 1,588
Preferred dividends 109 233 126
------- ------- -------
Net income applicable to common shareholders $ 565 $ 170 $ 1,462
======= ======= =======
Basic earnings (loss) per common share:
Continuing operations $ .39 $ (.60) $ (.03)
Discontinued operations -- -- .54
Gain on sale of discontinued operations -- .74 .75
------- ------- -------
$ .39 $ .14 $ 1.26
======= ======= =======
Diluted earnings (loss) per common share:
Continuing operations $ .37 $ (.60) $ (.03)
Discontinued operations -- -- .54
Gain on sale of discontinued operations -- .74 .75
------- ------- -------
$ .37 $ .14 $ 1.26
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
15
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 2000, 1999 and 1998
(dollars in thousands)
Net
Unrealized
Additional Investment Total
Common Paid-in Accumulated Treasury Gains Stockholders' Comprehensive
Stock Capital Deficit Stock (Losses) Equity Income
Balance, June 30, 1997 $ 11 $ 159,762 $(153,232) $ (30) $ -- $ 6,511
Preferred dividends -- -- (126) -- -- (126)
Issuance of common stock -- 135 -- -- -- 135
Conversion of subsidiary's
common stock -- 215 -- -- -- 215
Issuance of common
stock to directors -- 136 -- -- -- 136
Net unrealized
investment loss -- -- -- -- (4) (4) $ (4)
Net income -- -- 1,588 -- -- 1,588 1,588
---------
Total comprehensive
income $ 1,584
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 11 160,248 (151,770) (30) (4) 8,455
Preferred dividends -- -- (233) -- -- (233)
Issuance of common
stock to directors 2 155 -- -- -- 157
Purchase of treasury stock -- -- -- (17) -- (17)
Net unrealized
investment loss -- -- -- -- (157) (157) $ (157)
Net income -- -- 403 -- -- 403 403
---------
Total comprehensive income $ 246
--------- --------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 13 160,403 (151,600) (47) (161) 8,608
Preferred dividends -- -- (109) -- -- (109)
Issuance of common
stock to directors and
employees -- 46 -- 8 -- 54
Conversion of preferred
stock 6 2,539 -- -- -- 2,545
Issuance of common stock -- 336 -- -- -- 336
Purchase of treasury stock -- -- -- (54) -- (54)
Net unrealized investment
loss -- -- -- -- (107) (107) $ (107)
Net income -- -- 674 -- -- 674 674
---------
Total comprehensive income $ 567
--------- --------- --------- --------- --------- --------- ==========
Balance, June 30, 2000 $ 19 $ 163,324 $(151,035) $ (93) $ (268) $ 11,947
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
16
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000, 1999 and 1998
(dollars in thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 674 $ 403 $ 1,588
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain from sale of discontinued operations -- (911) (873)
Depreciation and amortization 426 59 574
Issuance of stock for services -- -- 136
Loss on disposal of property and equipment 14 9 --
Changes in assets and liabilities, net of business acquired:
Accounts receivable (166) 92 (23)
Inventories 61 203 (2,850)
Tax receivable 1,027 (1,150) --
Other assets 17 482 1
Accounts payable (16) 64 (757)
Accrued expenses (280) (12) 310
Accrued tax reserves -- -- 720
-------- -------- --------
Net cash provided by (used in) operating activities 1,757 (761) (1,174)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (1,285) (1,069)
Redemption of marketable securities 991 -- 600
Minority interest -- -- 21
Proceeds from disposal of discontinued operations -- 911 8,724
Accrued transaction costs -- (1,704) 1,704
Purchase of property and equipment (81) (17) (608)
Purchase of Simulaids, net of $237 of cash acquired -- (8,463) --
-------- -------- --------
Net cash provided by (used in) investing activities 910 (10,558) 9,372
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings -- 5,000 --
Repurchase of minority interest Preferred Stock -- -- (800)
Proceeds from sale of Series E Preferred Stock -- -- 2,250
Net borrowings under line of credit -- -- 2,424
Repayment of short-term borrowings (5,000) -- --
Proceeds from credit agreement 2,000 -- --
Principle debt payments (187) -- (75)
Repayment of capital lease obligations (25) (4) --
Repurchase of preferred stock (136) (6) --
Proceeds from sale of common stock -- -- 135
Proceeds from exercise of stock options -- 157 --
Payment of dividends on preferred stock (163) (233) --
Purchase of treasury stock (54) (17) --
-------- -------- --------
Net cash (used in) provided by financing activities (3,565) 4,897 3,934
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (898) (6,422) 12,132
CASH AND CASH EQUIVALENTS, beginning of period 5,849 12,271 139
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,951 $ 5,849 $ 12,271
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 180 $ 28 $ 901
======== ======== ========
Income taxes $ 28 $ 1,259 $ 56
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
THE ARISTOTLE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 2000 and 1999
(dollars in thousands, except share and per share data)
(1) NATURE OF OPERATIONS
Organization
The Aristotle Corporation (Aristotle or the Company) is a holding company
which, through its operating subsidiary, Simulaids Inc. (Simulaids),
currently conducts business in the health and medical educational products
market. Simulaids' proprietary products include manikins and simulation
kits used for training in the CPR, emergency rescue and patient care
fields. Simulaids' products are sold throughout the United States and
internationally via distributors and catalogues to end-users such as fire
and emergency medical departments and nursing and medical schools.
Acquisition of Simulaids, Inc.
Effective April 30, 1999, pursuant to a Stock Purchase Agreement dated as
of April 30, 1999, Aristotle acquired all of the outstanding stock (the
Acquisition) of Simulaids, a privately-held New York corporation. As a
result, the Company's 1999 consolidated statement of operations includes
the results of operations of Simulaids since the date of the Acquisition.
The Acquisition purchase price of approximately $8,700, which includes
$300 of transaction and tax obligations resulting from the Acquisition,
was paid utilizing approximately $3,700 of cash and $5,000 of bank
financing. The fair value of assets acquired and liabilities assumed
amounted to $3,456 and $412, respectively. The excess cost over the fair
value of net assets acquired amounted to $5,656 and is reflected as
goodwill in the accompanying financial statements, net of amortization
based on a straight-line basis over 25 years.
The Acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities acquired based on their fair market values at the
date of the Acquisition. The following summarizes the final allocation of
the purchase price of Simulaids:
Cash $ 237
Accounts receivable 391
Inventories (Note 2) 1,192
Property, plant and equipment 1,486
Other assets 150
Goodwill 5,656
Accounts payable and accrued expenses (156)
Other liabilities (256)
-------
$ 8,700
=======
18
Operating results for the years ended June 30, 1999 and 1998 on a pro
forma basis, excluding the discontinued operations of The Strouse, Adler
Company, as though Simulaids was acquired as of July 1, 1998 are:
1999 1998
(Dollars in thousands (Dollars in thousands
except share data) except share data)
(unaudited) (unaudited)
Net sales $ 5,820 $ 5,527
Net income (loss) from continuing operations
available to common shareholders (422) 39
Net income (loss) from continuing operations
available to common shareholders
per basic share $ (.34) $ .03
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, increased interest expense and state income
taxes on the income of Simulaids.
Sale of The Strouse, Adler Company
Effective June 30, 1998, pursuant to an Asset Purchase Agreement dated as
of March 3, 1998 (the Purchase Agreement), Aristotle sold substantially
all of the assets and certain specified liabilities of its wholly-owned
subsidiary The Strouse, Adler Company (Strouse) to the Sara Lee
Corporation (Sara Lee) (the Strouse Sale). Strouse, which was Aristotle's
only operating subsidiary during fiscal 1998 and 1997, designed,
manufactured and marketed specialty bra and shapewear products. Aristotle
had originally acquired Strouse on April 11, 1994 for an aggregate
purchase price of $5,990 (the Strouse Acquisition).
The final consideration received by Aristotle from Sara Lee was $21,452.
Included in the $21,452 aggregate purchase price was a $5,000 payment as
consideration for Aristotle agreeing not to compete in the business of
manufacturing, marketing, distributing and selling women's intimate
apparel.
Aristotle recognized a net gain on the Strouse Sale of approximately
$1,784 calculated as follows:
Proceeds $ 21,452
Net book value of acquired assets and liabilities
related to and resulting from the operation of Strouse (18,397)
Estimated taxes and transaction costs (1,271)
--------
Gain on sale of discontinued operation $ 1,784
========
During the year ended June 30, 1999, Aristotle recorded adjustments
aggregating $911 which increased the gain on the sale of Strouse. The $911
adjustments resulted from a $48 charge related to a final purchase price
adjustment based on the net book value of net assets acquired by Sara Lee,
as defined and as provided for in the Purchase Agreement; a $41 charge
related to additional transaction costs in excess of management's original
estimate and $1,000 of additional gain resulting from the final
determination of the ultimate tax obligations resulting from the sale. As
a result of these final adjustments, the ultimate gain recognized by the
Company in connection with
19
the Strouse Sales was $1,784, of which a gain of $873 was recorded in
fiscal 1998 and a gain of $911 was recorded in fiscal 1999. The net cash
proceeds to Aristotle resulting from the Strouse Sale is as follows:
Gross proceeds $ 21,452
Payment of Strouse obligations not assumed by Sara Lee,
including payment of Strouse bank debt of $10,455 (10,546)
Payment of taxes and transaction costs (1,271)
--------
Net proceeds from sale of discontinued operation $ 9,635
========
The results of Strouse prior to the sale have been classified as
Discontinued Operations in the accompanying consolidated financial
statements. Revenues generated from Strouse operations were $26,645 for
the year ended June 30, 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Aristotle
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Revenue recognition
Revenue is recorded when goods are shipped to the Company's customers.
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
an original maturity of three months or less.
Marketable securities
The Company accounts for marketable securities under Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires that
marketable securities be carried at their fair values. The Company has
classified its marketable securities as "available-for-sale" in accordance
with SFAS No. 115. Accordingly, all unrealized holding gains and losses
are recorded as a separate component of stockholders' equity. The Company
utilized the specified identification method in determining cost and fair
value.
Inventories
Inventories were valued at the lower of cost, using the first-in,
first-out method (FIFO), or market.
20
At June 30, 2000 and 1999, inventories consisted of the following:
2000 1999
Raw materials $ 458 $ 296
Work-in-process 50 119
Finished goods 450 574
----- -----
958 989
Reserve (30) --
----- -----
$ 928 $ 989
===== =====
In connection with the Acquisition (see Note 1), and in accordance with
the purchase method of accounting, at the date of acquisition the
purchased inventories were valued at a fair value which was approximately
$259 greater than its historic cost. This purchase accounting adjustment
was expensed as the associated inventories were sold and is therefore
included in cost of sales in the accompanying 1999 consolidated statement
of operations.
Notes receivable
Notes receivable relates to loans from Aristotle to the former
stockholders of Strouse. The loans bore interest at 8.9% per annum. During
fiscal 2000 and 1999, certain former Strouse shareholders surrendered
4,606 and 616 shares of Series F, G & H Preferred Stock (see Note 6) in
exchange for the cancellation of $46 and $6, respectively, of loans. In
addition, during fiscal 2000 the remaining $56 of outstanding notes
receivable were repaid to the Company in cash.
Property, plant and equipment
Property, plant and equipment are recorded at cost and are depreciated or
amortized, using the straight-line method, over the estimated useful lives
of the assets, as follows:
Buildings 40
Machinery, equipment and other 5-7
Leasehold improvements various
At June 30, 2000 and 1999 property, plant and equipment consisted of the
following:
2000 1999
Land $ 220 $ 220
Buildings and improvements 835 845
Machinery, equipment and other 512 434
------- -------
1,567 1,499
Less accumulated depreciation and amortization (202) (21)
------- -------
$ 1,365 $ 1,478
======= =======
Expenditures for repairs and maintenance are charged against income as
incurred. Renewals and betterments are capitalized.
21
Goodwill
Goodwill resulted from the excess of cost over the fair value of assets
acquired in the Acquisition (see Note 1) and is being amortized on a
straight-line basis over 25 years.
Long-lived assets
The Company has adopted the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This statement requires a company to review long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Future
realization of the Company's property, plant and equipment and intangible
assets is dependent upon the ability of the Company to generate future
profitable operating results in accordance with its operating plans. Based
upon management's evaluations of expected future cash flows, no impairment
was indicated.
Earnings per common share
The Company has adopted the provisions of SFAS No. 128, "Earnings Per
Share". For the years ended June 30, 2000, 1999 and 1998, Basic and
Diluted Earnings Per Share are calculated as follows:
2000 1999 1998
Basic Earnings (Loss) Per Share:
Numerator
Income (loss) from continuing operations $ 674 $ (508) $ 91
Preferred dividends (109) (233) (126)
----------- ----------- -----------
Income (loss) from continuing operations
applicable to common shareholders 565 (741) (35)
Income from discontinued operation -- -- 624
Gain on sale of discontinued operation -- 911 873
----------- ----------- -----------
Net income applicable to common shareholders $ 565 $ 170 $ 1,462
=========== =========== ===========
Denominator
Weighted average shares outstanding 1,464,465 1,226,144 1,151,920
22
2000 1999 1998
Basic Earnings (Loss) Per Share Per Common
Shareholder
Continuing operations $ .39 $ (.60) $ (.03)
Discontinued operations -- -- .54
Gain on sale of discontinued operations -- .74 .75
------------- ----------- -------------
Net income $ .39 $ .14 $ 1.26
============= =========== =============
Diluted Earnings (Loss) per Share:
Numerator
Income (loss) from continuing operations $ 674 $ (508) $ 91
Preferred dividends -- (233) (126)
------------- ----------- -------------
Income (loss) from continuing operations
applicable to common shareholders 674 (741) (35)
Income from discontinued operations -- -- 624
Gain on sale of discontinued operations -- 911 873
------------- ----------- -------------
Net income applicable to common shareholders $ 674 $ 170 $ 1,462
============= =========== =============
Denominator
Weighted average shares outstanding 1,464,465 1,226,144 1,151,920
Options to purchase common stock 2,164 -- --
Convertible preferred stock 368,339 -- --
------------- ----------- -------------
1,834,968 1,226,144 1,151,920
============= =========== =============
Diluted Earnings (Loss) per Share per Common
Shareholder
Continuing operations $ .37 $ (.60) $ (.03)
Discontinued operations -- -- .54
Gain on sale of discontinued operations -- .74 .75
------------- ----------- -------------
Net income $ .37 $ .14 $ 1.26
============= =========== =============
23
For the years ended June 30, 1999 and 1998, options to purchase shares of
common stock and convertible preferred stock of the Company were
outstanding but were not included in the computation of diluted earnings
per share as such inclusion would be anti-dilutive or because the options'
exercise price was greater than the average market price of the common
shares. In addition, for the year ended June 30, 2000, there were an
additional 134,637 options exercisable whose exercise price exceeded the
average market price for the year and therefore are excluded in the
computation of diluted earnings per share.
New accounting standards
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS No. 133 - an Amendment
of SFAS No. 133" for the sole purpose of updating the effective date of
adoption of SFAS No. 133 to January 1, 2001. The Company does not utilize
derivative instruments, therefore SFAS 133 will have no impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 (SAB 101) Revenue Recognition, was issued. SAB
101 will require a company to defer revenue recognition on product
shipments until contractual terms of customer acceptance, including
inspection and installation requirements, are met. The Company will be
required to adopt this new accounting principle through a cumulative
charge to accumulated deficit in accordance with the provisions of APB
Opinion No. 20 no later than the fourth quarter of fiscal 2001. The
Company does not believe that the adoption of this standard will have a
material impact on its financial position or results of operations.
Other comprehensive income
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Accordingly, the Company has
included this presentation as a component of the statements of changes in
stockholders' equity. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). This statement requires
that financial statements report net unrealized investment gains (losses)
as a component of comprehensive income or loss.
Concentration of credit risk
At June 30, 2000, accounts receivable from two customers accounted for
28.3% of the outstanding balance. No other customers had balances in
excess of 10% of the outstanding balance. Sales to those two customers
accounted for 29.9% of net sales during the year ended June 30, 2000.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
24
(3) MARKETABLE SECURITIES
As of June 30, 2000, all of the Company's remaining outstanding preferred
stock was converted to common or put to the Company in accordance with the
applicable preferred stock agreements (see Note 6). Therefore, as of June
30, 2000, the Company was no longer required to escrow funds related to
the put rights of the former Strouse stockholders. As of June 30, 1999,
the Company had $709 in escrow related to those put rights which were
invested in cash equivalents, U.S. treasuries, and corporate bonds and
were classified as available-for-sale.
Investment securities available-for-sale and cash equivalents relating to
the above escrow arrangements are summarized as follows:
----------- June 30, 1999 ---------
Amortized Unrealized Gross Market
Cost Losses Value
Cash equivalents and interest receivable $ 157 $ -- $ 157
Corporate bonds, maturing in 1 to 5 years 573 (21) 552
----- ----- -----
$ 730 $ (21) $ 709
===== ===== =====
As of June 30, 2000 and 1999, the Company had funds invested in high-grade
corporate debentures which have been classified as available-for-sale. As
of June 30, 2000 and 1999, the fair value of these securities were $1,806
and $2,088, respectively, and the amortized cost associated with the
securities was $2,074 and $2,228, respectively. A total unrealized holding
loss, related to all investment securities, of $268 and $161 is recorded
as a component of stockholders' equity as of June 30, 2000 and 1999,
respectively.
(4) SHORT-TERM BORROWINGS
On May 3, 1999, the Company entered into a $5,000 revolving loan agreement
with a bank to finance the Simulaids Acquisition (see Note 1). Borrowings
under the revolving loan agreement bore interest at 7%. During fiscal
2000, the Company repaid $3,000 of the revolving loan and refinanced the
remaining $2,000 (see Note 5).
(5) LONG TERM DEBT
On September 27, 1999, Simulaids and Citizens Bank of Connecticut
(Citizens) entered into a $2.5 million Credit Agreement. The credit
agreement is comprised of three facilities (Credit Facilities):
(a) $1,200 Seven-Year Term Loan - Principal payments are scheduled on a
---------------------------
seven-year straight-line amortization. The interest rate is charged
at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180
day LIBOR rate at the Company's election.
(b) $800 Seven-Year Mortgage - Principal payments are scheduled on a
------------------------
fifteen-year straight-line amortization, with a balloon payment at
the seven-year maturity. The interest rate is charged at the rate of
LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at
the Company's election.
(c) $500 Two-Year Revolving Line of Credit - Borrowing availability
--------------------------------------
under the line of credit is determined by a borrowing base which is
equal to the sum of 80% of eligible accounts
25
receivable and 50% of eligible inventory, with a maximum borrowing
of $500. There are no scheduled principal payments. The interest
rate is charged at the rate of LIBOR plus 175 basis points on a 30,
60, 90 or 180 day LIBOR rate at the Company's election.
As of June 30, 2000, the balance outstanding on the term loan was $1,058
and the balance outstanding on the mortgage was $756. Future monthly
principal payments on the term loan and mortgage are $14 and $5,
respectively. As of June 30, 2000, the Company had not drawn on the line
of credit.
Repayments of long-term debt for each of the next five years and
thereafter are as follows:
Year Ending
June 30, Amount
2001 $ 225
2002 225
2003 225
2004 225
2005 225
Thereafter 689
--------
$ 1,814
========
Simulaids is required to maintain certain financial ratios, including
maintaining a debt service coverage ratio of 1.25 to 1, as defined, and
satisfy various other covenants in connection with the Credit Facilities.
As of June 30, 2000, Simulaids was in compliance with all financial ratios
and covenants.
The Credit Facilities are secured by a lien on all assets of Simulaids.
Aristotle has guaranteed the Credit Facilities with recourse under the
guaranty limited to $1,000, to be reduced by an amount equal to the
principal payments made on the term loan. As of June 30, 2000, recourse
under the Aristotle guaranty is limited to $813.
(6) PREFERRED STOCK
Series E
On January 2, 1998, the Company and Geneve Corporation (Geneve)
consummated a transaction which provided for the purchase of 489,131
shares of Aristotle's $.01 par value Series E Convertible Preferred Stock
(Series E) for an aggregate price of $2,250, or a per share price of
$4.60. The Series E earned dividends of 8% per annum and the holder of the
Series E was entitled to one vote per share. Pursuant to the Series E
redemption features, the Company was obligated to redeem all or part of
the Series E on January 1, 2002, at $4.60 per share plus accrued but
unpaid dividends. Contemporaneously with the purchase of the Series E,
Geneve purchased 30,000 shares of Aristotle common stock for an aggregate
purchase price of $135.
In February 2000, Geneve elected to convert all 489,131 shares of Series E
into 489,131 shares of common stock and a promissory note issued by the
Company in the amount of $330 due December 31, 2001 and bearing interest
at 8% per annum (Geneve Note). In June 2000, the Company repaid the $330
Geneve Note, plus accrued interest of approximately $6, by issuing 56,100
shares of common stock. The aggregate fair value of the 545,231 shares of
common stock was less than the $2,250 carrying value of the Series E.
26
Series F, G & H
At June 30, 1999, the Company had 79,883 shares of Series F, G and H
Preferred Stock (Series F, G and H) outstanding. The Series F, G and H
were entitled to one vote per share with respect to matters other than the
election of directors and auditors. Through January 1, 1999 all holders of
Series F, G and H were entitled to dividends of 8.9% per annum and from
January 2, 1999 through January 1, 2000 the holders of 40,250 shares of
Series F, G and H were entitled to dividends of 8.9% per annum.
Pursuant to the Series F, G and H redemption features, the holders could
require Aristotle to immediately repurchase the shares at $10 per share
(the Put Right). As a result of the Put Right, Aristotle had been required
to escrow certain funds (see Note 3) and at June 30, 1999, $709 was held
in escrow resulting from this requirement. If the holder of the Series F,
G and H elected not to redeem this preferred stock they could elect to
convert each share into 1.667 shares of Aristotle common stock, subject to
adjustment as defined.
During fiscal 2000, a holder of the Series H exercised his right to put
13,617 shares, with an aggregate value of $136, back to the Company in
exchange for $90 in cash and the cancellation of a loan from the Company
to him in the amount of $46. The remaining 66,266 shares of Series F, G
and H were acquired by Geneve directly from the Series F, G and H
shareholders and were subsequently converted into 110,441 shares of common
stock at the original 1.667 conversion rate.
(7) STOCKHOLDERS' EQUITY
The Company had the following common and treasury stock issued and
outstanding at June 30, 2000, 1999 and 1998:
Common Treasury
Stock Stock
Issued, June 30, 1997 1,105,801 7,287
Issuance of common stock 30,000 --
Conversion of ASI common into Aristotle common 33,424 --
Issuance of common stock to directors 39,802 --
--------- ------
Issued, June 30, 1998 1,209,027 7,287
Exercise of options 32,322 (7,178)
Fractional shares (622) --
Purchase of treasury stock -- 7,500
--------- ------
Issued, June 30, 1999 1,240,727 7,609
Purchase of treasury stock -- 11,900
Issuance of stock 8,214 (1,675)
Conversion of Series E, F, G & H preferred stock 599,572 --
Issuance of shares in repayment of note 56,100 --
--------- ------
Issued, June 30, 2000 1,904,613 17,834
========= ======
Aristotle common shares reserved for future issuance consist of the
following:
27
2000 1999
Conversion of Series E -- 489,131
Conversion of Series F, G and H Preferred Stock -- 133,137
Exercise of options issued to Former Strouse Stockholders (Note 9) 35,208 35,208
Exercise of stock options granted under the Plan (Note 9) 130,429 118,429
Exercise of stock options granted outside of the Plan (Note 9) 20,000 20,000
------- -------
Total 185,637 796,431
======= =======
(8) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 utilizes the
liability method and deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax
basis of assets and liabilities given the provisions of enacted tax laws.
At June 30, 2000 and 1999, the principal components of deferred tax
assets, liabilities and the valuation allowance were as follows:
---------------- 2000 ----------------
Current Asset Long-term Asset
(Liability) (Liability)
Federal net operating loss carryforwards $ - $ 17,505
State of Connecticut net operating loss carryforwards - 120
----------- -----------
- 17,625
Valuation allowance - (17,625)
----------- -----------
$ - $ -
=========== ===========
---------------- 1999 ----------------
Current Asset Long-term Asset
(Liability) (Liability)
Federal net operating loss carryforwards $ - $ 17,600
State of Connecticut net operating loss carryforwards - 100
----------- -----------
- 17,700
Valuation allowance - (17,700)
----------- -----------
$ - $ -
=========== ===========
A valuation allowance has been recorded for the deferred tax assets as a
result of uncertainties regarding the realization of the asset, including
the lack of profitability to date and the variability of operating
results.
28
Provision for (benefits from) income taxes are comprised of the following
for the years ended June 30, 2000, 1999 and 1998:
2000 1999 1998
Current:
Federal $ -- $ -- $ (1,199)
State 31 89 17
-------- -------- ---------
$ 31 $ 89 $ (1,182)
======== ======== ==========
The 1998 federal tax benefit relates to a tax refund of $1,919 resulting
from a tax loss carryback claim related to its 1996 tax year. In
connection therewith, the Company recorded an income tax benefit of
$1,199, which is net of a $720 reserve which is included in the
accompanying consolidated balance sheets. In addition, upon receipt of
such refund the Company was obligated to pay $480 as a result of a
contingent fee arrangement entered into in connection with this income tax
refund claim. The state tax provisions relate principally to minimum state
and franchise taxes.
At June 30, 2000, without giving consideration to the 1992 carryback claim
(see below), the Company had $50,600 of federal net operating loss
carryforwards which expire through 2011 and $1,600 of state net operating
loss carryforwards which expire through 2004.
Prior to October 2, 1992, Aristotle was the holding Company of First
Constitution Bank (the Bank). On October 2, 1992, the Federal Deposit
Insurance Company (FDIC) was appointed as receiver of the Bank and
Aristotle wrote off its investment in the Bank.
On its return for 1992 as originally filed, the Company made elections
under provisions set forth in regulations proposed by the Internal Revenue
Service in April 1992 as guidance for the application of Section 597 of
the Internal Revenue Code of 1986, as amended and under Section
1.1502.20(g)(1) of the Federal Income Tax Regulations to (i) disaffiliate
from the Bank for Federal income tax purposes and (ii) reattribute net
operating losses of the Bank in excess of $81,000 to the Company. The
application of the tax law with respect to the Company's election to
disaffiliate from the Bank and to reattribute the Bank's net operating
losses to the Company is not certain and, therefore, there is no assurance
that the Company could succeed to any of the Bank's net operating losses.
In September, 1996, the Company filed an amended Federal income tax return
for the year ending December 31, 1992 claiming a worthless stock deduction
of approximately $54,000 with respect to its stock in the Former Bank. As
a result of such amended returns, the Company has also claimed tax refunds
of approximately $10,000 resulting from the carryback of the Company's net
operating loss from 1992 to prior years. Pending final review by the
Internal Revenue Service, the Company has not recorded the $10,000 refund
claim in its consolidated financial statements. After consideration of
such carryback claim, the Company's remaining Federal net operating loss
carryforward related to the worthless stock deduction would be
approximately $30,800 and the Company's aggregate Federal net operating
loss deduction would be reduced from $50,600 to $28,600.
During 2000, the Company received from the Internal Revenue Service a
letter disallowing the two carryback claims filed on its amended 1992 and
1996 returns (see above). This disallowance at the field examination level
was not unexpected by the Company. The Company continues to believe the
claims have merit and, therefore, the Company is pursuing its case at the
Internal Revenue Service appellate level.
29
There is no assurance that the Company will be entitled to any net
operating loss carryforwards arising from, or with respect to, its
interest in the Bank. Even if the Company is entitled to any net operating
loss carryforward arising from, or with respect to, its interest in the
Bank, its ability to utilize such carryforward is dependent upon many
factors including: (1) the acquisition by the Company of profitable
investments, and (2) avoiding a fifty percent "ownership change" as
defined in Section 382 of the Internal Revenue Code. If there is an
"ownership change," the tax loss carryforwards available to the Company
would be significantly reduced or eliminated. At a special stockholders
meeting held on April 8, 1994, the stockholders voted to restrict certain
stockholder transfers.
(9) STOCK OPTION PLANS
During fiscal 1997, the Board of Directors adopted the 1997 Stock Option
Plan, (the 1997 Plan). The 1997 Plan provides for granting up to 150,000
options to purchase shares of Common Stock of the Company. The term of the
options and vesting requirements shall be for such period as the Stock
Option Committee designates.
The Company established a Stock Option Plan in 1986 (the 1986 Plan) which
provided for the granting of nonincentive and incentive stock options to
directors and officers of the Company for the purchase of Aristotle common
stock. Nonincentive stock options and certain incentive stock options
granted under the Plan are generally exercisable after one year but within
ten years as of the date of the grant. Additionally, certain nonincentive
stock options granted under the Plan may be accompanied by stock
appreciation rights ("SAR"). The granting of such stock options (SAR's)
entitles the holder to surrender an option and receive cash equal to the
increase in the fair market value of the common stock from the date of
grant to the date of exercise.
In addition to the options outstanding under the foregoing plans, the
Company has granted directors and employees of the Company stock options
to purchase 20,000 common stock shares exercisable through December 3,
2004. Also, in connection with the Strouse Acquisition, the Company
granted 35,208 options to purchase shares of Aristotle common stock.
In October 1995, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires the measurement of the fair
value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No.
25 and elect the disclosure-only alternative under SFAS 123.
The Company has computed the pro forma disclosures required under SFAS 123
for options granted in 2000, 1999 and 1998 using the Black-Scholes option
pricing model prescribed by SFAS 123. The weighted average assumptions
used as of June 30, 2000, 1999 and 1998 are as follows:
2000 1999 1998
Risk free interest rate 6.18% 4.76% 5.76%-5.83%
Expected dividend yield None None None
Expected lives 5 years 5 years 5 years
Expected volatility 62.3% 69.6% 77.2%-78.1%
Had compensation cost for the Company's stock option plans been determined
based on the fair value of the grant dates of awards under these plans
consistent with the method of SFAS 123, the
30
Company's income (loss) from continuing operations applicable to common
shareholders would have been adjusted to reflect the following pro forma
amounts as of June 30, 2000, 1999 and 1998:
2000 1999 1998
Income (loss) from continuing operations
applicable to common shareholders:
As reported $ 565 $ (741) $ (35)
Pro forma $ 529 $ (888) $ (135)
Pro forma income (loss) from continuing
operations:
Basic earnings (loss) per share:
As reported $ .39 $ (.60) $ (.03)
Pro forma $ .36 $ (.72) $ (.11)
Pro forma income (loss) from continuing
operations:
Diluted earnings (loss) per share:
As reported $ .37 $ (.60) $ (.03)
Pro forma $ .35 $ (.72) $ (.11)
In addition to the pro forma impact on continuing operations shown above,
options were granted to certain employees of Strouse during the year ended
June 30, 1998. The value of such options would have decreased net income
by $117.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to July 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans and other
options as of June 30, 2000, 1999 and 1998, and changes during the years
then ended, is presented below:
--------- 2000 --------- -------- 1999 --------- -------- 1998 ---------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 173,637 $ 6.42 173,137 $ 6.15 99,137 $ 15.24
Granted 12,000 5.05 40,000 5.88 83,000 4.80
Expired -- -- -- -- (9,000) --
Exercised -- -- (39,500) 4.66 -- --
-------- -------- --------- -------- -------- --------
Outstanding at end of year 185,637 $ 6.05 173,637 $ 6.42 173,137 $ 6.15
======== ========= ========
Options exercisable at year-end 164,637 $ 6.46 138,637 $ 6.70 143,137 $ 6.54
Weighted-average fair value of
options granted during the year $ 2.97 $ 3.61 $ 3.21
31
The following table summarizes information about stock options outstanding at
June 30, 2000:
------------ Options Outstanding ------------- ---- Options Exercisable ---
Weighted-
Average
Number Remaining Number
Exercise Outstanding at Contractual Exercise Exercisable
Prices 6/30/00 Life Price at 6/30/00
$4.63 30,000 88.5 4.63 30,000
4.64 1,000 112.5 4.64 --
5.00 20,210 83.5 5.00 10,210
5.30 2,395 45.5 5.30 2,395
5.40 20,000 49.0 5.40 20,000
5.45 24,998 45.5 5.45 24,998
5.63 15,000 88.0 5.63 15,000
5.88 40,000 100.5 5.88 30,000
5.99 1,000 100.5 5.99 1,000
10.00 27,769 35.0 10.00 27,769
17.50 958 10.5 17.50 958
23.75 2,307 7.0 23.75 2,307
------- ----- -------
4.63-23.75 185,637 6.46 164,637
======= =======
(10) RELATED PARTY TRANSACTIONS
During the years ended June 30, 2000, 1999 and 1998, the Company paid its
directors $175, $189 and $84, respectively, in compensation for services
as directors of the Company.
Simulaids has entered into a management services agreement with an
affiliate of a stockholder to provide Simulaids with strategic and
operational assistance. As part of this agreement, Simulaids agreed to pay
management fees of $100 per annum. During the years ended June 30, 2000
and 1999, the Company recorded approximately $100 and $16, respectively,
of expense as part of this agreement.
In the ordinary course of business, the Company sells its products to an
affiliate of a stockholder. Sales to this affiliate by the Company for the
year ended June 30, 2000 and 1999 were $350 and $92 respectively, and
accounts receivable from this affiliate at June 30, 2000 and 1999 were $14
and $11 respectively.
(11) COMMITMENTS AND CONTINGENCIES
401(k) Plan
Simulaids maintains a 401(k) Plan, the Simulaids, Inc. 401(k) Plan (the
Plan) for eligible employees. Employees are eligible to participate in the
Plan when they reach 21 years of age and have completed one year of
service. The Company's matching contribution is discretionary and can
change from year to year. For fiscal year 2000, the Company elected to
match 25% of employee contributions up to the first 6% of pay deferred.
Simulaids contributions to the Plan were $12, $12 and $10 in 2000, 1999
and 1998, respectively.
32
(12) QUARTERLY DATA - UNAUDITED (000's OMITTED EXCEPT FOR PER SHARE DATA)
------------------------2000-------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Net Sales $ 1,646 $ 1,687 $ 1,577 $1,803
Gross profit 671 708 776 783
Operating profit 151 118 148 125
Net income 156