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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998 or
[ ] 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: 0-1460
ANDERSEN GROUP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-0659863
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
515 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 826-8942
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------------------------------------------------------
Common Stock, No Par Value The NASDAQ Stock Market
10 1/2% Convertible Subordinated Debentures Due 2007
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, 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 the 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.
The aggregate market value of the Common Stock, no par value, held by
non-affiliates of the Registrant based upon the average bid and asked prices on
May 8, 1998, as reported on the NASDAQ Stock Market, was approximately
$8,646,000. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of May 8, 1998, there were 1,930,478 shares of Common Stock, no par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy
Statement dated May 19, 1998,
filed with the Commission pursuant to Regulation 14A,
are incorporated into Part III.
The exhibit index is located on page E-1
PART I
ITEM 1. BUSINESS.
General. Andersen Group, Inc., referred to herein as the "Company" or the
"Registrant", was incorporated under the laws of the State of Connecticut in
1951.
The Company has historically made investments in companies that operated in
several highly diverse segments, and which required extensive management
participation in operation and restructure. These segments have included dental
distribution and manufacture, electronics manufacturing and supply businesses,
ultrasonic cleaning equipment, communications electronics, medical products and
services and video products. More recently, however, the Company has increased
its level of investments that do not require extensive management participation.
These passive investments include investments in certain U.S.-based financial
institutions and in the securities of Russian and Eastern European companies.
The Company intends to continue to make minority, non-controlling investments in
the future.
Since 1991, however, the Registrant's primary investment, comprising
approximately 33% of the Company's total assets, has been The J.M. Ney Company
(JM Ney) which historically operated in two industry segments: Electronics,
consisting of JM Ney's electronics and ultrasonics divisions, and Dental. In
November 1995, JM Ney sold the assets and certain liabilities of the Dental
segment. In 1997, Ney Ultrasonics Inc., a subsidiary of JM Ney, was classified
as a separate industry segment (Ultrasonic Cleaning Equipment) and, effective
February 28, 1998, substantially all of the assets of the Ultrasonics Cleaning
Equipment segment were sold.
In December 1997, JM Ney borrowed $7.5 million on a 10.26% bullet
subordinated note, due 2004 with warrants, entitling the lender to purchase
40,000 shares of JM Ney capital stock at a fixed price, in order to have funds
available for a strategic acquisition designed to grow JM Ney's business. If JM
Ney makes an acquisition, the Company's ownership of JM Ney may become diluted
through the issuance of JM Ney capital stock as part of the consideration paid.
While criteria for a strategic acquisition have been identified, no agreements
have been reached concerning any possible targets. In addition to the investment
in JM Ney, since April 1993, the Registrant has held an investment in Digital
GraphiX, Incorporated (DGI), a video graphics company. DGI sold substantially
all of its assets in April 1997 and has substantially completed the winding up
of its affairs (see "Other Investments").
Effective June 1, 1997, as part of a strategic reorganization of the
Company, Oliver R. Grace, Jr., the Company's former Chairman, became President
and Chief Executive Officer, and Francis E. Baker, the Company's President and
Chief Executive Officer from 1959 to 1997, became Chairman and Secretary. In
addition, in May 1998 the Company's principal executive offices were relocated
to New York, New York.
Industry Segment Information.
Financial information regarding the Company's industry segments is
contained in Note 18 to the Registrant's Consolidated Financial Statements for
the fiscal year ended February 28, 1998 contained in Item 8 herein.
Narrative Description of Business.
During the fiscal year ended February 28, 1998, the Company held
investments in companies that operated in two business segments, Electronics and
Ultrasonic Cleaning Equipment. As noted below, the Ultrasonic Cleaning Equipment
segment was sold effective February 28, 1998 and has been treated as a
discontinued operation in the Company's Consolidated Financial Statements. In
addition, the Company held interests in a company with plans to develop data
transmission networks throughout the Commonwealth of Independent States, and in
a Russian titanium producing company. The Company also holds a portfolio of
marketable securities comprised primarily of the common stock of certain
financial institutions and of companies based in, or mutual funds which invest
in, companies based in Russia or other Eastern European countries.
Electronics Segment
The Electronics segment, which consists of the operations of JM Ney, is a
full-service, precious metal and parts supplier to automotive, medical,
industrial electronics, military and semi-conductor manufacturers. JM Ney's
fully integrated approach includes fabrication and manufacture of its precious
metal alloys, as well as design, engineering and metallurgical support. The
fabrication capabilities include stamping, wire drawing, rolling from ingot to
foil, precision turning, injection and insert molding, and refining.
JM Ney specializes in the engineering and manufacturing of precious metal alloy
contacts and contact assemblies aimed at low amperage applications. Electrical
contacts made of precious metals, including gold, platinum, palladium and
silver, are considered extremely dependable as the materials are inert and
highly resistant to corrosion and wear. In developing a finished contact or
assembly, JM Ney's technical staff works closely with customers, typically on an
engineer-to-engineer level, in order to design a product that meets all of the
metallurgical, electronic, dynamic and other performance specifications required
for the customer's applications. JM Ney designs and builds the necessary molds
and tools as well as designs and manufactures the end product. By controlling
the total process JM Ney believes it has a competitive advantage over other
companies in technology, cost and response time. JM Ney has attained ISO 9001
certification and QS9000 certification for the manufacture of its products as
well as approval by the Japanese Industrial Standards (JIS) and the United
States Food and Drug Administration.
In connection with the sale of the assets and liabilities of the Company's
Dental segment in November, 1995, JM Ney (and the Company, solely for purposes
of a non-competition covenant) entered into a three year manufacturing agreement
to alloy and fabricate precious metals for Ney Dental International, Inc. (NDI),
the purchaser of JM Ney's dental business. As part of this agreement, JM Ney and
the Company agreed, for a ten-year period, not to sell alloys, equipment or
merchandise into the dental market that NDI serves. JM Ney is, however,
permitted to continue producing, selling and marketing precious metal copings
and other machined and molded parts and material for use in the dental implant
industry.
JM Ney's business has limited direct competition with regard to the
manufacture of low amperage precious metal contacts and contact assemblies due
to the inherent risks, which accompany the engineering and manufacture of
precious metals (i.e., high start-up and inventory costs, theft, etc.). While
some competitors offer similar products, the Company believes that these
operations lack the vertical integration to compete across the entire spectrum
of products. JM Ney faces indirect competition from companies such as Engelhard
Corporation and Johnson Matthey, Inc., which have significantly greater
resources and which are involved in higher volume production of more standard
precious metal alloys.
JM Ney sells to more than 800 customers, with approximately 85% of its sales
being made to customers in the United States. JM Ney's sales are made
domestically through both field sales and manufacturers' representatives located
in key geographic markets. Internationally, JM Ney sells through manufacturers'
representatives, independent distributors and original equipment manufacturers.
Two customers in the Electronics segment (Implant Innovations, Inc., a purchaser
of precision machined precious metal components and precious metal materials,
and First Inertia, Inc., a purchaser of electronic components for the automotive
market) each accounted for more than 10% of the Registrant's consolidated sales
in fiscal 1998.
Ultrasonic Cleaning Equipment Segment
Effective February 28, 1998, the Company sold the net assets of Ney
Ultrasonics Inc. (Ney Ultrasonics) which until that date comprised the Company's
Ultrasonic Cleaning Equipment segment for approximately $3.5 million in cash. In
addition to consideration received at closing, and anticipated to be received
upon the agreement of closing date financial information, the Company expects to
receive consideration during the next several years based on growth of sales of
certain products by the purchasers of Ney Ultrasonics net assets. See Note 5 to
the Company's Consolidated Financial Statements for the year ended February 28,
1998 contained in Item 8 herein.
Other Investments
Trading Portfolio
At February 28, 1998, the Company had a portfolio of short-term investments with
a reported value of $9,001,000. The reported amount is reflected net of a
$617,000 valuation reserve to provide for volatility and liquidity concerns
relating to marketable investments in Russia and other eastern European
countries. The larger components of these investments include $5.6 million of
common stocks of savings banks and $2.4 million of the CA IB Emerging Russia
Fund. In addition, these investments include investment in Ukrainian and Polish
companies, common stock of Centennial Cellular, Inc. and municipal bonds. See
Note 3 to the Company's Consolidated Financial Statements for the year ended
February 28, 1998 contained in Item 8 herein.
Digital GraphiX
During fiscal 1998 the Company received payments of its investments in notes,
preferred stock and common stock of DGI, pursuant to DGI's liquidation as a
result of the sale of substantially all of its net assets in April 1997. For
further information on the Registrant's investment in DGI, see Note 7 to the
Company's Consolidated Financial Statements for the fiscal year ended February
28, 1998 contained in Item 8 herein, and Certain Relationships and Related
Transactions in Item 13.
Institute for Automated Systems
The Company also holds an investment in Treglos Investments, LTD, a joint
venture that is investing in the Institute for Automated Systems, a Russian
telecommunications company that has agreements to develop a data transmission
network throughout the Commonwealth of Independent States. The joint venture
owns approximately 6% of the Institute for Automated Systems. Among the joint
venture partners are the Company's Chairman and another Director. See Note 7 to
the Company's Consolidated Financial Statements for the fiscal year ended
February 28, 1998 contained in Item 8 herein, and Certain Relationships and
Related Transactions in Item 13.
AVISMA
The Company also owns 9,734 shares of AVISMA, a Russian based titanium producer.
These shares were purchased during fiscal 1998 for an aggregate cost of
approximately $1,225,000. They are being valued for financial reporting purposes
net of a valuation reserve of $245,000. AVISMA will be merged into VSMPO, a
Russian titanium processing company, under the terms of a transaction in which
VSMPO will be the surviving entity. There is currently a limited trading market
for AVISMA. The Company anticipates improved liquidity following the merger with
VSMPO. See Note 7 to the Company's Consolidated Financial Statements for the
fiscal year ended February 28, 1998 contained in Item 8 herein, and Certain
Relationships and Related Transactions in Item 13.
Research and Development
During fiscal years 1998, 1997, and 1996, research and development expenditures
from continuing operations totaled approximately $1,444,000, $1,228,000 and
$1,374,000, respectively.
Sources and Availability of Raw Materials and Components
JM Ney purchases its raw materials, including precious metals, and the
components used in the manufacture of its products from a number of domestic
suppliers, and generally is not dependent upon any single supplier. Although JM
Ney utilizes Russian palladium in the manufacture of many of its products, and
despite recent publicized events regarding lack of palladium shipments from
Russia to the world market, the Company believes that its sources of supply are
adequate for its continuing needs.
Compliance with Environmental Protection Laws
Management of the Company believes that the Company and its operating
subsidiaries are in material compliance with applicable federal, state and local
environmental regulations. Compliance with these regulations has not in the past
had any material effect on the Company's capital expenditures, consolidated
statements of operations or competitive position, nor does the Company
anticipate that compliance with existing regulations will have any such effect
in the near future.
Employees
As of April 30, 1998, the Company, including all subsidiaries, had 191 full-time
employees and one part-time employee. None of these employees are represented by
a labor union, and the Company is not aware of any organizing activities.
Neither the Company nor any of its subsidiaries has experienced any significant
work stoppage due to any labor problems. The Company considers its employee
relations to be satisfactory.
Forward Looking Statements
This report contains forward-looking statements, which are subject to a number
of risks, and uncertainties that may cause actual results to differ materially
from expectations.
Executive Officers of the Company
The Executive Officers of the Company and certain significant employees of its
subsidiaries are as follows:
- ------------------------------- -------- ----------------------------------------------------------- -----------------
Officer
Name Age Position Since
- ------------------------------- -------- ----------------------------------------------------------- -----------------
Francis E. Baker 68 Chairman and Secretary 1959
Oliver R. Grace, Jr. 44 President and Chief Executive Officer 1997
Bernard F. Travers, III 40 Assistant Secretary 1993
Ronald N. Cerny 46 President, The J.M. Ney Company 1993
Andrew M. O'Shea 39 Treasurer of the Company; Chief Financial Officer and
Secretary, The J.M. Ney Company 1995
Eugene Phaneuf 51 Vice President - Operations,
The J.M. Ney Company 1996
- ------------------------------- -------- ----------------------------------------------------------- -----------------
Except as set forth below, all of the officers and significant employees of its
subsidiaries have been associated with the Company in their present positions
for more than the past five years.
Mr. Grace, Jr. has been a Director of the Company since 1986 and President
and Chief Executive Officer since June 1, 1997. Mr. Grace, Jr. was Chairman of
the Company from March 1990 to May 1997. Mr. Grace, Jr. has also been President
of AG Investors, Inc., one of the Company's subsidiaries, since 1992. Mr. Grace,
Jr. is a General Partner of The Anglo American Security Fund L.P. Mr. Grace,
Jr., the Company's Chairman, is the brother of John S. Grace, a member of the
Company's Board of Directors.
Mr. Baker became Chairman on June 1, 1997. He has been a Director of the
Company since 1959 and was President and Chief Executive Officer from 1959 until
June 1, 1997. Mr. Baker is also the Secretary of the Company, a position he has
held since May 1997.
Mr. Travers, III joined the Company in 1983. He was promoted to Assistant
Secretary in June 1993. From 1990 through the present he has also served as the
Company's Director of Law and Taxation. Mr. Travers is an attorney and a
Certified Public Accountant.
Mr. Cerny has served as President of JM Ney since November 1995. From April 1993
to November 1995, Mr. Cerny was the General Manager of JM Ney's Electronics
Division. From 1988 until joining JM Ney, Mr. Cerny served as Director of
Operations (1990-1993) and Director of Sales & Marketing (1988 to 1990) for the
Materials Technology Division of Johnson Matthey, Inc., a precious metals
fabricator.
Mr. O'Shea became Treasurer of the Company in June 1997. He joined the
Company in December 1995 as Treasurer and Chief Financial Officer of JM Ney. In
November 1997 he was also appointed JM Ney's Secretary. From 1994 until joining
the Company, Mr. O'Shea was Vice-President of Finance and Administration for the
WorldCrisa Corporation. From 1990 to 1994, Mr. O'Shea worked for Buxton Co. in
various financial management capacities, including Senior Vice-President,
Finance and Administration. Mr. O'Shea is a Certified Public Accountant.
Mr. Phaneuf joined JM Ney in 1990. He was promoted to Vice
President-Operations of JM Ney in March 1996. From April 1994 to February 1996,
Mr. Phaneuf was JM Ney's Director of Operations. He was also Acting General
Manager of Ney Ultrasonics from April 1995 through December 1996. From 1990 to
1994, Mr. Phaneuf was JM Ney's Manager of Engineering and Manufacturing.
ITEM 2. PROPERTIES.
The Company's principal executive offices were relocated to New York, New York
in May 1998. The Company subleases office space from an entity owned by Oliver
R. Grace, Jr. the Company's President and Chief Executive Officer, at lease
rates that approximate market.
The Company's subsidiary, Andersen Realty, Inc., owns a 108,000 square foot
building located in Bloomfield, Connecticut. Portions of this facility are
leased to the present owners of its former Dental and Ultrasonic Cleaning
Equipment segments, as well as to third parties.
JM Ney owns a 100,000 square foot facility within a 16.5 acre industrial park in
Bloomfield, Connecticut. This site contains JM Ney's principal operations and
general administrative offices. The Registrant believes that its plants and
properties, and the production capacities thereof, are suitable and adequate for
its business needs of the present and immediately foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
Morton International, Inc. v. A.E. Staley Mfg. Co. et al. and Velsicol
Chemical Corp. v. A.E. Staley Mfg. Co. et al.
As previously 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.
Based on preliminary disclosure of information relating to the claims made by
plaintiffs and defendants, JM Ney, which produced and refined precious metals
used in dental amalgams, is one of the smaller parties to have had any
transactions with one of the plaintiff's predecessors in interest. However,
under both CERCLA and the New Jersey Spill Act, a party is jointly and severally
liable, unless there is a basis for divisibility. At this time, there is
insufficient information to determine the appropriate allocation of costs as
between or among the defendant group, if liability to the generator defendants
is ultimately proven. Moreover, because of the incomplete status of discovery,
the Company is unable to predict the probable outcome of the lawsuit, whether
favorable or unfavorable, and has no basis to ascertain a range of loss, should
any occur, with respect to an outcome that might be characterized as
unfavorable.
The Company continues to investigate whether any liability, which may accrue at
some future date, may be subject to reimbursement in whole or in part from
insurance proceeds. The Company intends to continue to vigorously defend the
lawsuit.
James S. Cathers and Sylvia Jean Cathers, his wife v. Kerr Corporation,
Whip-Mix Corporation, The J.M. Ney Company and Dentsply Corporation, Inc.
As previously reported in the Company's Form 10-Q for the Quarter ended August
31, 1997, in August 1997, JM Ney was included as a defendant in an asbestos
related civil action for negligence and product liability filed in the Court of
Common Pleas of Allegheny County, Pennsylvania, in which the Plaintiffs claim
damages in excess of $30,000 (the jurisdictional limit) from being exposed to
asbestos and asbestos products alleged to have been manufactured and supplied by
the defendants, including Ney's former Dental Division, while one of the
Plaintiffs worked in a dental lab from 1960 to 1986 at an unspecified location
in Pittsburgh, Pennsylvania. The Plaintiffs allege that this exposure to
asbestos and asbestos products caused the wrongful death of one of the
Plaintiffs from cancer (mesothelioma). The Plaintiffs have not provided any
specific allegations of facts as to which defendants may have manufactured or
supplied asbestos and asbestos products which are alleged to have caused the
injury.
The Company has determined that it has insurance that potentially
covers this claim and has called upon the insurance carriers to provide
reimbursement of defense costs and liability, should any arise. As of this date,
the Company has no basis to conclude that the litigation may be material to the
Company's financial condition or business. The Company intends to vigorously
defend the lawsuit.
Anthony Nicholas Georgiou, et al. v. Mobil Exploration and Producing
Services, Inc., Metromedia International Telecommunications, Inc., et al.
On January 14, 1998, Anthony Nicholas Georgiou, et al. v. Mobil Exploration and
Producing Services, Inc., Metromedia International Telecommunications, Inc., et
al., was filed in the United States District Court for the Southern District of
Texas. Plaintiffs claim that the defendants, including the Registrant and Oliver
R. Grace, Jr. the Registrant's President and Chief Executive Officer, interfered
with plaintiffs' business relationships with several companies involving certain
oil exploration and production contracts in Siberia and telecommunications
contracts in the Russian Federation. The specific counts are civil conspiracy,
tortious interference with contractual relationships and tortious interference
with prospective contractual relationships. Plaintiffs have alleged actual
damages in excess of $500,000,000 and have sought punitive damages of three
times alleged actual damages. The Company filed its answer denying each of the
substantive allegations of wrongdoing contained in the complaint. In addition,
the Company has moved to dismiss this case in Texas against it for lack of
personal jurisdiction.
The Company believes that this action against it will be dismissed for lack of
personal jurisdiction. If the action were not dismissed, the Company believes
that it has meritorious defenses and will continue to vigorously defend the
action. The Company is investigating whether any liability, which may accrue at
some future date, may be subject to reimbursement in whole or in part from
insurance proceeds. As of this date, the Company has no basis to conclude the
litigation may be material to the Company's financial condition or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 25, 1998, the Company held a special meeting of its stockholders to
amend and restate the Company's Amended and Restated Certificate of
Incorporation to eliminate certain restrictions on the payment of dividends on
the Company's Common Stock and the Company's Series A Cumulative Convertible
Preferred Stock, change the dividend payment rate on the Preferred Stock and
eliminate the requirement that the Company redeem the Preferred Stock.
The number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes of each class of capital stock entitled to vote
is set forth below:
Class of Stock For Against Withheld Abstentions
Common 1,140,084 37,782 744,234 13,378
Preferred 236,258 5,832 5,614 8,744
Based upon these results, the changes to the Company's Amended and Restated
Certificate of Incorporation was amended to reflect the changes referred to
above.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's Common Stock is traded on The NASDAQ Stock Market under the
symbol (ANDR) with quotes supplied by the National Market System of the National
Association of Securities Dealers, Inc. (NASDAQ).
The approximate number of record and beneficial holders of the Registrant's
Common Stock on May 8, 1998 was 625 and 1,100, respectively. The Company's high,
low and closing sales prices for the common equity, for each full quarterly
period within the two most recent fiscal years, are included below. The stock
prices shown, which were obtained from NASDAQ, represent prices between dealers
and do not include retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
- --------------------------------------------- ---------------------- ------------------------ ----------------------
Year ended February 28, 1998 High Low Close
- --------------------------------------------- ---------------------- ------------------------ ----------------------
First Quarter 5 1/2 4 1/2 5 1/8
Second Quarter 6 3/4 5 6 1/2
Third Quarter 10 1/4 6 1/4 7 5/8
Fourth Quarter 7 1/2 4 7/8 5 7/8
- --------------------------------------------- ---------------------- ------------------------ ----------------------
- --------------------------------------------- ---------------------- ------------------------ ----------------------
Year ended February 28, 1997 High Low Close
- --------------------------------------------- ---------------------- ------------------------ ----------------------
First Quarter 6 1/2 3 3/4 6
Second Quarter 7 5 1/4 6 1/2
Third Quarter 7 3 1/4 5 1/4
Fourth Quarter 6 1/2 5 5 1/2
- --------------------------------------------- ---------------------- ------------------------ ----------------------
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes certain financial data with respect to the
Company and is qualified in its entirety by the Consolidated Financial
Statements of the Company for the fiscal year ended February 28, 1998 contained
in Item 8 herein, (amounts in thousands, except per share data).
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Years ended February 1998 1997 1996 1995 1994
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Revenues (1) $28,868 $20,501 $19,437 $24,520 $17,024
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Income (loss) from continuing
operations 1,770 334 (1,921) (397) (923)
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Net income (loss) 2,212 299 1,933 (388) (868)
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Income (loss) applicable to
common shares 1,772 22 2,389 (975) (1,468)
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Income (loss) from continuing
operations per common share,
diluted .68 .03 (.76) (.90) (1.22)
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Income (loss) per common
share, diluted .91 .01 1.23 (.50) (0.80)
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Depreciation, amortization
and accretion 1,480 1,419 1,887 2,329 3,368
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Total assets 44,771 37,677 38,798 43,679 48,590
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Total debt 14,537 10,119 8,485 12,328 16,371
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Redeemable preferred stock - 4,891 5,280 10,593 10,494
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Common and other stockholders'
equity (2) 20,196 13,647 13,625 9,913 10,837
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
Book value per common share 7.97 7.05 7.04 5.13 5.62
- ------------------------------------ ---------------- ----------------- --------------- --------------- ----------------
(1) The results of Digital GraphiX are included in 1994, 1995 and two months of
1996. Net sales and revenues, and income (loss) from continuing operations,
exclude the results of operations of the Company's Ultrasonic Cleaning Equipment
and Dental segments as a result of their sales in February 1998 and November
1995, respectively.
(2) 1998 amount includes preferred stock as a result of the elimination of
its mandatory redemption provisions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
1998 vs. 1997
REVENUES
- --------
Total revenues from continuing operations of $28,868,000 for the fiscal year
ended February 28, 1998 (FY98) were 40.8% more than the $20,501,000 of revenues
recorded for the year ended February 28, 1997 (FY97). This increase represents
the combination of a 23.0% increase in sales generated by The J.M. Ney Company
(JM Ney), and an increase of $3,613,000 of investment and other income over the
net losses of $142,000 recorded in FY97.
JM Ney's increase in sales to $25,397,000 reflects growth in sales of contacts
for sensors used in the automotive industry, and increased sales of precious
metal materials, particularly materials for use in the manufacture of dental
implant components. Such sales growth during FY98 is reflected net of a 2%
decline in sales to the Company's former Dental segment.
Investment and other income totaled $3,471,000 for FY98, versus a loss of
$142,000 in FY97, as follows (000s omitted):
FY98 FY97
Net gains from domestic investment portfolio $1,759 $1,032
Net gains from Russian and Eastern European portfolio 665 -
Interest and dividends 228 366
Rental income 376 342
Gain from Digital GraphiX 196 -
Loss from investments in Phoenix Shannon - (2,175)
Other, net 247 293
------- -------
$3,471 ($142)
Gains from the Company's domestic investment portfolio increased due to a
rebound in the market value of the Company's investment in Centennial Cellular,
which had experienced a decline in value in FY97, and to continued growth in
value from the Company's portfolio of financial institutions. All gains from
this portion of the investment portfolio in each of the two most recent years
represented increases in net unrealized appreciation of the underlying
investments. Also, during FY98, the Company significantly expanded its
investment activities in Russia and Eastern Europe. This resulted in the
recording of net realized and unrealized gains of $665,000, net of valuation
allowances of $617,000 established for the foreign trading portfolio, and
$245,000 established for a Russian security held for longer term investment.
Such reserves were established to address volatility and liquidity concerns
within these markets.
During FY98, Digital GraphiX, Incorporated, an investment whose results had been
consolidated with those of the Company through April 1995, sold its net assets
and used the proceeds to repay notes, redeem its preferred stock, and issue
liquidating dividends on its common stock. As a result, the Company received
$196,000 in excess of the net carrying value of its investment.
During FY97, the Company wrote off $2,175,000 in the value of its investment in
the common stock of, and a note receivable from, Phoenix Shannon, p.l.c. which
had been received as part of the consideration for the sale of the net assets of
the Company's former Dental segment in FY96.
COST OF SALES
- -------------
Cost of sales totaled $17,040,000, or 67.1% of net sales in FY98, versus cost of
sales of $13,259,000, or 64.2% of net sales in FY97. The decline in the gross
margins from 35.8% to 32.9% was caused primarily by significant increases and
volatility in the price of palladium which is used in the majority of JM Ney's
products, and by increases in materials sales as a percentage of overall sales.
However, gross margins of $8,357,000 in FY98 represented a 13.2% increase over
FY97 levels.
During most of FY97, the price of palladium remained relatively stable between
$141 per troy ounce and $115 per troy ounce, with an increase at fiscal year end
to above $155 per ounce. Such a market condition enabled JM Ney to easily
replace the metal it had sold with metal of approximately equal value for LIFO
accounting purposes. However, during FY98, the price of palladium fluctuated
widely. Prices ranged from a low of $142 per troy ounce to a high of $240 per
ounce. During much of this period, the market viewed these price increases as
temporary, as reflected in the lower cost for palladium in future months.
Accordingly, for certain segments of its business, this price increase could not
be immediately passed on to JM Ney's customers. Although JM Ney had certain
hedging programs in place, such strategies did not cover all sales programs
involving significant quantities of palladium.
During the first quarter of FY99, the price of palladium has increased further.
JM Ney has utilized expanded metals hedging, financing and purchasing programs
to reduce the adverse exposure that this development may have on its results of
operations.
In addition, the Company's FY98 gross margin benefited from lower gold prices,
which served to slightly offset the impact of the effects of the palladium price
increases and volatility.
Also, during FY98, sales of precious metal materials, in the form of wire,
strip, and rod represented approximately 31.8% of sales, versus material sales
of 24.4% in FY97. Material products generally have lower average gross margins,
due to the commodity nature of the product, versus highly engineered parts and
components, which involve an increased amount of value-added processing, and
higher gross margins. Such sales mix contributed further to the lower average
gross margins during FY98.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses from continuing operations totaled
$6,260,000, or 8.5% more than the costs incurred during FY97. Costs of
approximately $128,000 incurred in the process of upgrading JM Ney's
manufacturing system to be Year 2000 compliant, an increase of $167,000 of
recruiting costs, including personnel fees and advertising, and legal costs
incurred in connection with the exchange of the Company's 10 1/2% Debentures and
change of the terms of its Preferred Stock all contributed to the growth in
these expenses.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
Research and development expenses increased from $1,228,000, or 5.9% of sales in
FY97 to $1,444,000, or 5.7% of sales in FY98. While increased material sales
served to lower the relative comparison, the absolute increase of 17.6% reflects
the cost of efforts to develop new proprietary alloys that have similar physical
attributes to existing alloys with lower palladium content to reduce exposure to
market fluctuations, and to work on new manufacturing processes which enable JM
Ney to offer product alternatives.
INTEREST EXPENSE
- ----------------
Interest expense increased from $790,000 in FY97 to $1,163,000 in FY98.
Increased borrowings under JM Ney's revolving line of credit to support both its
working capital requirements and those of Ney Ultrasonics served to increase
interest. In addition, significant increases in the leasing rates of palladium
and platinum also served to increase financing costs under its line of credit.
JM Ney was not exposed to these volatile interest rates to the extent that many
other companies using palladium were, thus this impact was contained.
Also, during the year, JM Ney closed on a $7.5 million seven-year subordinated
note that bears interest at the annual rate of 10.26%. Interest and amortization
of deferred financing costs for two months added to the interest expense total.
INCOME TAXES
- ------------
Income tax expense from continuing operations totaled $1,191,000 for FY98,
versus a tax benefit from continuing operations of $882,000 for FY97. The
current year expense included a net increase of $1,016,000 in deferred income
taxes payable. The effective tax rate for FY97 was favorably impacted by the
settlement of audits of prior state income tax returns.
DISCONTINUED OPERATIONS
- -----------------------
Effective February 28, 1998, the Company sold the net assets of Ney Ultrasonics
for approximately $3.5 million and additional contingent consideration. Net of
expenses incurred in the transaction, the Company recognized a gain of $97,000,
net of tax. For the year then ended, Ney Ultrasonics generated approximately
$345,000 of net income on sales of $5,713,000. During FY98 these operations
generated an increase in sales of 47.5% over FY97, which produced the first
operating profit in its history. The Company is optimistic that continuation of
the market penetration of the ultrasonic cleaning technology will result in
increased future profits in the form of contingent consideration from the sale.
PREFERRED DIVIDENDS
- -------------------
Preferred dividends, including the amortization of issuance costs, totaled
$477,000 during FY98, which is a 16.1% increase over the dividends of $411,000
accrued for FY97. The dividends per preferred share, which include a
participating dividend based on the operating income of JM Ney, including
earnings relating to Ney Ultrasonics and the former Dental segment, increased
from approximately $1.24 per share in FY97 to approximately $1.69 in FY98.
However, due to purchases of shares of preferred stock during both years, the
aggregate preferred dividends increased by a lower amount. Reversals of
previously accrued but unpaid dividends added $37,000 and $134,000 to income
applicable to common shareholders in FY98 and FY97, respectively.
As a result of the shareholder approval of the change in the terms of the
Preferred Stock, dividends that had been accrued from May 1993 through November
1997 were paid in February 1998.
NET INCOME
- ----------
As a result of the income of $1,770,000 generated from continuing operations,
income of $345,000 from discontinued operations, and the gain of $97,000 on the
sale of Ney Ultrasonics, total net income for FY98 was $2,212,000, versus net
income of $299,000 in FY97. After net preferred dividends, income applicable to
common shareholders for FY98 was $1,772,000, or $.92 per share basic, $.91
diluted, versus income applicable to common shareholders of $22,000, or $0.01
per basic and diluted share in FY97.
1997 VS. 1996
REVENUES
- --------
For the year ended February 28, 1997 (FY97), revenues from continuing operations
totaled $20,501,000, which were 5.5% more than revenues during the fiscal year
ended February 29, 1996 (FY96). This increase primarily reflects a 24.8%
increase in sales for The J.M. Ney Company (JM Ney), losses sustained from
investments in Phoenix Shannon, p.l.c., and the absence of sales from the
Company's former Video Products segment.
Sales from JM Ney were $20,643,000 during FY97, versus FY96 sales of
$16,544,000. Sales growth was generated in automotive, medical and other
industrial markets, which resulted from expansion of manufacturing capabilities
and effective marketing efforts. Additional sales growth was generated from
dental alloy fabrication services to the Company's former Dental segment, which
during FY96 was included for only three months after the sale of that division
to Phoenix Shannon. Sales from Digital GraphiX, Incorporated (DGI), the
Company's formerly consolidated Video Products segment, totaled $2,080,000
during the first two months of FY96. Due to an offering of DGI's common stock,
the Company's ownership was diluted and DGI's results beyond that date were not
consolidated with those of the Company. Accordingly, during FY97, this segment
did not generate any reported sales for the Company.
Investment and other income produced a net loss of $142,000 during FY97, versus
income of $813,000 in the prior fiscal year. A significant decline in the market
value of Phoenix Shannon common stock resulted in the complete write-off of
$2,175,000 of the Company's investment in Phoenix Shannon, including a $1
million note receivable. During FY96, the Company absorbed a $525,000 loss
relating to a decline in the market value of Phoenix Shannon's common stock.
Gains from common stocks, which primarily comprised investments in certain
financial institutions, produced net investment gains of $1,032,000 during FY97,
while these investment activities yielded $585,000 of net gains during FY96. In
addition, rental income increased from $281,000 in FY96 to $342,000 in FY97, due
primarily to a full year of revenue from the former Dental segment, which has
leased space in the Company's 100,000 square foot office and manufacturing
facility. Interest income of $342,000 in FY97 was 27.1% lower than the $469,000
recorded in FY96, due primarily to reduced interest related to the Company's
note receivable from DGI, which was partially offset by increased interest on
excess cash balances. The DGI note was partially converted to DGI's preferred
stock during FY97, and no accruals of dividend income were recorded. In
addition, fee income of $200,000 in FY97 added to the total of investment and
other income.
COST OF SALES
- -------------
Cost of sales of $13,259,000 in FY97 represented 64.2% of sales, while such
costs amounted to $12,016,000, or 64.5% of sales during FY96. The increased
gross margins, 35.8% versus 35.5%, represents the net of a 1.5% increase in
margins for JM Ney, and the absence of higher margin sales from the Video
Products segment, for which only modest sales were reported for FY96.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses of $5,772,000 during FY97 were
24.9% lower than the $7,683,000 of such expenses reported for FY96. A write-down
in FY96 of $1 million of the Company's investment in DGI, and approximately
$950,000 of legal and settlement costs relating to a suit filed against a former
subsidiary of the Company accounted for most of the higher costs in FY96.
Selling, general and administrative expenses totaled 28.2% of revenues in FY97
versus 39.5% in FY96.
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
Research and development expenses decreased from $1,374,000 in FY96 to
$1,228,000 in FY97 due to the absence in FY97 of such expenses from DGI. Such
expenses, excluding DGI, were $1,041,000, or 6.3% of sales in FY96, versus 5.9%
of sales for FY97. The relative increase reflects efforts at JM Ney to develop
new precious metal alloys, and product processes.
INTEREST EXPENSE
- ----------------
Interest expense of $790,000 during FY97 represents a 36.1% decrease from
interest expense of $1,237,000 incurred during FY96. Principal payments in both
years on long-term obligations, including prepayments made during FY97 to
implement a Capital Stock Purchase Program, along with lower average outstanding
amounts under revolving credit agreements, resulted in the lower interest
expense in FY97.
INCOME TAX BENEFIT
- ------------------
An income tax benefit of $882,000 relating to continuing operations was recorded
in FY97 due to the $548,000 pre-tax loss and to the favorable settlement of a
state income tax audit relating to prior years which was the primary factor that
enabled the Company to reverse approximately $546,000 of accrued income taxes. A
tax benefit of $952,000 relating to $2,873,000 of losses from continuing
operations was recorded in FY96.
DISCONTINUED OPERATIONS
- -----------------------
During FY97, Ney Ultrasonics' operations produced a net loss of $35,000, versus
a net loss of $349,000 from this former segment in FY96. Market acceptance of
newly-introduced ultrasonic cleaning technology improved its sales and operating
results. In addition, during FY96, nine months of activities from the Company's
former Dental segment produced net income of $413,000, or $0.21 per share. A net
gain of $3,790,000, or $1.96 per share, was recorded in FY96 from the sale of
the net assets of this segment to Phoenix Shannon. This gain included $519,000
of a curtailment gain relating to JM Ney's defined benefit pension plan. Part of
the proceeds received from the sale of the Dental segment included 200,000
shares of Phoenix Shannon's stock, which were valued at $1,700,000 and a $1
million note receivable. As noted, during FY96 and FY97, the entire value of
this portion of the consideration was completely written off. Phoenix Shannon
was subsequently placed into bankruptcy and its assets, including the former
Dental segment, were sold. However, such proceeds were insufficient to enable
the Company to realize any value from either the note or the stock.
PREFERRED DIVIDENDS
- -------------------
The preferred dividend requirement, including the amortization of the issuance
discount, totaled $411,000 in FY97 versus $559,000 in FY96. The decrease
reflects the combination of fewer outstanding preferred shares in FY97 versus
FY96 due to share purchases in the fourth quarters of both FY96 and FY97, and
increased per-share dividends. Due to increased consolidated operating income of
The J.M. Ney Company, including the results of Ney Ultrasonics, and the gain on
the sale of the Dental segment, per-share dividends increased from $0.78 in FY96
to $1.24 in FY97.
NET INCOME
- ----------
For FY97, the Company reported net income of $299,000. After preferred
dividends, and reversal of preferred dividends due to the repurchase of shares,
income applicable to common shareholders was $22,000 or $0.01 per share. This
compares to net income of $1,933,000, including the gain on sale of the Dental
segment and the results of both discontinued operations. After preferred
dividends and the reversal of $1,015,000 of dividends from share purchases, FY96
income applicable to common shareholders was $2,389,000, or $1.23 per share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At February 28, 1998, consolidated cash and short-term investments and
marketable securities totaled approximately $11,517,000, which was an increase
of $2,953,000 from the February 28, 1997 total of $8,564,000. At February 28,
1998, the marketable securities included approximately $5,611,000 of the common
stock of certain financial institutions, $493,000 of non-investment grade
municipal bonds, and $430,000 of the common stock of Centennial Cellular, which
had purchased certain cellular partnership interests from the Company in FY95.
This portfolio also included approximately $2,467,000 reported value of
marketable investments in an emerging Russian mutual fund, and a portfolio of
securities of companies located in the Ukraine and Poland. The reported value of
this portfolio is reflected net of a valuation reserve of $617,000, which was
established to address liquidity and market volatility concerns inherent in
those particular emerging markets.
During FY98, the Company made substantial investments in Russian and Eastern
European markets, including an investment with a recorded value of $980,000 in
AVISMA/VSMPO, a Russian titanium producer whose stock does not currently have a
reported market value due to the relative sparseness in the stock's trading
volume. This security is recorded at its cost less a valuation reserve of
$245,000. Including this investment, the Company's investment of $835,000 in the
Institute for Automated Systems and the above-reported marketable securities,
total Russian and Eastern European investments was $4,282,000, net of
aforementioned valuation reserves. This represents approximately 9.6% of assets
and 21.2% of total stockholders' equity.
During FY98, pursuant to shareholder approval, the Company exchanged $4,311,000
of its 10 1/2% Convertible Subordinated Debentures for an equal amount of new
notes which bear the same interest rate and conversion terms, but do not contain
restrictive covenants contained in the original issue. The new notes have a
longer average maturity, with the final maturity date being in 2007. Pursuant to
this exchange, the Company paid the remaining $456,000 of an Industrial Revenue
Bond and $1,387,000 principal value of the 10 1/2% Debentures that were not
tendered in the exchange. The exchange and redemption of the original notes
resulted in the elimination of a restriction concerning the payment of
dividends. Accordingly, in February 1998, approximately $1,222,000 of previously
accrued but unpaid dividends on preferred stock were paid.
The Company also received the consent of its shareholders to change the terms of
its Series A Cumulative Convertible Preferred Stock ("Preferred Stock"),
including elimination of the required redemption terms and an amendment of the
dividend rate to a fixed annual amount of $1.50 per share, paid quarterly. Prior
to the change, the Preferred Stock called for dividends based upon the earnings
of JM Ney (including the former Dental and Ultrasonics Cleaning segments).
Accordingly, such dividends could range from a minimum of $0.75 per share, to a
maximum of $1.75 per share. For FY98, such dividends totaled $1.69 per preferred
share.
During FY98, JM Ney entered into a seven-year $7,500,000 subordinated note with
a commercial bank that bears interest at 10.26% per annum. JM Ney used the
proceeds to make distributions to the Company, pay down existing obligations and
fund certain capital expenditures. The remaining funds and the increased
availability under its line of credit will be used for the acquisition of
another business, although no specific transaction has been identified. In
connection with issuing this note, JM Ney also granted the lender warrants to
acquire 34,000 and 6,000 shares of its common stock at $1.00 and $10.00 per
share, respectively. Concurrent with this note agreement, JM Ney also amended
the terms of its $6 million revolving credit agreement which expanded its
precious metals financing options, reduced JM Ney's interest rates for certain
borrowings under the line, and amended covenants to accommodate the new
financing.
During FY98, the prices of the precious metals that JM Ney utilizes in the
alloying and manufacturing of its products experienced significant volatility.
Primarily as a net result of an increase of approximately $100 per ounce of the
palladium content of its inventory, and a $60 per ounce decline in the gold
component of its inventory, JM Ney's LIFO reserve increased by $1,176,000 to
maintain the net recorded value of these inventories at their historical values.
As a result of covenants contained in its borrowing agreements, JM Ney is
restricted from paying dividends or otherwise transferring funds to the Company
outside the normal course of business, except as defined in certain agreements.
At February 28, 1998, JM Ney's working capital and net worth, net of liabilities
to the Company, totaled approximately $9.4 million and $6.8 million,
respectively. The Company believes income generated from its investments, or
funds generated from liquidation of existing investments and allowed payments
from JM Ney will be sufficient to meet its anticipated working capital and debt
service requirements for the foreseeable future.
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements, which are subject to a number
of risks, and uncertainties that may cause actual results to differ materially
from expectations. Those uncertainties include, but are not limited to the
following:
The Company has expanded its investment and business development activities in
Russia and Eastern Europe. Economic and political developments in these
countries could significantly impact both the return on and the return of
capital employed in these regions. Anticipated contingent consideration from the
sale of Ney Ultrasonics is dependent upon the successful marketing of technology
developed while the Company owned Ney Ultrasonics. Changes in technology, or
shortfalls in the success of the buyer's marketing of this technology, could
affect the ultimate consideration to be received. The price and volatility of
precious metals, particularly palladium and gold, could impact the market for
many of JM Ney's products as users substitute less expensive materials.
YEAR 2000
- ---------
The Year 2000 compliance issues concern the inability of certain computerized
information systems to properly recognize date-sensitive information as the Year
2000 approaches. Systems that do not recognize such information could generate
erroneous data or cause systems to fail. The Company has upgraded its hardware
and is in the process of installing a new version of its software, which among
other benefits, will result in the Company being Year 2000 compliant. This
conversion is expected to be completed prior to the end of FY99. The Company has
also taken measures to ensure that other systems within its operations, as well
as the interface with its customers, suppliers and other vendors, are conducted
in a Year 2000 compliant environment. Approximately $128,000 of costs was
incurred during FY98 for this project. The Company estimates that the costs
anticipated to be incurred during the next fiscal year to complete this
conversion process will not exceed $300,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statement schedules are filed as part of Part IV, Item 14, of this
Annual Report on Form 10-K.
The Registrant's Consolidated Financial Statements for the fiscal year ended
February 28, 1998 are set forth below.
The following table summarizes certain financial data with respect to the
Company and is qualified in its entirety by the Company's Consolidated Financial
Statements for the fiscal year ended February 28, 1998 contained in this Item
(amounts in thousands, except per share data).
Selected Quarterly Financial Data
1998 Quarterly Financial Data May 31 August 31 November 30 February 28
- --------------------------------------------------- ----------- ------------- --------------- ---------------
Net sales and revenues $6,338 $9,346 $6,396 6,788
Gross profit 2,073 1,938 2,226 2,120
Income (loss) from continuing operations 217 2,088 (283) (252)
Net income (loss) 267 2,111 (183) 17
Income (loss) applicable to common shares 141 2,040 (305) (104)
- --------------------------------------------------- ------------ ------------- ---------------- ---------------
Earnings (Loss) Per Diluted Common Share (1):
Continuing operations .05 .78 (.21) (.19)
Net income (loss) .07 .79 (.16) (.05)
- --------------------------------------------------- ------------ ------------- --------------- ----------------
1997 Quarterly Financial Data May 31 August 31 November 30 February 28
- --------------------------------------------------- ----------- ------------- --------------- -----------------
Net sales and revenues $6,694 $4,775 $3,942 $5,090
Gross profit 2,200 1,657 1,774 1,753
Income (loss) from continuing operations 574 (376) (855) 991
Net income (loss) 619 (374) (941) 995
Income (loss) applicable to common shares 477 (474) (1,027) 1,046
- --------------------------------------------------- ------------ ------------- ---------------- -----------------
Earnings (Loss) Per Common Share:
Continuing Operations .22 (.25) (.49) 0.43
Net income (loss) .25 (.25) (.53) 0.43
- --------------------------------------------------- ------------- -------------- ----------------- -----------------
(1) The sum of earnings per share for the four quarters may not equal
earnings per share for the total year due to certain items in the diluted
earnings per share calculation for an individual quarter that were anti-dilutive
for the total year.
ANDERSEN GROUP, INC.
Consolidated Balance Sheets
February 28, 1998 and 1997
(in thousands, except share data)
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $2,516 $3,219
Marketable securities 9,001 5,345
Receivable from sale of subsidiary 3,521 -
Accounts and other receivables, less allowance for doubtful
accounts of $130 in 1998 and $190 in 1997 3,870 2,773
Inventories 8,076 9,040
Prepaid expenses and other assets 142 516
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 27,126 20,893
- -------------------------------------------------------------------------------------------------- -------------------------
Property, plant and equipment, net 9,443 9,336
Prepaid pension expense 4,665 4,274
Investments 1,815 2,181
Other assets 1,722 993
- ----------------------------------------------------------------------------------------------------------------------------
$44,771 $37,677
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 595 $ 773
Short-term borrowings 2,183 2,305
Accounts payable 951 1,398
Accrued liabilities 3,352 3,670
Deferred income taxes 1,286 564
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,367 8,710
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 4,459 7,041
Subordinated note payable, net of unamortized discount 7,300 -
Other long-term obligations 1,888 1,121
Deferred income taxes 2,561 2,267
Commitments and contingencies (Notes 17 and 20)
Redeemable cumulative convertible preferred stock,
no par value; authorized 800,000 shares; issued
789,628 shares; outstanding shares 265,192 in 1997;
unamortized discount of $81 in 1997; liquidation 4,891
preference $18.75 per share -
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Cumulative convertible preferred stock, no par value;
authorized 800,000 shares, outstanding 256,416 shares 4,769 -
Common stock, no par value; authorized 6,000,000 shares,
issued 1,958,478 shares in 1998 and 1997 2,103 2,103
Treasury stock, at cost, 21,800 shares in 1998 and 24,000
shares in 1997 (82) (90)
Additional paid-in capital 3,248 3,248
Retained earnings 10,158 8,386
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,196 13,647
- ----------------------------------------------------------------------------------------------------------------------------
$44,771 $37,677
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC.
Consolidated Statements of Operations
Years ended February 28, 1998, 1997
and February 29, 1996
(in thousands, except per share data)
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $25,397 $ 20,643 $18,624
Investment and other income (loss) 3,471 (142) 813
- -------------------------------------------------------------------------------------------------------------------------
28,868 20,501 19,437
- --------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 17,040 13,259 12,016
Selling, general and administrative 6,260 5,772 7,683
Research and development 1,444 1,228 1,374
Interest expense 1,163 790 1,237
- --------------------------------------------------------------------------------------------------------------------------
25,907 21,049 22,310
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 2,961 (548) (2,873)
Income tax expense (benefit) 1,191 (882) (952)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,770 334 (1,921)
Income (loss) from discontinued Ultrasonics
segment, net of income taxes (benefit) of
$221, ($22) and ($214), respectively 345 (35) (349)
Gain on sale of discontinued Ultrasonics
segment, net of income taxes of $84 97 - -
Income from discontinued Dental segment,
net of income taxes of $170 - - 413
Gain on sale of discontinued Dental segment, net
of income taxes of $2,041 - - 3,790
- --------------------------------------------------------------------------------------------------------------------------
Net income 2,212 299 1,933
Preferred dividend requirement (477) (411) (559)
Reversal of preferred dividends 37 134 1,015
- --------------------------------------------------------------------------------------------------------------------------
Income applicable to common shareholders $ 1,772 $ 22 $ 2,389
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
BASIC
Continuing operations $.69 $.03 $ (.76)
Discontinued operations .18 (.02) .03
Gain on sales of discontinued segments .05 - 1.96
- --------------------------------------------------------------------------------------------------------------------------
Income per common share $.92 $.01 $ 1.23
- --------------------------------------------------------------------------------------------------------------------------
DILUTED
Continuing operations $.68 $.03 $ (.76)
Discontinued operations .18 (.02) .03
Gains on sales of discontinued segments .05 - 1.96
- --------------------------------------------------------------------------------------------------------------------------
Income per common share, diluted $.91 $.01 $1.23
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years ended February 28, 1998, 1997
and February 29, 1996
(in thousands, except share data)
1998 1997 1996
- -------------------------------------------- ------------------ ------------------ -----------------
Preferred Stock
Beginning balance - - -
Reclassification due to removal of
redemption provisions of preferred
stock $4,769 - -
- -------------------------------------------- ------------------ ------------------ -----------------
$4,769 - -
- -------------------------------------------- ------------------ ------------------ -----------------
Common Stock, Outstanding Shares
Beginning balance 1,958,478 1,958,205 1,958,205
Shares issued from prior
conversion of preferred stock - 273 -
- -------------------------------------------- ------------------ ------------------ -----------------
1,958,478 1,958,478 1,958,205
- -------------------------------------------- ------------------ ------------------ -----------------
Common Stock
Beginning balance $2,103 $2,103 $2,103
Shares issued from prior
conversion of preferred stock - - -
- -------------------------------------------- ------------------ ------------------ -----------------
$2,103 $2,103 $2,103
- -------------------------------------------- ------------------ ------------------ -----------------
Additional Paid-In Capital
Beginning balance $3,248 $3,248 $1,924
Gain from redemption of preferred
stock - - 1,324
- -------------------------------------------- ------------------ ------------------ -----------------
$3,248 $3,248 $3,248
- -------------------------------------------- ------------------ ------------------ -----------------
Retained Earnings
Beginning balance $8,386 $8,364 $5,975
Net income 2,212 299 1,933
Preferred stock dividend and
accretion (477) (411) (559)
Reversal of preferred dividends and
accretion 37 134 1,015
- -------------------------------------------- ------------------ ------------------ -----------------
$10,158 $8,386 $8,364
- -------------------------------------------- ------------------ ------------------ -----------------
Treasury Stock
Beginning balance $(90) $(90) $(90)
Shares issued, at identified cost 8 -
- -------------------------------------------- ------------------ ------------------ -----------------
$(82) $(90) $(90)
- -------------------------------------------- ------------------ ------------------ -----------------
- -------------------------------------------- ------------------ ------------------ -----------------
Total stockholders' equity $20,196 $13,647 $13,625
- -------------------------------------------- ------------------ ------------------ -----------------
See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC.
Consolidated Statements of Cash Flows
Years ended February 28, 1998, 1997
and February 29, 1996
(in thousands)
1998 1997 1996
- ----------------------------------------------------------- ------------- ------------- --------------
Cash flows from operating activities:
Net income $2,212 $ 299 $1,933
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation, amortization and accretion 1,480 1,419 1,887
Deferred income taxes 1,016 67 (479)
Gain on sale of Dental segment - - (3,790)
Gain on sale of Ney Ultrasonics (97) - -
Losses (gains) from securities (2,619) 1,149 (46)
Purchases of securities (2,218) (1,625) (3,576)
Proceeds from sales of securities 1,230 526 1,893
Pension (income) expense (391) (247) 8
Loss on disposal of property, plant and equipment - 58 1
Investment in Digital GraphiX - (87) 543
Changes in operating assets and liabilities, net of
changes from sale of Ney Ultrasonics in 1998 and sale of
Dental segment in 1996:
Accounts and notes receivable (2,048) 1,564 (1,205)
Inventories (386) (428) (2,941)
Prepaid expenses and other assets (97) (339) (806)
Accounts payable 507 (1,799) 2,006
Accrued liabilities and other long-term obligations (1,257) (930) (2,022)
- ----------------------------------------------------------- ------------- ------------- --------------
Net cash used in operating activities (2,516) (373) (6,594)
- ----------------------------------------------------------- ------------- ------------- --------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment - 4 256
Purchase of property, plant and equipment (1,740) (1,191) (1,503)
Proceeds from sale of Dental segment, net of cash sold - - 16,848
Purchase of investments (1,225) - -
Proceeds from collection of investments 1,542 - -
- ----------------------------------------------------------- ------------- ------------- --------------
Net cash (used in) provided by investing activities (1,423) (1,187) 15,601
- ----------------------------------------------------------- ------------- ------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt (2,760) (1,250) (642)
Proceeds from issuance of subordinated debt 7,500 - -
Redemptions of preferred stock (160) (392) (3,758)
Proceeds (payment) of short-term borrowing, net (122) 2,305 (3,200)
Dividends paid (1,222) - -
- ----------------------------------------------------------- ------------- ------------- --------------
Net cash provided by (used in) financing activities 3,236 663 (7,600)
- ----------------------------------------------------------- ------------- ------------- --------------
Net (decrease) increase in cash and cash equivalents (703) (897) 1,407
Cash and cash equivalents, beginning of year 3,219 4,116 2,709
- ----------------------------------------------------------- ------------- ------------- --------------
Cash and cash equivalents, end of year $2,516 $3,219 $4,116
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended February 28, 1998, 1997
and February 29, 1996
(1) Nature of Business
Andersen Group, Inc. (the Company) is a diversified holding company, which
invests in both marketable and illiquid securities of domestic and foreign-based
companies. It also owns a consolidated subsidiary, which manufactures electronic
connectors, components and precious metal materials for sale to the automotive,
defense, semiconductor and medical and dental markets.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation
The Company's financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include funds held in investments with an original
maturity of three months or less.
Marketable Securities
The Company's marketable securities are carried as trading securities at market
value in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). The
Company has established a valuation allowance of $617,000 at February 28, 1998
to provide for volatility and liquidity concerns relating to its marketable
investments in Russia and other eastern European countries. Any changes in the
valuation of the portfolio are reflected in the accompanying Consolidated
Statements of Operations.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for precious metals and at standard costs
which approximate the first-in, first-out (FIFO) and average cost methods for
the balance of the inventories.
Property, Plant and Equipment
Property, plant and equipment, including capital leases, are stated at cost and
depreciated using the straight-line method over the estimated useful life of the
respective assets, as follows:
Buildings and improvements 10-50 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-10 years
Unamortized Discounts
Unamortized discounts on redeemable convertible cumulative preferred stock and
subordinated notes payable are accreted using the effective interest method.
Income Taxes
Income taxes are determined using the asset and liability approach. This method
gives consideration to the future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities at
currently enacted tax rates.
Earnings per share
In accordance with Statement of Financial Accounting Standards No. 128 -
"Earnings Per Share" (SFAS 128), basic earnings per share is computed based upon
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed based upon the weighted average number of
common shares plus the assumed issuance of common shares for all potentially
diluted securities. See Note 13 for additional information and a reconciliation
of the basic and diluted earnings per share computations.
Inventory Hedging
The Company has entered into precious metal forward contracts as a hedge against
precious metal fluctuations for firm price deliveries. These contracts limit the
Company's exposure to both favorable and unfavorable precious metals price
fluctuations. Gains or losses on these contracts are recognized when the product
deliveries being hedged have been made. The Company also utilizes precious
metals leasing and deferred payment purchases of precious metals to manage the
price exposure of certain components of its inventory.
Financial Statement Presentation
Certain reclassifications, and the restatement of the Consolidated Statements of
Operations to reflect Ney Ultrasonics Inc. as a discontinued operation due to
the sale of the net assets effective February 28, 1998, have been made to the
FY97 and FY96 financial statements in order to conform with the FY98
presentation.
(3) Marketable Securities
Marketable securities consist of the following (in thousands):
February 28, 1998 February 28, 1997
----------------- -----------------
Common stock of savings banks $5,611 $3,508
Common stock of Centennial Cellular 430 263
CA Emerging Russia Fund 2,422 -
Portfolio of Ukraine stocks 314 -
Common stock of Bank Handlowey 348 -
Portfolio of Russian stocks - 500
Valuation reserve - foreign investments (617) -
Municipal bonds 493 488
Escrowed investments - sale of Dental segment - 586
------ ------
$9,001 $5,345
------ ------
(4) Inventories
Inventories consist of the following (in thousands):
February 28, 1998 February 28, 1997
-------------------------------------------------------------------------------
Raw material $2,989 $3,111
Work in process 6,509 3,877
Finished goods 657 2,955
-------------------------------------------------------------------------------
10,155 9,943
LIFO Reserve 2,079 903
-------------------------------------------------------------------------------
$8,076 $9,040
-------------------------------------------------------------------------------
At February 28, 1998 and February 28, 1997, inventories valued at LIFO cost
comprised 79% and 64% of total inventories, respectively. At February 28, 1998,
inventories valued at LIFO consisted of 9,620 troy ounces of gold, 16,714 troy
ounces of silver, 3,448 troy ounces of platinum and 16,713 troy ounces of
palladium. Such quantities of precious metals are net of 5,000 ounces of silver,
558 ounces of platinum and 2,000 ounces of palladium, which represents physical
quantities held but not owned by the Company's primary operating subsidiary, The
J.M. Ney Company (JM Ney), subject to leasing arrangements with the precious
metals division of JM Ney's primary bank. In addition, as a hedge for certain
portions of its inventory, JM Ney at February 28, 1998 had short-term borrowings
of 732 troy ounces of gold, 2,000 ounces of silver and 2,000 ounces of
palladium.
(5) Discontinued Operations
Ney Ultrasonics Inc.
Effective February 28, 1998, the Company sold the net assets of Ney Ultrasonics
Inc. for approximately $3,521,000. As a result, the Company has recorded a gain
of $97,000, net of expenses relating to the transaction and income taxes of
$84,000. The Company expects to receive additional consideration, which is
contingent on the growth of the sales of products and technology transferred as
part of the sale.
The assets and liabilities sold are presented below (in thousands):
Accounts receivable, net $ 951
Inventories 1,350
Other current assets 63
Property and equipment 246
Other assets 153
------
2,763
Accounts payable and accrued liabilities 242
------
Net assets sold $2,521
Ney Ultrasonics' results of operations have been presented as discontinued
operations. Revenue from the segment totaled approximately $5,713,000,
$3,874,000 and $4,611,000 in FY98, FY97 and FY96, respectively.
Dental Segment
On November 28, 1995, the Company sold the assets and certain liabilities of its
Dental segment to Phoenix Shannon p.l.c. of Shannon, County Clare, Ireland and
recorded a gain of $3,790,000, net of expenses, and income taxes of $2,041,000.
The Company received $18.5 million in cash, part of which, under the terms of
the sale, was used to purchase 200,000 Phoenix Shannon Ordinary Shares and a
two-year, interest-bearing note for $1 million. Included in the gain on sale is
an increase of $519,000 in prepaid pension expense from a curtailment gain which
arose as a result of the transfer of the employees of the Dental segment to the
new employer.
During FY97, the $1 million note and the remaining value of the Phoenix Shannon
ordinary shares were written off, resulting in charges to investment income
totaling $2,175,000.
The results of operations of the Dental segment have been presented as
discontinued operations. Revenue from this segment totaled approximately $29.6
million during FY96.
(6) Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
February 28, 1998 February 28, 1997
- ------------------------------------------------------ ------------------------------ ------------------------------
Land and improvements $1,056 $ 1,054
Buildings and improvements 9,392 8,783
Machinery and equipment 10,539 10,188
Furniture and fixtures 867 921
- ------------------------------------------------------ ------------------------------ -------------------------------
21,854 20,946
Less accumulated depreciation and
amortization 12,411 11,610
- ------------------------------------------------------ ------------------------------ -------------------------------
$9,443 $ 9,336
- ------------------------------------------------------ ------------------------------ -------------------------------
Depreciation and amortization expense was $1,405,000, $1,393,000 and
$1,797,000 in FY98, FY97 and FY96, respectively.
At both February 28, 1998 and February 28, 1997, property, plant and equipment
includes $1,146,000 of machinery and equipment acquired under capital leases,
which expire through FY02, with related allowances for depreciation of $728,000
and $493,000, respectively.
(7) Investments
Investments consist of the following (in thousands):
February 28, 1998 February 28, 1997
- --------------------------------------------------------- --------------------------- ------------------------------
Investment in Institute for Automated Systems $ 835 $ 835
Investment in AVISMA 980 -
Investment in Digital GraphiX, Incorporated - 1,346
- --------------------------------------------------------- --------------------------- -------------------------------
$ 1,815 $ 2,181
- --------------------------------------------------------- --------------------------- -------------------------------
Digital GraphiX Incorporated
Prior to a May 1995 offering of its common stock, DGI was a wholly owned
subsidiary of the Company. After the transaction, the Company's ownership was
diluted to 19%, after which time the investment in DGI stock and debt was
recorded using lower of cost or market accounting.
During FY97, the Company reduced its investment in DGI through the formal
discharge of DGI's obligation to repay $2.2 million of a note payable, and
recorded a corresponding income tax benefit. During FY97, as part of a plan to
position DGI for ultimate sale, the Company invested an additional $250,000 to
purchase DGI common shares which increased the recorded value of its investment
to $1,346,000.
In FY98, the net assets of DGI were sold. Through payments of debts and
preferred stock and liquidating distributions on its common stock, the Company
was able to realize its carrying value and recognize a gain of $196,000.
Institute for Automated Systems
At both February 28, 1998 and February 28, 1997, the Company had an investment
of $835,000 in a joint venture, which has an equity interest in the Institute
for Automated Systems, a Russian telecommunications company that has plans to
develop a data transmission network throughout Russia. Costs expended in FY98 to
develop this investment were expensed in the Consolidated Statement of
Operations.
The Company's President and another Director are among a group of investors in
this joint venture.
AVISMA
During FY98, the Company invested approximately $1,225,000 in the common stock
of AVISMA, a Russian titanium producer. This investment is being recorded at its
cost, net of a valuation allowance of $245,000. Excluded from the recorded
balance are shares with a cost basis of approximately $775,000 purchased by
three of the Company's directors and an investment fund controlled by one of
these directors. Such shares are being held by the Company for administrative
convenience pending the issuance of new shares to be issued in connection with a
merger of AVISMA into VSMPO, a Russian titanium processing company.
(8) Short-term Borrowings
J.M. Ney has a $6.0 million demand revolving credit and deferred payment sales
agreement with two commercial banks. At February 28, 1998, $696,000 was
outstanding. The facility is secured by substantially all of JM Ney's assets. At
JM Ney's discretion, interest is charged at the bank's prime rate, which was
8.5% and 8.25% at February 28, 1998 and February 28, 1997, respectively, or at
LIBOR plus 1.75% if the borrowing is fixed for a period of time, or at 1.75%
over the bank's precious metals leasing rate if the borrowing is represented by
deferred payment purchases of precious metals. A fee of 0.25% is charged on the
unused balance of the facility. This agreement includes restrictive covenants
that limit the amount of dividends and distributions from JM Ney to the Company
and which require JM Ney to maintain a specified amount of stockholders' equity.
At February 28, 1998 the amount of net assets which JM Ney was restricted from
distributing to the Company totaled approximately $10,808,000.
In addition, at February 28, 1998, the Company had a $1,487,000 demand loan,
which was secured by a portion of the Company's portfolio of marketable
securities. Interest on this borrowing was charged at 7.75%.
(9) Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
February 28, 1998 February 28, 1997
- --------------------------------------- ------------------------------------ ----------------------------------------
Employee compensation $ 449 $ 628
Accrued dividends 112 934
Income taxes 201 51
Accrued interest 314 265
Deferred hedging gains 346 42
Other 1,930 1,750
- --------------------------------------- ------------------------------------ ----------------------------------------
$3,352 $3,670
- --------------------------------------- ------------------------------------ ----------------------------------------
(10) Long-term Debt and Subordinated Notes Payable
Long-term debt and subordinated notes payable consist of the following (in
thousands):
February 28, 1998 February 28, 1997
- -------------------------------------------------------------------- ---------------------- --- ----------------------
Mortgage note payable, interest at 5.4%,
paid February 1998 $ - $ 575
Convertible subordinated debentures, due
October 2002; redeemed or exchanged in
February 1998 - 6,287
Convertible subordinated debentures, due October
2007; interest at 10.5%, payable semi-annually;
annual principal payments in varying amounts
through maturity; unsecured 4,311 -
Subordinated note payable of JM Ney due
December 2004; unsecured; quarterly interest
payments at 10.26% 7,500 -
Other 743 952
- -------------------------------------------------------------------- ---------------------- ----------------------
12,554 7,814
Less unamortized discount on subordinated
note payable 200 -
- -------------------------------------------------------------------- ---------------------- ----------------------
12,354 7,814
Less current maturities 595 773
- -------------------------------------------------------------------- ---------------------- ----------------------
$11,759 $7,041
- -------------------------------------------------------------------- ---------------------- ----------------------
The terms of the 2007 convertible subordinated debentures call for the annual
redemption of approximately $431,000 of principal. The debentures are
convertible into common stock of the Company at any time prior to maturity,
unless previously redeemed, at $16.17 per share, subject to adjustment under
certain conditions. At February 28, 1998, 266,604 shares of common stock were
reserved for conversion.
In connection with the issuance of the subordinated note payable, JM Ney issued
warrants to the lender to acquire 34,000 shares of its common stock at an
exercise price of $1.00 per share, and 6,000 warrants with an exercise price of
$10.00 per share. The lender has an option to put the warrant back to J.M. Ney
at the earlier of December 2002 or the date of an initial public offering of
J.M. Ney's Common Stock on terms as defined in the agreement.
Maturities of long-term debt for each of the next five fiscal years and
thereafter are as follows (in thousands):
1999 $ 595
2000 569
2001 542
2002 548
2003 443
Thereafter 9,857
-------
$12,554
(11) Income Taxes
For FY98, FY97 and FY96, income tax expense (benefit) consists of the following
(in thousands):
Fiscal Years 1998 1997 1996
- ------------ -------------------- --------------------- ------------------
Current Federal $ 350 $(410) $ 360
Current State 130 (561) 296
Deferred Federal 940 62 360
Deferred State 76 5 29
-------------------- --------------------- ------------------
$1,496 $(904) $1,045
-------------------- --------------------- ------------------
The difference between the actual income tax expense (benefit) and the income
tax expense (benefit) computed by applying the statutory Federal income tax rate
of 34% to income (loss) before taxes is attributable to the following (in
thousands):
1998 1997 1996
-------------------- --------------------- ------------------
Income tax expense (benefit) $1,261 $(206) $1,012
State income taxes, net of Federal benefit 206 107 196
Change in enacted tax rates - (264) -
Change in valuation allowance - - (483)
Adjustment of accrual for prior years' taxes - 546 319
Other 29 5 1
- ------------------------------------------------------- -------------------- --------------------- ------------------
$1,496 $(904) $1,045
- ------------------------------------------------------- -------------------- --------------------- ------------------
During FY97, the Company settled a State income tax audit covering FY89 through
FY96. This settlement is the primary reason for the $546,000 benefit adjustment
of accrual for prior years' taxes reported in the above reconciliation.
The principal components of the net deferred tax asset (liability) as of
February 28, 1998 and February 28, 1997 are as follows (in thousands):
1998 1997
----------------------- --------------------------
Deferred tax liabilities:
Fixed asset basis differences $(1,229) $(1,288)
Inventory (1,486) (1,443)
Pension (1,726) (1,581)
Unrealized gains on marketable securities, net (470) -
Installment sale (30) (207)
- ------------------------------------------------------------------ ----------------------- --------------------------
Total deferred tax liabilities (4,941) (4,519)
- ------------------------------------------------------------------ ----------------------- --------------------------
Deferred tax assets:
Post-retirement benefits other than pensions 395 415
Unrealized losses on marketable securities, net - 177
Allowance for uncollectible receivables 48 440
Federal credit carry-forwards 337 302
Other 314 354
- ------------------------------------------------------------------ ----------------------- --------------------------
Total deferred tax assets 1,094 1,688
- ------------------------------------------------------------------ ----------------------- --------------------------
Net deferred tax liabilities $(3,847) $(2,831)
- ------------------------------------------------------------------ ----------------------- --------------------------
At February 28, 1998 and 1997 the Company recorded no valuation allowance. The
Company believes that it is more likely than not that the sale of certain
assets, investment securities and certain real property, will generate
sufficient income to fully utilize its deferred tax assets. At February 28, 1998
the Company had $337,000 of Federal credit carry-forwards, $156,000 of which
were attributable to the alternative minimum tax and have no expiration date.
The remaining credits, totaling $181,000, expire from 1999 through 2002.
(12) Series A Cumulative Convertible Preferred Stock
During February 1998 the Company amended its Certificate of Incorporation to
modify the terms of the Company's Series A Preferred Stock (Preferred Stock) to
provide for a fixed dividend rate of $1.50 per preferred share and to eliminate
the mandatory redemption feature of the Preferred Stock.
During FY98, FY97 and FY96, the Company purchased 8,776, 24,283 and 299,561
shares, respectively, of its Preferred Stock at $18.25 per share in FY98, $16.15
per share in FY97, and at $12.25 per share in FY96. The FY98 and FY97 purchases
were part of a repurchase program, while in FY96 purchases were made under terms
of a voluntary tender offer. As a result of the purchases, the Company reversed
accrued dividends and accreted discounts of $37,000, $134,000 and $1,015,000 in
FY98, FY97 and FY96, respectively. In addition, in FY96, $1,324,000 of
additional paid-in capital was recorded to reflect the discount of the total
purchase cost, including expenses, from the original issue cost of the shares
purchased.
Quarterly dividend payments, ranging from $.1875 to $.4375 per share, were
accrued based upon the operating income of JM Ney, as defined. Approximately
$1.69, $1.24, and $.78 per preferred share of dividends were accrued during
FY98, FY97, and FY96, respectively.
The preferred shares increase in carrying value at a rate of approximately $.26
per share per year and, as such, approximately $40,000, $58,000, and $137,500 of
accretion were recorded as part of the preferred dividend requirement for FY98,
FY97 and FY96, respectively.
The preferred shares are convertible into the Company's common stock at any time
at a rate of 1.935 shares of common stock for each preferred share. At February
28, 1998, 496,165 shares of common stock have been reserved for conversion.
(13) Earnings Per Share
The computation of base and diluted earnings per share is as follows (in
thousands, except per share amounts):
1998 1997 1996
- --------------------------------------------------------------- ------------------ ---------------- -----------------
Numerator for basic and diluted earnings per share
Income applicable to common shareholders $1,772 $ 22 $2,389
- --------------------------------------------------------------- ------------------ ---------------- -----------------
Denominator for basic earnings per share -
weighted average shares 1,935 1,934 1,934
Effect of dilutive securities - stock options 18 - -
- --------------------------------------------------------------- ------------------ ---------------- -----------------
Denominator for diluted earnings per share 1,953 1,934 1,934
- --------------------------------------------------------------- ------------------ ---------------- -----------------
Basic earnings per share $.92 $.01 $1.23
Diluted earnings per share $.91 $.01 $1.23
- --------------------------------------------------------------- ------------------ ---------------- -----------------
For each of FY98, FY97 and FY96 the effects of the conversion of Preferred Stock
or the 10 1/2% Debentures have been excluded because the impacts of such
conversions would have been antidilutive.
(14) Stock Option Plans
The Company's incentive stock option plan provides for option grants to
directors and key employees at prices equal to at least 100% of the stock's fair
market value at date of grant. In addition, during FY97, a stock option plan was
put into effect under which options to acquire shares of JM Ney were granted in
both FY98 and FY97. The per share weighted average fair value of stock options
granted in 1998 under the JM Ney Plan was $6.22. The per share weighted average
fair value of stock options granted in 1997 under the Company and JM Ney plans
were $2.08 and $4.95, respectively on the dates of grant using the Black Scholes
option pricing model with the following weighted average assumptions: expected
dividend yield of 0%; risk-free interest rate of 6.5%; expected life of seven
years; and expected volatility of 33.3%.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation cost for the Company's
stock option plans, including the JM Ney plan, been determined based on the fair
value on the grant date for awards during FY98 and FY97 consistent with the
provisions of SFAS No. 123, the Company's net earnings applicable to common
shares, and earnings per share would have been reduced to the proforma amounts
indicated below (amounts in thousands, except per share data):
1998 1997
----------------------- --------------------
Net income (loss) applicable to common shareholders:
As reported $1,772 $ 22
Pro forma $1,581 $ (68)
Earnings (loss) per share - diluted:
As reported $.91 $.01
Pro forma $.81 $(.03)
The assumption regarding the stock options issued during FY98 and FY97 was that
such options vest over periods ranging from one to three years. Proforma net
income reflects only options granted in FY98 and FY97. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the proforma amounts because the compensation cost for options
granted prior to FY97 is not considered.
The Company reserved 149,700 shares of common stock for the exercise of stock
options. At February 28, 1998, the Company had 70,500 options available for
issuance under the plan. JM Ney has reserved 150,000 shares of its common stock
for the exercise of stock options, of which 3,700 were available for issuance at
February 28, 1998.
Activity under the Company's plans, including an expired plan, but excluding
J.M. Ney's plan, was as follows:
Number Weighted Average Range of
Outstanding Options of Shares Exercise Price Exercise Prices
- ---------------------------------------- ------------------------- ------------------------ -------------------------
Balance at February 28, 1995 77,300 $8.40 $6.50 - $9.50
Canceled (37,600) $9.06 $7.00 - $9.00
- ---------------------------------------- ------------------------- ------------------------ -------------------------
Balance at February 29, 1996 39,700 $7.77 $6.50 - $9.38
Granted 75,000 $4.29 $3.81 - $6.13
Canceled (13,000) $7.50 $3.81 - $9.38
- ---------------------------------------- ------------------------- ------------------------ -------------------------
Balance at February 28, 1997 101,700 $5.02 $3.81 - $8.38
Exercised (2,200) $3.81 $3.81
Canceled (20,300) $5.43 $3.81 - $7.00
- ---------------------------------------- ------------------------- ------------------------ -------------------------
- ---------------------------------------- ------------------------- ------------------------ -------------------------
Balance at February 28, 1998 79,200 $4.95 $3.81 - $8.38
- ---------------------------------------- ------------------------- ------------------------ -------------------------
At February 28, 1998, the range of exercise prices and the weighted average
remaining contractual life of the options was as follows:
- --------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life Exercisable Price
- --------------------- ------------------ ------------------ --------------------- ----------------- ----------------
$8.38 - $7.75 8,000 $8.22 3.0 years 8,000 $8.22
$7.00 - $5.38 22,900 $6.22 5.8 years 22,900 $6.22
$3.81 48,300 $3.81 8.1 years 45,800 $3.81
- --------------------- ------------------ ------------------ --------------------- ----------------- ----------------
79,200 $4.95 6.9 years 76,700 $4.99
- --------------------- ------------------ ------------------ --------------------- ----------------- ----------------
Also, during FY98 and FY97, options to purchase 16,800 and 130,000 shares of JM
Ney, at exercise prices of $10.86 and $10.00 per share respectively, were
issued. During FY98, options to acquire 500 shares of JM Ney at $10.00 per share
were forfeited. At February 28, 1998, 38,841 of the 146,300 total outstanding JM
Ney options were exercisable. At February 28, 1998, the Company owned all
850,000 outstanding shares of JM Ney. There presently is no public market for JM
Ney's common stock.
(15) Retirement Plans
The Company maintains both noncontributory defined benefit and defined
contribution plans, which collectively cover substantially all full-time
employees. The defined contribution plans are funded annually through
contributions in amounts that can be deducted for Federal income tax purposes.
Benefits payable under all plans are based upon years of service and
compensation levels.
The plan assets, which are managed by third-party trustees, include equity
securities, government and corporate debt securities and other fixed income
obligations.
The following table sets forth the actuarially determined funded status of the
Company's defined benefit plan and amounts recognized in the Company's
Consolidated Balance Sheets (in thousands):
February 28, 1998 February 28, 1997
- --------------------------------------------------------------- -------------------------- --------------------------
Actuarial present value of benefit obligations:
Vested $ 9,145 $8,970
Non-vested 72 68
- --------------------------------------------------------------- -------------------------- --------------------------
Accumulated benefit obligation 9,217 9,038
Effect of projected compensation increases 995 983
- --------------------------------------------------------------- -------------------------- --------------------------
Projected benefit obligation 10,212 10,021
Plan assets at fair value 18,087 16,815
- --------------------------------------------------------------- -------------------------- --------------------------
Plan assets in excess of projected benefit obligation 7,875 6,794
Unrecognized prior service cost (131) (141)
Unrecognized net gain on plan assets (3,079) (2,379)
- --------------------------------------------------------------- -------------------------- --------------------------
Prepaid pension expense $ 4,665 $4,274
- --------------------------------------------------------------- -------------------------- --------------------------
For FY98, FY97 and FY96, the projected benefit obligations and pension income
were determined using the following assumptions:
Fiscal Years 1998 1997 1996
- ------------ -------------------- ------------------- --------------------
Discount rate 7.5% 7.5% 7.5%
Future compensation growth rate 5.5% 5.5% 5.5%
Long-term rate of return on plan assets 9.0% 8.0% 8.0%
Net pension expense (income) for the Company's funded defined benefit plan for
FY98, FY97 and FY96 includes the following components:
Fiscal Years 1998 1997 1996
- ------------ ------------------- ------------------- --------------------
Service cost of benefits accrued $ 234 $ 253 $ 341
Interest cost on projected benefit obligations 736 723 806
Return on plan assets (2,294) (2,190) (2,130)
Unrecognized net gain 933 967 991
- ------------------------------------------------------- ------------------- ------------------- --------------------
Pension (income) expense $ (391) $ (247) $ 8
- ------------------------------------------------------- ------------------- ------------------- --------------------
In addition, as discussed in Note 4, during 1996 prepaid pension expense
increased by $519,000 as a result of the curtailment gain recorded in connection
with the sale of the net assets of the Dental segment.
The Company also has a supplemental defined benefit plan, which covers a former
senior executive of JM Ney. There are no assets held by the plan. At February
28, 1998 and February 28, 1997, the actuarially determined status of the plan
and the amount recognized in the balance sheet was a vested accumulated and
projected benefit obligation of approximately $284,000 and $314,400,
respectively. For FY98, FY97, and FY96, a discount rate of 7.5% was used for
determining the projected benefit obligation.
Pension expense for all defined contribution plans totaled $122,000, $121,000,
and $143,000 in FY98, FY97 and FY96, respectively.
(16) Post-retirement Benefit Obligations
During FY93, the Company amended its retiree health care plan to include only
those retirees currently in the plan and discontinued the benefit for current
employees. The Company's cost of its unfunded retiree health care plan for FY98,
FY97 and FY96 was approximately $56,000, $53,000, and $55,000, respectively,
including interest. At February 28, 1998 and February 28, 1997, the accumulated
benefit obligation for post-retirement benefits was approximately $803,000 and
$823,000, respectively. At February 28, 1998, 32 retirees were receiving
benefits under this plan.
The accumulated benefit obligation was determined using the unit credit method
and assumed discount rates of 7.25% at both February 28, 1998 and February 28,
1997, respectively. At February 28, 1998 and February 28, 1997, the accumulated
benefit obligation was compiled using assumed health care cost trend rates of 9%
and 10%, respectively gradually declining to 5% in the year 2001 and thereafter
over the projected payout period of the benefits.
The estimated effect on the present value of the accumulated benefit obligation
at March 1, 1998 of a 1% increase each year in the health care cost trend rate
used would result in an estimated increase of approximately $61,000 in the
obligation.
(17) Leases
During FY97, the Company incurred capital lease obligations totaling $579,000 in
connection with lease agreements to acquire equipment. This non-cash financing
activity has been excluded from the FY97 Consolidated Statement of Cash Flows.
The Company leases various manufacturing and office facilities and equipment
under operating lease agreements expiring through December 2004. In addition,
the Company earns rental income from office space leased to tenants under
operating leases expiring through November 2000. Lease expense was $264,000,
$209,000, and $240,000 for FY98, FY97, and FY96, respectively, while rental
income totaled $376,000, $342,000, and $281,000 for FY98, FY97, and FY96,
respectively.
Future minimum lease payments and rental income under the terms of the leases
for each of the years ending February 28, are as follows (in thousands):
Lease Payments Rental Income
1999 $284 $412
2000 179 215
2001 125 102
2002 117 -
2003 88 -
Thereafter 106 -
-----------------------------------------------------------------------
(18) Business Segments and Export Sales
During FY98, the Company operated in two continuing segments, Electronics, which
comprises the operations of JM Ney, and Corporate, which includes the Company's
investment, real estate and corporate administrative activities. Operating
income consists of net sales, less cost of sales and selling, general and
administrative expenses directly allocated to the industry segments. Corporate
revenues consist of investment and other income not attributable to a specific
segment. Corporate identifiable assets include marketable securities and
short-term investments, and assets not directly attributable to JM Ney, or a
specific segment.
Summarized financial information for business segment is as follows (in
thousands):
FY98 FY97 FY96
---- ---- ----
Net sales and revenues:
Electronics $25,397 $20,643 $16,544
Video Products ---- ---- 2,080
Corporate 3,471 (142) 813
------------- ------------ ------------
$28,868 $20,501 $19,437
------------- ------------ ------------
Operating income (loss):
Electronics $2,860 $2,589 $ 1,612
Video Products ---- ---- (177)
Corporate 1,264 (2,356) (3,071)
------------- ------------ ------------
$4,124 $ 242 $(1,636)
------------- ------------ ------------
Interest expense:
Electronics $ 468 $ 13 379
Corporate 695 777 858
------------- ------------ ------------
$1,163 $ 790 $ 1,237
------------- ------------ ------------
Identifiable assets:
Electronics $25,337 $22,467 $20,886
Ultrasonics ---- 1,798 1,911
Corporate 19,434 13,412 16,001
------------- ----------- ------------
$44,771 $37,677 $38,798
------------- ----------- ------------
Depreciation and amortization:
Electronics $1,126 $ 1,142 $1,363
Ultrasonics 139 95 76
Corporate 215 240 230
------------- ------------ ------------
$1,480 $1,477 $1,669
------------- ------------ ------------
Capital expenditures:
Electronics $1,597 $1,512 $1,239
Ultrasonics 109 234 66
Corporate 34 24 123
------------- ------------ ------------
$1,740 $1,770 $1,428
------------------------------------------------------------- ------------- ------------ ------------
Export sales for FY98, FY97 and FY96 were $4,370,000, $3,417,000, and
$2,560,000, respectively. Such sales were made primarily to customers in Europe
and the Pacific Rim.
During FY98 sales to two customers accounted for 14.9% and 12.6% of net sales.
Sales to a third customer during FY97 accounted for 10.3% of net sales during
that year. No single customer accounted for more than 10% of sales during FY96.
(19) Estimated Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities are reasonable estimates of their fair
value based upon their current maturities. The carrying value of marketable
securities approximates fair value as determined by quoted market prices.
At February 28, 1998, JM Ney owned futures contracts to purchase 5,500 ounces of
palladium through June 1998 at an average price of $217.87, which had a fair
market value of $61,000. The value of these contracts has not been recorded at
February 28, 1998, as these contracts have been purchased to hedge firm price
orders. In addition, gains totaling $346,000 from expired or sold futures
contracts have been deferred from income recognition until the underlying orders
have been shipped.
The carrying value of short-term borrowing equals fair value as it reflects the
market value of the corresponding precious metals in which the liability is
denominated, or is at current market rates.
The carrying values of long-term debt issued by banks and capital lease
obligations approximate fair value based on interest rate and repayment terms,
and the extent to which the individual debts are secured. The fair value of the
Company's 10.5% convertible debentures approximates carrying value based upon
market interest rates, its subordinated status, and the market value of the
Company's common stock in relation to the conversion feature of the debt.
(20) Litigation
The Company is involved in various legal proceedings generally incidental to its
business. While the results of any litigation or regulatory issues contain an
element of uncertainty, management believes that the outcome of any known,
pending or threatened legal proceeding, or all of them combined, will not have a
material adverse effect on the Company's financial position or results of
operations.
(21) New Accounting Standards
Reporting Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") was issued in June 1997 and is effective for financial
statements beginning after December 15, 1997. The statement establishes new
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. The impact of SFAS 130 on future financial statement
presentations will be to show comprehensive income.
Segment Reporting
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131") was issued in June 1997
and is effective for financial statements beginning after December 15, 1997.
This Statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management has not yet determined the
impact of SFAS 131 on future financial statement presentations.
(22) Supplemental Disclosure of Cash Flow Information
The information below supplements the cash flow data presented in the Company's
Consolidated Statements of Cash Flows (in thousands):
1998 1997 1996
---- ---- ----
Cash paid for
Interest $1,129 $863 $1,203
Income taxes, net $ 360 $ 85 $1,410
During FY98, the company exchanged $4,311,000 of its convertible subordinated
debentures due October 2002 for an equal amount of convertible subordinated
debentures due 2007. In addition to the extended average maturity of the notes,
the new notes do not contain the restrictive covenants that were present in the
original issue.
Interest and conversion terms of the old notes remain the same in the new notes.
As discussed in Note 5, effective February 28, 1998, the Company sold the net
assets of Ney Ultrasonics Inc. No consideration had been paid as of February 28,
1998, and accordingly the effects of this transaction have not been included in
the Consolidated Statements of Cash Flow. During March 1998, $2,400,000 of the
consideration was received and an additional $500,000 was placed in escrow. The
remaining portion of the purchase price is expected to be received during the
second quarter of FY99.
Independent Auditors' Report
Deloitte and Touche LLP Letterhead
The Stockholders and Board of Directors
Andersen Group, Inc.:
We have audited the accompanying consolidated balance sheet of Andersen Group,
Inc. and subsidiaries as of February 28, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Andersen Group, Inc.
and subsidiaries at February 28, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
April 16, 1998
Independent Auditors' Report
KPMG Peat Marwick LLP Letterhead
The Board of Directors and Stockholders
Andersen Group, Inc.:
We have audited the accompanying consolidated balance sheet of Andersen Group,
Inc. and subsidiaries as of February 28, 1997 and the related consolidated
statements of operations, common and other stockholders' equity, and cash flows
for the years ended February 28, 1997 and February 29, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Andersen Group, Inc.
and subsidiaries at February 28, 1997, and the results of their operations and
their cash flows for the years ended in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
Hartford, Connecticut
April 8, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The information required by this Item is not applicable because it has been
previously reported in the Registrant's definitive Proxy Statement, dated
May 19, 1998.
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant has filed a definitive proxy statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report and
certain information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
Registrant's definitive Proxy Statement, dated May, 19, 1998, and is
incorporated by reference to the Section in Part I hereof entitled, Executive
Officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Registrant's definitive Proxy Statement, dated May 19, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Registrant's definitive Proxy Statement, dated May 19, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Registrant's definitive Proxy Statement, dated May 19, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a)1. Consolidated Financial Statements applicable to the Registrant contained
in Item 8:
Pages
Consolidated Balance Sheets
as of February 28, 1998 and 1997 20
Consolidated Statements of Operations
for the years ended February 28, 1998, 1997 and
February 29, 1996 21
Consolidated Statements of Stockholders' Equity
for the years ended February 28, 1998, 1997
and February 29, 1996 22
Consolidated Statements of Cash Flows
for the years ended February 28, 1998, 1997
and February 29, 1996 23
Notes to Consolidated Financial Statements 24-40
Independent Auditors' Reports 41-42
(a)2. Consolidated Financial Statement Schedules:
Schedule
I Condensed Financial Information F-1 to F-5
II Valuation and Qualifying Accounts F-6
Note: Schedules other than those listed above, are omitted as not applicable,
not required, or the information is included in the Consolidated Financial
Statements or notes thereto.
(a)3. Exhibits required by Item 601 of Regulation S-K:
Exhibit
No. Description
- ------- -----------
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated By-Laws of the Registrant as of April 18, 1997,
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended February 28, 1997
(Commission File No. 0-1460).
4.1 Indenture, dated as of February 26, 1998, between the Registrant and The
Chase Manhattan Bank, as Trustee, in respect of $4,311,000, aggregate
principal amount, 10 1/2% Convertible Subordinated Debentures Due 2007.*
10.1 Andersen Group, Inc. Incentive Stock Option Plan incorporated herein by
reference to Appendix A to the Registrant's Post-Effective Amendment No.1
to Form S-8 (File No. 333-17659) filed February 27, 1997.
10.2 Andersen Group, Inc. Incentive and Non-Qualified Stock Option Plan
incorporated herein by reference to Appendix B to the Registrant's
Post-Effective Amendment No. 1 to Form S-8 (File No. 333-17659) filed
February 27, 1997.
10.3 Deferred Compensation Agreement, entered into as of September 30, 1992,
by and between the Registrant and Francis E. Baker, incorporated herein
by reference to Exhibit 10.26 of the Registrant's Annual Report on Form
10-K for the year ended February 28, 1995 (Commission File No. 0-1460).
10.4 Letter Agreement, dated March 7, 1993, between the Registrant and Ronald
N. Cerny, incorporated herein by reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the year ended February 28,
1995 (Commission File No. 0-1460).
10.5 Letter Agreements, dated February 23, 1995 and March 20, 1995, between
the Registrant and Ronald N. Cerny.
10.6 Asset Purchase Agreement among Phoenix Shannon p.l.c., Andersen Group,
Inc., The J.M. Ney Company and Ney Dental International, Inc. dated as
of August 10, 1995, incorporated herein by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ending
August 31, 1995 (Commission file No. 0-1460).
10.7 Amendment No. 1 to Asset Purchase Agreement by and among Phoenix Shannon
p.l.c., The J.M. Ney Company, Andersen Group, Inc. and Ney Dental
International, Inc. made as of October 30, 1995, incorporated herein by
reference to Exhibit 10.1 to the Registrant's current report on Form 8-K
dated December 13, 1995 (Commission file No. 0-1460).
10.8 Amendment No. 2 to Asset Purchase Agreement by and among Phoenix Shannon
p.l.c., The J. M. Ney Company, Andersen Group, Inc., and Ney Metals, Inc.
(f/k/a Ney Dental International, Inc.) made as of October 30, 1995,
incorporated herein by reference to Exhibit 10.2 to the Registrant's
current report on Form 8-K dated December 13, 1995 (Commission file
No.0-1460).
10.9 Revolving Credit and Deferred Payment Sales Agreement by and among The
J.M. Ney Company, Bank of Boston Connecticut and Rhode Island Hospital
Trust National Bank made as of the 8th day of October 1996, incorporated
herein by reference to exhibit 10.13 of the Registrant's Annual Report on
Form 10-K for the year ended February 28, 1997.
10.10 Securities Purchase Agreement dated as of December 29, 1997 by and between
The J.M. Ney Company and BankBoston, N.A.*
10.11 Asset Purchase Agreement made effective as of February 28, 1998 among CAE
U.S., Inc., Ney Ultrasonics Inc. and Andersen Group, Inc.*
10.12 Amendment Agreement dated as of December 29, 1997 by and among The J.M.
Ney Company ("Borrower"), BankBoston, N.A. (Successor by merger to Bank of
Boston Connecticut)("BankBoston") and Rhode Island Hospital Trust National
Bank ("RIHT" and, collectively, with BankBoston, the "Banks") with respect
to a Certain Revolving Credit and Deferred Payment Sales Agreement dated
as of October 8, 1996 by and among the Borrower and the Banks.*
21. Subsidiaries of the Registrant.*
23. Consent of Deloitte & Touche LLP.*
27.1 Financial Data Schedule.*
27.2 Restated Financial Data Schedule.*
27.3 Restated Financial Data Schedule.*
(b) Reports on Form 8-K.
A Form 8-K was filed on December 29, 1998 reporting, under Item 4
"Changes in Registrant's Certifying Accountant", a change in the
Company's independent certified public accountants. An amendment to Form
8-K was filed on January 9, 1998 filing a copy of the letter received
from KPMG Peat Marwick.
*Filed herein
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.
ANDERSEN GROUP, INC. ANDERSEN GROUP, INC.
Registrant Registrant
/s/ Oliver R. Grace, Jr. /s/ Andrew M. O'Shea
- ------------------------- ---------------------
Oliver R. Grace, Jr., Principal Andrew M. O'Shea, Principal
Executive Officer Financial and Accounting Officer
May 28, 1998 May 29, 1998
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.
NAME TITLE DATE
/s/ Francis E. Baker Chairman, Secretary May 26, 1998
- -------------------- and
Francis E. Baker Director
/s/ Oliver R. Grace, Jr. President, Chief May 28, 1998
- ------------------------ Executive Officer
Oliver R. Grace, Jr. and Director
/s/ Peter N. Bennett Director May 24, 1998
- --------------------
Peter N. Bennett
/s/ John S. Grace Director May 27, 1998
- -----------------
John S. Grace
/s/ Louis A. Lubrano Director May 29, 1998
- --------------------
Louis A. Lubrano
/s/ James J. Pinto Director May 27, 1998
- ------------------
James J. Pinto
Deloitte and Touche LLP Letterhead
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Andersen Group, Inc.:
We have audited the consolidated financial statements of Andersen Group, Inc.
and subsidiaries as of February 28, 1998 and for the year then ended, and have
issued our report thereon dated April 16, 1998; such report is included
elsewhere in this Form 10-K. Our audit also included the financial statement
schedules of Andersen Group, Inc. and subsidiaries, listed in Item 14 as of and
for the year ended February 28, 1998. These 1998 financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit. In our opinion, such 1998 financial
statement schedules, when considered in relation to the basic 1998 consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ Deloitte and Touche LLP
Hartford, Connecticut
April 16, 1998
KPMG Peat Marwick LLP Letterhead
The Board of Directors and Stockholders
Andersen Group, Inc.
Under date of April 8, 1997, we reported on the consolidated balance sheet of
Andersen Group, Inc. and subsidiaries as of February 28, 1997 and the related
consolidated statements of operations, common and other stockholders' equity,
and cash flows for the years ended February 28, 1997 and February 29, 1996, as
contained in the 1998 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the Annual Report on
Form 10-K for 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the accompanying index as of February 28, 1997
and for the years ended February 28, 1997 and February 29, 1996. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such 1997 and 1996 financial statement schedules, when
considered in relation to the basic 1997 and 1996 consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/KPMG Peat Marwick LLP
------------------------
Hartford, Connecticut
April 8, 1997
F-1
ANDERSEN GROUP, INC.
Schedule I - Condensed Financial Information
of the Registrant
Condensed Balance Sheets
February 28, 1998 and 1997
(amounts in thousands)
1998 1997
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,441 $ 2,304
Marketable securities 9,001 5,345
Receivable from sale of subsidiary 3,521 -
Accounts and other receivables, less allowance for doubtful
accounts 125 53
Prepaid expenses and other assets 5 390
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Total current assets 14,093 8,092
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Investment in The J. M. Ney Company 6,604 15,107
Subordinated note receivable from The J.M. Ney Company 4,000 -
Investment in Digital GraphiX, Incorporated - 1,346
Property, plant and equipment, net 2,629 2,748
Other assets 2,711 1,225
- ------------------------------------------------------------------------- ---------------------------- --------------------------
$30,037 $28,518
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 1,487 $ -
Current maturities of long-term debt 441 586
Accounts payable 297 101
Due to The J. M. Ney Company 656 316
Accrued liabilities 1,728 1,765
Deferred income taxes 161 564
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Total current liabilities 4,770 3,332
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Long-term debt, less current maturities 4,124 6,540
Other long-term liabilities 596 -
Deferred income taxes 351 108
Commitments and contingencies (Note 7)
Redeemable cumulative convertible preferred stock,
no par value; authorized 800,000 shares; issued
789,628 shares; outstanding 265,192 shares;
liquidation preference $18.75 per share - 4,891
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Stockholders' equity:
Cumulative convertible preferred stock,
no par value; authorized 800,000 shares; issued
789,628 shares; outstanding 256,416 shares;
liquidation preference $18.75 per share 4,769 -
Common stock, no par value; authorized 6,000,000
shares, issued 1,958,478 shares 2,103 2,103
Additional paid-in capital 3,248 3,248
Retained earnings 10,158 8,386
- ------------------------------------------------------------------------- ---------------------------- --------------------------
20,278 13,737
Treasury stock, at cost, 21,800 shares in 1998 and 24,000 in 1997 (82) (90)
- ------------------------------------------------------------------------- ---------------------------- --------------------------
Total stockholders' equity 20,196 13,647
- ------------------------------------------------------------------------- ---------------------------- --------------------------
$30,037 $28,518
- ------------------------------------------------------------------------- ---------------------------- --------------------------
See accompanying notes to condensed financial information.
F-2
ANDERSEN GROUP, INC.
Schedule I Condensed Financial Information
Of the Registrant
Condensed Statements of Operations
Years ended February 28, 1998 and 1997
(amounts in thousands, except per share data)
1998 1997
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Revenues:
Investment and other income $3,691 $ 267
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Costs and expenses:
General and administrative 2,223 2,280
Interest expense 694 777
- ------------------------------------------------------- ----------------------------------- ------------------------------------
2,917 3,057
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Income (loss) from continuing operations
before income taxes and equity in earnings
of The J.M. Ney Company 774 (2,790)
Income tax expense (benefit) 361 (1,778)
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Income (loss) from continuing operations
before equity in earnings of
The J.M. Ney Company 413 (1,012)
Equity in earnings of The J.M. Ney Company 1,357 1,346
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Income from continuing operations 1,770 334
Income from discontinued operations
net of income taxes 345 (35)
Gain on sale of discontinued segment
net of income taxes 97 -
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Net income 2,212 299
Preferred dividend requirement (477) (411)
Reversal of preferred dividend 37 134
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Income applicable to common shares $1,772 $ 22
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Earnings (loss) per common share:
BASIC
Continuing operations $ 0.69 $ 0.03
Discontinued operations 0.18 (0.02)
Gain on sale of discontinued segment 0.05 0.00
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Net income $ 0.92 $ 0.01
- ------------------------------------------------------- ----------------------------------- ------------------------------------
DILUTED
Continuing operations $ 0.68 $ 0.03
Discontinued operation 0.18 (0.02)
Gain on sale of discontinued segment 0.05 0.00
- ------------------------------------------------------- ----------------------------------- ------------------------------------
Net income $ 0.91 $ 0.01
- ------------------------------------------------------- ----------------------------------- ------------------------------------
See accompanying notes to condensed financial information.
F-3
ANDERSEN GROUP, INC.
Schedule I - Condensed Financial Information of the Registrant
Condensed Statements of Cash Flows
Years ended February 28, 1998 and 1997
(amounts in thousands)
1998 1997
- ----------------------------------------------------------- ------------------------------- --------------------------------
Cash flows from operating activities:
Net income $2,212 $ 299
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in earnings of The J. M. Ney Company (1,357) (1,346)
Equity in earnings of Ney Ultrasonics (345) 35
Depreciation, amortization and accretion 216 167
Deferred income taxes 880 105
Gain on sale of Ney Ultrasonics (97) -
Net (gains) losses from securities (2,619) 1,149
Purchases of securities (2,218) (1,625)
Proceeds from sales of securities 1,230 526
Investment in Digital GraphiX - (87)
Changes in operating assets and liabilities
Accounts and notes receivable (72) 652
Prepaid expenses and other assets 372 (184)
Accounts payable, accrued liabilities and other
long-term obligations (409) (654)
- ----------------------------------------------------------- ------------------------------- --------------------------------
Net cash used in operating activities (2,207) (963)
- ----------------------------------------------------------- ------------------------------- --------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (34) (7)
Proceeds from collection of investments 1,542 -
Investment in other assets (1,225) -
- ----------------------------------------------------------- ------------------------------- --------------------------------
Net cash provided by (used in) investing activities 283 (7)
- ----------------------------------------------------------- ------------------------------- --------------------------------
Cash flows from financing activities:
Principal payments on long-term debt (2,561) (1,178)
Proceeds from short-term debt 1,486 -
Redemption of preferred stock (160) (392)
Dividends paid (1,222) -
Dividends received from The J. M. Ney Company 3,518 1,150
- ----------------------------------------------------------- ------------------------------- --------------------------------
Net cash provided by (used in) financing activities 1,061 (420)
- ----------------------------------------------------------- ------------------------------- --------------------------------
Net decrease in cash and cash equivalents (863) (1,390)
Cash and cash equivalents, beginning of year 2,304 3,964
- ----------------------------------------------------------- ------------------------------- --------------------------------
Cash and cash equivalents, end of year $1,441 $2,304
- ----------------------------------------------------------- ------------------------------- --------------------------------
Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 766 $ 803
Income taxes, net $ 360 $ 85
- ----------------------------------------------------------- ------------------------------- --------------------------------
See accompanying notes to condensed financial information.
F-4
ANDERSEN GROUP, INC
Schedule I - Condensed Financial Information
of the Registrant
Notes to Condensed Financial Information
February 28, 1998 and 1997
NOTE 1 - GENERAL
The Condensed Financial Information presented herein is required because the
Registrant's wholly owned subsidiary, The J. M. Ney Company (JM Ney), entered
into a Revolving Credit and Deferred Payment Sales Agreement with two banks in
October 1996 and was subsequently amended December 30, 1997, which contained
covenants that limit the transfer of cash and other resources from JM Ney to the
Registrant.
The Condensed Financial Information of the registrant should be read in
conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements which are included in Item 8 herein. The
Condensed Financial Information of the Registrant include the accounts of
several wholly owned subsidiaries which are immaterial to the Registrant's
Condensed Financial Information.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Registrant and its wholly owned subsidiaries share certain administrative
services. The costs of these services are allocated to the entity, which
receives the service. The following are among the types of services which have
been provided to the Registrant by JM Ney: maintenance, accounting, human
resources, management information systems and the rental of office space in JM
Ney's facility. Services provided by the Registrant to JM Ney include the
following: legal, tax, and business advisory services. In addition, during FY97
JM Ney paid the Registrant interest for the cost of capital used by JM Ney. Also
during the last two months of FY98, JM Ney paid the Registrant interest on a
junior subordinated note, and a management fee, which will extend into 1999. In
connection with JM Ney entering into the Revolving Credit and Deferred Payment
Sales Agreement referred to above, the Registrant and JM Ney entered into a Tax
Sharing Agreement, effective as of March 1, 1996, which requires JM Ney to pay
the Registrant an amount which may be equal to the maximum allowable amount of
any Federal and State income taxes for which JM Ney or any of its subsidiaries
would have been liable for in the particular year. During FY98, the Registrant
and JM Ney refined their accounting for deferred income taxes, which resulted in
a transfer of $1,041,000 of deferred tax obligations from the Registrant to JM
Ney. The Registrant files a consolidated Federal income tax return with its
subsidiaries. During FY98, JM Ney made a $4 million distribution to the
Registrant in the form of an 8% junior subordinated note due January 31, 2005.
Effective December, 1997, the Registrant and JM Ney also entered into a
Financial, Investment Banking and Professional Services Agreement under which,
subject to JM Ney's compliance with certain covenants, JM Ney will pay the
Registrant fees for defined services. The retainer for the first 15 months of
this agreement will be at the annual rate of $500,000. Thereafter, the retainer
will increase by $100,000 per year. The agreement runs through November 30,
2002.
NOTE 3 - SHORT TERM BORROWINGS
At February 28, 1998, the Registrant had a $1,487,000 demand loan, which was
secured by a portion of the Company's portfolio of marketable securities.
Interest on this borrowing was charged at 7.75%.
NOTE 4 - LONG TERM DEBT
Long-term debt consists of the following (in thousands):
February 28, 1998 February 28, 1997
----------------------------- -----------------------------
Mortgage note payable; Interest at 5.4%, paid February 1998 - $ 575
Convertible subordinated debentures, due October 2002;
redeemed or exchanged in February 1998 - 6,287
Convertible subordinated debentures, due October 2007;
interest at 10.5%, payable semi-annually; annual
principal payments in varying amounts through $4,311 -
maturity, unsecured
Other 254 264
----------------------------- -----------------------------
4,565 7,126
Less current maturities 441 586
----------------------------- -----------------------------
$4,124 $6,540
----------------------------- -----------------------------
F-5
The terms of the 2007 convertible subordinated debentures call for the
annual redemption of approximately $431,000 of principal. The debentures are
convertible into common stock of the Company at any time prior to maturity,
unless previously redeemed, at $16.17 per share, subject to adjustment under
certain conditions. At February 28, 1998, 266,604 shares of common stock were
reserved for conversion.
Maturities of long-term debt for each of the next five fiscal years are as
follows (in thousands):
1999 $ 441
2000 441
2001 442
2002 443
2003 443
Thereafter 2,355
---------
$ 4,565
---------
NOTE 5 - CUMULATIVE CONVERTIBLE PREFERRED STOCK
See Note 12 to the Registrant's Consolidated Financial Statements for the fiscal
year ended February 28, 1998 contained in Item 8 herein.
NOTE 6 - CASH DIVIDENDS
The amount of cash dividends paid to the Registrant by Consolidated Subsidiaries
during fiscal years 1998 and 1997 was approximately $3,518,000 and $1,150,000,
respectively.
NOTE 7 - Litigation
The Registrant is involved in various legal proceedings generally
incidental to its business. While the results of any litigation or regulatory
issues contain an element of uncertainty, management believes that the outcome
of any known, pending or threatened legal proceeding, or all of them combined,
will not have a material adverse effect on the Company's financial position or
results of operations.
F-6
Andersen Group, Inc.
Schedule II - Valuation and Qualifying Accounts
(Amounts in thousands)
-----Additions-----------
Balance Charged to Charged Balance
beginning costs and to other end
Description of year expenses account Deductions of year
- -------------------------------------------------------------------------------------------------------------------------------
February 28, 1998
Allowance for doubtful
accounts $190 17 (36) (d) (41) (a) $ 130
Reserve for returns $ 95 $ 95
Warranty reserve $ 70 (40) (30) (d) $ 0
- ------------------------------------------------------------------------------------------------------------------------------
February 28, 1997
Allowance for doubtful
accounts $124 76 (10) (a) $ 190
Reserve for returns $ 0 95 $ 95
Warranty reserve $100 (30) $ 70
- ------------------------------------------------------------------------------------------------------------------------------
February 29, 1996
Allowance for doubtful
accounts $360 97 (287) (b) (46)(a) $124
Warranty reserve $ 65 35 $100
Discontinued operation $ 63 (63) (c) $ 0
Deferred income tax
valuation allowance $483 (483) $ 0
- ------------------------------------------------------------------------------------------------------------------------------
(a) Write offs net of recoveries.
(b) Transferred in connection with sale of certain assets of Dental Segment. (c)
Eliminated in connection with reduction in stock ownership of Digital GraphiX in
May 1995.
(d) Transferred in connection with sale of certain assets of Ultrasonics
segment.
E-1
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ----------- --------
3.1 Second Amended and Restated Certificate of Incorporation. E-2
4.1 Indenture, dated as of February 26, 1998, between the
Registrant and The Chase Manhattan Bank, as Trustee,
in respect of $4,311,000, aggregate principal amount,
10-1/2% Convertible Subordinated Debentures Due 2007.* E-3
10.10 Securities Purchases Agreement dated as of December 29, 1997.
by and between The J.M. Ney Company and BankBoston, N.A. E-4
10.11 Asset Purchase Agreement made effective as of February 28,1998
among CAE U.S., Inc., Ney Ultrasonics Inc.
and Andersen Group, Inc. E-5
10.12 Amendment Agreement dated as of December 29, 1997 by and among
The J.M. Ney Company ("Borrower"), BankBoston, N.A. (Successor
by merger to Bank of Boston Connecticut)("BankBoston") and Rhode
Island Hospital Trust National Bank ("RIHT" and, collectively,
with BankBoston, the "Banks") with respect to a Certain
Revolving Credit and Deferred Payment Sales Agreement dated as
of October 8, 1996 by and among the Borrower and the Banks. E-6
21. Subsidiaries of the Registrant. E-7
23. Consent of Deloitte & Touche LLP. E-8
27.1 Financial Data Schedule. E-9
27.2 Restated Financial Data Schedule. E-10
27.3 Restated Financial Data Schedule. E-11