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, 2001
[ ] 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 06-1165854
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
27 ELM STREET, NEW HAVEN, CONNECTICUT
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
06510
(ZIP CODE)
(203) 867-4090
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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. [X]
As of September 10, 2001, 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 $4,622,904, based on the closing price as
reported by the Nasdaq Stock Market. The number of shares outstanding of the
Registrant's common stock as of September 10, 2001 was approximately 1.9
million.
DOCUMENTS INCORPORATED BY REFERENCE
None
FORM 10-K CROSS REFERENCE INDEX
PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 4
Item 3. Legal Proceedings.............................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............................ 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................................ 5
Item 6. Selected Financial Data........................................................ 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Item 8. Financial Statements and Supplementary Data.................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . 62
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 62
Item 11. Executive Compensation......................................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 68
Item 13. Certain Relationships and Related Transactions................................. 69
PART IV
Item 14. Exhibits, Reports on Form 8-K.................................................. 70
PART I
ITEM 1. BUSINESS
GENERAL. The Aristotle Corporation ("Aristotle" or the "Company") is a
holding company which, through its subsidiaries, develops and manufactures
health and medical education teaching aids and computer based training products.
Simulaids, Inc. ("Simulaids"), a wholly-owned subsidiary, primarily
produces manikins and simulation kits used for training in CPR, emergency rescue
and patient care fields. Simulaids' products are sold throughout the United
States and internationally via distributors and catalogs to end users such as
fire and emergency medical departments and nursing and medical schools.
Safe Passage International, Inc. ("Safe Passage"), of which Aristotle
owns 80% of the outstanding stock, develops and licenses computer based training
products to government and industry clients. (Unless the context indicates
otherwise, the "Company" includes Aristotle, Simulaids and Safe Passage.)
BUSINESS STRATEGY. Aristotle's business strategy is to position the
Company in the fast growing for-profit education and training industry through
the development of Simulaids and Safe Passage and through acquisitions of
complementary companies. The following discussion pertains to the Subsidiaries
during the fiscal year ended June 30, 2001.
PRODUCTS. Simulaids designs, manufactures and markets health and
medical education teaching aids. Simulaids' proprietary products include
manikins and simulation kits used for training in CPR, emergency rescue and
patient care. For the most recent year, approximately 71% of Simulaids' total
net sales were attributable to manikins and the remaining 29% of total net sales
were attributable to simulation kits and other teaching aids. Safe Passage
primarily develops and distributes computer based training software focused
towards the aviation security and general security industries.
MARKETING AND DISTRIBUTION. Simulaids' products are marketed and
distributed throughout the United States and internationally via distributors
and catalogs to end users such as fire and emergency departments and nursing and
medical schools. The Simulaids' sales executives, who are full-time employees of
the Company, are responsible for marketing the Simulaids' products in the
continental United States and employ the services of an affiliate to market
internationally. Safe Passage's software products are marketed and distributed
throughout the United States and internationally through sales executives, who
are full-time employees of the Company, sales agents and manufacturers
representatives.
CUSTOMERS. Simulaids currently sells products under its brand names
primarily to distributors. One of Simulaids' customers, Armstrong Medical
Industries, individually accounted for approximately 20% of total net sales for
fiscal 2001. If this customer substantially reduced the amount of products it
purchased from Simulaids, Simulaids' financial condition could be adversely
affected. Safe Passage licenses software products under its brand names mainly
to security companies and U.S. and foreign government agencies. Two of Safe
Passage's customers accounted for approximately 50% of total net sales for
fiscal 2001. If any of these customers substantially reduced the amount of
products it purchased from Safe Passage, Safe Passage's financial condition
could be adversely affected.
1
MANUFACTURING AND RAW MATERIALS. Simulaids conducts virtually all
manufacturing operations at its facility located in Woodstock, New York. The
design and manufacture of the health and medical teaching aids are complex,
requiring specialized and sophisticated machinery and tools. Simulaids uses
principally plastics in the manufacture of its products. This raw material is
generally available from multiple sources and Simulaids currently obtains raw
materials from three sources. Simulaids purchases the majority of its raw
materials from sources within the United States. In the event that a supplier
would no longer be able to supply certain raw materials to Simulaids, Simulaids
would have access to substitute raw materials. However, there can be no
assurance that Simulaids would have immediate access to these substitute raw
materials on a timely basis. Any delays in obtaining raw materials could cause
Simulaids to experience delays in production.
Safe Passage does not manufacture products but is engaged in the design
and formation of complex computer based training products which are created in
its Rochester, New York facility. Some of its design work is dependent upon the
hiring of software consultants in the Rochester area. The availability of
software consultants can vary dependent upon the employment market in the
Rochester area.
INTELLECTUAL PROPERTY. Patents, trademarks, and trade secrets are the
principal protection sources for Simulaids' products. Simulaids owns two
federally registered patents, one for a disposable protective sleeve having a
pneumatic action and one for a cardiopulmonary resuscitation manikin with
antiseptic cleaning system. Simulaids considers all of the patents, licenses and
trademarks to be valuable property rights. Simulaids believes that the
protection afforded by these intellectual property rights and the law of trade
secrets is adequate protection for its products. However, it is possible for a
competitor to develop near imitations of Simulaids' products without violating
those rights.
Safe Passage protects its courseware by registering its copyrights with
the U.S. Patent Office. Currently Safe Passage holds 22 registered copyrights.
Additionally the Safe Passage name is a registered trademark in six countries
outside the U.S. Safe Passage also has a patent application pending with the
U.S. Patent Office. The patent application involves the capture and integration
of images for inclusion in various training applications. While Safe Passage
believes that the protection afforded by these intellectual property rights and
the law of trade secrets is adequate protection for its products, it is possible
for a customer or competitor to copy and duplicate courseware in countries where
international intellectual property rights are minimally enforced.
COMPETITION. The health and medical education teaching aids industry is
highly competitive. Simulaids' products compete for customers with numerous
manufacturers of well-known brands of teaching products. The principal
competitive factors in the health and medical education teaching aids markets
are quality, price, and design of products, engineering and customer service.
Some of Simulaids' competitors have greater financial and other resources and
are, therefore, able to expend more resources and effort than Simulaids in areas
such as marketing and product development.
The technology-based training industry is diverse and generally highly
competitive. Safe Passage products compete primarily in the aviation security
and general security (protection) markets. Within these market sectors, Safe
Passage has two principal competitors. One Safe Passage competitor has greater
financial resources and is, therefore, able to expend more resources and effort
than Safe Passage in areas such as marketing and product development.
2
EMPLOYEES. As of June 30, 2001, the Company employed a total of 82
full-time and 2 part-time, non-union employees. Simulaids employed 64 full-time
and 2 part-time, non-union employees. Safe Passage employed 15 full-time,
non-union employees. Aristotle employed 3 full-time, non-union employees.
BANK FINANCING. On September 27, 1999, Simulaids and Citizens Bank of
Connecticut ("Citizens") entered into a $2.5 million Credit Agreement. The
credit agreement was comprised of three facilities ("Credit Facilities"):
(Amounts in Thousands)
(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 Simulaids' 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 Simulaids' election.
(c) $500 TWO-YEAR REVOLVING LINE OF CREDIT - Borrowing availability
under the line of credit is determined by a borrowing base that is
equal to the sum of 80% of eligible accounts 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 Simulaids' election.
As of June 30, 2001, the balance outstanding on the term loan was $86
and the balance outstanding on the mortgage was $702. Future monthly principal
payments on the term loan and mortgage are $14 and $5, respectively. As of June
30, 2001, Simulaids had not drawn on the line of credit. Subsequent to year-end,
Simulaids elected not to extend its line of credit with Citizens.
BACKGROUND REGARDING ARISTOTLE. Aristotle was organized in 1986 and is
chartered in the State of Delaware. Aristotle is the former holding company of
First Constitution Bank (the "Bank"), which was initially Aristotle's only
subsidiary and which, on October 2, 1992, was seized by the FDIC. On April 14,
1993, Aristotle changed its name from First Constitution Financial Corporation
to "The Aristotle Corporation."
On April 11, 1994, Aristotle acquired 97% of The Strouse, Adler Company
("Strouse") through its subsidiary, Aristotle Sub. Inc. ("ASI") pursuant to the
terms of a Capital Contribution Agreement and certain other agreements (the
"Strouse Acquisition"). As a result of the Strouse Acquisition, Aristotle owned
approximately 97% of the issued and outstanding common stock of ASI, which in
turn owned all of the outstanding capital stock of Strouse. In May 1994,
Aristotle effectuated a one for ten reverse stock split. On January 2, 1998, ASI
was merged into Aristotle (the "ASI Merger") and, accordingly, Strouse became a
wholly-owned subsidiary of Aristotle. On June 30, 1998, Aristotle sold
substantially all the assets of Strouse, which subsequently changed its name to
S-A Subsidiary, Inc. ("S-A Subsidiary").
On April 30, 1999, Aristotle acquired all the outstanding stock of
Simulaids. On September 14, 2000, Aristotle acquired 80% of the outstanding
stock of Safe Passage.
3
ITEM 2. PROPERTIES
Aristotle's executive office occupies a 1,500 square foot office in New
Haven, Connecticut that is leased from 27 Elm Street, LLC for rent of
approximately $10.18 per square foot. Simulaids' office is located at 12 Dixon
Avenue, Woodstock, New York and is comprised of two buildings totaling 72,800
square feet. Both buildings are owned by Simulaids and constitute office and
manufacturing space. Safe Passage's 6,700 square foot office is located at 333
Metro Park, Rochester, New York which is leased from Metro Business Complex for
rent of approximately $10.70 per square foot.
ITEM 3. LEGAL PROCEEDINGS
Aristotle is not a party to any material legal proceedings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Income Taxes" and Note 7 - "Income Taxes" to the Consolidated
Financial Statements with regard to the status of the Aristotle's claims for tax
refunds from the Internal Revenue Service.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
June 30, 2001.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Aristotle's Common Stock is listed for trading on the NASDAQ SmallCap
Market under the symbol "ARTL." The table below sets forth the high and low sale
prices per share of Common Stock during the fiscal quarters indicated.
MARKET PRICE $
--------------
HIGH LOW
------ -----
FISCAL YEAR ENDED JUNE 30, 2001:
June 30......................... 9.000 5.510
March 31......................... 6.625 5.250
December 31...................... 7.625 5.000
September 30..................... 7.250 4.875
FISCAL YEAR ENDED JUNE 30, 2000:
June 30.......................... 9.625 3.500
March 31......................... 5.438 3.000
December 31...................... 5.500 3.750
September 30..................... 6.500 5.000
As of September 6, 2001, there were approximately 2,300 stockholders of
record and, according to the Company's estimates, 1,600 additional beneficial
stockholders. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and Note 1 of the Notes to Consolidated
Financial Statements.
The Company has not paid any cash dividends on its Common Stock since
its inception and does not intend to pay any cash dividends on its Common Stock
in the foreseeable future.
5
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 Aristotle
and Strouse, (now known as S-A Subsidiary) on a consolidated basis for the
fiscal years ended June 30, 1997 and 1998 and also includes Simulaids for the
fiscal years ended June 30, 1999, 2000 and 2001, and Safe Passage for the year
ended June 30, 2001. Aristotle formed ASI in 1993 and acquired Strouse (the
"Strouse Acquisition") in 1994. All references in the following discussion to
the "Company" include Aristotle, S-A Subsidiary, ASI, Simulaids and Safe
Passage. 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.
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales................................... $ - $ - $ 966 $ 6,887 $ 8,147
Costs and expenses:
Costs of goods sold.................. - - 789 3,949 4,176
Selling, general and administrative.. 649 685 1,250 2,168 3,507
Goodwill amortization................ - - 39 228 428
Nonrecurring tax claim contingency fee - 480 - - -
-------- -------- -------- -------- --------
Operating income (loss)..................... (649) (1,165) (1,112) 542 36
Other income (expense):
Investment and interest income............ 146 151 725 337 354
Interest expense.......................... (9) (5) (32) (174) (115)
Equity loss in unconsolidated subsidiary - - - - (14)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and minority interest. (512) (1,019) (419) 705 261
Provision for (Benefit from) income
taxes (1)............................... (32) 1,182 (89) (31) (79)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before minority
interest.................................. (544) 163 (508) 674 182
Minority interest........................... (175) (72) - - 36
-------- -------- -------- -------- --------
Income (loss) from continuing operations.... (719) 91 (508) 674 218
Discontinued operations:
Income from operations of
Strouse................................. 732 624 - - -
Gain on sale of Strouse................... - 873 911 - -
-------- -------- -------- -------- --------
Net income ................................. 13 1,588 403 674 218
Preferred dividends......................... - 126 233 109 -
-------- -------- -------- -------- --------
Net income applicable to common shareholders $ 13 $ 1,462 $ 170 $ 565 $ 218
======== ======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations..................... $ (0.65) $ (0.03) $ (0.60) $ .37 $ .11
Discontinued operations................... 0.66 0.54 - - -
Gain on sale of discontinued operations... - 0.75 0.74 - -
-------- -------- -------- -------- --------
Net income................................ $ 0.01 $ 1.26 $ 0.14 $ .37 $ .11
======== ======== ======== ======== ========
Weighted average shares .................. 1,100,700 1,151,920 1,226,144 1,834,968 1,921,560
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................ $ 20,381 $ 14,582 $ 18,485 $ 15,211 $ 14,908
Stockholders' equity........................ 6,511 8,455 8,608 11,947 12,368
Long-term debt.............................. 1,670 - 111 1,672 702
(1) Income tax benefit for the year ended June 30, 1998 includes a tax refund
received resulting from a tax loss carryback claim.
6
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, 1998 and June 30, 1998,
1999, 2000, and 2001. The selected financial data for the fiscal years ended
June 30, 1998 and 1999 have not been audited. 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 YEAR ENDED FISCAL YEARS ENDED JUNE 30,
DECEMBER 31, ---------------------------------------------
------------
(UNAUDITED)
1998 1998 1999 2000 2001
---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 5,860 $ 5,527 $ 5,944 $ 6,887 $ 7,595
Costs and expenses:
Costs of goods sold.................... 3,266 3,121 3,381 3,949 4,153
Selling, general and administrative.... 1,433 1,418 1,486 1,502 1,651
Goodwill amortization.................. - - 39 228 228
------- ------- ------- ------- -------
Operating income...................... 1,161 988 1,038 1,208 1,563
Other income (expense):
Interest and other income-net............. 27 40 12 13 38
Interest expense ......................... (11) (13) (12) (165) (113)
------- ------- ------- ------- -------
Income from continuing operations
before income taxes ...................... 1,177 1,015 1,038 1,056 1,488
Provision for income taxes ................. (14) (9) (101) (492) (673)
------- ------- ------- ------- -------
Net income ............................ $ 1,163 $ 1,006 $ 937 $ 564 $ 815
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................ $ 3,213 $ 3,139 $ 8,743 $ 9,208 $ 8,388
Stockholders' equity........................ 3,081 2,871 8,350 6,885 7,079
Long-term debt.............................. $ - $ 96 $ 111 1,672 702
-----------------------
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.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS)
GENERAL
This discussion and analysis of financial condition and results of
operations reviews the results of operations of the Company, on a consolidated
basis, for the fiscal year ended June 30, 2001, as compared to the fiscal year
ended June 30, 2000, and the fiscal year ended June 30, 2000, as compared to the
fiscal year ended June 30, 1999. 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 Form
10-K.
On April 30, 1999, Aristotle acquired all of the outstanding stock of
Simulaids. 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.
Aristotle ended the June 30, 2001 fiscal year with net sales of $8,147
and net income of $218 versus prior year net sales of $6,887, an increase of
$1,260 or 18.3%, and net income of $565, a decrease of $347 or 61.4%. Excluding
the impact of the amortization of goodwill, fiscal 2001 earnings would have been
$646 compared with $793, for fiscal 2000, a decrease of $147 or 18.5%.
During the fiscal year ended June 30, 2001, Simulaids continued to
perform well with net sales of $7,595 and net income of $815 versus prior year
net sales of $6,887, an increase of $708 or 10.3%, and net income of $564, an
increase of $251 or 44.5%. Excluding the impact of the amortization of goodwill,
the fiscal 2001 net income would have been $1,043 compared with $792, an
increase of $251 or 31.7%. The Simulaids' sales growth was experienced with both
domestic and export distributors and across most major product categories.
Safe Passage performed significantly below expectations with net
revenues of $552 and a net loss of $905 in fiscal 2001. Excluding the impact of
the amortization of goodwill, the total year loss would have been $705. Safe
Passage's negative fiscal 2001 operating results were a result of significantly
lower revenues than originally forecasted. In particular, actual revenues
derived from transactions with the Federal Aviation Administration ("FAA"), a
primary customer of Safe Passage, were negatively impacted by delays in the
awarding of certain FAA contracts. Safe Passage currently anticipates that
certain of such contracts will be awarded in the quarter ended December 31,
2001. If there are additional delays in the awarding of such contracts, or if
the amount of such contracts awarded to Safe Passage is significantly less than
anticipated, the fiscal 2002 operating results of Safe Passage could be
materially impacted and additional operating losses may be recognized.
RESULTS OF OPERATIONS OF THE COMPANY
FISCAL YEAR ENDED JUNE 30, 2001 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30,
2000
The Company's net sales of $8,147 for the fiscal year ended June 30,
2001 increased 18.3% or $1,260 as compared to net sales of $6,887 for the fiscal
year ended June 30, 2000. The increase in revenues principally reflect revenue
growth at Simulaids of $708, which experienced increases with both domestic and
export distributors and increased revenues across most major product categories.
In addition, during the fiscal year 2001, the acquisition of Safe Passage
resulted in additional revenues of $552.
8
Gross profit for the fiscal year ended June 30, 2001 of $3,971
increased 35.2% or $1,033 versus gross profit for the prior fiscal year of
$2,938. The increase in gross profit reflected higher sales and improved plant
efficiency for Simulaids, which generated $504 of increased gross profit, and
nine months of gross profit of $529 for Safe Passage that was acquired in
September of 2000. In addition, the gross margin in fiscal 2001 improved from
42.7% in the prior year to 48.7% in the current fiscal year. This improvement
reflected improved manufacturing efficiency for Simulaids and high margins
generated by the Safe Passage business.
The Company's selling, product development, general and administrative
expenses for the fiscal year ended June 30, 2001 increased by 61.8% or $1,339 to
$3,507 compared to $2,168 for the prior fiscal year. The increase principally
reflected expenses of Safe Passage of $1,269, which included $499 of product
development costs, since the date of acquisition, commission expenses of $89
paid to an affiliate for sales to international customers and increased
advertising of $36, partially offset by decreased professional fees of $65.
Goodwill amortization of $428 for the current fiscal year increased by
$200, or 87.7%, as compared to fiscal 2000 goodwill amortization of $228. The
increase in goodwill amortization resulted from the acquisition of Safe Passage
in September 2000. Effective July 1, 2001, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead, SFAS 142 requires that
goodwill be evaluated at least annually for impairment by applying a fair value
based test and, if impairment occurs, the amount of impaired goodwill must be
written off immediately. The timing and amount, if any, of FAA contract awards
to Safe Passage, anticipated to be awarded in the quarter ended December 31,
2001, will be a significant consideration in assessing any potential Safe
Passage goodwill impairment during fiscal 2002.
Investment and interest income was $354 and $337 for the twelve months
ended June 30, 2001 and 2000, respectively. The increase in 2001 mainly reflects
higher returns on investment balances and gains on the sale of marketable
securities. The income for the twelve months ended June 30, 2001 and 2000 was
principally generated by short-term cash investments and corporate bonds.
Interest expense for the twelve months ended June 30, 2001 decreased to
$115 from $174 in the corresponding twelve months ended June 30, 2000. The
decrease reflected lower debt levels due to principal payments made during the
prior twelve months.
The equity loss in an unconsolidated subsidiary of $14 in the current
fiscal year represented the Company's 50% portion of the results of an on-line
continuing medical education joint venture with Quinnipiac University.
The income tax provision for the twelve months ended June 30, 2001 was
$79 compared to $31 for the twelve months ended June 30, 2000. The tax provision
primarily represents state taxes due to the utilization of federal net operating
loss carryforwards to offset federal taxable income.
There were no preferred dividends for the twelve months ended June 30,
2001 compared to $109 for the twelve months ended June 30, 2000. The decrease
was due to the conversion of all shares of Aristotle Preferred Stock into shares
of Common Stock from February 2000 through May 2000.
9
RESULTS OF OPERATIONS OF THE COMPANY
FISCAL YEAR ENDED JUNE 30, 2000 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30,
1999
The Company's net sales of $6,887 for the fiscal year ended June 30,
2000 increased by $5,921 as compared to net sales of $966 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 increased by $2,761
versus gross profit for the prior fiscal year of $177. 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 that
resulted in a $259 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, product development, general and administrative
expenses for the fiscal year ended June 30, 2000 increased by $918 to $2,168
compared to $1,250 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 increased by
$189 versus goodwill amortization for the prior fiscal year of $39. The increase
in goodwill 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 and $725 for the twelve months
ended June 30, 2000 and 1999, respectively. The decrease in fiscal year 2000
mainly reflects 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 from $32 in the corresponding twelve months ended June 30, 1999. The
increase reflected interest expense on the bank funds used in the acquisition of
Simulaids that 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 compared to $89 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 for the twelve months ended June 30, 2000
compared to $233 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
10
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 FISCAL YEAR ENDED JUNE 30,
1999
Gain on the sale of Strouse of $911 for the year ended June 30, 1999
reflects adjustments which 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, 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.
RESULTS OF OPERATIONS OF SIMULAIDS, ON A STAND ALONE BASIS
TWELVE MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THE TWELVE MONTHS ENDED JUNE
30, 2000
Simulaids' net sales for the twelve months ended June 30, 2001
increased 10.3% to $7,595, compared to net sales of $6,887 for the prior year.
The increase was primarily due to growth with both domestic and export
distributors and across most major product categories. Price increases initiated
during the year increased sales by $50.
Simulaids' gross profit for the twelve months ended June 30, 2001
increased 17.2% to $3,442 from $2,938 for the prior year, and the gross margin
percentage increased to 45.3% from 42.7%. The increase in gross profit and gross
margin was principally due to the sales increase and improved plant efficiency.
Operating expenses include selling, general and administrative and
product development expenses. Operating expenses for the twelve months ended
June 30, 2001 were $1,651 versus $1,502 for the twelve months ended June 30,
2000. The $149, or 9.9%, increase was principally a result of commission
expenses of $89 to an affiliate for sales to international customers and
increased advertising of $36.
Investment and interest income was $37 and $13 for the twelve months
ended June 30, 2001 and 2000, 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, 2001 decreased to
$113 from $165 in the prior year. The decrease reflected lower debt levels due
to principal payments made during the prior twelve months.
The provision for income taxes for the twelve months ended June 30,
2001 was $673 versus $492 for the prior year. Income taxes represent provisions
made pursuant to the tax sharing agreement with its parent, Aristotle. The
increase in the income tax provision reflects higher income in 2001 versus 2000.
11
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 15.9% to $6,887, compared to net sales of $5,944 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 from $2,563 for the prior year (a 14.6% increase), and the
gross margin percentage decreased to 42.7% from 43.1%. 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 versus $1,486 for the twelve months ended June 30,
1999. The $16, 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 twelve months ended June 30, 2000 of $228
increased by $189 versus goodwill amortization for the twelve months ended June
30, 1999 of $39. The increase in goodwill reflects twelve months of amortization
in the twelve months ended June 30, 2000 versus two months of amortization in
the prior year.
Investment and interest income was $13 and $12 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 from $12 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 versus $101 for the prior year. Income taxes represent provisions
made pursuant to the tax sharing agreement with its parent, Aristotle. The
increase in the income tax provision reflects twelve months with a tax sharing
agreement with its parent for the twelve months ended June 30, 2000 versus two
months with a tax sharing agreement with its parent and ten months as a "S"
Corporation in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, Aristotle had $4,149 in cash and cash equivalents
versus $4,951 at June 30, 2000, a decline of 16.2%. Cash consumed during the
twelve months ended June 30, 2001 was principally used to fund the Safe Passage
acquisition of $1,927 and to reduce debt by $1,149, partially offset by cash
provided by the sale of marketable securities of $1,173 and operating activities
of $1,368. The overall decrease in cash and cash equivalents of $802 is detailed
below.
The Company generated cash of $1,368 from operations during the fiscal
year ended June 30, 2001 and provided net cash of $1,757 from operations for the
fiscal year ended June 30, 2000. During fiscal 2001, the generation of cash from
operations was principally the result of earnings plus depreciation and
amortization of $881, increased accounts payable and accrued expenses of $146
and the receipt of tax refunds totaling $123. During fiscal 2000, the generation
of cash from operations was principally the result of earnings plus depreciation
and amortization of $1,100 and the receipt of tax refunds totaling $1,027.
12
The Company used $1,062 in investing activities for the fiscal year
ended June 30, 2001 and generated $910 from investing activities in the fiscal
year ended June 30, 2000. During fiscal 2001, the utilization of cash was
principally due to the acquisition of Safe Passage of $1,927, capital
expenditures of $297, and the net investment of $11 for the development of an
on-line continuing medical education program with Quinnipiac University,
partially offset by the sale of marketable securities of $1,173. During fiscal
2000, the generation of cash principally reflected the redemption of marketable
securities of $991.
Financing activities utilized cash of $1,125 for the fiscal year ended
June 30, 2001 and of $3,565 for the fiscal year ended June 30, 2000. Funds used
in fiscal 2001 primarily reflect the reduction of debt by $1,149. Funds used in
fiscal 2000 were primarily for the repayment of borrowings of $3,212, the
repurchase of shares of Aristotle Preferred Stock of $136 and the payment of
dividends on Aristotle Preferred Stock of $163.
Capital resources in the future are expected to be used for the
development of the Simulaids and Safe Passage businesses and to acquire
additional companies. The Company anticipates that there will be sufficient
financial resources to meet projected working capital and other cash
requirements at least for the next twelve months.
INCOME TAXES
At June 30, 2001, Aristotle had $49,500 of federal net operating loss
carryforwards, which expire through 2011, and $1,300 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 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 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 $25,300 and the Company's aggregate Federal net operating
loss carryforwards would be reduced from $49,500 to $27,500.
During 1997, the Company filed a carryback claim related to its 1996
tax year. In connection therewith, the Company received $1,919 for which the
Company recorded an income tax benefit of $1,199, which is net of a $720
reserve. 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.
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 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
13
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.
RECENT DEVELOPMENTS
Discussions between Geneve Corporation ("Geneve") and the Company are
continuing concerning a possible stock merger of the Company with Nasco
International, Inc. ("Nasco"), a large operating subsidiary of Geneve. Nasco is
a manufacturer and worldwide distributor of products primarily to the education
and health markets. Nasco is headquartered in Fort Atkinson, Wisconsin. There is
no assurance that a merger transaction will be consumated. Geneve, a privately
held entity, currently owns approximately 51% of Aristotle's Common Stock. Two
principals of Geneve are currently directors of Aristotle.
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.
14
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 as more fully
detailed below. 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 below and discussed throughout this
report.
RISKS RELATING TO ARISTOTLE'S AND ITS SUBSIDIARIES' BUSINESS, INDUSTRY, STRATEGY
AND OPERATIONS
INFLUENCE BY EXISTING STOCKHOLDERS. Geneve and certain of its
affiliates beneficially own approximately 51% of the issued and outstanding
capital stock of Aristotle. Geneve is subject to certain voting limitations
through January 1, 2003, including the obligation to exercise its voting rights
and privileges of those shares that exceed 30% of the then outstanding voting
securities for and against any proposal related to the election of directors or
the appointment of auditors in the same percentage as all other voting
securities in Aristotle were voted for and against such proposal in a
preliminary vote taken for this purpose. Geneve and its affiliates collectively
have the ability to determine the outcome of certain other corporate actions
requiring stockholder approval, including the merger of Aristotle with or into
another company, a sale of substantially all of Aristotle's assets and
amendments to Aristotle's Certificate of Incorporation.
MAINTENANCE OF PRESENT GROWTH. Aristotle's revenue growth rate in the
future may not approach the level attained in prior years. Operating expenses
are expected to increase from historical levels. Because of the fixed nature of
a significant portion of such expenses, coupled with the possibility of slower
revenue growth, operating margins may decrease from historical levels
DEPENDENCE ON KEY PERSONNEL. Aristotle provides oversight and minimal
operating support to its subsidiaries and limits its services principally to
supplying accounting and administration services to its subsidiaries. For this
reason, Aristotle has not needed the services of additional management beyond
its two executive officers. As Aristotle continues to grow, it may require the
services of additional executives.
The performance of Aristotle's subsidiaries is substantially dependent
on the continued services and performance of their senior management and other
key personnel, particularly John T. McNeff, Vice President of Simulaids, and
James S. Viscardi, President of Safe Passage. Neither Simulaids nor Safe Passage
maintains key man life insurance on its senior management or key personnel.
Aristotle's performance also depends upon its ability to continue to retain and
motivate other officers and key employees. The loss of the services of, and the
failure to promptly replace, any of executive officers or other key employees
could have a material adverse effect on the business, prospects, financial
condition and results of operations of either Simulaids or Safe Passage, as the
case may be. The future success of each subsidiary also depends on the
subsidiary's ability to continue to identify, attract, hire, train, retain and
motivate other highly skilled managerial and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that Aristotle or
its subsidiaries will be able to continue to successfully attract, integrate or
retain sufficiently qualified personnel. The failure to attract and retain the
necessary personnel could have a material adverse effect on the business,
prospects, financial condition and results of operations of each subsidiary and,
accordingly, Aristotle.
15
DEPENDENCE ON MAJOR CUSTOMERS Aristotle's revenues have been, and for a
substantial period of time in the future likely will be, largely derived from
the sale of its subsidiaries' products and services to a small number of major
customers. During the last two fiscal years, Simulaids had two major customers,
who accounted for approximately 40% of its sales. Similarly, Safe Passage had
one major customer over the last two years, the FAA, which accounted for
approximately 25% of its sales. Sales to the FAA in fiscal year 2001 declined by
72%. The FAA has delayed the award of new contracts for Safe Passage's
computer-based security training products.
No assurances can be given that such customers will continue to do
business with Simulaids and Safe Passage, respectively, or that the volume of
their orders for such products and services will increase or remain constant.
The loss of any major customer, or a significant reduction in the volume of its
orders for the products and services of, or such customer's inability to pay its
obligations to, the subsidiaries, will have a material adverse impact on the
operations of each subsidiary and, accordingly, Aristotle. In addition, if the
FAA does not award new contracts to Safe Passage, it could have a material
impact on the operating results of the Company, as well as having a negative
impact on the Company's assessment of any potential impairment of the goodwill
resulting from the Safe Passage acquisition.
COMPETITION. The market for the products and services of each of the
subsidiaries is constantly evolving and growing rapidly. Barriers to entry are
relatively insubstantial. Some of both Simulaids' and Safe Passage's existing
and potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources. Such competitors are able to commit operating
resources to product development and enhancement, engage in more thorough
marketing campaigns for their products and services, be more aggressive from a
pricing standpoint and make more attractive offers to potential employees and
partners. Furthermore, growing competition may result in reduced revenue, gross
margins or market share for the subsidiaries, any one of which could have a
material adverse effect on Aristotle's business and results of operations.
CHANGING TECHNOLOGY. Aristotle's success depends on the ability of
Simulaids and Safe Passage to enhance existing products, develop new products
and technologies that address the increasingly sophisticated and varied needs of
customers and its ability to respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. There can
be no assurance that Simulaids and Safe Passage will successfully develop,
license or acquire and implement new technologies or adapt its proprietary
technology and products to customer requirements or emerging industry standards.
If Aristotle's subsidiaries are unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, Aristotle's business, prospects, financial condition
and results of operations would be materially adversely affected.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. Each of Simulaids
and Safe Passage relies upon trade secrets, know-how, copyrights and continuing
technological innovations to develop and maintain its respective competitive
position. Simulaids and Safe Passage seek to protect such information, in part,
by confidentiality agreements with their corporate partners, collaborators,
employees and consultants. These agreements provide that all confidential
information developed or made known during the course of the individual's or
entity's relationship with Simulaids or Safe Passage is to be kept confidential
and not disclosed to third parties except in specific circumstances. Simulaids
and Safe Passage have endeavored to cause their respective employees to execute
Confidentiality and Inventions Agreements, which provide
16
that, to the extent permitted by applicable law, all inventions conceived by the
individual during the individual's employment are the exclusive property of the
respective company. There can be no assurance that these agreements will not be
breached, that there exists adequate remedies for any breach, or that the trade
secrets of Simulaids and Safe Passage will not otherwise become known or be
independently discovered by competitors. Further, there can be no assurance that
the subsidiaries will be able to protect their respective trade secrets and
copyrights, or that others will not independently develop substantially
equivalent proprietary information and techniques. Furthermore, the laws of some
of the countries that the subsidiaries compete in may not protect our
intellectual property rights to the same extent, as do the laws of the United
States.
PRODUCT LIABILITY. The manufacture and sale of training aids for
emergency, medical and rescue personnel by Simulaids entails an inherent risk of
product liability. Furthermore, as a provider of security service training, Safe
Passage could face potential liability claims in the event of any actions or
negligence of security personnel which could be linked to Safe Passage training
procedures. There can be no assurance that product liability insurance is
adequate to cover potential claims or that Simulaids or Safe Passage, as the
case may be, will be able to obtain product liability insurance on acceptable
terms in the future or that any product liability insurance subsequently
obtained will provide adequate coverage against all potential claims. A
successful claim brought against either Simulaids or Safe Passage in excess of
its insurance coverage, or any material claim for which insurance coverage was
denied or limited, could have material adverse effect on Simulaids' or Safe
Passage's business, results of operations, and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. International sales are
subject to certain risks not inherent in the domestic sales of Simulaids and
Safe Passage, including political and economic instability in foreign markets,
restrictive trade policies of foreign governments, local economic conditions in
foreign markets, potentially adverse tax consequences, difficulties or delays in
developing and supporting non-English language versions of certain products and
services and the burdens on customers of complying with a variety of applicable
laws. All of these factors may suppress demand for the services and products of
the subsidiaries. The impact of such factors on business is inherently
unpredictable. There can be no assurance that these factors will not have a
material adverse effect upon the subsidiaries' revenues from international sales
and, consequently, the business, prospects, financial condition and results of
operations.
NEW PRODUCT OFFERING. Safe Passage has recently begun the product
launch of a hosted Internet-based learning solution. Accordingly, Safe Passage
is in the initial phase of rolling out its new Web-based services and is subject
to certain risks inherent in launching new products and services. Safe Passage
has relatively limited experience with these Web-based products, which makes its
historical results of limited value in predicting the potential success of this
initiative. The ultimate success of this initiative will depend on Safe
Passage's ability to build-out and maintain its on-line learning infrastructure,
to market and sell the new Web-based solutions to existing and prospective
customers, to create a significant subscriber base for Web-based educational
programs, to host, operate and manage its destination site, and to attract and
retain key management and technical personnel. Sage Passage's decision to
develop, market and support a Web-based version of its software training
products is predicated on the assumption that the demand for such services will
be large enough to permit Safe Passage to operate profitably. There can be no
assurance that its assumption will be correct or that it will be able to
successfully compete as a provider of such Web-based service. If its assumption
is not accurate, or if it is unable to compete as a provider of Web-based
training services, Safe Passage's, and Aristotle's business, prospects,
financial condition and results of operations may be materially adversely
affected. Moreover, to the extent that Safe Passage is successful in its efforts
to enter into
17
agreements with customers for the purchase of its new Web-based solution, those
arrangements are expected to have accounting and operating consequences that
would be materially different from Safe Passage's traditional software licensing
arrangements.
RELIANCE ON KEY SUPPLIERS. Simulaids currently purchases several key
raw materials, including petroleum, used in its products from single or limited
sources of supply. Simulaids has no guaranteed supply arrangements for any of
these materials, which it generally purchases through purchase orders. As a
result, these suppliers could terminate the supply of these materials at any
time without penalty. Simulaids' failure to obtain these materials or other
single or limited-source materials could delay or reduce its product shipments,
which could result in lost orders, increased costs, and reduced control over
quality and delivery schedules. A failure to obtain these materials also could
require Simulaids to redesign its products. If a significant supplier became
unable or unwilling to continue to ship materials in required volumes, Simulaids
would have to identify and qualify an acceptable replacement. A delay or
reduction in shipments caused by a need to identify and qualify replacement
suppliers or a significant increase in Simulaids' need for material that cannot
be met on acceptable terms could cause customers to cancel orders and would harm
Simulaids' and accordingly Aristotle's business.
ABSENCE OF DIVIDENDS. Aristotle has not, in recent years, paid
dividends with respect to its Common Stock, and it is unlikely that Aristotle
will pay any dividends with respect to its Common Stock in the foreseeable
future.
ANTI-TAKEOVER PROVISIONS. Certain provisions of Aristotle's charter
documents, such as authorization of "blank check" preferred stock, restrictions
on certain transfers of Common Stock and election of a classified board of
directors to staggered three year terms, could have the effect of discouraging
certain attempts to acquire Aristotle or remove directors even if some of
Aristotle's stockholders deem such an attempt to be in Aristotle's and their
best interests. Management and the affiliates of Aristotle's may be deemed to
have effective control of Aristotle, which may give management and such
affiliates the ability to influence the election of directors and other
stockholder actions.
TAX REFUND CLAIM. In 1997, the Company received a refund in the amount
of $1.9 million for a net operating loss carryback claim related to its 1996 tax
year. The refund is currently being reviewed by the Internal Revenue Service.
The Company has recorded a cash asset, net of reserves, with regard to such
refund of $719,000. To the extent that any portion of the refund in excess of
the amount reserved is disallowed by the Internal Revenue Service, or the
Company enters into an agreement with the Internal Revenue Service to such
effect, the Company's cash position, net worth, and earnings would be adversely
affected.
18
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MATERIAL 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,
2001 are as follows:
Maturity less Maturity greater
than one year than one year
------------- -------------
Marketable securities
Cost value $ - $ 901
Weighted average return - 7.0%
Fair market value $ - $ 795
Short-term borrowings
Amount $ 169 $ 702
Weighted average interest rate 6.1% 6.1%
Fair market value $ 169 $ 702
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board FASB issued SFAS
No. 141, "Business Combinations" ("SFAS No. 141") which will eliminate the
pooling of interest method of accounting for acquisitions. SFAS No. 141 is
effective for all acquisitions initiated after June 30, 2001.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" to be effective for fiscal years beginning after December 15,
2001. The Company will adopt SFAS No. 142 on July 1, 2001. Under SFAS No. 142,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, SFAS No. 142 requires that goodwill be evaluated at least annually for
impairment by applying a fair-value-based test and, if impairment occurs, the
amount of impaired goodwill must be written off immediately. Upon the adoption
of SFAS No. 142, the Company will no longer record amortization of goodwill. For
the year ended June 30, 2001, the Company recorded $428 of goodwill
amortization. The Company is required to apply the initial fair value test by
December 31, 2001. The Company has not yet determined
19
whether the initial fair value test of the goodwill reflected in the
accompanying consolidated balance sheets will result in any impairment charges.
The Emerging Issues Task Force ("EITF") of the FASB reached a consensus
on EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" ("EITF
00-10"). EITF 00-10 requires that all amounts billed to a customer in a sales
transaction related to shipping and handling represent revenues earned for the
goods provided and should be classified as revenue. The Company adopted EITF
00-10 in the fourth quarter of fiscal 2001 and has reclassified approximately
$177, $174 and $19 to revenue for the years ended June 30, 2001, 2000 and 1999,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and its
subsidiaries, together with the related Notes to Consolidated Financial
Statements and the report of independent accountants; the Financial Statements
of Simulaids for the four months ended April 30, 1999, together with the related
Notes to Financial Statements and the report of independent accountants; the
Financial Statements of Simulaids for the years ended December 31, 1998, 1997,
and 1996, together with the related Notes to Financial Statements and the report
of independent accountants, are set forth below.
20
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2001 AND 2000
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Aristotle Corporation:
We have audited the accompanying consolidated balance sheets of The Aristotle
Corporation (a Delaware corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income and cash flows for each of the
three years ended June 30, 2001. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Aristotle Corporation and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States.
Hartford, Connecticut
August 31, 2001
22
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30, 2001 and 2000
(dollars in thousands, except for share data)
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 4,149 $ 4,951
Marketable securities, at market value 795 1,806
Accounts receivable 651 465
Inventories 854 928
Tax receivable - 123
Other current assets 121 128
-------------- -------------
Total current assets 6,570 8,401
-------------- -------------
Property, plant and equipment, net 1,547 1,365
-------------- -------------
Other assets:
Goodwill, net of accumulated amortization of $695 and $267 in 2001
and 2000, respectively 6,768 5,428
Other noncurrent assets 23 17
-------------- -------------
6,791 5,445
-------------- -------------
$ 14,908 $ 15,211
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 139 $ 225
Current maturities of capital lease obligations 30 28
Accounts payable 340 127
Accrued expenses 510 492
Accrued tax reserves 720 720
Deferred revenue 99 -
-------------- -------------
Total current liabilities 1,838 1,592
-------------- -------------
Long-term debt, net of current maturities 649 1,589
Capital lease obligations, net of current maturities 53 83
-------------- -------------
Total long-term liabilities 702 1,672
-------------- -------------
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 shares authorized;
1,904,613 shares issued in 2001 and 2000 19 19
Additional paid-in capital 163,324 163,324
Accumulated deficit (150,817) (151,035)
Treasury stock, at cost, 12,988 shares and 17,834 shares in
2001 and 2000, respectively (69) (93)
Foreign currency translation 17 -
Net unrealized investment losses (106) (268)
--------------- -------------
Total stockholders' equity 12,368 11,947
-------------- -------------
$ 14,908 $ 15,211
============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
23
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 2001, 2000 and 1999
(dollars in thousands, except per share data)
2001 2000 1999
Net sales $ 8,147 $ 6,887 $ 966
Cost of goods sold 4,176 3,949 789
----------- ----------- -----------
Gross profit 3,971 2,938 177
----------- ----------- -----------
Selling expenses 942 454 46
Product development expenses 560 58 8
General and administrative expenses 2,005 1,656 1,196
Goodwill amortization 428 228 39
----------- ----------- -----------
Operating income (loss) 36 542 (1,112)
----------- ----------- -----------
Other income (expense):
Investment and interest income 354 337 725
Interest expense (115) (174) (32)
Equity loss in unconsolidated subsidiary (14) - -
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interest 261 705 (419)
Provision for income taxes 79 31 89
----------- ----------- -----------
Income (loss) from continuing operations
before minority interest 182 674 (508)
Minority interest 36 - -
----------- ----------- -----------
Income (loss) from continuing operations 218 674 (508)
Discontinued operations:
Gain on sale of The Strouse, Adler Company - - 911
----------- ----------- -----------
Net income 218 674 403
Preferred dividends - 109 233
----------- ----------- -----------
Net income applicable to common shareholders $ 218 $ 565 $ 170
=========== =========== ===========
Basic earnings (loss) per common share:
Continuing operations $ 0.12 $ 0.39 $ (0.60)
Gain on sale of discontinued operations - - 0.74
----------- ----------- ------------
$ 0.12 $ 0.39 $ 0.14
========== ============ ============
Diluted earnings (loss) per common share:
Continuing operations $ 0.11 $ 0.37 $ (0.60)
Gain on sale of discontinued operations - - 0.74
----------- ----------- ------------
$ 0.11 $ 0.37 $ 0.14
========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
24
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the Years Ended June 30, 2001, 2000 and 1999
(dollars in thousands)
NET
UNREALIZED
ADDITIONAL INVESTMENT FOREIGN TOTAL
COMMON PAID-IN ACCUMULATED TREASURY GAINS CURRENCY STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL DEFICIT STOCK (LOSSES) TRANSLATION EQUITY INCOME
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) gain - - - - (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) gain - - - - (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
Issuance of common
stock to directors and
employees - - - 24 - - 24
Foreign currency
translation adjustment - - - - - 17 17 $ 17
Net unrealized
investment gain (loss) - - - - 162 - 162 162
Net income - - 218 - - - 218 218
---------
Total comprehensive
income $ 397
-------- --------- ----------- -------- ---------- ---------- ------------ =========
Balance, June 30, 2001 $ 19 $ 163,324 $ (150,817) $ (69) $ (106) $ 17 $ 12,368
======== ========= =========== ======== ========== ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
25
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2001, 2000 and 1999
(dollars in thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 218 $ 674 $ 403
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 663 426 59
Minority interest (36) - -
Non-cash deferred compensation 18 - -
Loss on disposal of property and equipment - 14 9
Gain from sale of discontinued operations - - (911)
Changes in assets and liabilities, net of business acquired:
Accounts receivable 98 (166) 92
Inventories 74 61 203
Tax receivable 123 1,027 (1,150)
Other assets 56 17 482
Accounts payable and accrued expenses 146 (296) 52
Deferred revenue 8 - -
-------------- ------------- -------------
Net cash provided by (used in) operating activities 1,368 1,757 (761)
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (297) (81) (17)
Redemption of marketable securities 1,173 991 -
Investment in unconsolidated subsidiary (11) - -
Purchase of Safe Passage, net of $16 of cash acquired (1,927) - -
Purchase of marketable securities - - (1,285)
Proceeds from disposal of discontinued operations - - 911
Accrued transaction costs - - (1,704)
Purchase of Simulaids, net of $237 of cash acquired - - (8,463)
-------------- ------------- -------------
Net cash provided by (used in) investing activities (1,062) 910 (10,558)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings - - 5,000
Repayment of short-term borrowings - (5,000) -
Proceeds from credit agreement - 2,000 -
Principle debt payments (1,121) (187) -
Repayment of capital lease obligations (28) (25) (4)
Repurchase of preferred stock - (136) (6)
Proceeds from exercise of stock options - - 157
Payment of dividends on preferred stock - (163) (233)
Issuance of treasury stock 24 - -
Purchase of treasury stock - (54) (17)
-------------- ------------- -------------
Net cash provided by (used in) financing activities (1,125) (3,565) 4,897
-------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES 17 - -
-------------- ------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (802) (898) (6,422)
CASH AND CASH EQUIVALENTS, beginning of period 4,951 5,849 12,271
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 4,149 $ 4,951 $ 5,849
============== ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 115 $ 180 $ 28
============== ============= =============
Income taxes $ 131 $ 28 $ 1,259
============== ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
26
THE ARISTOTLE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001 and 2000
(Amounts 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 wholly-owned subsidiaries, Simulaids, Inc.
("Simulaids") and Safe Passage International Inc. ("Safe Passage"),
currently conducts business in two segments, the health and medical
educational products market and the computer-based training market.
Simulaids' primary products include manikins and simulation kits used for
training in CPR, emergency rescue and patient care fields. Simulaids'
products are sold throughout the United States and internationally via
distributors and catalogs to end users such as fire and emergency medical
departments and nursing and medical schools. Safe Passage, which operates
in Rochester, New York and England (through a wholly owned subsidiary
Safe Passage Limited), develops and licenses computer-based training
products for the international security and transportation industries.
ACQUISITION OF SAFE PASSAGE INTERNATIONAL, INC.
On September 14, 2000, Aristotle acquired 80% of the outstanding shares
of common stock (the "Safe Passage Acquisition") of Safe Passage, 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"). Accordingly, the Company's
consolidated statement of operations includes the results of operations
of Safe Passage since the date of the Safe Passage Acquisition.
The Safe Passage Acquisition purchase price of approximately $1,943,
which included approximately $318 of transaction costs, was paid
utilizing cash on hand. The fair value of assets acquired and liabilities
assumed amounted to $462 and $268, respectively. The excess of the
purchase price over the fair value of the net assets acquired amounted to
$1,749 and is reflected as goodwill in the accompanying financial
statements, net of amortization based on a straight-line basis over seven
years (see Note 2). In addition, the Company and the Sellers entered into
an agreement whereby the Company may be required to pay to the Sellers an
additional consideration up to a maximum of $2.3 million based on the
operating performance of Safe Passage during calendar 2000 and 2001. If
and when such additional consideration is earned, the payments will be
recognized as additional purchase price consideration and goodwill will
be adjusted accordingly. As of June 30, 2001, no additional consideration
was due to the Sellers.
The Safe Passage 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 allocation of the purchase price of Safe Passage:
Cash $ 16
Accounts receivable 284
Property and equipment 118
Other assets 44
Goodwill 1,749
Accounts payable and accrued expenses (169)
Other liabilities (99)
---------
$ 1,943
=========
27
Operating results for the year ended June 30, 2001 on a pro forma basis,
as though Safe Passage was acquired as of July 1, 2000, are as follows:
2001
(UNAUDITED)
Net sales $ 8,834
Net income applicable to common shareholders $ 404
Basic earnings per common share $ 0.21
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 Safe Passage Acquisition been
consummated as of the above date, nor are they necessarily indicative of
future operating results. The pro forma adjustments include amortization
of intangibles and decreased interest income.
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
"Simulaids Acquisition") of Simulaids, a privately-held New York
corporation. As a result, the Company's consolidated statements of
operations include the results of operations of Simulaids since the date
of the Simulaids Acquisition.
The Simulaids Acquisition purchase price of approximately $8,700, which
included $300 of transaction costs and tax obligations resulting from the
Simulaids 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 $3,419 and $412, respectively. The excess
cost over the fair value of net assets acquired amounted to $5,693 and is
reflected as goodwill in the accompanying financial statements, net of
amortization based on a straight-line basis over 25 years (see Note 2).
The Simulaids 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 Simulaids 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 113
Goodwill 5,693
Accounts payable and accrued expenses (156)
Other liabilities (256)
--------
$ 8,700
========
28
Operating results for the year ended June 30, 1999 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
(UNAUDITED)
Net sales $ 5,820
Net income (loss) from continuing operations available
to common shareholders $ (422)
Net income (loss) from continuing operations available
to common shareholders per basic share $ (0.34)
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 Simulaids 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, 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"). Strouse, which was Aristotle's only operating subsidiary during
fiscal 1998, designed, manufactured and marketed specialty bra and
shapewear products.
The final consideration received by Aristotle from Sara Lee was $21,452,
and the net cash proceeds from the sale were approximately $9,600. The
ultimate gain recognized by the Company in connection with the sale of
Strouse was $1,784, of which a gain of $873 was recorded in fiscal 1998
and a gain of $911 was recorded in fiscal 1999.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Aristotle
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Simulaids revenue is recorded when goods are shipped to the Company's
customers.
Safe Passage generates revenues from licensing the rights to use its
software products to end users. The Company also generates revenues from
sales of software maintenance contracts. Revenue from software license
agreements is recognized upon delivery of the software to the customer if
there are no significant post delivery obligations and collection is
probable. If a significant vendor obligation remains, then revenue is
recognized under the percentage of completion method of accounting,
whereby revenues and profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs
to complete. The cumulative impact of any revision in the estimate of the
cost to complete is reflected in the period in which the changes become
known. Software maintenance fees are recognized over the term of the
maintenance period. Advance billings of license and software maintenance
contracts are reflected as deferred revenue in the accompanying
consolidated balance sheet
29
FOREIGN CURRENCY TRANSLATION
The operations and cash flows of Safe Passage Limited are translated at
average exchange rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. Translation adjustments are
included as a separate component of comprehensive loss within
stockholders' equity.
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" ("SFAS No. 115"). 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 specific 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.
At June 30, 2001 and 2000, inventories consisted of the following:
2001 2000
Raw materials $ 413 $ 458
Work-in-process 37 50
Finished goods 414 450
---------- ----------
864 958
Reserve (10) (30)
---------- ----------
$ 854 $ 928
========== ==========
In connection with the Simulaids 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 was therefore included in cost of sales in the accompanying 1999
consolidated statement of operations.
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
30
At June 30, 2001 and 2000, property, plant and equipment consisted of the
following:
2001 2000
Land $ 220 $ 220
Buildings and improvements 896 835
Machinery, equipment and other 866 512
---------- ----------
1,982 1,567
Less accumulated depreciation and amortization (435) (202)
---------- ----------
$ 1,547 $ 1,365
========== ==========
Expenditures for repairs and maintenance are charged against income as
incurred. Renewals and betterments are capitalized.
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, 2001, 2000 and 1999, Basic and
Diluted Earnings Per Share are calculated as follows:
2001 2000 1999
BASIC EARNINGS PER SHARE:
Numerator
Income (loss) from continuing operations $ 218 $ 674 $ (508)
Preferred dividends - (109) (233)
----------- ---------- -----------
Income (loss) from continuing operations
applicable to common shareholders 218 565 (741)
Gain on sale of discontinued operations - - 911
----------- ---------- -----------
Net income applicable to common shareholders $ 218 $ 565 $ 170
=========== ========== ===========
31
2001 2000 1999
Denominator
Weighted average shares outstanding 1,888,501 1,464,465 1,226,144
Basic Earnings Per Share
Continuing operations $ 0.12 $ 0.39 $ (0.60)
Gain on sale of discontinued operations - - 0.74
----------- ---------- -----------
Net income $ 0.12 $ 0.39 $ 0.14
=========== ========== ===========
DILUTED EARNINGS PER SHARE:
Numerator
Income (loss) from continuing operations $ 218 $ 674 $ (508)
Preferred dividends - - (233)
----------- ---------- -----------
Income (loss) from continuing operations
applicable to common shareholders 218 674 (741)
Gain on sale of discontinued operations - - 911
----------- ---------- -----------
Net income applicable to common shareholders $ 218 $ 674 $ 170
=========== ========== ===========
Denominator
Weighted average shares outstanding 1,888,501 1,464,465 1,226,144
Options to purchase common stock 33,059 2,164 -
Convertible preferred stock - 368,339 -
----------- ---------- -----------
1,921,560 1,834,968 1,226,144
=========== ========== ===========
DILUTED EARNINGS PER SHARE
Continuing operations $ 0.11 $ 0.37 $ (0.60)
Gain on sale of discontinued operations - - 0.74
----------- --------- -----------
Net income $ 0.11 $ 0.37 $ 0.14
=========== ========== ===========
For the years ended June 30, 2001 and 2000, respectively, there were an
additional 27,769 and 134,637 options exercisable (prior to the
application of the treasury stock method) whose exercise price exceeded
the average market price for the year and were therefore excluded in the
computation of diluted earnings per share. In addition, for the year
ended June 30, 1999, 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.
32
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 and comprehensive income. 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) and foreign currency translation adjustments as
a component of comprehensive income or loss.
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
During the year, the Company invested $25 for a 50% interest in the
capital stock of QU Online Continuing Medical Education, LLC ("QUCME"), a
joint venture formed with Quinnipiac University for the purpose of
developing on-line continuing medical education programs. The investment
in QUCME's capital stock is recorded under the equity method of
accounting. As of June 30, 2001, the initial investment of $25 was
reduced to $11 to reflect the Company's share of QUCME's losses.
Safe Passage owns a 50% interest in CerTrac, Inc., a joint venture
established to develop and market computer-based training programs
related to alcohol training and awareness. Safe Passage has not been
required to make any initial investments in the joint venture but has
subsequently performed certain services for CerTrac (see Note 9).
CONCENTRATION OF CREDIT RISK
At June 30, 2001 and 2000, accounts receivable from two customers
accounted for 22.4% and 28.3% of the outstanding balance, respectively.
No other customers had balances in excess of 10% of the outstanding
balance. Sales to those two customers accounted for 39.7% and 29.9% of
net sales, respectively during the years ended June 30, 2001 and 2000.
GOODWILL
Goodwill resulting from the excess of cost over the fair value of net
assets acquired in the acquisitions of Simulaids and Safe Passage (see
Note 1) is being amortized on a straight-line basis over 25 years and 7
years, respectively.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS No. 141") which will
eliminate the pooling of interest method of accounting for acquisitions.
SFAS No. 141 is effective for all acquisitions initiated after June 30,
2001.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") to be effective for fiscal years
beginning after December 15, 2001. The Company will adopt SFAS No. 142 on
July 1, 2001. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead, SFAS No. 142
requires that goodwill be evaluated at least annually for impairment by
applying a fair-value-based test and, if impairment occurs, the amount of
impaired goodwill must be written off immediately. Upon the adoption of
SFAS No. 142, the Company will no longer record amortization of goodwill.
For the year ended June 30, 2001, the Company recorded $428 of goodwill
amortization. The Company is required to apply the initial fair value
test by December 31, 2001. The Company has not yet determined whether the
initial fair value test of the goodwill reflected in the accompanying
consolidated balance sheets will result in any impairment charges.
33
The Emerging Issues Task Force ("EITF") of the FASB reached a consensus
on EITF 00-10 "Accounting for Shipping and Handling Fees and Costs"
("EITF 00-10"). EITF 00-10 requires that all amounts billed to a customer
in a sales transaction related to shipping and handling represent
revenues earned for the goods provided and should be classified as
revenue. The Company adopted EITF 00-10 in the fourth quarter of fiscal
2001 and has reclassified approximately $177, $174 and $19 to revenue for
the years ended June 30, 2001, 2000 and 1999, respectively.
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.
(3) MARKETABLE SECURITIES
As of June 30, 2001 and 2000, the Company had funds invested in
high-grade corporate debentures which have been classified as
available-for-sale. As of June 30, 2001 and 2000, the fair value of these
securities were $795 and $1,806, respectively, and the amortized cost
associated with the securities was $901 and $2,074, respectively. A total
unrealized holding loss, related to all investment securities, of $106
and $268 is recorded as a component of stockholders' equity as of June
30, 2001 and 2000, respectively.
(4) 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 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, 2001, the balance outstanding on the term loan was $86 and
the balance outstanding on the mortgage was $702. Future monthly
principal payments on the term loan and mortgage are $14 and $5,
respectively. As of June 30, 2001, Simulaids had not drawn on the line of
credit. Subsequent to year-end, Simulaids elected not to extend its line
of credit with Citizens.
Repayments of long-term debt for each of the next five years and
thereafter are as follows:
YEAR ENDING
JUNE 30, AMOUNT
2002 $ 139
2003 53
2004 53
34
2005 53
2006 53
Thereafter 437
-----------
$ 788
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, 2001, Simulaids was in compliance with all financial
ratios and covenants.
The Credit Facilities are secured by a lien on all assets of Simulaids.
(5) PREFERRED STOCK
During fiscal 2000, Geneve Corporation ("Geneve") elected to convert its
shares of Series E Redeemable Preferred Stock ("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. In June 2000, the Company repaid the $330 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 initial carrying value of the Series E. Prior to
conversion of the Series E into common, the Series E earned dividends of
8% per annum.
During fiscal 2000, 13,617 shares of the Company's Series F, G and H
Redeemable Preferred Stock ("Series F, G and H") was redeemed for $136
and the remaining 66,266 shares were acquired by Geneve, directly from
the shareholders, and subsequently converted into 110,441 shares of
common stock at the then applicable 1.667 conversion rate. Prior to
redemption and conversion, the Series F, G and H earned dividends of 8.9%
per annum.
(6) STOCKHOLDERS' EQUITY
The Company had the following shares of common and treasury stock issued
and outstanding at June 30, 2001, 2000 and 1999:
COMMON TREASURY
STOCK STOCK
June 30, 1998 1,209,027 7,287
Exercise of options 32,322 (7,178)
Fractional shares (622) -
Purchase of treasury stock - 7,500
---------- ----------
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 for repayment of note 56,100 -
---------- ----------
June 30, 2000 1,904,613 17,834
Issuance of stock - 4,846
---------- ----------
June 30, 2001 1,904,613 12,988
========== ==========
35
Aristotle common shares reserved for future issuance
consist of the following:
2001 2000
Exercise of options issued to Former Strouse
Stockholders (Note 8) 35,208 35,208
Exercise of stock options granted under the Plan (Note 8) 148,164 130,429
Exercise of stock options granted outside of the Plan (Note 8) 20,000 20,000
---------- ----------
Total 203,372 185,637
========== ==========
(7) 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, 2001 and 2000, the principal components of deferred tax
assets, liabilities and the valuation allowance were as follows:
---------------- 2001 -----------------
CURRENT ASSET LONG-TERM ASSET
(LIABILITY) (LIABILITY)
Federal net operating loss carryforwards $ - $ 17,124
State of Connecticut net operating loss carryforwards - 98
----------- -----------
17,222
Valuation allowance - (17,222)
----------- -----------
$ - $ -
=========== ===========
Federal net operating loss carryforwards $ - $ 17,505
State of Connecticut net operating loss carryforwards - 120
----------- -----------
- 17,625
Valuation allowance - (17,625)
----------- -----------
$ - $ -
=========== ===========
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.
36
Provision for income taxes are comprised of the following for the years
ended June 30, 2001, 2000 and 1999:
2001 2000 1999
Current:
Federal $ 6 $ 5 $ -
State 73 26 89
----------- ---------- -----------
$ 79 $ 31 $ 89
=========== ========== ===========
During 1998 the Company filed a tax loss carryback claim related to its
1996 tax year. In connection therewith, the Company recorded a $720
reserve which is included in the accompanying consolidated balance
sheets.
At June 30, 2001, without giving consideration to the 1992 carryback
claim (see below), the Company had $49,500 of federal net operating loss
carryforwards which expire through 2011 and $1,300 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 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 $25,300 and the Company's aggregate Federal net
operating loss deduction would be reduced from $49,500 to $27,500.
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 and its advisors
continue to believe the claims have merit and therefore, the Company is
pursuing its case at the Internal Revenue Service appellate level.
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.
37
(8) 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
SARs 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 prior acquisition of Strouse (see Note
1), the Company granted 35,208 options to purchase shares of Aristotle
common stock.
In October 1995, the FASB issued SFAS 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 2001, 2000 and 1999 using the Black-Scholes
option pricing model prescribed by SFAS 123. The weighted average
assumptions used as of June 30, 2001, 2000 and 1999 are as follows:
2001 2000 1999
Risk free interest rate 6.0% 6.18% 4.76%
Expected dividend yield None None None
Expected lives 5 years 5 years 5 years
Expected volatility 60.9% 62.3% 69.6%
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 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, 2001, 2000 and 1999:
2001 2000 1999
Income (loss) from continuing operations
applicable to common shareholders:
As reported $ 218 $ 565 $ (741)
Pro forma $ 157 $ 529 $ (888)
Pro forma income (loss) from continuing
operations:
Basic earnings (loss) per share:
As reported $ 0.12 $ 0.39 $ (0.60)
Pro forma 0.08 $ 0.36 $ (0.72)
38
2001 2000 1999
Pro forma income (loss) from continuing
operations:
Diluted earnings (loss) per share:
As reported $ 0.11 $ 0.37 $ (0.60)
Pro forma 0.08 $ 0.35 $ (0.72)
A summary of the status of the Company's stock option plans and other
options as of June 30, 2001, 2000 and 1999, and changes during the years
then ended, is presented below:
------------- 2001 ------------------------- 2000 ----------------------- 1999 ---------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 185,637 6.05 173,637 $ 6.42 173,137 $ 6.15
Granted 21,000 5.79 12,000 5.05 40,000 5.88
Expired (3,265) 21.92 - - - -
Exercised - - - - (39,500) 4.66
-------- ------- --------- -------- -------- --------
Outstanding at end of year 203,372 6.03 185,637 $ 6.05 173,637 $ 6.42
======== ========= ========
Options exercisable at year-end 180,872 6.06 164,637 $ 6.46 138,637 $ 6.70
Weighted-average fair value of
options granted during the year $ 3.46 $ 2.97 $ 3.61
The following table summarizes information about stock options
outstanding at June 30, 2001:
---------- OPTIONS OUTSTANDING ----------- --- OPTIONS EXERCISABLE --
WEIGHTED-
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE OUTSTANDING AT LIFE EXERCISE EXERCISABLE
PRICES 6/30/01 (MONTHS) PRICE AT 6/30/01
$4.63 30,000 78.5 4.63 30,000
4.64 3,500 109.1 4.64 3,500
5.00 21,210 72.9 5.00 16,210
5.30 2,395 33.5 5.30 2,395
5.40 20,000 47.2 5.40 20,000
5.45 24,998 33.4 5.45 24,998
5.63 15,000 76.0 5.63 15,000
5.88 40,000 88.5 5.88 40,000
5.99 1,000 88.7 5.99 1,000
6.00 17,500 110.3 6.00 -
10.00 27,769 23.0 10.00 27,769
--------- ------ -------- --------
203,372 66.3 6.06 180,872
========= ====== ======== ========
39
STOCK APPRECIATION RIGHTS
During fiscal 2001, the Company entered into employment agreements with
certain key employees. In connection with these employment agreements,
the Company granted a total of 80,000 SARs to these employees, of which
36,000 vest on January 1, 2002, with the remainder vesting ratably each
quarter through December 31, 2003. In connection with FASB Interpretation
No. 28 "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans," the SARs will require interim calculations and
the Company will record a compensation charge for the difference between
the exercise price and the fair market value of the Company's common
stock, as defined. For the year ended June 30, 2001, approximately $18
was recorded as a compensation charge in the accompanying consolidated
statements of operations relating to these SARs.
(9) RELATED PARTY TRANSACTIONS
During the years ended June 30, 2001, 2000 and 1999, the Company paid its
directors $178, $175 and $189, respectively, as 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 for $100 per annum. During each of the years ended
June 30, 2001 and 2000, the Company recorded approximately $100 of
expense as part of this agreement.
In the ordinary course of business, Simulaids sells its products to an
affiliate of a stockholder. Sales to this affiliate by Simulaids for the
years ended June 30, 2001 and 2000 were $1,483 and $350, respectively,
and accounts receivable from this affiliate at June 30, 2001 and 2000
were $58 and $14, respectively.
In the ordinary course of business, Safe Passage performs certain
services and licenses certain technology to CerTrac. Revenues related to
CerTrac during fiscal 2001 were approximately $125 and accounts
receivable at June 30, 2001 were approximately $65.
(10) COMMITMENTS AND CONTINGENCIES
Simulaids maintains a 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. Simulaids matching
contribution is discretionary and can change from year to year. For
fiscal year 2001, Simulaids elected to match 25% of employee
contributions up to the first 5% of pay deferred. Simulaids contributions
to the Plan were $13, $12 and $12 in 2001, 2000 and 1999, respectively.
(11) QUARTERLY DATA - UNAUDITED
------------------------------------------2001------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
Net Sales $ 1,828 $ 1,982 $ 2,184 $ 2,153
Gross profit 828 985 1,046 1,112
Operating gain (loss) 158 48 (22) (148)
Net income (loss) 228 122 18 (150)
Earnings per share:
Basic $ 0.12 $ 0.06 $ 0.01 $ (0.07)
Diluted $ 0.12 $ 0.06 $ 0.01 $ (0.08)
40
------------------------------------------2000------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
Net Sales $ 1,677 $ 1,733 $ 1,628 $ 1,849
Gross profit 671 708 776 783
Operating gain 151 118 148 125
Net income 156 168 181 169
Earnings per share:
Basic $ 0.08 $ 0.09 $ 0.12 $ 0.10
Diluted $ 0.08 $ 0.09 $ 0.10 $ 0.10
(12) SEGMENT DATA
Operating segments are defined as components of an enterprise about which
financial information is available that is evaluated regularly by the
Company's management in deciding how to allocate resources and in
assessing performance. The operating segments are managed separately
because each operating segment represents a strategic business unit that
offers different products and serves different markets.
Commencing in 2001, the Company has two reportable segments identified as
Medical Education and Training Products (since April 30, 1999) and
Computer-Based Training (since September 14, 2000). During fiscal 2000
and 1999, the Company had only one reporting segment. The major
proprietary products of the Medical Education Training Products segment
include manikins and simulation kits used for training in the CPR,
emergency rescue and patient care fields. The major products of the
Computer-Based Training segment are the development and sale of computer
based training products to government, industry and educational clients.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
the performance of these segments based on segment profit or loss after
income taxes. The Company allocates certain administrative expenses to
segments.
41
OPERATIONS IN DIFFERENT INDUSTRIES
Year Ended June 30, 2001
MEDICAL
EDUCATION
AND COMPUTER-
TRAINING BASED
PRODUCTS TRAINING CORPORATE TOTAL
Net sales $ 7,595 $ 552 $ - $ 8,147
========= ========= ========= =========
Operating income (loss) $ 1,563 $ (940) $ (587) $ 36
========= ========= ========= =========
Depreciation and amortization $ 383 $ 277 $ 3 $ 663
========= ========= ========= =========
Identifiable assets $ 8,388 $ 1,887 $ 4,633 $ 14,908
========= ========= ========= =========
Identifiable liabilities $ 1,309 $ 302 $ 929 $ 2,540
========= ========= ========= =========
42
SIMULAIDS, INC.
---------------
FINANCIAL STATEMENTS
--------------------
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
----------------------------------------
TOGETHER WITH
-------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
The accompanying notes are an integral
part of this financial statement.
43
SIMULAIDS, INC.
---------------
BALANCE SHEET
-------------
AS OF APRIL 30, 1999
--------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 237,068
Trade accounts receivable 391,281
Inventories (Note 2) 933,454
Prepaid expenses and other current assets 147,392
----------
Total current assets 1,709,195
----------
Property, plant and equipment:
Land 61,944
Buildings and improvements 1,020,599
Machinery and equipment 1,298,975
Office furniture, fixtures and equipment 77,401
Computer equipment 243,291
Vehicles 46,164
----------
2,748,374
Less: accumulated depreciation
and amortization 1,557,552
----------
1,190,822
Other assets:
Patent costs, net of accumulated amortization of $2,877 3,937
Deposits 2,786
----------
Total other assets 6,723
----------
$2,906,740
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities:
Trade accounts payable $ 78,922
Accrued expenses 148,236
Current maturities of capital lease obligation 24,990
----------
Total current liabilities 252,148
----------
Capital lease obligation, net of current maturities 115,056
----------
Commitments and contingencies (Notes 3 and 4)
Shareholder's equity:
Common stock, $1 par value, 2,000 shares
authorized; 100 shares issued and outstanding 100
Additional paid-in capital 5,741
Retained earnings 2,533,695
----------
Total shareholder's equity 2,539,536
----------
$2,906,740
==========
The accompanying notes are an integral
part of this financial statement.
44
SIMULAIDS, INC.
---------------
STATEMENT OF INCOME
-------------------
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
----------------------------------------
Net sales $1,896,860
Cost of goods sold 1,123,012
----------
Gross profit 773,848
Selling expenses 81,313
General and administrative expenses 374,316
----------
Income from operations -
manufacturing division 318,219
----------
Operating loss - video division (2,082)
----------
Other income (expense):
Interest income 3,420
Interest expense (3,110)
----------
310
----------
Income before income taxes
and shareholder's salary 316,447
State income tax provision 7,104
----------
Income before shareholder's
salary 309,343
Shareholder's salary 77,196
----------
Net income $ 232,147
==========
45
SIMULAIDS, INC.
---------------
STATEMENT OF SHAREHOLDER'S EQUITY
---------------------------------
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
----------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----- ------- -------- -----
BALANCE, January 1, 1999 $100 $5,741 $3,075,268 $3,081,109
Net income - - 232,147 232,147
Distributions to
shareholder - - (773,720) (773,720)
---- ------ ---------- ----------
BALANCE, April 30, 1999 $100 $5,741 $2,533,695 $2,539,536
==== ====== ========== ==========
The accompanying notes are an integral
part of this financial statement.
46
SIMULAIDS, INC.
---------------
STATEMENT OF CASH FLOWS
-----------------------
FOR THE FOUR MONTHS ENDED APRIL 30, 1999
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 232,147
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 83,027
Changes in operating assets and liabilities:
Accounts receivable (169,331)
Inventories 51,789
Prepaid expenses and other current assets (98,651)
Deposits 13,023
Trade accounts payable 3,590
Accrued expenses and other payables 88,953
----------
Net cash provided by operating activities 204,547
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (37,380)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease repayments (5,989)
Cash distributions to shareholder (423,211)
----------
Net cash used in financing activities (429,200)
----------
Net decrease in cash and cash equivalents (262,033)
CASH AND CASH EQUIVALENTS, beginning of year 499,101
----------
CASH AND CASH EQUIVALENTS, end of year $ 237,068
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,140
==========
Income taxes $ -
==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
Non-cash asset distributions to shareholder $ 350,509
==========
Equipment acquired pursuant to capital lease obligations $ 146,035
==========
The accompanying notes are an integral
part of this financial statement.
47
SIMULAIDS, INC.
---------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
APRIL 30, 1999
--------------
1. Organization and Significant Accounting Policies:
------------------------------------------------
Description of business -
-----------------------
Simulaids, Inc. (the "Company"), a New York subchapter S Corporation,
operates two plants in Woodstock, N.Y. engaged in the manufacturing of
manikins and related products. The Company sells both domestically and
internationally and creates training aids for emergency medical, rescue
and law enforcement personnel. The Company's raw materials are readily
available, and the Company is not dependent on a single supplier or only
a few suppliers. In addition, the Company operates a local retail video
rental facility in Saugerties, N.Y. The retail video rental facility and
associated assets were distributed to the owner in anticipation of the
sale of the Company (see Notes 4 and 6).
Cash and cash equivalents -
-------------------------
Cash equivalents consist of overnight repurchase agreement and money
market accounts with an initial term of three months or less at date of
purchase. For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
Concentration of credit risk -
----------------------------
At April 30, 1999, accounts receivable from two customers accounted for
35% of the outstanding balance. No other customers had balances in excess
of 10% of the outstanding balance. Sales to those two customers accounted
for 34% of net sales during the four months ended April 30, 1999.
Inventories -
-----------
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
Property, plant and equipment -
-----------------------------
Deprecation on plant and equipment is calculated on the straight-line or
declining balance methods over the estimated useful lives of the assets.
Buildings 40
Machinery and equipment 7
Vehicles 5
Computer equipment 5-7
Office furniture, fixtures and equipment 7
Improvements various
48
Expenditures for maintenance and repairs are charged to operations as
incurred. Renewals and betterments are capitalized.
Income taxes -
------------
The Company is a subchapter S corporation and, accordingly, no provision
has been made for Federal income taxes since the tax is the
responsibility of the individual owner and not the Company. Income tax
expense reflects state income taxes at the Subchapter S rate.
Impairment of long-lived assets on long-lived assets to be disposed of -
----------------------------------------------------------------------
The Company accounts for long-lived assets in accordance with 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 that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
Use of estimates -
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
2. Inventories:
-----------
At April 30, 1999 inventories consisted of the following:
Raw materials $280,036
Work-in-progress 112,014
Finished goods 541,404
--------
$933,454
========
49
3. Capital Lease Obligations:
-------------------------
The Company entered into a capital lease for computer equipment in
January 1999. The outstanding capital lease obligation at April 30, 1999
is as follows:
Capital lease for computer equipment payable
in 60 monthly installments of $2,999,
including interest at a 8.54% rate $140,046
Less - current maturities (24,990)
--------
$115,056
========
Future capital lease principal payments for each twelve-month period
ended April 30 are as follows:
2000 $ 24,990
2001 27,210
2002 29,628
2003 32,260
2004 25,958
--------
$140,046
========
4. Distributions to Shareholder:
----------------------------
Included in the accompanying statement of shareholder's equity are
distributions to shareholder of $773,720, which represents $423,211 of
cash distributions and $350,509 of other asset distributions made in
contemplation of the sale of the Company (see Note 6). The $350,509 of
other asset distributions reflects the distribution of property and
associated assets related to the video business as well as the cash
surrender value of an officers life insurance policy, a vehicle and
certain artwork.
5. Commitments and Contingencies:
-----------------------------
Operating leases -
----------------
The Company leases two of its facilities from the owner of the Company on
a month-to-month basis. Rent expense related to these facilities recorded
in the accompanying statement of income was approximately $3,000.
6. Subsequent Event:
----------------
Pursuant to a Stock Purchase Agreement dated April 30, 1999, the owner
sold all of its outstanding stock to the Aristotle Corporation for
$8,400,000.
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders of
Simulaids, Inc.
We have audited the accompanying balance sheet of Simulaids, Inc. (a New York
Subchapter S corporation) as of April 30, 1999 and the related statements of
income, shareholder's equity and cash flows for the four-month period 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 Simulaids, Inc. as of April 30,
1999, and the results of its operations and its cash flows for the four-month
period then ended in conformity with generally accepted accounting principles.
Hartford, Connecticut
September 13, 1999
51
SIMULAIDS, INC
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
52
SIMULAIDS, INC.
Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
---------------- ---------------
Current assets:
Cash and cash equivalents $ 499,101 662,920
Trade accounts receivable (notes 3 and 4) 221,950 224,456
Inventories (notes 2 and 3) 987,239 833,198
Prepaid expenses and other current assets 50,236 22,697
---------------- ---------------
Total current assets 1,758,526 1,743,271
---------------- ---------------
Property, plant and equipment:
Land 61,944 61,944
Buildings and improvements 1,020,291 994,550
Machinery and equipment 1,291,634 1,238,005
Leasehold improvements 83,585 83,585
Cassette tapes 1,032,142 939,460
Office furniture, fixtures and equipment 127,716 124,861
Computer equipment 122,163 111,253
Vehicles 61,028 61,028
---------------- ---------------
3,800,503 3,614,686
Less: accumulated depreciation and amortization 2,565,829 2,320,764
---------------- ---------------
Net property, plant and equipment 1,234,674 1,293,922
Other assets:
CSV of officer's life insurance, net of loans of $18,012 in 1998 and 1997 199,900 182,727
Patent costs, net of accumulated amortization of $2,366
in 1998 and $1,912 in 1997 4,089 4,543
Deposits 15,809 586
Loan commitment fee, net -- 2,275
---------------- ---------------
Total other assets 219,798 190,131
---------------- ---------------
Total assets $ 3,212,998 3,227,324
================ ===============
See accompanying notes to financial statements.
53
LIABILITIES AND SHAREHOLDER'S EQUITY
Current
liabilities:
Mortgage payable $ -- 127,500
Trade accounts payable 75,332 50,392
Corporate taxes payable 5,295 2,862
Due to shareholder -- 76,525
Accrued expenses 51,262 26,981
---------------- ---------------
Total liabilities 131,889 284,260
---------------- ---------------
Shareholder's equity:
Common stock, $1 par value. Authorized 2,000 shares; issued and
outstanding 100 shares in 1998 and 1997 100 100
Additional paid-in capital 5,741 5,741
Retained earnings 3,075,268 2,937,223
---------------- ---------------
Total shareholder's equity 3,081,109 2,943,064
---------------- ---------------
Commitments and contingencies (note 3)
Total liabilities and shareholder's equity $ 3,212,998 3,227,324
================ ===============
See accompanying notes to financial statements.
54
SIMULAIDS, INC.
Statements of Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------------- ---------------- ----------------
Net sales $ 5,860,417 5,478,380 5,624,835
Cost of goods sold 3,266,388 2,965,358 3,258,789
--------------- ---------------- ----------------
Gross profit 2,594,029 2,513,022 2,366,046
Selling, expenses 330,507 491,776 460,577
General and administrative expenses 873,246 744,074 640,365
--------------- ---------------- ----------------
Income from operations -
manufacturing division 1,390,276 1,277,172 1,265,104
--------------- ---------------- ----------------
Operating income (loss) - video division (2,330) 21,969 20,245
--------------- ---------------- ----------------
Other income (expense):
Other 126 7,912 1,633
Interest income 28,788 11,646 8,692
Interest expense (note 6) (11,187) (13,963) (20,800)
--------------- ---------------- ----------------
17,727 5,595 (10,475)
--------------- ---------------- ----------------
Income before income taxes
and shareholder's salary 1,405,673 1,304,736 1,274,874
State income tax provision 13,700 8,383 5,563
--------------- ---------------- ----------------
Income before shareholder's
salary 1,391,973 1,296,353 1,269,311
Shareholder's salary 228,903 221,290 593,397
--------------- ---------------- ----------------
Net income $ 1,163,070 1,075,063 675,914
=============== ================ ================
See accompanying notes to financial statements.
55
SIMULAIDS, INC.
Statements of Shareholder's Equity
Years ended December 31, 1998, 1997 and 1996
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------------- --------------- ---------------- ----------------
Balance at December 31, 1995 $ 100 5,741 2,639,003 2,644,844
Net income -- -- 675,914 675,914
Distributions -- -- (751,068) (751,068)
---------------- --------------- ---------------- ----------------
Balance at December 31, 1996 100 5,741 2,563,849 2,569,690
Net income -- -- 1,075,063 1,075,063
Distributions -- -- (701,689) (701,689)
---------------- --------------- ---------------- ----------------
Balance at December 31, 1997 100 5,741 2,937,223 2,943,064
Net income -- -- 1,163,070 1,163,070
Distributions -- -- (1,025,025) (1,025,025)
---------------- --------------- ---------------- ----------------
Balance at December 31, 1998 $ 100 5,741 3,075,268 3,081,109
================ =============== ================ ================
See accompanying notes to financial statements.
56
SIMULAIDS, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 1,163,070 1,075,063 675,914
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 247,794 260,296 252,049
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 2,506 1,903 134,100
Increase in inventories (154,041) (297) 2,727
(Increase) decrease in prepaid and other
current assets (27,539) 14,052 (17,809)
(Increase) decrease in deposits (15,223) 5,000 --
Increase (decrease) in trade accounts
payable 24,940 (6,961) (5,073)
Increase (decrease) in accrued and
other payables 26,714 294 (11,349)
---------------- ---------------- ----------------
Net cash provided by
operations 1,268,221 1,349,350 1,030,559
---------------- ---------------- ----------------
Cash flows from investing activities:
Increase in cash surrender value of
officers life insurance (17,173) (15,702) (15,373)
Purchase of property, plant and equipment (185,817) (137,378) (365,613)
---------------- ---------------- ----------------
Net cash used in investing
activities (202,990) (153,080) (380,986)
---------------- ---------------- ----------------
Cash flows from financing activities
Decrease in mortgage payable (127,500) (21,000) (151,352)
(Decrease) increase in due to shareholder (76,525) 76,525 --
Distributions to shareholder (1,025,025) (701,689) (751,068)
---------------- ---------------- ----------------
Net cash used in financing
activities (1,229,050) (646,164) (902,420)
---------------- ---------------- ----------------
Net (decrease) increase in cash
and cash equivalents (163,819) 550,106 (252,847)
Cash and cash equivalents at beginning of year 662,920 112,814 365,661
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 499,101 662,920 112,814
================ ================ ================
Supplemental cash flows information:
Cash paid during the year for interest $ 11,187 13,963 20,800
================ ================ ================
Cash paid during the year for income tax $ 14,900 5,500 11,300
================ ================ ================
See accompanying notes to financial statements.
57
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
Simulaids, Inc. (the "Company") operates two plants in
Woodstock, N.Y. engaged in the manufacturing of manikins and
related products. The Company sells both domestically and
internationally and creates training aids for emergency medical,
rescue and law enforcement personnel. The Company's raw
materials are readily available, and the Company is not
dependent on a single supplier or only a few suppliers. In
addition, the Company operates a local retail video rental
facility in Saugerties, N.Y.
(B) CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements and
money market accounts with an initial term of three months or
less at date of purchase. For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash
equivalents.
(C) INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
(D) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
Depreciation on plant and equipment is calculated on the
straight-line or declining balance methods over the estimated
useful lives of the assets.
Buildings 40
Molds and Dies 7
Cars 5
Cassette tapes 1
Equipment 5-7
Furniture and fixtures 7
Improvements various
58
(E) INCOME TAXES
The Company is a subchapter S corporation and, accordingly, no
provision has been made for Federal income taxes since the tax is
the responsibility of the individual owner and not the Company.
Income tax expense for 1998 and 1997 reflect state income taxes at
the subchapter S rate.
(F) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.
(G) IMPAIRMENT OF LONG-LIVED ASSETS ON LONG-LIVES ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with 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 that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(2) INVENTORIES
At December 31, 1998 and 1997, inventories consisted of the following:
1998 1997
----------------- -----------------
Raw materials $ 283,167 $ 285,350
Work-in-progress 129,577 135,435
Finished goods 567,722 412,413
----------------- -----------------
$ 980,466 $ 833,198
================= =================
59
(3) COMMITMENTS AND CONTINGENCIES
FINANCIAL GUARANTEES
As of December 31, 1998, the Company has issued guarantees aggregating
$3.5 million on borrowings by the owner of the Company. The guarantees
are secured by accounts receivable, fixed assets and inventory of the
suppliers. No amount has been accrued for the Company's obligation under
its guaranty arrangements.
LEASES
The Company leases two of its facilities from the owner of the Company on
a month-to-months basis. Rent expense related to these facilities was
$19,305, $18,900 and $19,766 in 1998, 1997 and 1996, respectively.
(4) BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are located throughout the United States and
internationally. Three, two and two customers accounted for more than
five percent of the Company's sales in 1998, 1997 and 1996, respectively,
and no account receivable from any customer exceeded $50,000 at December
31, 1998. The Company estimates an allowance for doubtful accounts based
on the credit worthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could effect
the Company's estimate of its bad debts.
(5) MORTGAGE PAYABLE
At December 31, 1997, the Company had a mortgage loan in the amount of
$127,500 bearing interest at 10% annually. The loan was repaid in 1998.
Interest expense for 1998, 1997 and 1996 was $11,187, $13,963 and
$20,800, respectively.
60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Simulaids, Inc.:
We have audited the accompanying balance sheet of Simulaids, Inc. as of December
31, 1998. Further, we were engaged to audit the accompanying balance sheet as of
December 31, 1997, and the related statements of income, shareholder's equity
and cash flows for the years ended December 31, 1998, 1997 and 1996. 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.
Except as discussed in the following paragraph, 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.
Because we were not engaged as auditors until after December 31, 1997, we were
not present to observe the physical inventory taken for December 31, 1997, 1996
or 1995 and we were unable to satisfy ourselves regarding inventory quantities
by means of other audit procedures. Furthermore, the Company did not maintained
certain of its accounting records with respect to inventories at those dates,
and adequate evidential matter in support of recorded transactions was not
available in all cases. The amount of inventory at December 31, 1997, 1996 and
1995, materially affects the determination of the results of operations and cash
flows for the years ended December 31, 1998, 1997 and 1996.
Because of the matter discussed in the preceding paragraph the scope of our work
was not sufficient to enable us to express, and we do not express, an opinion on
the financial position at December 31, 1997 or on the results of its operations
and its cash flows for the years ended December 31, 1998, 1997 and 1996.
In our opinion, the balance sheet of Simulaids, Inc. as of December 31, 1998
presents fairly, in all material respects, the financial position of Simulaids,
Inc. as of December 31, 1998 in conformity with generally accepted accounting
principles.
March 19, 1999 /s/ KPMG
---------------
KPMG
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
Aristotle's Amended and Restated Bylaws (the "Bylaws") provide that the
number of directors shall not be less than seven (7) nor more than fifteen (15),
as fixed by the Board of Directors. The Amended and Restated Certificate of
Incorporation (the "Charter") and the Bylaws provide that the directors be
divided into three classes, as equal in number as possible, with terms expiring
in successive years. Directors are elected by the stockholders, other than in
the case of newly created directorships, in which case a majority of the
directors then in office appoint an individual to fill the newly created
directorship. Directors are elected for terms of three years, or, in the case of
newly created directorships, for a full term for the class of directors in which
the new directorship was created and, in any case, until their successors are
elected and qualified. As of June 30, 2001, there were nine (9) directorships.
Set forth below are the names of each member of the Board of Directors,
their ages at September 1, 2001, the periods during which each served as a
director of Aristotle and the positions currently held with Aristotle. Following
the table is biographical information about each director, including each
director's principal occupation or employment during the past five years. Some
of this information has been obtained from Aristotle's records and some has been
supplied by the directors.
DIRECTOR OF THE POSITIONS HELD WITH
NAME AGE COMPANY SINCE THE COMPANY
---- --- ------------- -----------
Directors with terms expiring at
the FY 2001 Annual Meeting:
---------------------------
John J. Crawford........... 56 1989 Director, President,
Chief Executive Officer
and Chairman of the Board
Edward Netter.............. 68 1998 Director
Sharon M. Oster............ 53 1992 Director
62
DIRECTOR OF THE POSITIONS HELD WITH
NAME AGE COMPANY SINCE THE COMPANY
---- --- ------------- -----------
DIRECTORS WITH TERMS EXPIRING AT THE
FY 2002 ANNUAL MEETING:
Steven B. Lapin......................... 55 1998 Director
Daniel J. Miglio........................ 60 1990 Director
John Lahey.............................. 54 1999 Director
DIRECTORS WITH TERMS EXPIRING AT THE FY
2003 ANNUAL MEETING:
Robert Fiscus........................... 64 1991 Director
Betsy Henley-Cohn....................... 48 1993 Director
John C. Warfel.......................... 49 1994 Director
JOHN J. CRAWFORD has been President and Chief Executive Officer of
Aristotle since April 1990 and Chairman of the Board since April 1993. Mr.
Crawford also serves as Chairman of Simulaids and Safe Passage, subsidiaries of
Aristotle. Mr. Crawford was formerly the Chief Executive Officer of the Regional
Water Authority until December 2000, a utility located in New Haven,
Connecticut. Mr. Crawford is also a member of the Board of Directors of Webster
Financial Corporation.
EDWARD NETTER has been Chairman, Chief Executive Officer and a director
of Geneve Corporation, a private diversified holding company, for more than five
years. Mr. Netter is also Chairman and a director of Independence Holding
Company, a holding company engaged principally in the life and health insurance
business.
SHARON M. OSTER has been a Professor of Economics at the School of
Organization and Management, Yale University since 1982. Ms. Oster is a director
of two publicly-held companies, Health Care REIT, a real estate investment
company, and TransPro, Inc., a manufacturer of automotive/industrial-related
products.
STEVEN B. LAPIN has been President, Chief Operating Officer and a
director of Geneve Corporation, a private diversified holding company, for more
than five years. Mr. Lapin is also Vice Chairman and a director of Independence
Holding Company, a holding company engaged principally in the life and health
insurance business.
DANIEL J. MIGLIO was formerly Chairman, President and Chief Executive
Officer of Southern New England Telecommunications Corporation ("SNET"), a
publicly-held telecommunications company. He had been employed by SNET from 1962
through 1998. Mr. Miglio also serves as a director of UIL Holdings Corporation
and The United Illuminating Company.
JOHN LAHEY is the President of Quinnipiac University, a private
university located in Hamden, Connecticut. Dr. Lahey has been the President for
the past 14 years. He also serves on the Board of Trustees of Yale-New Haven
Hospital and on the Board of Directors of UIL Holdings Corporation and The
United Illuminating Company.
ROBERT L. FISCUS is Vice Chairman and Chief Financial Officer of UIL
Holdings Corporation, the publicly-held holding company parent of The United
Illuminating Company, an electric utility
63
company, and several smaller non-utility companies. Mr. Fiscus is also Vice
Chairman and Chief Financial Officer of The United Illuminating Company, where
he previously served as President and Chief Financial Officer. Mr. Fiscus has
been employed by The United Illuminating Company since 1972 and also serves as a
director of UIL Holdings Corporation and The United Illuminating Company.
BETSY HENLEY-COHN is Chairperson of Birmingham Utilities, Inc., a water
utility in Ansonia, Connecticut, and Joseph Cohn & Son, Inc., in New Haven,
Connecticut. Ms. Henley-Cohn has been employed by Birmingham Utilities, Inc.
since 1993 and by Joseph Cohn & Son, Inc. since 1978. She also serves as a
director of UIL Holdings Corporation and The United Illuminating Company.
JOHN C. WARFEL has been the Vice President and Chief Financial Officer
of FYC International, Inc., a privately held manufacturer of women's apparel
since October 1999. Prior to that, Mr. Warfel was the Senior Vice President,
Administration and Finance and Chief Financial Officer of Starter Corporation, a
leading sports apparel manufacturer. Starter Corporation had employed Mr. Warfel
since 1988.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
BOARD OF DIRECTORS MEETING ATTENDANCE. During the fiscal year ended
June 30, 2001, the Board of Directors of Aristotle held five (5) meetings.
During fiscal 2001, none of the directors attended less than 80% of the total
number of meetings of the Board of Directors and committees of which they were
members, except for Betsy Henley-Cohn who attended 40% of such meetings.
AUDIT COMMITTEE. The Board of Directors has appointed a standing Audit
Committee, which during the year ended June 30, 2001, conducted four (4)
meetings. The members of the Audit Committee were Messrs. Fiscus, Lahey, Lapin
and Warfel. The duties of the Audit Committee include reviewing the financial
statements of the Company and the scope of the independent annual audit and
internal audits. It also reviews the independent accountants' letter to
management concerning the effectiveness of the Company's internal financial and
accounting controls, and reviews and recommends to the Board of Directors the
firm to be engaged as the Company's independent accountants. The Audit Committee
may also examine and consider such other matters relating to the financial
affairs and operations of the Company as it determines to be appropriate.
HUMAN RESOURCES AND STOCK OPTION COMMITTEE. The Board of Directors of
Aristotle also has appointed a Human Resources and Stock Option Committee
comprised of three directors, which during the fiscal year ended June 30, 2001
conducted one (1) meeting. The Human Resources and Stock Option Committee
reviews the salary structure and policies of Aristotle and its subsidiaries,
administers Aristotle's 1997 Employee and Director Stock Option Plan (the "1997
Stock Option Plan"), selects the eligible persons to whom stock options or stock
appreciation rights will be granted, and prescribes the terms and provisions of
each such option or right. The members of the Human Resources and Stock Option
Committee during the fiscal year ended June 30, 2001 were Ms. Oster and Messrs.
Fiscus and Miglio.
COMPENSATION OF DIRECTORS
Effective January 1, 1998, directors of Aristotle, other than officers,
each receive a retainer of $7,500, payable semi-annually in 50% Common Stock and
50% cash. The Common Stock is payable in six month intervals and is valued based
on its average market value during the ten days preceding the determination
date. In addition to the retainer, the Chairperson and the members of board
committees receive $550 or $500, respectively, for each committee meeting
attended. As of June 30, 2001, Aristotle had not paid the entire amount of the
retainers due to directors. Accordingly, Aristotle has accrued an aggregate of
$136,583 for the payment of such retainers to directors.
64
Non-employee directors are eligible to receive grants of stock options
under the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the
automatic grant of non-qualified options to non-employee directors of the
Company. Each non-employee director, upon first being elected to the Board of
Directors, is eligible to receive an option to purchase 2,500 shares, which will
vest after completion of one year of service on the Board of Directors.
Additionally, the 1997 Stock Option Plan provides for a grant to each
non-employee director on the date of his or her reelection (provided that the
director has served as a director since his or her initial election) of an
option to purchase 1,000 shares, which vests upon completion of one year of
service on the Board of Directors.
EXECUTIVE OFFICERS
The following table sets forth the name of the Company's current
executive officer who is not a director, his age, and all positions held with
the Company as of September 1, 2001. The executive officer serves at the
discretion of the Board of Directors, subject to an Employment Agreement that
the Company has entered into with the executive officer.
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Paul M. McDonald 48 Chief Financial Officer and Secretary
The principal occupations of the executive officer for the last five
years are set forth below.
PAUL M. MCDONALD has been the Chief Financial Officer of Aristotle
since November 1994. Mr. McDonald has been the Secretary of Aristotle since
April 1994. Mr. McDonald also serves as Vice Chairman, Treasurer and Secretary
of Simulaids and Safe Passage, Aristotle's subsidiaries.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16 (a) of the Securities Exchange Act of 1934, as amended,
requires Aristotle's executive officers and directors, and persons who
beneficially own more than ten percent (10%) of the Common Stock, to file with
the Securities and Exchange Commission (the "SEC") and any national securities
exchange on which Aristotle's securities are registered initial reports of
beneficial ownership and reports of changes in beneficial ownership of the
Common Stock or other equity securities of Aristotle. Executive officers,
directors and greater than ten percent (10%) beneficial owners are required by
SEC regulations to furnish Aristotle with copies of all Section 16(a) forms they
file. To Aristotle's knowledge, based solely on a review of the copies of such
reports furnished to Aristotle, all Section 16(a) filing requirements applicable
to its executive officers, directors and greater than ten percent (10%)
beneficial owners were complied with for the fiscal year ended June 30, 2001.
65
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the periods
indicated regarding cash and other compensation paid to, earned by, or awarded
to the Company's Chief Executive Officer and certain other executive officers of
the Company (collectively, the "Named Officers") whose salary and bonus exceeded
$100,000 during the last three fiscal years ended June 30, 2001.
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
OPTIONS/SARS ALL OTHER
------------ ---------
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ AWARDED # COMPENSATION $
---------------------------- ---- --------- --------- --------- --------------
John J. Crawford.............................. 2001 $117,500 $ 0 50,000 $ 909 3
President, Chief Executive Officer and 2000 80,000 1 0 20,000 0
Chairman of the Board 1999 100,000 1 0 20,000 0
Paul McDonald................................. 2001 $150,000 $ 0 33,500 $ 2,506 4
Chief Financial Officer and Secretary 2000 149,000 0 10,000 3,324 4
1999 149,000 24,213 2 20,000 2,622 4
------------
(1) In fiscal 2000, salary includes $20,000 in shares of Common Stock and in
fiscal 1999, salary includes $40,000 in shares of Common Stock.
(2) In fiscal 1999, the Company paid Mr. McDonald a $24,213 performance bonus
for meeting management objectives.
(3) In fiscal 2001, other compensation for Mr. Crawford included $190 for term
life, AD&D and disability insurance premiums and $719 for business dues.
(4) Other compensation for Mr. McDonald is comprised of the following: in
fiscal 2001, $644 for term life, AD&D and disability insurance premiums and
$1,862 as a contribution to the 401K Plan; in fiscal 2000, $176 for term
life insurance premiums and $3,148 as a contribution pursuant to the SEP
Plan: in fiscal 1999, $373 for term life insurance premiums and $2,249 as a
contribution pursuant to the SEP Plan.
66
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding each stock option
granted to a Named Officer during the fiscal year ended June 30, 2001.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING AWARDED TO EXERCISE
NAME OPTIONS1/SARS 2 EMPLOYEES IN FISCAL PRICES
---- -------------- ------------------- ($/SHARE) EXPIRATION DATE
GRANTED YEAR 2001 --------- ---------------
------- ---------
Paul McDonald 3,500 3 3.6% $6.000 August 31, 2010
30,000 2 30.8% $7.000 June 30, 2004
John Crawford 50,000 2 51.3% $7.000 June 30, 2004
(1) All stock options were granted under the 1997 Stock Option Plan.
(2) Stock Appreciation Rights (SARs) granted under an employment agreement vest
over a period of three years.
(3) The options granted to the named executive officer are non-qualified stock
options and may be exercised after August 31, 2001.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding
unexercised stock options held as of June 30, 2001, by the Named Officers. No
stock options were exercised by the Named Officers during the fiscal year ended
June 30, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT JUNE 30, 2001 (#) AT JUNE 30, 2001 ($)1
---------------------------- ---------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
John J. Crawford............... 72,500 50,000 $147,000 2 $ 37,500 3
Paul McDonald.................. 39,139 38,500 $ 92,786 4 $ 42,375 5
(1) The value of unexercised, "in-the-money" options at June 30, 2001 is the
difference between (a) the closing price of Common Stock on June 29, 2001
as reported by NASDAQ ($7.75) - the assumed fair market value - and (b) the
per share option exercise price, multiplied by the number of shares of
Common Stock underlying such options.
(2) Mr. Crawford holds exercisable options to purchase 12,500 shares of Common
Stock that have an exercise price of $10.00 per option which is greater
than the fair market value of the Common Stock as of June 30, 2001 ($7.75).
Such options are not "in-the-money" and their value, therefore, is zero.
The exercise price of Mr. Crawford's remaining 60,000 exercisable options
averages $5.30.
(3) Mr. Crawford holds 50,000 unexercisable stock appreciation rights that have
an average price of $7.00.
(4) Mr. McDonald holds exercisable options to purchase 39,139 shares, at an
average price of $5.38.
(5) Mr. McDonald holds unexercisable options to purchase 8,500 shares of Common
Stock that have an average exercise price of $5.41 per option. In addition,
Mr. McDonald holds 30,000 unexercisable stock appreciation rights that
have an average price of $7.00.
67
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Crawford
effective February 1, 2001 for a term expiring December 31, 2003, pursuant to
which he will serve as the Company's President and Chief Executive Officer. The
agreement provides for an annual base salary of $175,000 and such stock options
and bonuses, as the Board of Directors in its sole discretion shall award,
including 50,000 stock appreciation rights vesting over the term of the
agreement.
The Company entered into an employment agreement with Mr. McDonald
effective February 1, 2001 for a term expiring December 31, 2003, pursuant to
which he will serve as the Company's Vice President and Chief Financial Officer.
The agreement provides for an annual base salary of $150,000 and such stock
options and bonuses, as the Board of Directors in its sole discretion shall
award, including 30,000 stock appreciation rights vesting over the term of the
agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 1, 2001, certain
information regarding beneficial ownership of the Common Stock by: (i) each
person who is known to Aristotle to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each director of Aristotle; (iii) each
executive officer of Aristotle who is named in the Summary Compensation Table in
Item 11; and (iv) all executive officers and directors of Aristotle as a group.
Unless otherwise indicated, all persons listed below have sole voting and
investment power with respect to their shares and the address for each such
person is The Aristotle Corporation, 27 Elm Street, New Haven, Connecticut. In
preparing the following table, Aristotle has relied on information furnished by
such persons.
NUMBER OF SHARES
5% STOCKHOLDERS, DIRECTORS OF COMMON STOCK VOTING
AND EXECUTIVE OFFICERS BENEFICIALLY OWNED 1 POWER 2
---------------------- ------------------ -----
5% STOCKHOLDERS:
Geneve Corporation 3 ............... 964,596 50.99%
DIRECTORS:
John J. Crawford.................. 123,329 4 6.28%
Robert L. Fiscus.................. 13,275 5 *
Betsy Henley-Cohn................. 29,794 6 1.57%
John Lahey........................ 4,241 7 *
Steven B. Lapin................... 0 8 *
Daniel J. Miglio.................. 20,075 9 1.08%
Edward Netter..................... 0 10 *
Sharon M. Oster................... 49,274 11 2.60%
John C. Warfel.................... 10,847 12 *
NAMED OFFICERS (EXCLUDING MR. CRAWFORD)
Paul McDonald..................... 39,139 13 2.03%
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP (10 PERSONS)
290,932 14.36%
68
* Less than 1%
1 Includes as part of the total number of issued and outstanding shares of
Common Stock those stock options which are currently exercisable by the
individual whose share ownership percentage is being calculated, in
accordance with the applicable securities regulations.
2 Percentages are calculated based on the total number of shares of Common
Stock (on a fully converted basis) outstanding. Includes as part of the
total number of issued and outstanding shares of Common Stock those stock
options which are currently exercisable by the individual whose share
ownership percentage is being calculated, in accordance with the applicable
securities regulations.
3 Geneve Corporation's address is 96 Cummings Point Road, Stamford,
Connecticut. Director Steven B. Lapin is the President and Chief Operating
Officer of Geneve Corporation and Director Edward Netter is the Chairman
and Chief Executive Officer of Geneve Corporation.
4 Includes 46,199 shares held by Mr. Crawford directly; 4,580 shares held in
his wife's name; 50 shares held in the name of his daughter; and stock
options, which are currently exercisable, to purchase 72,500 shares.
5 Includes 9,417 shares held by Mr. Fiscus directly and 400 shares held
jointly with his wife; and stock options, which are currently exercisable,
to purchase 3,458 shares.
6 Includes 8,996 shares held by Ms. Henley-Cohn directly; 11,840 shares held
in trusts in which Mrs. Henley-Cohn has the power to vote the shares; 5,500
shares held equally by Ms. Henley-Cohn's son and daughter; and stock
options, which are currently exercisable, to purchase 3,458 shares.
7 Includes 1,741 shares held by Mr. Lahey directly, and stock options, which
are currently exercisable, to purchase 2,500 shares.
8 Does not include any shares owned by Geneve Corporation. Mr. Lapin is the
President and Chief Operating Officer of Geneve Corporation.
9 Includes 15,617 shares held by Mr. Miglio directly; and stock options,
which are currently exercisable, to purchase 4,458 shares.
10 Does not include any shares owned by Geneve Corporation. Mr. Netter is the
Chairman and Chief Executive Officer of Geneve Corporation.
11 Includes 12,437 shares held by Ms. Oster directly and 31,900 held by Ms.
Oster's husband; and stock options, which are currently exercisable, to
purchase 4,937 shares. Ms. Oster disclaims control over shares owned by her
husband.
12 Includes 7,868 shares held by Mr. Warfel directly; and stock options, which
are currently exercisable, to purchase 2,979 shares.
13 Includes stock options, which are currently exercisable, to purchase 39,139
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 14, 2000, the Company acquired 80% of the outstanding
shares of common stock (the "Acquisition") of Safe Passage, a
privately-held Rochester, New York-based company, pursuant to a Stock
Purchase Agreement dated as of September 13, 2000 between the Company and
the Safe Passage shareholders (the "Sellers"). In consideration for such
shares, the Company paid an aggregate purchase price of $1.625 million in
cash to the Sellers plus possible additional future consideration of up to
a maximum of $2.3 million based on the operating performance of Safe
Passage during calendar years 2000 and 2001. If and when such additional
consideration is earned, the Company will record the payment as additional
purchase price consideration. At June 30, 2001, no such consideration was
earned. In addition, the Company has incurred approximately $.3 million of
transaction and other related costs associated with the Acquisition.
The Company has entered into employment agreements with two executive
officers, John Crawford and Paul McDonald. See Item 11 - "Executive
Compensation - Employment Agreements."
69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
(1) and (2) Financial Statements:
Consolidated Balance Sheets.......................................... 23
Consolidated Statements of Operations................................ 24
Consolidated Statements of Changes in Stockholders' Equity........... 25
Consolidated Statements of Cash Flows................................ 26
Notes to Consolidated Financial Statements........................... 27
Report of Independent Public Accountants............................. 22
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 or notes thereto.
(3) Exhibits:
Exhibit
Number Description
------ -----------
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 Current
Report on Form 8-K dated April 14, 1994, as amended (the "1994 Current
Report").
Exhibit 2.2--Agreement and Plan of Reorganization, dated as of September
13, 2000 (closed on September 14, 2000), by and among the Registrant,
Aristotle Acquisition Sub, Inc., Safe Passage International, Inc., James
S. Viscardi, Michael R. Rooksby, Howard C. Rooksby and Andrew M. Figiel,
incorporated herein by reference to Exhibit 2.1 of the Registrant's
Current Report on Form 8-K dated September 27, 2000.
Exhibit 2.3--Agreement and Plan of Merger, dated as of September 13,
2000 (closed on September 14, 2000), by and between Aristotle
Acquisition Sub, Inc. and Safe Passage International, Inc., incorporated
herein by reference to Exhibit 2.2 of the Registrant's Current Report on
Form 8-K dated September 27, 2000.
Exhibit 3.1--Restated Certificate of Incorporation of The Aristotle
Corporation, incorporated herein by reference to Exhibit 3.1 of The
Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1997.
Exhibit 3.2--Amended and Restated Bylaws, incorporated herein by
reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1997.
Exhibit 4.1--Restated Certificate of Incorporation of The Aristotle
Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and
3.2 are incorporated into this item by reference. See Exhibit 3.1 and
Exhibit 3.2 above.
70
Exhibit 4.2--Registration Rights Agreement dated as of April 11, 1994
between the Registrant and the shareholders listed on Exhibit A thereto,
incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-3 (File No. 333-4185).
Exhibit 4.3--Preferred Stock Purchase Agreement dated as of October 22,
1997 between The Aristotle Corporation and Geneve Corporation,
incorporated herein by reference to Exhibit 10.5 of the Registrant's
Quarterly Report on Form 10-Q for fiscal quarter ended September 30,
1997.
Exhibit 4.4--Registration Rights Agreement dated as of October 22, 1997
between The Aristotle Corporation and Geneve Corporation, incorporated
herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1997.
Exhibit 4.5--Letter Agreement dated as of September 15, 1997 among The
Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders,
incorporated herein by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
1997.
Exhibit 4.6--Letter Agreement dated as of February 9, 2000 between The
Aristotle Corporation and the Geneve Corporation regarding certain
limitations on voting and the acquisition of additional shares of common
stock, incorporated herein by reference to the Registrant's Report on
Form 13D/A dated February 15, 2000.
Exhibit 4.7--Letter Agreement dated as of April 28, 2000 between The
Aristotle Corporation and the Geneve Corporation, modifying the letter
agreement between such parties dated as of February 9, 2000, regarding
certain limitations on voting and the acquisition of additional shares
of common stock, incorporated herein by reference to the Registrant's
Report on Form 8-K dated May 2, 2000.
Exhibit 10.1--Stock Option Plan of The Aristotle Corporation, as
amended, incorporated herein by reference to Exhibit 10.2 of The
Aristotle Corporation Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (the "1992 Form 10-K").
Exhibit 10.2--Form of Stock Option Agreement (for non-employee
directors), incorporated herein by reference to Exhibit 10.3 of the 1992
Form 10-K.
Exhibit 10.3--Form of Incentive Stock Option Agreement (for employees),
incorporated herein by reference to Exhibit 10.4 of the 1992 Form 10-K.
Exhibit 10.4--Settlement and Release Agreement dated as of May 29, 1996
among The Aristotle Corporation, the Federal Deposit Insurance
Corporation and certain other interested parties, incorporated herein by
reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on
Form 10-K for the fiscal year ended June 30, 1996.
Exhibit 10.5--Stipulation and Agreement of Settlement dated as of May
28, 1996 regarding In Re First Constitution Stockholders Litigation,
incorporated herein by reference to Exhibit 10.23 of The Aristotle
Corporation Annual Report on Form 10-K for the fiscal year ended June
30, 1996.
Exhibit 10.6--Stock Purchase Agreement between The Aristotle Corporation
and Kevin Sweeney dated as of April 30, 1999, incorporated herein by
reference to Exhibit 2.1 of The Aristotle Corporation Current Report on
form 8-K dated May 4, 1999, as amended.
71
Exhibit 10.7--The Aristotle Corporation 1997 Employee and Director Stock
Plan, incorporated herein by reference to The Aristotle Corporation
Registration Statement on Form S-8 dated December 10, 1997.
Exhibit 10.8--The Employment Agreement dated as of February 1, 2001 by
and between The Aristotle Corporation and Paul McDonald, incorporated
herein by reference to Exhibit 10.8 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 2001.
Exhibit 10.9--The Employment Agreement dated as of February 1, 2001 by
and between The Aristotle Corporation and John Crawford is attached
hereto as Exhibit 10.9.
Exhibit 21.1--Subsidiaries of The Aristotle Corporation is attached
hereto as Exhibit 21.1.
Exhibit 23.1 --Consent of KPMG LLP is attached hereto as Exhibit 23.1.
(b) Reports on Form 8-K:
None.
(c) See (a)(3) above.
(d) See (a)(2) above.
72
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: September 27, 2001
/s/ Paul Mcdonald
------------------
Paul McDonald
ITS CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL FINANCIAL AND CHIEF ACCOUNTING OFFICER)
Date: September 27, 2001
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 September 27, 2001
----------------------- Officer, Chairman of the
John J. Crawford Board and Director
(principal executive officer)
/s/ Paul Mcdonald Chief Financial Officer and September 27, 2001
----------------------- Secretary (principal financial
Paul McDonald and accounting officer)
/s/ Betsy Henley-Cohn Director September 27, 2001
-----------------------
Betsy Henley-Cohn
/s/ Robert L. Fiscus Director September 27, 2001
-----------------------
Robert L. Fiscus
/s/ John L. Lahey Director September 27, 2001
-----------------------
John L. Lahey
73
/s/ Steven B. Lapin Director September 27, 2001
-----------------------
Steven B. Lapin
/s/ Daniel J. Miglio Director September 27, 2001
-----------------------
Daniel J. Miglio
/s/ Edward Netter Director September 27, 2001
-----------------------
Edward Netter
/s/ Sharon M. Oster Director September 27, 2001
-----------------------
Sharon M. Oster
/s/ John C. Warfel Director September 27, 2001
-----------------------
John C. Warfel
74
EXHIBIT INDEX
Exhibit 10.9 --The Employment Agreement dated as of February 1, 2001 by
and between The Aristotle Corporation and John Crawford
Exhibit 21.1 --Subsidiaries of The Aristotle Corporation
Exhibit 23.1 --Consent of KPMG LLP
75