size=2 face="Times New Roman"> 6
Transaction expenses related to the sale of JM Ney are as follows:
Settlement of JM Ney stock options
|
size=2 face="Times New Roman">$ 275
|
Severance and bonuses
|
size=2 face="Times New Roman"> 750
|
Legal and accounting
|
size=2 face="Times New Roman"> 365
|
Other
|
size=2 face="Times New Roman"> 150
|
|
|
Total transaction expenses
|
|
|
|
For the three month period ended May 31, 2002, JM Ney's summarized
results of operations were as follows (in thousands):
Net sales and other revenues
|
face="Times New Roman">$ 1,298
|
Cost of sales
|
face="Times New Roman">(744)
|
Operating expenses
|
size=2 face="Times New Roman"> (333)
|
|
|
Operating income
|
face="Times New Roman">221
|
Interest expense
|
size=2 face="Times New Roman">
(9)
|
|
|
Net income before income taxes
|
face="Times New Roman">212
|
Income tax expense
|
size=2 face="Times New Roman"> (80)
|
|
|
Net income
|
|
|
|
In connection with the asset sale, the Company entered into an
eight-year lease with Deringer for the lease of JM Ney's manufacturing
facility. The lease calls for the
Company to receive monthly retail payments at the annual rate of $290,000 with
annual increases of the annual lease rate of $5,800.
(3) Investment in ComCor-TV
On May 30, 2003, the
Company invested $3,500,000 into ZAO ComCor-TV ("CCTV") pursuant to
the terms of the agreements reached with Moscow Telecommunications Corporation
("COMCOR") under which the Company plans to acquire 100% of the
equity interests of CCTV through the issuance of common stock to COMCOR in
exchange for COMCOR's equity interest in CCTV, and the exchange of its common
stock for the outstanding stock of Moscow Broadband Communication Ltd
("Moscow Broadband") that it does not already own. The Company has recorded this investment at
its cost basis.
(4) Investment in
Moscow Broadband Communication Ltd.
The Company records its investment in Moscow Broadband using the equity
method of accounting. The Company's fiscal year ends on February 28/29,
while Moscow Broadband
has a December 31 year end. As a result, the Company's equity in Moscow
Broadband's results is reported on a two month lag. For the three month periods ended May 31, 2003
and 2002, the Company recorded losses of $174,000 and $168,000, respectively,
which represent its 25% interest in Moscow Broadband's losses of $696,000 and $672,000 for the three months ended March 31,
2003 and 2002, respectively. These
losses include Moscow Broadband's 50% equity interest in the losses of CCTV for
the same periods.
At May 31, 2003, the carrying value of the Company's investment in
Moscow Broadband was $1,797,000, and the Company's 25% equity interest in the
net assets of Moscow Broadband was $2,178,000.
The $381,000 difference is attributed to a non-depreciable asset that
was contributed to CCTV and will not result in the Company accreting the
difference into its consolidated results of operations.
7
The following presents summarized financial information for Moscow
Broadband as of March 31, 2003 and December 31, 2002 and its results of
operations for the three months ended March 31, 2003 and 2002 (in thousands):
width=94>
|
size=2 face="Times New Roman">March 31, 2003
|
face="Times New Roman">December 31, 2002
|
|
|
|
Balance Sheet Data |
|
|
Current assets
|
face="Times New Roman">$ 482
|
face="Times New Roman">$ 557
|
Noncurrent assets
|
size=2 face="Times New Roman">8,274
|
size=2 face="Times New Roman">8,903
|
|
|
|
Total assets
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
face="Times New Roman">$ 44
|
face="Times New Roman">$ 52
|
Stockholders' equity
|
size=2 face="Times New Roman">8,712
|
size=2 face="Times New Roman">9,408
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
|
|
|
|
Three months ended March 31, |
|
size=2 face="Times New Roman">2003
|
size=2 face="Times New Roman">2002
|
Statement of Operations Data:
|
|
|
Net loss before equity in losses of CCTV
|
face="Times New Roman">$ (69)
|
face="Times New Roman">$ (115)
|
Equity in losses of CCTV
|
size=2 face="Times New Roman">(627)
|
size=2 face="Times New Roman">(557)
|
|
|
|
Net loss
|
|
|
|
|
|
|
The following presents summarized financial information for CCTV as of
March 31, 2003 and December 31, 2002 and for the three months ended March 31,
2003 and 2002 (in thousands):
|
size=2 face="Times New Roman">March 31, 2003
|
size=2 face="Times New Roman">December 31, 2002
|
|
|
|
Balance Sheet Data: |
|
|
Current
Assets
|
face="Times New Roman">$ 5,473
|
face="Times New Roman">$ 6,014
|
Non-Current
Assets
|
size=2 face="Times New Roman">28,641
|
size=2 face="Times New Roman">28,496
|
|
|
|
Total assets
|
|
|
|
|
|
Current
liabilities
|
face="Times New Roman">$ 4,051
|
face="Times New Roman">$ 3,124
|
Non-current
liabilities and minority interest
|
face="Times New Roman">1,771
|
face="Times New Roman">1,844
|
Stockholder's
equity
|
size=2 face="Times New Roman">28,292
|
size=2 face="Times New Roman">29,542
|
|
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
|
8
|
size=2 face="Times New Roman"> Three Months
Ended March 31,
|
|
size=2 face="Times New Roman">2003
|
size=2 face="Times New Roman">2002
|
|
|
|
Statement of Operations Data:
|
face="Times New Roman">
|
face="Times New Roman">
|
Subscription
fees
|
face="Times New Roman">$ 522
|
face="Times New Roman">$ 289
|
|
|
|
Connection fees
and equipment and other sales
|
size=2 face="Times New Roman">198
|
size=2 face="Times New Roman"> 146
|
|
|
|
Total revenues
|
size=2 face="Times New Roman">$ 720
|
size=2 face="Times New Roman">$ 435
|
|
|
|
Cost of
revenues, including amortization of intangibles
|
$
(1,179) |
size=2 face="Times New Roman">$ (863)
|
|
|
|
Loss from
operations
|
size=2 face="Times New Roman">$ (1,256)
|
size=2 face="Times New Roman">$ (1,152)
|
|
|
|
Net loss
|
size=2 face="Times New Roman">$ (1,255)
|
size=2 face="Times New Roman">$ (1,113)
|
|
|
|
(5) CCTV and Moscow Broadband
Transactions
face="Tms Rmn">
In May 2003, the Company entered into agreements with COMCOR pursuant
to which, subject to stockholder and regulatory approvals, the Company will
acquire control over 100% of the equity ownership of CCTV through the purchase
of CCTV equity held and to be acquired by COMCOR, and the acquisition of the
75% of Moscow Broadband which the Company does not currently own. These agreements replace earlier agreements
entered into with Asinio Commercial Limited ("ACL") which were
terminated in May 2003. The agreements
with COMCOR call for the Company to issue 4,220,879 shares of its common stock
to COMCOR in exchange for the equity of CCTV to be held by COMCOR, including
the equity of CCTV to be acquired by COMCOR in exchange for the extinguishment
of approximately $1,380,500 of amounts
owed or expected to be owed to COMCOR from CCTV. Consummation of this
transaction is subject to among other things, i) the approval of the Company's
stockholders, and ii) the Company's acquisition of substantially all of the
shares of Moscow Broadband's common stock that it does not currently own.
In connection with the COMCOR agreements, the Company committed to
making i) a $3.5 million investment into CCTV within 20 days, which was made on
May 30, 2003; ii) a $1.0 million investment in CCTV within 20 days of the
closing of the acquisition of the CCTV shares; and iii) a $1.5 million investment
into CCTV at the earlier of the closing of a rights offering or August 31,
2004. The COMCOR agreements also provide for an
additional $5,829,000 of capital
contributions to CCTV from the Company prior to March 31, 2005. If such
contributions are not made, then the Company will be obligated to issue up to
477,994 additional shares of its common stock to COMCOR.
9
Pursuant to agreements signed, effective April 1, 2003, COMCOR also agreed to eliminate the fee it
charged CCTV for transportation network services from CCTV's utilization of the
Moscow Fiber Optic Network that had been charged at the rate of 10% of CCTV's
television service revenue. COMCOR also agreed to limit CCTV's payment
obligations for the lease of secondary node switching stations to the lesser of
i) $350 per secondary node per month and ii) 20% of CCTV's television service
revenues, calculated on a cumulative basis beginning January 1, 2003. At May 20, 2003, CCTV was utilizing 234
of COMCOR's secondary nodes. To make this existing network more cost
effective, CCTV plans
to reduce the use of up to 63 of these nodes within the next six months.
CCTV also plans to
lease an additional approximately 68 secondary nodes from COMCOR as further buildout of its access network occurs.
color=black face="Times New Roman">Concurrent with the closing of the proposed
acquisition of CCTV equity from COMCOR, the Company intends to acquire the 75%
of MBC equity that it does not currently own in exchange for 2,250,000 shares
of Company common stock. To partially satisfy its additional funding
requirements discussed above, after the closing of the transactions, the
Company intends to contribute approximately $1,250,000 to CCTV which is
comprised of Moscow Broadband's loans and advances to CCTV, 4,402 shares of the
stock of the Institute for Automated Systems and the extinguishment of a
$138,144 liability of CCTV through the issuance of 33,427 shares of the
Company's common stock. Such contributions would reduce the number of shares of
the Company's common stock that the Company would be obligated to issue to COMCOR,
in the absence of any other qualifying
contributions made by the Company to CCTV, from 477,994 to 374,941.
size=2 face="Times New Roman">The
agreements further call for the Company to maintain the right to name four of
the seven members of the Company's Board of Directors and for COMCOR to name
the remaining three. Voting Agreements
among COMCOR, Oliver R. Grace, Jr., the Company's President, and Francis E.
Baker, the Company's Chairman, were entered into to support the continuation of
the Company's control over the corporate governance of the Company for a
two-year period.
face="Times New Roman">(6) Income Taxes
face="Times New Roman">Income tax benefit represents an estimate of the effective income tax rate for the current fiscal
year after considering valuation allowances with respect to the Company's
ability to realize a tax benefit from its equity in the losses of Moscow
Broadband.
face="Times New Roman">(7) Earnings (Loss) Per Share
face="Times New Roman">Earnings (loss) per share
are computed based on the weighted average number of common and common
equivalent shares outstanding. Diluted
earnings per share assumes full conversion of all convertible securities into
common stock at the later of the beginning of the year or date of issuance,
unless antidilutive. For the three
months periods ended May 31, 2003 and 2002 the assumed conversion of the
Company's convertible securities had antidilutive effects on the Company's per
share results from continuing operations.
size=2 face="Times New Roman">
|
Three Months Ended May 31,
|
size=2 face="Times New Roman">
|
|
|
|
|
|
size=2 face="Times New Roman">Calculation of
basic earnings per share
|
size=2 face="Times New Roman">
|
size=2 face="Times New Roman">
|
face="Times New Roman">
|
size=2 face="Times New Roman">
|
face="Times New Roman">
|
face="Times New Roman">Numerator for basic and
diluted earnings per share:
|
size=2 face="Times New Roman">
|
face="Times New Roman">
|
face="Times New Roman">
|
size=2 face="Times New Roman">
|
face="Times New Roman">
|
face="Times New Roman">Net (loss) income
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">Denominator for basic
earnings per share:
|
size=2 face="Times New Roman">
|
size=2 face="Times New Roman">
|
face="Times New Roman">Weighted average number
of shares outstanding during the period
|
size=2 face="Times New Roman">2,100
|
size=2 face="Times New Roman">2,097
|
face="Times New Roman">Effect of dilutive
securities (a)
|
|
|
face="Times New Roman">
|
size=2 face="Times New Roman">
|
size=2 face="Times New Roman">
|
face="Times New Roman">Denominator for diluted
earnings per share
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">Basic (loss) earnings
per share
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">Diluted (loss) earnings
per share
|
|
|
|
|
|
10
face="Times New Roman">(8)
Subsequent Event - Mortgage
Loan
size=2 face="Times New Roman">
face="Times New Roman">On June 18, 2003,
Andersen Land Corp. ("Andersen Land"), a wholly-owned subsidiary of
the Company formerly known as the J.M. Ney Company, entered into a seven-year $2.0
million mortgage agreement secured by Andersen Land's real estate property and
an assignment of rents from the lease agreement entered into with the buyer of
JM Ney's operating assets, as discussed in Note 2. Andersen Land intends to provide the proceeds
of this loan to the Company to assist the Company in meeting its cash flow
obligations.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
face="Times New Roman">
face="Times New Roman">The accompanying Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") should be read in
conjunction with the MD&A in the Company's Report on Form 10-K for the year
ended February 28, 2003.
face="Times New Roman">Overview
face="Times New Roman">The Company is a holding
company which holds a 25% ownership interest in Moscow Broadband which in turn
holds 50% voting control over CCTV, a Russian company that delivers cable
television, high speed data transmission and Internet services to its customers
in Moscow, Russia. CCTV is a start up
business that is currently expanding its network and attempting to increase its
customer base.
In May 2003, the Company terminated agreements with ACL and entered into new
agreements with COMCOR, that, subject to stockholder approval, among other
conditions, will result in CCTV becoming a wholly-owned subsidiary of the
Company. These agreements call for the
issuance of between 6,470,879 shares and
6,948,873 shares of the Company's common stock in exchange for the equity
interest of CCTV to be held by COMCOR, and for the 75% of Moscow Broadband not
presently owned by the Company.
The Company also has a trading portfolio of equity investments of domestic and
foreign-based companies which at May 31, 2003 was valued at $2,265,000
face="Times New Roman">From 1991 until March 22, 2002, the Company owned and operated JM Ney as its
primary operating subsidiary. The
operating assets of JM Ney were sold during the first quarter of FY03 and the
net current assets of JM Ney which were not sold have been substantially liquidated. The Company retained ownership of JM Ney's
facility which it leases to the buyer of JM Ney's operating assets under terms
of an eight-year lease which was negotiated in connection with the sale of JM
Ney's net assets.
Due to the proposed acquisition of CCTV, and the prior fiscal year sale of JM
Ney, the following discussion and analysis of the results of operations and the
financial condition of the Company will not be indicative of the Company's
expectations of its future results of operations.
face="Times New Roman">Critical Accounting
Policies and Estimates
The MD&A discusses the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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. On an on-going
basis, management evaluates its estimates and judgments, including those
related to bad debts, investments, income taxes,
financing operations, retirement benefits, and contingencies and
litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
11
Deferred Tax Assets
The Company records a valuation allowance to reduce its deferred tax
assets to the amount that it believes is more likely than not to be realized.
The Company considers future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance. When the Company determines that it may not
be able to realize all or part of its net deferred tax assets, a valuation
allowance to reduce the deferred tax assets to estimated recoverable amounts is
charged to income in the period such determination is made. Likewise, should the Company determine that
it would be able to realize its deferred tax assets in the future in excess of
its net recorded amount, a reduction in the valuation allowance would increase
income in the period such determination is made.
Investment in Moscow Broadband
The Company records its investment in
Moscow Broadband using the equity method which also requires that the carrying
value of the investment be evaluated for impairment. The agreements
which the Company entered into in May 2003 and the related $3.5 million cash
investment into CCTV have contributed to supporting the reported values as of
May 31, 20003. The ability for the Company to consummate the proposed
transactions and CCTV's future operating results will be determining factors in
continuing impairment evaluations.
face="Times New Roman">RESULTS OF OPERATIONS -
THREE MONTHS ENDED MAY 31, 2003 VS. THREE MONTHS ENDED MAY 31, 2002
face="Times New Roman">
face="Times New Roman">For the three months
ended May 31, 2003 and 2002 the Company reported net (loss) income applicable
to common shareholders as follows (in thousands, except per share amounts):
face="Times New Roman">
|
|
|
face="Times New Roman">
|
|
|
|
|
|
|
|
|
|
face="Times New Roman">Net loss from
continuing operations
|
size=2 face="Times New Roman">$
(484)
|
size=2 face="Times New Roman">$ (0.23)
|
size=2 face="Times New Roman">$ (505)
|
size=2 face="Times New Roman">$ (0.24)
|
face="Times New Roman">Net income from
discontinued operations
|
size=2 face="Times New Roman">-
|
size=2 face="Times New Roman">-
|
size=2 face="Times New Roman">132
|
size=2 face="Times New Roman">0.06
|
face="Times New Roman">Gain on sale of JM Ney
|
|
|
|
|
face="Times New Roman">
|
|
|
|
|
face="Times New Roman">
|
|
|
|
|
|
|
|
|
|
face="Times New Roman">
face="Times New Roman">Continuing Operations -
General and Administrative Expenses
face="Times New Roman">General and
administrative expenses from continuing operations increased 62.1% to $885,000
for the three months ended May 31, 2003, from $546,000 in the comparable period
in the prior fiscal year. Higher professional fees incurred in connection with
the proposed acquisition of CCTV, and the non-recurrence of the prior year $142,000
gain from the settlement of retiree health care obligations through an
amendment to the Company's deferred benefit pension plan, contributed to the
increased costs.
face="Times New Roman">Continuing Operations -
Interest Expense
face="Times New Roman">Interest expense from
continuing operations for the three months ended May 31, 2003 decreased 17.4%
to $57,000 from $69,000 during the comparable period in the prior fiscal
year. The annual sinking fund payment of
the Company's 10 1/2% convertible subordinated debenture lowered average debt
levels which contributed to the decrease in this expense.
12
face="Times New Roman">Continuing Operations-
Investment Income and Other Income
face="Times New Roman">For the three months
ended May 31, 2003, investment income and other income totaled $610,000 as
compared to $196,000 in the comparable period in the prior fiscal year. Significant components of
investment income and other income are as
follows (in thousands):
face="Times New Roman">
|
|
|
|
|
|
face="Times New Roman">Net gains from domestic
trading portfolio
|
size=2 face="Times New Roman">$ 456
|
size=2 face="Times New Roman">$ 83
|
face="Times New Roman">Rental income
|
size=2 face="Times New Roman">76
|
size=2 face="Times New Roman">59
|
face="Times New Roman">Interest and dividends
|
size=2 face="Times New Roman">20
|
size=2 face="Times New Roman">17
|
face="Times New Roman">Ultrasonic royalties
|
size=2 face="Times New Roman">13
|
size=2 face="Times New Roman">14
|
face="Times New Roman">Change in deferred
compensation accounts
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">
|
|
|
|
|
|
size=2 face="Times New Roman">
face="Times New Roman">Equity in Losses of
Moscow Broadband
face="Times New Roman">The Company's equity in
the losses of Moscow Broadband increased 3.6% to $174,000 in the three months
ended May 31, 2003 from $168,000 in the comparable period of the prior fiscal
year and was comprised as follows (in thousands).
|
Three Months Ended March 31, |
face="Times New Roman">
|
|
|
|
|
|
face="Times New Roman">MBC's operating losses
|
size=2 face="Times New Roman">$ (69)
|
size=2 face="Times New Roman">$ (115)
|
face="Times New Roman">MBC's equity in CCTV's
losses
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman"> Total MBC loss
|
|
|
|
|
|
Andersen equity portion |
$
(174) |
$
(168) |
|
|
|
face="Times New Roman"> MBC's net operating loss
declined primarily due to a decrease of $75,000 in consulting costs which had
been incurred during 2002 in connection with the process to try to raise
additional equity for MBC. The savings
in consulting costs were partially offset by a $35,000 decrease in interest
income, due to lower cash being available for short term investments as a
result of the May 2002 investment of $5 million into CCTV and the use of cash
for MBC's operating expenses.
13
face="Times New Roman">CCTV's results of
operations, and MBC's equity in these results were comprised as follows (in
thousands):
face="Times New Roman">
|
Three Months Ended March 31,
|
face="Times New Roman">
|
|
|
|
|
|
face="Times New Roman">Subscription fees
|
size=2 face="Times New Roman">$ 522
|
size=2 face="Times New Roman">$ 289
|
face="Times New Roman">Connection fees,
equipment and other revenue
|
|
|
|
|
|
face="Times New Roman"> Total revenues
|
size=2 face="Times New Roman">720
|
size=2 face="Times New Roman">435
|
face="Times New Roman">Cost of sales
|
|
|
|
|
|
face="Times New Roman">Gross margin
|
size=2 face="Times New Roman">(459)
|
size=2 face="Times New Roman">(428)
|
face="Times New Roman">Operating expenses
|
|
|
|
|
|
face="Times New Roman">Loss from operations
|
size=2 face="Times New Roman">(1,256)
|
size=2 face="Times New Roman">(1,152)
|
face="Times New Roman">Equity in losses of
unconsolidated subsidiary
|
size=2 face="Times New Roman">(45)
|
size=2 face="Times New Roman">-
|
face="Times New Roman">Other non-operating
items, net
|
|
|
|
|
|
face="Times New Roman">Net loss before income
taxes
|
size=2 face="Times New Roman">(1,324)
|
size=2 face="Times New Roman">(1,177)
|
face="Times New Roman">Income tax benefit
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">Net loss
|
|
|
face="Times New Roman">
|
|
|
face="Times New Roman">MBC equity portion
|
|
|
|
|
|
face="Times New Roman">CCTV's subscription fees
for television and Internet access services increased by 80.6% as a result of
increased subscription levels both from increased market penetration in areas
which it had access to in the prior year, and from new subscribers in areas to
which it has expanded in the last year.
face="Times New Roman">At March 31, 2003, CCTV
reported that it had 45,934 subscribers from its broadcasting and premium
television services and 6,048 subscribers for its Internet access
services. These represent increases of
47.8% and 95.1% respectively over the number of subscribers it had reported as
of March 31, 2002. As a result,
subscription fees during the quarter have increased 41.8% and 107.2% for the
television and Internet access services, respectively, from the prior year's
first quarter.
face="Times New Roman">CCTV's cost of sales for
the three months ended March 31, 2003, increased 36.6% over the comparable
period in the first quarter primarily as a result of utilization fees and lease
of secondary node fees from COMCOR which were not present in the prior year
until August 2002 and to increased depreciation expense relating to assets
contributed by COMCOR in July 2002.
Prior to that time, COMCOR charged CCTV access network charges for the
rental of the networks in Chertanovo and Khamovniki, which in total were
approximately $261,000 lower than the utilization fees and lease of secondary
node fees charged in the current year.
face="Times New Roman">CCTV's general and
administrative expenses for the three months ended March 31, 2003 increased
10.1% due to higher sales commissions associated with subscriber growth,
increased advertising costs and increases in asset-based taxes.
face="Times New Roman">Income Tax Benefit
face="Times New Roman">Income tax benefits have been
accrued based upon estimated effective tax rates for the fiscal year, after
considering valuation allowances related to the Company's ability to realize a
tax benefit from its equity in the losses of Moscow Broadband.
face="Times New Roman">Income from Discontinued
Operations
face="Times New Roman">During the three month
period ended May 31, 2002, the Company owned JM Ney for only 22 days until its
sale effective March 22, 2002. JM Ney's results for that period produced
net income of $132,000 after income taxes.
14
face="Times New Roman">Gain on Sale of JM Ney
face="Times New Roman">The sale of JM Ney's net
assets in March 2002 produced a gain of $1,472,000 after a provision for income
taxes of $686,000. The components of the
selling price resulted in proceeds which were higher than book value for
inventory and fixed assets, which were partially offset by expenses of the
transaction.
face="Times New Roman">LIQUIDITY AND CAPITAL
RESOURCES
face="Times New Roman">At May 31, 2003
consolidated cash and marketable securities totaled $4,038,000 as compared to $8,088,000
as of February 28, 2003. The decrease of
$4,050,000 is primarily attributable to the Company's $3,500,000 investment in CCTV
and from the use of $935,000 of cash in its operating activities. In
addition, $71,000 of cash was used in financing activities for the payment of
preferred dividends. Unrealized appreciation of the Company's trading
portfolio of common stock totaling $456,000 during the quarter increased the
marketable securities balance.
face="Times New Roman">The agreements which the
Company entered into in May 2003 under which it proposes to acquire 100% of
CCTV, require the Company to make cash investments in CCTV totaling $2.5
million by August 31, 2004, of which $1.0 million is expected to be made at the
closing of the acquisition, which the Company expects will occur during its
third fiscal quarter.
face="Times New Roman">The present cash
resources, including the proceeds from a mortgage loan which was obtained in
June 2003, may not be adequate for the Company to meet the CCTV funding
requirements and its continuing operating expense, debt service and preferred
dividend payment obligations for more than 12 months. The Company does have a trading portfolio of
equity securities that it contemplates selling to help meet cash payment obligations
during and beyond this period.
face="Times New Roman">The agreements entered
into with COMCOR provide for the use of proceeds of a rights offering of the
Company's common stock and from a private placement or other offering of
Company debt or equity securities. Such
events would provide the Company with additional liquidity to support its and
CCTV's business objectives. The Company has plans to undertake capital raising
activities, but there can be no assurance that such activities, if formalized, will be
successful.
face="Times New Roman">At March 31, 2003, CCTV had
approximately $159,000 in cash and current liabilities in excess of
$4,000,000. The Company's $3,500,000
contribution in May 2003, COMCOR's planned conversion of liabilities into CCTV
equity prior to the closing of the Company's acquisition of CCTV and the
Company's planned contribution of certain advances and loans from MBC to CCTV
have improved and will continue to improve CCTV's financial position. However, CCTV is still generating cash flow
losses and it has plans to expand its
access network by an additional approximately 70,000 homes, which will require
capital expenditures in excess of an estimated $3,000,000. Accordingly, CCTV will remain dependent upon
outside sources of cash, including the planned capital contributions to be made
by the Company. The Company's ability to
make such contributions cannot be guaranteed. In addition, the adequacy of such
additional cash contribution into CCTV, if made, to meet CCTV's planned cash flow
obligations cannot be assured.
Effect of new Accounting
Pronouncements
In April 2003, the Financial Accounting
Standards Board "(FASB") issued Statement of Financial Accounting Standards No.
149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS 149 amends Statement of Financial Accounting
Standards No. 133 to provide clarification on the financial accounting and
reporting of derivative instruments and hedging activities and requires that
contracts with similar characteristics be accounted for on a comparable basis.
The provisions of SFAS 149 are effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Company is currently evaluating the effects this statement may
have on its consolidated financial statements.
In May 2003, the FASB issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity.
The provisions of SFAS 150 are effective for financial instruments entered into
or modified after may 31, 2003 and to all other instruments that exist as of the
beginning of the first interim financial reporting period beginning after June
15, 2003 (our third quarter of fiscal 2004). The Company is currently
evaluating the effects this statement may have on its consolidated financial
statements.
15
face="Times New Roman">OFF BALANCE SHEET
ARRANGEMENTS
face="Times New Roman">The Company has a
contingent liability with respect to a $386,000 letter of credit issued by its
bank to secure performance bonds issued in connection with an unresolved state
income tax matter. The Company believes that its accruals are sufficient to
meet any obligations that may arise from this matter.
The Company is also party to certain operating leases which will require $92,000
of payments to be made during the remainder of FY04.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
face="Times New Roman">
face="Times New Roman">The Company is exposed to
market risk from changes in equity security prices, interest rates and from
factors that impact equity investments in Russia, as discussed in the Company's
Annual Report on Form 10-K for the year ended February 28, 2003. The following information is presented to
update the status of the identified risks.
face="Times New Roman">EQUITY SECURITY RISK
face="Times New Roman">At May 31, 2003, the
Company has equity risk with respect to $2,260,000 of investments in publicly
traded financial institutions held in its trading portfolio.
face="Times New Roman">FOREIGN INVESTMENT RISK
face="Times New Roman">The Company has
investments in CCTV and Moscow Broadband with a combined carrying value of $5,297,000. Moscow Broadband's primary asset is an
investment in CCTV, a Moscow, Russia based broadband cable operator licensed to
provide video, Internet and telephony to up to 1.5 million homes and businesses
in Moscow. Accordingly, these investments bear the specific economic, currency
and political risks of this region.
face="Times New Roman">In May 2003, the Company
entered into agreements which, subject to stockholder and regulatory approvals,
will result in CCTV being wholly-owned by the Company. The consummation of these transactions will
increase the concentration of both foreign investment risk and the
capital risk associated with a start-up company which is experiencing operating
losses and requires the commitment of funds to meet the capital expenditure
needs of its business plan. Such
transactions are also expected to significantly reduce the Company's liquidity
as discussed in the Liquidity and Capital Resource section of Item 2 of this
report.
face="Times New Roman">INTEREST RATE RISK
face="Times New Roman">At May 31, 2003, the
Company had no variable rate obligations and its borrowing costs were not
exposed to changes in interest rates.
However, On June 18, 2003, Andersen Land Corp., a wholly-owned
subsidiary of the Company, received the proceeds of a $2 million mortgage collateralized
by a real estate property and an assignment of rental income from the lease of
the property. Interest under this note
will fluctuate at 2.25% above the London Interbank Offered Rate (LIBOR), which will
expose the Company at each periodic renewal of the rate, the first of which
will be in March 2004. The initial annual rate of interest on this note is
3.284%.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no
significant changes in the Company's internal controls, or in other factors,
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
16
Part II. Other Information
face="Times New Roman">
Item 1. Legal Proceedings
face="Times New Roman">
Morton International, Inc. v.
A.E. Staley Mfg. Co. et al. and Velsicol Chemical Corp. v. A.E. Staley Mfg. Co.
et al.
As originally reported in the Company's Form 10-K for the year ended
February 28, 1997, in July 1996, two companion lawsuits were filed in the
United States District Court for the District of New Jersey, by various owners
and operators of the Ventron-Velsicol Superfund Site ("Site"). The lawsuits, which were subsequently consolidated,
were filed under the Comprehensive Environmental Resource Compensation and
Liability Act ("CERCLA"), the Resource Conservation and Recovery Act,
the New Jersey Spill Act and New Jersey common law, alleging that the
defendants (over 100 companies, including JM Ney) were generators of certain wastes
allegedly processed at the Site. The
lawsuits seek recovery of costs incurred and a declaration of future liability
for costs to be incurred by the owners and operators in studying and
remediating the Site.
As further reported in the Company's Form 10-Q for the period ended November
30, 2001, this case was dismissed without prejudice and the plaintiffs' ability
to reinstate their claims were limited for a minimum of three years until
October 2004. If the plaintiffs reinstate the case, given
the legal and factual issues that remain outstanding, the Company currently has
no basis to ascertain the range of loss, should any occur, with respect to an
outcome that may be considered unfavorable.
This contingent liability was not assumed by the buyer of JM Ney's net
assets.
Item
4. Submission of Matters to a Vote of
Security Holders
size=2 face="Times New Roman">
face="Times New Roman">During the three months
ended May 31, 2003, no matters were submitted to a vote of the security holders
of the Company.
face="Times New Roman">However, on June 20,
2003, the Company held a combined 2002 and 2003 Annual Meeting at which the
existing Board of Directors was re-elected as follows:
face="Times New Roman">
|
size=2 face="Times New Roman">FOR
|
size=2 face="Times New Roman">%
|
size=2 face="Times New Roman">WITHHELD
|
size=2 face="Times New Roman">%
|
face="Times New Roman">
|
|
|
|
|
face="Times New Roman">Oliver R. Grace, Jr.
|
size=2 face="Times New Roman">1,233,278
|
size=2 face="Times New Roman">95.3
|
size=2 face="Times New Roman">61,308
|
size=2 face="Times New Roman">4.7
|
face="Times New Roman">Francis E. Baker
|
size=2 face="Times New Roman">1,233,151
|
size=2 face="Times New Roman">95.3
|
size=2 face="Times New Roman">61,435
|
size=2 face="Times New Roman">4.7
|
face="Times New Roman">Peter N. Bennett
|
size=2 face="Times New Roman">1,293,578
|
size=2 face="Times New Roman">99.9
|
size=2 face="Times New Roman">1,008
|
size=2 face="Times New Roman">0.1
|
face="Times New Roman">John S. Grace
|
size=2 face="Times New Roman">1,233,278
|
size=2 face="Times New Roman">95.3
|
size=2 face="Times New Roman">61,308
|
size=2 face="Times New Roman">4.7
|
face="Times New Roman">Louis A. Lubrano
|
size=2 face="Times New Roman">1,293,578
|
size=2 face="Times New Roman">99.9
|
size=2 face="Times New Roman">1,008
|
size=2 face="Times New Roman">0.1
|
face="Times New Roman">Thomas McPartland
|
size=2 face="Times New Roman">1,293,578
|
size=2 face="Times New Roman">99.9
|
size=2 face="Times New Roman">1,008
|
size=2 face="Times New Roman">0.1
|
face="Times New Roman">James J. Pinto
|
size=2 face="Times New Roman">1,293,578
|
size=2 face="Times New Roman">99.9
|
size=2 face="Times New Roman">1,008
|
size=2 face="Times New Roman">0.1
|
face="Times New Roman"> 17
Item 6. Exhibits and Reports on Form 8-K
face="Times New Roman">
size=2 face="Times New Roman">(a)
Exhibits
required by Item 601 of Regulation S-K:
|
face="Times New Roman">
|
face="Times New Roman">Exhibit
Description
|
face="Times New Roman">
face="Times New Roman">Exhibit 10.1
Open-End Mortgage and Security Agreement dated June 18, 2003 between Sovereign
Bank and Andersen Land Corp.
|
face="Times New Roman">Exhibit 99.1 Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350
|
face="Times New Roman">
|
(b) Reports on Form 8-K
|
size=2 face="Times New Roman">On May 29, 2003,
the Company filed a Form 8-K under Item 5 to report that it had terminated its
previously announced agreements with Asinio Commercial Limited under which
agreements the Company would have acquired 100% equity interest in ComCor-TV
("CCTV"). The Company also
announced that it had entered into agreements with Moscow Telecommunications
Corporation ("COMCOR") pursuant to which it will acquire COMCOR's
equity interest in CCTV, including additional equity to be obtained from the
conversion of certain liabilities. Pursuant
to the agreements the Company will (i) issue 4,220,879 shares of its common
stock to COMCOR, and will issue up to an additional 477,994 shares by March 31,
2005 if certain capital contribution into CCTV are not made by the Company;
(ii) commit to invest $6.0 million of cash into CCTV, of which $3.5 million was
made on May 30, 2003, and (iii) acquire the equity of Moscow Broadband
Communication Ltd that it does not presently own. The Company also announced that agreements
had been reached which reduce charges to CCTV for services provided by COMCOR
which define CCTV's payment obligations for CCTV's lease of certain secondary
nodes from COMCOR.
size=2 face="Times New Roman">On May 29, 2003,
the Company filed a Form 8-K to report under Item 12 that it had announced it results
of operations for the fiscal year ended February 29, 2003.
size=2 face="Times New Roman">Subsequent to the
quarter end, on June 6, 2003, the Company filed a Form 8-K under Item 9 to
report that it had issued a press release in which the Company announced that a
rights offering by its 25%-owned affiliate, Moscow Broadband Communication
Limited had been canceled. The Company
also announced that the agreements reached with COMCOR to acquire control of
CCTV include provision for the Company to have its own rights offering of its
common stock, which the Company has indicated it will use it best efforts to
have such an offering prior to August 2004, however, terms of any such offering
have not been determined.
Also subsequent to the quarter end, on July 3, 2003, the
Company field a Form 8-K under Item 9 to report that it had received a Nasdaq
Staff Determination Letter indicating that the Company fails to comply with the
Market Value of Publicly Held Shares requirement for continued listing, and that
the Company had requested a hearing before a Nasdaq Qualification Listing Panel
to review the determination.
Pursuant to the requirements 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.
face="Times New Roman"> 18
SIGNATURES
face="Times New Roman">ANDERSEN GROUP, INC.
face="Times New Roman">
face="Times New Roman">By: /s/ Oliver R. Grace, Jr.
|
face="Times New Roman"> Oliver R. Grace, Jr.
|
face="Times New Roman"> President and Chief Executive Officer
|
face="Times New Roman">Date: July 8, 2003
|
face="Times New Roman">
face="Times New Roman">By: /s/ Andrew M. O'Shea
|
face="Times New Roman"> Andrew M. O'Shea
|
face="Times New Roman"> Chief Financial Officer
|
face="Times New Roman">Date: July 8, 2003
|
face="Times New Roman">
|
19
CERTIFICATIONS
I, Oliver R. Grace, Jr., President and Chief Executive
Officer of Andersen Group, Inc., certify that:
- I have reviewed this quarterly report on Form
10-Q of Andersen Group, Inc.;
- Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
- The registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
size=2 face="Times New Roman">a)
designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
size=2 face="Times New Roman">b)
evaluated
the effectiveness of the registrant's disclosure controls and procedures as of
a date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
size=2 face="Times New Roman">c)
presented
in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
- The registrant's other certifying officer and I
have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent function):
size=2 face="Times New Roman">a)
all
significant deficiencies in the design or operation of internal controls which
could adversely affect the registrant's ability to record, process, summarize
and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
size=2 face="Times New Roman">b)
any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
face="Times New Roman"> 6. The
registrant's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: July 7,
2003
|
/s/ Oliver R. Grace, Jr.
|
Oliver R. Grace, Jr.
|
President and Chief Executive Officer
|
20
I, Andrew M. O'Shea, Chief Financial Officer of
Andersen Group, Inc., certify that:
- I have reviewed this quarterly report on Form
10-Q of Andersen Group, Inc.;
- Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
- Based on my knowledge, the financial statements,
and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
- The registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
size=2 face="Times New Roman"> a)
designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
size=2 face="Times New Roman"> b)
evaluated
the effectiveness of the registrant's disclosure controls and procedures as of
a date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and
size=2 face="Times New Roman"> c)
presented
in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
- The registrant's other certifying officer and I
have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
size=2 face="Times New Roman"> a)
all
significant deficiencies in the design or operation of internal controls which
could adversely
affect the registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud,
whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
face="Times New Roman"> 6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: July 8, 2003
|
/s/ Andrew M. O'Shea
|
Andrew M. O'Shea
|
Chief Financial Officer
|
21