-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GW4UHWSO1WEfMOqksMETqbk6Tr9Wc/tO+vmANnDLULZz/iu2NkR8T0ld3WnyJhbo jC1lKzUiXRRV0GkKZQxlrg== 0000006383-99-000044.txt : 19990624 0000006383-99-000044.hdr.sgml : 19990624 ACCESSION NUMBER: 0000006383-99-000044 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDERSEN GROUP INC CENTRAL INDEX KEY: 0000006383 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 060659863 STATE OF INCORPORATION: CT FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-01460 FILM NUMBER: 99633984 BUSINESS ADDRESS: STREET 1: 1280 BLUE HILLS AVE CITY: BLOOMFIELD STATE: CT ZIP: 06002-1374 BUSINESS PHONE: 2032420761 MAIL ADDRESS: STREET 1: NEY INDUSTRIAL PARK CITY: BLOOMFIELD STATE: CT ZIP: 06002 FORMER COMPANY: FORMER CONFORMED NAME: ANDERSEN LABORATORIES INC DATE OF NAME CHANGE: 19790828 10-K 1 ANDERSEN GROUP, INC. FORM 10-K 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, 1999 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) Delaware 06-0659863 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No. 515 Madison Avenue, New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 826-8942 Registrant's telephone number, including area code 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, $.01 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. [X] The aggregate market value of the Common Stock, $.01 par value, held by non-affiliates of the Registrant based upon the average bid and asked prices on May 14, 1999, as reported on The NASDAQ Stock Market, was approximately $10,094,830. 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 14, 1999 there were 1,932,503 shares of Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement dated May 19, 1999 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. On April 24, 1998, the Company re-incorporated to the State of Delaware. 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 the Registrant's primary investment, currently comprising approximately 70% of the Company's total consolidated 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 Ultrasonic Cleaning Equipment segment were sold. In December 1997, JM Ney borrowed $7.5 million on a 10.26% subordinated note due 2004, with warrants entitling the lender to purchase 40,000 shares of JM Ney common 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 common stock as part of the consideration paid. While criteria for a strategic acquisition have been identified, no negotiations have yet commenced and no agreements have been reached concerning any possible targets. Industry Segment Information Financial information regarding the Company's industry segments is contained in Note 19 to the Registrant's Consolidated Financial Statements contained in Item 8 herein. Description of Business During the fiscal year ended February 28, 1999, the Company operated in two business segments, Electronics and Corporate. The Electronics segment is comprised of the activities of JM Ney. Corporate activities are comprised of investment activities. As previously noted, 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. Electronics Segment Products. The Electronics segment 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), a successor company to 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. Although the three-year manufacturing agreement expired in November 1998, JM Ney still manufactures products for NDI, but at significantly reduced levels. Competition. 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 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. Sales and Marketing. JM Ney sells to more than 800 customers, with approximately 84% 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) accounted for 16.1% and 13.9%, respectively, of the Registrant's consolidated sales in fiscal 1999. During the prior year, these customers comprised 14.9% and 12.6% of sales, respectively. Research and Development. During fiscal years 1999, 1998, and 1997 research and development expenditures from continuing operations totaled approximately $1,888,000, $1,444,000 and $1,228,000, 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 availability of palladium shipments from Russia to the world market, the Company believes that its sources of supply are adequate for its continuing needs. Corporate Segment The Corporate Segment is comprised of the Company's investment and administrative activities. This includes the management of the Company's trading portfolios and longer-term investments, as described below. This segment also includes the operation of Andersen Realty, Inc., which holds a 108,000 square foot office building in Bloomfield, Connecticut, and the monitoring of the Company's continuing interest in the ultrasonic cleaning technology sold during the prior fiscal year. Such continuing interest is represented by royalties received pursuant to a technology assignment agreement, as amended, which was entered into with the buyer of the former Ultrasonics Cleaning Equipment segment. During the fiscal year ended February 28, 1999, the Company realized approximately $60,000 of revenue pursuant to this agreement. Trading Portfolio. At February 28, 1999, the Company had a portfolio of short-term investments with a reported value of $6,014,000. The reported amount is reflected net of a $65,000 valuation reserve to provide for volatility and liquidity concerns relating to marketable investments in the Ukraine and Poland. The larger components of these investments include $5.5 million of common stocks of domestic savings banks, an investment in the FM Emerging Russia Fund with a recorded value of $294,000, and JM Ney's investment in a Russian bond fund with an estimated fair value of $98,000. JM Ney expects to realize this investment during the next 12 months through the receipt of periodic liquidating distributions. See Note 3 to the Company's Consolidated Financial Statements contained in Item 8 herein. Institute for Automated Systems. The Company also holds a 50% investment in Treglos Investments, LTD, a joint venture that is investing in the Institute for Automated Systems (IAS), 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 IAS. Although the Company's investment, including certain development costs, totals approximately $835,000, it is recorded at $83,500 due to other than temporary impairment in its value reflecting the collapse in the market value for Russian securities. Among the joint venture partners are the Company's Chairman and another Director. See Note 7 to the Company's Consolidated Financial Statements contained in Item 8 herein, and Certain Relationships and Related Transactions in Item 13. VSMPO. The Company also owns 43,803 shares of VSMPO, a Russian-based titanium producer and processor. These shares were acquired through the purchase in fiscal 1998 of 9,734 shares of AVISMA, a predecessor company to VSMPO, for an aggregate cost of approximately $1,225,000. The investment is valued for financial reporting purposes at $122,500 due to an other than temporary impairment in its value reflecting the collapse of Russian securities. See Note 7 to the Company's Consolidated Financial Statements contained in Item 8 herein, and Certain Relationships and Related Transactions in Item 13. Discontinued 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. The Company received $2.4 million at closing while additional consideration was dependent on the finalization of FY98 financial information. The determination of the purchase price remained in dispute until a settlement agreement was reached in February 1999, resulting in $400,000 of additional consideration being paid to the Company. The Company expects to receive further consideration during the next several years based on growth of sales of certain products by the purchasers of this business. See Note 5 to the Company's Consolidated Financial Statements contained in Item 8 herein. 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, 1999, the Company, including all subsidiaries, had 188 full-time employees and two part-time employees. None of these employees is 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. 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 69 Chairman and Secretary 1959 Oliver R. Grace, Jr. 45 President and Chief Executive Officer 1997 Peter R. Barker 48 Vice President and Chief Financial Officer 1999 Ronald N. Cerny 47 President, The J.M. Ney Company 1993 Andrew M. O'Shea 40 Chief Financial Officer and Secretary, The J.M. Ney Company 1995 Eugene E. Phaneuf 52 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., 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 May 1997. Mr. Baker is also the Secretary of the Company, a position he has held since May 1997. Mr. Barker became Vice President and Chief Financial Officer of the Company in January 1999. Prior to joining the Company, he served as Managing Director and Chief Financial Officer of Spring Investment Corporation from 1994 to 1998 and previously held the position of Founder and Executive Vice President of Global Intermediary, Inc. from 1982 to 1994. 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 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 have been located in New York, New York since 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 owner of its former Ultrasonic Cleaning Equipment segment, 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 originally reported in the Company's Form 10-K for the year ended February 28, 1997, in July 1996, two companion lawsuits were filed in the United States District Court for the District of New Jersey, by various owners and operators of the Ventron-Velsicol Superfund Site (Site). The lawsuits, which were subsequently consolidated, were filed under the Comprehensive Environmental Resource Compensation and Liability Act (CERCLA), the Resource Conservation and Recovery Act, the New Jersey Spill Act and New Jersey common law, alleging that the defendants (over 100 companies, including JM Ney) were generators of certain wastes allegedly processed at the site. The lawsuits seek recovery of costs incurred and a declaration of future liability for costs to be incurred by the owners and operators in studying and remediating the Site. 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 originally 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 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 7, 1999 was 608 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, 1999 High Low Close - ---------------------------------------------- --------------------- ------------------------ ---------------------- First Quarter 9 1/4 5 3/4 7 1/2 Second Quarter 9 4 5/8 4 5/8 Third Quarter 4 9/16 2 5/8 3 5/8 Fourth Quarter 7 5/8 2 11/16 4 - ---------------------------------------------- --------------------- ------------------------ ----------------------
- ---------------------------------------------- ------------------------ --------------------- ---------------------- 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 5/8 - ---------------------------------------------- ------------------------ --------------------- ----------------------
The Company has not paid dividends on its common stock since fiscal year ended February 28, 1993, and it does not anticipate paying any dividends in the foreseeable future. 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 contained in Item 8 herein, (amounts in thousands, except per share data).
- ---------------------------------------------- ---------------- --------------- --------------- -------------- ------------- Years Ended February 1999 1998 1997 1996 1995 - ---------------------------------------------- ---------------- --------------- --------------- -------------- ------------- Revenues1 $23,600 $28,868 $20,501 $19,437 $24,520 (Loss) income from continuing operations (2,964) 1,770 334 (1,921) (397) Net (loss) income (3,080) 2,212 299 1,933 (388) (Loss) income applicable to common shares (3,465) 1,772 22 2,389 (975) (Loss) income from continuing operations per common share, diluted (1.74) .68 .03 (.76) (.90) (Loss) income per common share, diluted (1.80) .91 .01 1.23 (.50) Depreciation, amortization and accretion 1,434 1,480 1,419 1,887 2,329 Total assets 37,119 44,771 37,677 38,798 43,679 Total debt 13,857 14,537 10,119 8,485 12,328 Redeemable preferred stock - - 4,891 5,280 10,593 Common and other stockholders' equity2 16,429 20,196 13,647 13,625 9,913 Book value per common share 6.18 7.97 7.05 7.04 5.13 - ---------------------------------------------- ---------------- --------------- --------------- -------------- -------------
1 The results of Digital GraphiX are included in 1995 and two months of 1996. Revenues and (loss) income 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 1999 and 1998 amounts include 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 1999 vs. 1998 For the year ended February 28, 1999 (FY99), the Company incurred a net loss applicable to common shareholders of $3,465,000, or $(1.80) per share, basic and diluted. During the prior fiscal year, the Company reported net income applicable to common shareholders of $1,772,000, or $.92 per share basic and $.91 diluted. Revenues Total revenues of $23,600,000 for FY99 were 18.2% lower than total revenues from continuing operations reported for the fiscal year ended February 28, 1998 (FY98). The decline was due to a $6,709,000 decrease in Investment Income (Loss) and Other Income, which was partially offset on a 5.7% increase in net sales from The J.M. Ney Company (JM Ney). During FY99, JM Ney's sales increased by $1,441,000. Such sales increase primarily reflected the pass-through effect of increased selling prices for products containing palladium as a result of higher market prices for this particular precious metal. During FY99, the average market value for palladium was approximately $302 per troy ounce, compared to approximately $198 per troy ounce during FY98. During each of the last two years, the market for palladium has been both volatile and generally increasing. During FY99, the products sold by JM Ney contained approximately 24,000 troy ounces of palladium. Overall sales growth was hampered by (i) the General Motors labor strike, which reduced demand for many of JM Ney's products that are sold to the automotive industry; (ii) the expiration of an exclusive manufacturing contract with the Company's former Dental segment which resulted in a sales decline of $280,000; and (iii) delays in the implementation of several sales programs to customers who had purchased the required tooling from JM Ney but did not request the anticipated level of parts production. Activities which comprise Investment Income (Loss) and Other Income produced a net loss of $3,238,000 during FY99, versus income of $3,471,000 during FY98 as follows (in thousands): FY99 FY98 Net (loss) gain from domestic investment portfolio $ (725) $ 1,759 Net (loss) gain from Russian and Eastern European portfolio (2,213) 665 Write-down of long-term Russian investments (1,609) - Interest and dividends 349 228 Rental income 482 376 Ultrasonic royalty income 60 - Gain from Digital GraphiX 24 196 Other, net 394 247 --------- -------- $(3,238) $ 3,471 ======== =======
The domestic portfolio loss is comprised of net realized and unrealized losses of $861,000 from the Company's portfolio of savings bank stocks, $4,000 of losses from the sale of municipal bonds and a net gain of $140,000 from the sale of the Company's investment in Centennial Cellular. During FY99, the market value for Russian securities decreased significantly resulting in an unrealized decline of 78% in the Company's portfolio of Russian, Ukrainian and Polish trading investments. In addition, a JM Ney investment in a Russian bond fund declined in value by approximately $299,000, or 60% of the original investment. The Company also wrote down the value of its long-term investments in IAS and VSMPO due to the Russian market conditions, and the perceived impact on the Company's ability to realize value from these investments in the near term. During FY98, increases in both the domestic and Eastern European markets resulted in unrealized appreciation in the value of the Company's investment portfolio. Cost of Sales Cost of sales totaled $18,255,000, or 68.0% of net sales, compared to $17,040,000, or 67.1% of net sales in FY98. The decline in gross margins from 32.9% to 32.0% was the result of the previously noted higher palladium prices which were passed on in the form of higher selling prices without a commensurate margin markup. During FY99, sales of precious metal materials in the form of wire, strip and rod, represented 33.1% of sales, as compared to 31.8% for FY98. Material products generally have lower average gross margins, due to the commodity nature of this product class, versus highly engineered parts and components, which involve more value-added processing and higher gross billing margins. This sales mix, and the resultant underabsorption of operating expenses contributed to lower average gross margins during FY99 compared to the prior year. The FY99 margin decline was somewhat offset through expanded metals purchasing programs that included forward purchases of palladium and sales of put options for the purchase of palladium as a hedge against JM Ney's manufacturing requirements. In addition, JM Ney reduced its inventory of palladium by approximately 2,600 troy ounces which resulted in a LIFO gain of approximately $349,000 when measured against the beginning of the fiscal year palladium prices. One further element contributing to offsetting narrower margins was a reclassification of approximately $240,000 in engineering costs to more properly reflect management's analysis of costs that related to the manufacture of its products. Selling, General and Administrative Expenses Selling, general and administrative expenses of $6,170,000 during FY99 represent a modest decline from the costs incurred in the prior fiscal year. The Company incurred costs in FY99 totaling $481,000 to convert JM Ney's primary operating software to be Y2K compliant; $128,000 of such costs incurred in FY98. Lower legal fees and corporate level compensation expense contributed to the overall decline in these costs. Research and Development Expenses Research and development expenses increased 30.7% to $1,888,000, or 7.0% of net sales, compared to $1,444,000, or 5.7% of net sales in FY98. The increase was attributable to effort expended to develop new alloys and expand JM Ney's technical competencies in meeting the changing requirements of its target markets, and to approximately $240,000 of costs that were formerly allocated to product costs. Interest Expense Interest expense of $1,735,000 during FY99 was 49.2% higher than the $1,163,000 of interest expense incurred during FY98. Most of the increase relates to a full year of interest on a $7.5 million subordinated note which JM Ney issued during the fourth quarter of FY98. In addition, JM Ney incurred increased interest expense on high interest rate palladium leases which served to hedge market risk, primarily attributable to its refining operations. Such interest costs were offset by charges to JM Ney's refining customers that were included in Other Income. Income Taxes An income tax benefit from continuing operations of $1,484,000 was recorded for FY99 which represents an effective tax rate of 33.4%. The $4,547,000 of net capital losses during FY99 was comprised of $482,000 of realized investment gains and $5,029,000 of net change in unrealized losses. As a result, $1,076,000 of the tax benefit is being deferred. Discontinued Operations In February 1999, the Company reached a settlement agreement with the buyer of the net assets of its Ultrasonics segment which it had sold as of February 28, 1998. Under the terms of this settlement, the Company received $400,000 of previously escrowed funds in addition to the $2.4 million it had received at the closing. In addition, the Company also granted the buyer certain allowances against current-year and future royalty payments. As a result of the settlement and costs incurred leading to the agreement, the Company recognized a net loss from the sale of this segment of $116,000, net of $71,000 of income tax benefits. In the prior year, the Company had recorded a gain of $97,000 on this sale, net of $84,000 of income taxes. Preferred Dividends During FY99, the Company incurred $385,000 of preferred dividends based upon the revised terms of $1.50 per share. During FY98, a total of $477,000 in dividends and discount accretion were accrued based on former terms under which the preferred dividends were linked to the operating results of JM Ney. 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 represented 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 reflected 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, compared to a loss of $142,000 in FY97, as follows (in thousands): 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 FY98 and FY97 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 from continuing operations totaled $17,040,000, or 67.1% of net sales in FY98, compared to $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 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. 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, compared to 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 more 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 expense. 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 FY98 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 Inc. for a purchase price which was estimated to be approximately $3.5 million, and additional contingent consideration. Net of expenses incurred in and accrued for the transaction, the Company recognized a gain of $97,000, net of tax. For the year then ended, Ney Ultrasonics Inc. 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. 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, 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 Inc., 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. LIQUIDITY AND CAPITAL RESOURCES At February 28, 1999, consolidated cash and short-term investments totaled $8,555,000, which is a decrease of $2,962,000, or 25.7%, from February 28, 1998. Within the current year total is a portfolio of common stocks of savings banks valued at $5,362,000, the Company's trading portfolio of Russian and Eastern European securities with a reported value of $554,000, and JM Ney's investment in a Russian bond fund with a reported value of $98,000. Under the terms of its $7.5 million subordinated note agreement and revolving credit agreement with a commercial bank, JM Ney is restricted from making payments to the Company except as defined. The defined payments are subject to JM Ney's meeting certain financial covenants. At February 28, 1999, JM Ney's working capital was $8,883,000 or 59.1% of consolidated net current assets, and its net worth, net of net liabilities to the Company, including a $4 million subordinated note payable, totaled $7,125,000, or 43.4% of the Company's consolidated total. The Company is dependent upon defined payments from JM Ney, which in FY99 totaled $820,000, and on income from its investments to meet its operating expenses, debt service and preferred dividend obligations. The Company believes it can meet these requirements in the foreseeable future from these defined sources of cash flows, or from the proceeds of liquidations of existing investments. During FY99, 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 $80 per ounce of the palladium content of its inventory, and a $10 per ounce decline in the gold component of its inventory, JM Ney's LIFO reserve increased by $969,000 to maintain the net recorded value of these inventories at their historical values. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the values of those derivatives would be recognized immediately or deferred depending on the use of the derivative and if the derivative is a qualifying hedge. The Company plans to adopt SFAS No. 133 by January 1, 2000, as required. The Company is currently assessing the impact of this statement on the Company's consolidated financial statements. Forward-looking Statements Statements contained in this Form 10-K that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that a number of important factors could cause actual results for fiscal 2000 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Such statements contain a number of risks and uncertainties, including, but not limited to (i) economic and political developments in Russia and Eastern Europe; (ii) changes and volatility in the market for domestic equity securities, particularly in the financial services sector, (iii) changes in technology that would affect JM Ney's products, or affect the value of the ultrasonic cleaning technology on which contingent consideration is based; (iv) acceptance of new product developments and (v) the price and volatility of precious metals. The Company cannot assure that it will be able to anticipate or respond timely to changes which could adversely affect its operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Company's common stock. Year 2000 The Year 2000 problems stem from three main issues: two-digit data storage, leap year calculations, and special meanings for dates (i.e., 9/9/99). There is not a simple solution to the Year 2000 issue due to the fact that the use of dates for calculations is pervasive throughout software and the use of these calculations is not standardized. State of Readiness. The Company has formalized a comprehensive Year 2000 plan that encompasses its products, vendors, customers, manufacturing equipment, technical infrastructure, facilities, telecommunications, and business systems. The plan consists of the following phases: inventory, assessment, remediation, testing, implementation, and a contingency plan for each area. The plan also contains the cost associated with providing Year 2000 solutions for each area. The Company's plan has been viewed favorably by a Year 2000 consulting firm, which reviewed each element of the plan. The Company has completed the process of identifying and assessing the extent to which the Year 2000 issue will affect its products, vendors, customers, manufacturing equipment, technical infrastructure, facilities, telecommunications and business systems. To date, most of the financial and operational effort has been expended in implementing Year 2000 compliant solutions or JM Ney's enterprise resource planning (ERP) systems and technical infrastructure. This effort was completed in October 1998. The Company is now in the process of remediation, testing and implementation of Year 2000 compliant solutions for its manufacturing equipment, telecommunications, facilities and some minor business systems. These processes are scheduled to be complete by September 1999. Costs. Through February 28, 1999, approximately $609,000 has been expended on the Year 2000 project, including $481,000 expended during FY99. Additional Year 2000 expenses to be incurred have been estimated to total less than $200,000. However, there can be no assurance that the Company will not incur any unanticipated costs in completing its remediation for non-compliant manufacturing equipment. Risks. The Company views its greatest area of exposure as being the degree of compliance of some of JM Ney's manufacturing equipment. There are machines that do not have blue prints, and information regarding the programmable logic controls is not always easy to obtain. These same machines do not have a mechanism to change the date, nor do they display or print a date. These same reasons could be a positive indicator to support the idea that they are not date-sensitive machines. JM Ney will be performing extensive tests on all manufacturing equipment during the second fiscal quarter of FY 2000. Other risks relate to the degree of readiness of the Company's vendors, suppliers, customers, and other third parties. Any failure by these parties to ensure the Year 2000 compliance could have an adverse effect on the Company's position. Contingency. The Company will continue to develop its contingency strategies for every area. Special attention will be paid to the manufacturing and third party disciplines. During the first quarter of FY2000, the Company has been evaluating the responses from its single-source and critical suppliers, and will be requesting updates from these suppliers as the year progresses. Additional or second sources will be identified for those suppliers who fail to provide sufficient Year 2000 information or who are not compliant by September 1999. Based upon a comprehensive review of exposure areas, the Company believes that manufacturing and other operational and administrative activities will not be at significant risk due to the Year 2000 problem. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company and JM Ney are exposed to market risk from changes in equity security prices, certain commodity prices, interest rates and from factors that impact equity investment in Russia, the Ukraine and Poland. Equity Securities Risk At February 28, 1999, the Company owned a portfolio of savings bank stock with a market value of $5,362,000. The Company has pledged this portfolio to secure short-term borrowings of $1,392,000. A decline in the value of these securities, in addition to reducing working capital could cause the Company to sell securities or use other sources of funds to reduce the margin loan. Foreign Investment Risk The Company has a trading portfolio of Russian, Ukraine and Polish investments with a net reported value of $558,000 and longer term Russian investments with a reported value of $206,000. In addition, JM Ney has an investment in a Russian bond fund with a reported value of $98,000. The realizable value of these investments, particularly Russian components, is subject to currency fluctuations, illiquid markets and political risks. The Company has no derivative financials instruments to hedge the risks associated with these investments. Commodity Price Risk JM Ney utilizes significant amounts of precious metals in the products it manufactures and sells. Significant increases in the market value of these metals, palladium, gold and platinum, in particular, may impact the demand for its products. JM Ney generally adjusts the selling prices of its products if market prices change significantly, or it hedges fixed selling price programs. Accordingly, while a change in precious metals prices may impact cost of sales, such impact is generally met with an approximately equivalent charge in sales, so that the impact on earnings is minimal or not present. Significant fluctuations and volatility in precious metal price creates risk that purchases of precious metals may not be efficiently coordinated with sales. While JM Ney believes it has the programs in place to limit this risk, there can be no assurance that volatility in price does not result in intended profits or losses. Also, while increases or decreases in precious metal prices impact the economic value of JM Ney's inventory, such changes are generally reflected with a corresponding change in the LIFO reserve and do not affect the net reported value of its inventory. Interest Rate Risk JM Ney has a revolving line of credit which bears interest at floating rates as described in Note 8 to the Company's consolidated financial statements. In addition, the Company has short-term borrowings in the form of a margin loan. Neither the Company nor JM Ney hedges its interest rate risk, including the note associated with precious metal consignment arrangements which are tied to precious metal leasing. A 1% change in interest rates would impact the Company's interest cost of its short-term borrowings by approximately $15,000. During most of FY99, JM Ney did not have outstanding cash borrowings on its revolving line of credit, thus a 1% change in interest rates would have a minimal impact on reported interest expense. Most of JM Ney's usage of its credit line is in the form of consignment borrowings of precious metals, much of which hedge precious metals inventory represented by scrap metal of its refining operations. A 1% change in precious metal leasing rates would impact JM Ney's interest cost by approximately $20,000, much of which would be offset by changes in market risk surcharges to US refining customers. Such leasing costs are also impacted by charges in the market prices for the precious metals being leased. During FY99 the leasing rates and market prices for palladium fluctuated significantly. Leasing costs ranged from a high of 210% per annum to a low of 9.5%, with an unweighted average of approximately 40%. Market prices for palladium contacts ranged from $242 per troy ounce to $397 per troy ounce. As a result, daily lease costs for palladium ranged from approximately $2.16 per ounce to approximately $0.10 per ounce. The Company passed these metal fluctuations and market sensitive lease costs to US refining customers, in the form of charges that are included in Other Income. Accordingly, the net impact of such fluctuations is estimated to not be material to the Company's consolidated results of operations. Due to the interest risk of financing and managing precious metals inventory, there can be no assurance that changes in either or both precious metals prices or leasing rates will not have a material impact on future results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 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 contained in this Item (amounts in thousands, except per share data).
Selected Quarterly Financial Data 1999 Quarterly Financial Data May 31 August 31 November 30 February 28 - -------------------------------------------------- ------------------ ------------------ ------------------ ------------------ Net sales and revenues from continuing operations $7,831 $1,116 $7,842 $6,811 Gross profit 2,515 2,086 2,215 1,767 Income (loss) from continuing operations 53 (3,351) 611 (277) Net income (loss) 53 (3,351) 611 (393) Income (loss) applicable to common shares (50) (3,447) 515 (483) - -------------------------------------------------- ------------------ ------------------ ------------------ ------------------ Earnings (Loss) Per Common Share1: Continuing operations (.03) (1.77) .27 (.25) Net income (loss) (.03) (1.77) .27 (.25) - -------------------------------------------------- ------------------ ------------------ ------------------ ------------------ 1998 Quarterly Financial Data May 31 August 31 November 30 February 28 - -------------------------------------------------- ------------------ ------------------ ------------------ ------------------ Net sales and revenues from continuing operations $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 Common Share1: Continuing operations .05 .78 (.21) (.19) Net income (loss) .07 .79 (.16) (.05) - -------------------------------------------------- ------------------ ------------------ ------------------ ------------------
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, 1999 and 1998 (in thousands, except share data) 1999 1998 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Assets Current assets: Cash and cash equivalents $ 2,541 $ 2,516 Marketable securities 6,014 9,001 Receivable from sale of subsidiary - 3,521 Accounts and other receivables, less allowance for doubtful accounts of $110 in 1999, and $130 in 1998 4,098 3,870 Inventories 7,821 8,076 Prepaid expenses and other current assets 100 142 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Total current assets 20,574 27,126 Property, plant and equipment, net 9,305 9,443 Prepaid pension expense 5,033 4,665 Investments 206 1,815 Other assets 2,001 1,722 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- $37,119 $44,771 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 443 $ 595 Short-term borrowings 2,356 2,183 Accounts payable 659 951 Accrued liabilities 1,501 3,352 Deferred income taxes 582 1,286 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Total current liabilities 5,541 8,367 Long-term debt, less current maturities 3,729 4,459 Subordinated note payable, net of unamortized discount 7,329 7,300 Other long-term obligations 1,902 1,888 Deferred income taxes 2,189 2,561 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Total liabilities 20,690 24,575 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Commitments and contingencies (Notes 18 and 21) Stockholders' equity: Cumulative convertible preferred stock, no par value; authorized 800,000 shares, outstanding 256,416 shares 4,769 4,769 Common stock, $.01 par value in 1999, no par value in 1998; authorized 6,000,000 shares, issued 1,958,478 shares in 1999 and 1998 20 2,103 Treasury stock, at cost, 30,549 shares in 1999, and 21,800 shares in 1998 (142) (82) Receivable from officer (250) - Additional paid-in capital 5,339 3,248 Retained earnings 6,693 10,158 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- Total stockholders' equity 16,429 20,196 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- $37,119 $44,771 - ------------------------------------------------------------------------- ----------------------- ----------------------- ---------- See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC. Consolidated Statements of Operations Years ended February 28, 1999, 1998 and 1997 (in thousands, except per share data) 1999 1998 1997 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- Revenues: Net sales $26,838 $25,397 $20,643 Investment income (loss) and other income (3,238) 3,471 (142) - ------------------------------------------------------- -------------------------- ----------------------- -------------------- 23,600 28,868 20,501 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- Costs and expenses: Cost of sales 18,255 17,040 13,259 Selling, general and administrative 6,170 6,260 5,772 Research and development 1,888 1,444 1,228 Interest expense 1,735 1,163 790 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- 28,048 25,907 21,049 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- (Loss) income from continuing operations before income taxes (4,448) 2,961 (548) Income tax (benefit) expense (1,484) 1,191 (882) - ------------------------------------------------------- -------------------------- ----------------------- -------------------- (Loss) income from continuing operations (2,964) 1,770 334 Income (loss) from discontinued Ultrasonics segment, net of income taxes (benefit) of $221 and ($22), respectively - 345 (35) (Loss) gain on sale of discontinued Ultrasonics segment, net of income taxes (benefit) of ($71) and $84, respectively (116) 97 - - ------------------------------------------------------- -------------------------- ----------------------- -------------------- Net (loss) income (3,080) 2,212 299 Preferred dividends (385) (477) (411) Reversal of preferred dividends - 37 134 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- (Loss) income applicable to common shareholders $(3,465) $ 1,772 $ 22 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- Earnings (loss) per common share: BASIC Continuing operations $ (1.74) $ .69 $ .03 Discontinued operations - .18 (.02) (Loss) gain on sale of discontinued segment (.06) .05 - - ------------------------------------------------------- -------------------------- ----------------------- -------------------- (Loss) income per common share, basic $ (1.80) $ .92 $ .01 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- DILUTED Continuing operations $ (1.74) $ .68 $ .03 Discontinued operations - .18 (.02) (Loss) gain on sale of discontinued segment (.06) .05 - - ------------------------------------------------------- -------------------------- ----------------------- -------------------- (Loss) income per common share, diluted $ (1.80) $ .91 $ .01 - ------------------------------------------------------- -------------------------- ----------------------- -------------------- See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity Years ended February 28, 1999, 1998 and 1997 (in thousands, except share data) 1999 1998 1997 Outstanding Outstanding Outstanding Shares Amount Shares Amount Shares Amount - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Preferred Stock Beginning balance 256,416 $ 4,769 - - - - Reclassification due to removal of redemption provisions of preferred 256,416 $ 4,769 - - stock - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- 256,416 $ 4,769 256,416 $ 4,769 - - - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Common Stock Beginning balance 1,958,478 $ 2,103 1,958,478 $ 2,103 1,958,205 $ 2,103 Shares issued from prior - conversion of preferred stock - - 273 Adjustment to reflect redomestication and (2,083) - - - - new par value for common shares - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- 1,958,478 $ 20 1,958,478 $ 2,103 1,958,478 $ 2,103 - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Additional Paid-in Capital Beginning balance $ 3,248 $ 3,248 $ 3,248 Adjustment to reflect redomestication and 2,083 - - new par value for common shares Net gain on issuances of treasury 8 - - shares - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- $ 5,339 $ 3,248 $ 3,248 - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Retained Earnings Beginning balance $10,158 $ 8,386 $ 8,364 Net (loss) income (3,080) 2,212 299 Preferred stock dividends and accretion (385) (477) (411) Reversal of preferred dividends and accretion - 37 134 - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- $ 6,693 $10,158 $ 8,386 - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- -------- Receivable from Officer Beginning balance - - - Receivable pursuant to officer's purchase $ ( 250) - - of common stock - ---------------------------------------- -------------- ----------------- --------------- ------------------ ----------------- ----- $ ( 250) - - - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Treasury Stock Beginning balance 21,800 $ (82) 24,000 $ (90) 24,000 $ (90) Shares issued (20,772) 78 (2,200) 8 - - Shares issued to officer (62,500) 250 Treasury shares purchased 92,021 (388) - - - - - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- 30,549 $ (142) 21,800 $ (82) 24,000 $ (90) - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- Total stockholders' equity $16,429 $20,196 $13,647 - ---------------------------------------- -------------- ----------------- --------------- ------------------ ------------- --------- See accompanying notes to consolidated financial statements.
ANDERSEN GROUP, INC. Consolidated Statements of Cash Flows Years ended February 28, 1999, 1998 and 1997 (in thousands) 1999 1998 1997 - -------------------------------------------------------------------- ---------------------- -------------------- ------------------- Cash flows from operating activities: Net (loss) income $(3,080) $ 2,212 $ 299 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation, amortization and accretion 1,434 1,480 1,419 Deferred income taxes (1,076) 1,016 67 Loss (gain) on sale of Ney Ultrasonics 116 (97) - Losses (gains) from securities and investments 4,547 (2,619) 1,149 Purchases of securities (1,836) (2,218) (1,625) Proceeds from sales of securities 1,885 1,230 526 Pension income (368) (391) (247) (Gain) loss on disposal of property, plant and equipment (25) - 58 Investment in Digital GraphiX - - (87) Changes in operating assets and liabilities, net of changes from sale of Ney Ultrasonics in 1998: Accounts and other receivables (228) (2,048) 1,564 Inventories 255 (386) (428) Prepaid expenses and other assets 57 (97) (339) Accounts payable (292) 507 (1,799) Accrued liabilities and other long-term obligations (1,273) (1,105) (930) - -------------------------------------------------------------------- ---------------------- -------------------- ------------------- Net cash provided by (used in) operating activities 116 (2,516) (373) - -------------------------------------------------------------------- ---------------------- -------------------- ------------------- Cash flows from investing activities: Proceeds from sale of Ultrasonics segment 2,800 - - Proceeds from sale of property, plant and equipment 223 - 4 Purchase of property, plant and equipment (1,702) (1,740) (1,191) Purchase of investments - (1,225) - Proceeds from collection of investments - 1,542 - - -------------------------------------------------------------------- ---------------------- -------------------- ------------------- Net cash provided by (used in) investing activities 1,321 (1,423) (1,187) - -------------------------------------------------------------------- ---------------------- -------------------- ------------------- Cash flows from financing activities: Principal payments on long-term debt (882) (2,760) (1,250) Proceeds from issuance of subordinated debt - 7,500 - Redemptions of preferred stock - (160) (392) Proceeds (payment) of short-term borrowings, net 173 (122) 2,305 Stock options exercised 50 - - Treasury shares purchased, net (352) - - Preferred dividends paid (401) (1,222) - - -------------------------------------------------------------------- ---------------------- -------------------- --------------- Net cash (used in) provided by financing activities (1,412) 3,236 663 - -------------------------------------------------------------------- ---------------------- -------------------- --------------- Net increase (decrease) in cash and cash equivalents 25 (703) (897) Cash and cash equivalents, beginning of year 2,516 3,219 4,116 - -------------------------------------------------------------------- ---------------------- -------------------- --------------- Cash and cash equivalents, end of year $ 2,541 $ 2,516 $ 3,219 - -------------------------------------------------------------------- ---------------------- -------------------- --------------- See accompanying notes to consolidated financial statements.
Andersen Group, Inc. Notes to Consolidated Financial Statements Years ended February 28, 1999, 1998 and 1997 (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, The J.M. Ney Company (JM Ney), 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 to provide for volatility and liquidity concerns relating to its 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 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 basis 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 dilutive securities. See Note 14 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 have been made to the prior years' financial statements in order to conform with the FY99 presentation.
(3) Marketable Securities Marketable securities consist of the following (in thousands): February 28, 1999 February 28, 1998 - --------------------------------------------------------------- ------------------------- -------------------------- -- Common stock of savings banks $5,362 $5,611 FM Emerging Russia Fund 294 2,422 Portfolio of Ukraine stocks 108 314 Common stock of Bank Handlowey 217 348 Renaissance Russia Bond Fund 98 - Valuation reserve - foreign investments (65) (617) Common stock of Centennial Cellular - 430 Municipal bonds - 493 - --------------------------------------------------------------- ------------------------- -------------------------- -- $6,014 $9,001 - --------------------------------------------------------------- ------------------------- -------------------------- --
(4) Inventories Inventories consist of the following (in thousands): February 28, 1999 February 28, 1998 --------------------------------------------------------------- ------------------------- --------------------------- Raw material $ 3,498 $ 2,989 Work in process 4,661 6,509 Finished goods 2,710 657 ------------------------------------------------------------ ------------------------- --------------------------- 10,869 10,155 Less LIFO Reserve 3,048 2,079 ------------------------------------------------------------ ------------------------- --------------------------- $ 7,821 $ 8,076 ------------------------------------------------------------ ------------------------- ---------------------------
At February 28, 1999 and 1998, inventories valued at LIFO cost comprised 76% and 79% of total inventories, respectively. At February 28, 1999, inventories valued at LIFO consisted of 9,565 troy ounces of gold, 11,817 troy ounces of silver, 3,396 troy ounces of platinum and 14,086 troy ounces of palladium. Such quantities of precious metals are net of 400 ounces of palladium held by the Company's primary operating subsidiary, JM Ney, subject to leasing arrangements with the precious metals division of JM Ney's primary bank. (5) Discontinued Operations Ney Ultrasonics Inc. Effective February 28, 1998, the Company sold the net assets of Ney Ultrasonics Inc. for an amount which at February 28, 1998 was estimated to be approximately $3,521,000. As a result, during FY98 the Company recorded a gain of $97,000, net of expenses relating to the transaction and net of income taxes of $84,000. During FY99, the Company and the purchaser of the business reached a settlement agreement to resolve disputes relating to the determination of the purchase price. Under this settlement, the Company received $400,000 of additional consideration beyond the $2,400,000 it had received at closing. This settlement, net of expenses incurred in excess of previous accruals, resulted in a current year loss of $187,000 before related tax benefits. The Company also expects to receive additional consideration, which is contingent on the growth of the sales of products and technology transferred as part of the sale. Ney Ultrasonics' results of operations have been presented as discontinued operations. Revenue from the segment totaled approximately $5,713,000 and $3,874,000 in FY98 and FY97, respectively.
(6) Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands): February 28, 1999 February 28, 1998 - ------------------------------------------------------- ---------------------------- ------------------------------ Land and improvements $ 1,056 $ 1,056 Buildings and improvements 9,308 9,392 Machinery and equipment 11,494 10,539 Furniture and fixtures 873 867 - ------------------------------------------------------- ---------------------------- ------------------------------ 22,731 21,854 Less accumulated depreciation and amortization 13,426 12,411 - ------------------------------------------------------- ---------------------------- ------------------------------ $ 9,305 $ 9,443 - ------------------------------------------------------- ---------------------------- ------------------------------
Depreciation and amortization expense was $1,350,000, $1,405,000 and $1,393,000 in FY99, FY98 and FY97, respectively. At February 28, 1999 and 1998, property, plant and equipment includes $579,000 and $1,146,000, respectively, of machinery and equipment acquired under capital leases, which expire through FY02, with related accumulated amortization of $268,000 and $728,000, respectively. (7) Investments Investments consist of the following (in thousands): February 28, 1999 February 28, 1998 - ------------------------------------------ ------------------- ----------------- Investment in Institute for Automated Systems $ 84 $ 835 Investment in VSMPO 122 980 - ------------------------------------------ ------------------- ----------------- $ 206 $ 1,815 - ------------------------------------------ ------------------- ----------------- At February 28, 1999, the Company had an investment with a cost basis of $835,000 in a joint venture, which has an equity investment in the Institute for Automated Systems, a Russian telecommunications company that has plans to develop a data transmission network throughout Russia. Two of the Company's directors are among a group of investors in this joint venture. During FY98, the Company invested approximately $1,225,000 in the common stock of AVISMA, a Russian titanium producer which was subsequently merged into VSMPO, a Russian titanium processing company. Three of the Company's directors and an investment fund controlled by one of these directors are also investors in VSMPO. These two investments, which the Company intends to hold long term and are recorded using the cost basis method of accounting, were written down in value during FY99 to reflect other than temporary impairments in their values due to significant declines in the market values of Russian securities. (8) Short-term Borrowings J.M. Ney has a $6.0 million revolving credit and deferred payment sales agreement with a commercial bank. At February 28, 1999, $964,000 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 7.75% and 8.5% at February 28, 1999 and 1998, 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, 1999 the amount of net assets which JM Ney was restricted from distributing to the Company totaled approximately $11,125,000. In addition, at February 28, 1999, the Company had a $1,392,000 demand loan, which was secured by a portion of the Company's portfolio of marketable securities. Interest on this borrowing was charged at a floating rate, which was 5.8% at February 28, 1999. (9) Accrued Liabilities Accrued liabilities consist of the following (in thousands):
February 28, 1999 February 28, 1998 - ---------------------------------------- ------------------------------------ ------------------------------------- Employee compensation $ 430 $ 449 Accrued dividends 96 112 Income taxes - 201 Accrued interest 276 314 Deferred hedging gains 165 346 Other 534 1,930 - ---------------------------------------- ------------------------------------ ------------------------------------- $ 1,501 $ 3,352 - ---------------------------------------- ------------------------------------ -------------------------------------
(10) Long-term Debt and Subordinated Notes Payable Long-term debt and subordinated notes payable consist of the following (in thousands): February February 28, 1999 28, 1998 - ---------------------------------------------------------------------- ---------------------- ---------------------- -- Convertible subordinated debentures, due October 2007; interest at 10.5%, payable semi-annually; annual principal payments in varying amounts through maturity; unsecured $ 3,759 $ 4,311 Subordinated note payable of JM Ney due December 2004; unsecured; quarterly interest payments at 10.26% 7,500 7,500 Other 413 743 - ---------------------------------------------------------------------- ---------------------- ---------------------- -- 11,672 12,554 Less unamortized discount on subordinated note payable 171 200 - ---------------------------------------------------------------------- ---------------------- ---------------------- -- 11,501 12,354 Less current maturities 443 595 - ---------------------------------------------------------------------- ---------------------- ---------------------- -- $11,058 $11,759 - ---------------------------------------------------------------------- ---------------------- ---------------------- --
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, 1999, 232,468 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 value of these warrants is being amortized over the life of the note. The lender has an option to put these warrants back to JM Ney at the earlier of December 2002 or the date of an initial public offering of JM 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): 2000 $ 443 2001 538 2002 543 2003 439 2004 440 Thereafter 9,269 $ 11,672
(11) Income Taxes For FY99, FY98 and FY97, income tax expense (benefit) consists of the following (in thousands): 1999 1998 1997 - --------------------------------------------------------- ------------------- -------------------- --------------------- Current Federal $ (377) $ 350 $ (410) Current State (102) 130 (561) Deferred Federal (977) 940 62 Deferred State (99) 76 5 - --------------------------------------------------------- ------------------- -------------------- --------------------- $ (1,555) $ 1,496 $ (904) - --------------------------------------------------------- ------------------- -------------------- ---------------------
The difference between the actual income tax (benefit) expense and the income tax (benefit) expense computed by applying the statutory Federal income tax rate of 34% to income (loss) before taxes is attributable to the following (in thousands):
1999 1998 1997 - --------------------------------------------------------- ----------------- ----------------------- --------------------- Income tax (benefit) expense $ (1,576) $ 1,261 $ (206) State income taxes, net of Federal benefit (132) 206 107 Change in enacted tax rates - - (264) Adjustment of accrual for prior years' taxes - - (546) Other 153 29 5 - --------------------------------------------------------- ----------------- ----------------------- --------------------- $ (1,555) $ 1,496 $ (904) - --------------------------------------------------------- ----------------- ----------------------- ---------------------
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, 1999 and 1998 are as follows (in thousands):
1999 1998 ----------- ---------- Deferred tax liabilities: Fixed asset basis differences $ (1,273) $ (1,229) Inventory (1,314) (1,486) Pension (1,940) (1,726) Unrealized gains on marketable securities, net - (470) Installment sale - (30) - ---------------------------------------------------------------- -------------------------- -------------------------- Total deferred tax liabilities (4,527) (4,941) - ---------------------------------------------------------------- -------------------------- -------------------------- Deferred tax assets: Post-retirement benefits other than pensions 406 395 Unrealized losses on marketable securities, net 361 - Allowance for uncollectible receivables 42 48 Federal credit carry-forwards 618 337 Other 329 314 - ---------------------------------------------------------------- -------------------------- -------------------------- Total deferred tax assets 1,756 1,094 - ---------------------------------------------------------------- -------------------------- -------------------------- Net deferred tax liabilities $ (2,771) $ (3,847) - ---------------------------------------------------------------- -------------------------- --------------------------
At February 28, 1999 and 1998 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, 1999, the Company had $618,000 of Federal credit carry-forwards, $172,000 of which were attributable to the alternative minimum tax that have no expiration date. The remaining credits, totaling $446,000, expire from 2000 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 annual dividend rate of $1.50 per preferred share and to eliminate the mandatory redemption feature of the Preferred Stock. Prior to this modification, 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 and $1.24 per preferred share of dividends were accrued during FY98 and FY97, respectively. During FY98 and FY97, the Company purchased 8,776 and 24,283 shares, respectively, of its Preferred Stock at $18.25 per share in FY98, and at $16.15 per share in FY97. As a result of the purchases, the Company reversed accrued dividends and accreted discounts of $37,000 and $134,000 in FY98 and FY97, respectively. During FY98 and FY97 approximately $40,000 and $58,000; respectively, of the accretion of a discount were recorded as part of the preferred dividend requirement. 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, 1999, 496,165 shares of common stock have been reserved for conversion. (13) Common Stock During FY99, the Company's shareholders approved a change of the Company's state of incorporation from Connecticut to Delaware. Among the impacts of this change in domicile was the change from a no par value common stock to common stock with a par value of $.01 per share. Accordingly, the accompanying financial statements reflect the adjustment of the par value of the common stock for issued and outstanding shares with a corresponding adjustment to the value of additional paid-in capital. (14) Earnings Per Share The computation of basic and diluted earnings per share is as follows (in thousands, except per share amounts):
1999 1998 1997 - ---------------------------------------------------------------- ------------------ ------------------ ---------------- Numerator for basic and diluted earnings per share: (Loss) income applicable to common shareholders $(3,465) $ 1,772 $ 22 - ---------------------------------------------------------------- ------------------ ------------------ ---------------- Denominator for basic earnings per share: Weighted average shares 1,928 1,935 1,934 Effect of dilutive securities - stock options - 18 - - ---------------------------------------------------------------- ------------------ ------------------ ---------------- Denominator for diluted earnings per share 1,928 1,953 1,934 - ---------------------------------------------------------------- ------------------ ------------------ ---------------- Basic earnings per share $ (1.80) $ .92 $ .01 Diluted earnings per share $ (1.80) $ .91 $ .01 - ---------------------------------------------------------------- ------------------ ------------------ ----------------
For each of FY99, FY98 and FY97, 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. (15) Stock Option Plans The Company's and JM Ney's incentive stock option plans provide 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. The per share weighted average fair value of stock options granted during FY99, FY98 and FY97 under these plans were $4.06, $6.22 and $3.90, respectively, using the Black Scholes option pricing model with the following weighted average assumptions: expected dividend yield of 0%; risk-free interest rates of 6.0%, 6.5%, and 6.5%; expected life of five to 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 FY99, 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 pro forma amounts indicated below (amounts in thousands, except per share data): 1999 1998 1997 (Loss) income applicable to common shareholders: As reported $(3,465) $ 1,772 $ 22 Pro forma $(3,695) $ 1,581 $ (68) (Loss) earnings per share - diluted: As reported $ (1.80) $ .91 $ .01 Pro forma $ (1.92) $ .81 $ (.03)
The Company reserved 139,000 shares of common stock for the exercise of stock options. At February 28, 1999, the Company had 43,100 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 7,200 were available for issuance at February 28, 1999. Activity under the Company's plan, which includes 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 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 $5.02 $3.81 - $8.38 Granted 37,000 $6.30 $6.25 - $6.44 Exercised (10,700) $4.54 $3.81 - $5.38 Canceled (11,500) $6.76 $3.81 - $7.50 - ----------------------------------------- -------------------- ------------------------------ ------------------------ - ----------------------------------------- -------------------- ------------------------------ ------------------------ Balance at February 28, 1999 94,000 $5.31 $3.81 - $8.38 - ----------------------------------------- -------------------- ------------------------------ ------------------------
At February 28, 1999, the range of exercise prices and the weighted average remaining contractual life of the options was as follows: Options Outstanding Options Exercisable Weighted Average Weighted Range of Exercise Weighted Average Remaining Average Prices Number Exercise Price Contractual Life Number Exercise Price Outstanding Exercisable - ---------------------- ----------------- ------------------ --------------------- ----------------- ---------------- $8.38 6,000 $8.38 2.3 years 6,000 $8.38 $7.00 - $5.38 46,000 $6.27 8.2 years 9,000 $6.13 $3.81 42,000 $3.81 7.1 years 42,000 $3.81 - ---------------------- ----------------- ------------------ --------------------- ----------------- ---------------- 94,000 $5.31 7.3 years 57,000 $4.66 - ---------------------- ----------------- ------------------ --------------------- ----------------- ----------------
Also, during FY99, FY98 and FY97, options to purchase 4,250, 16,800 and 130,000 shares of JM Ney, at average exercise prices of $11.47, $10.86 and $10.00 per share, respectively, were issued. During FY99 and FY98, options to acquire 7,750 and 500 shares, respectively, of JM Ney at $10.00 per share were forfeited. At February 28, 1999, 87,974 of the 142,800 total outstanding JM Ney options were exercisable. At February 28, 1999, the Company owned all 850,000 outstanding shares of JM Ney. There presently is no public market for JM Ney's common stock. (16) 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 following table sets forth the changes in benefit obligations, changes in fair value of plan assets, funded status and net amount recognized in the Consolidated Balance Sheets (in thousands). 1999 1998 1997 - ----------------------------------------------------- ---------------------- --------------------- ------------------- Changes in Benefit Obligations Benefit obligation at beginning of year $10,212 $10,021 $10,062 Service cost 240 234 253 Interest cost 781 736 723 Experience loss 842 243 - Distributions (2,885) (1,022) (1,017) Effect of curtailment (64) - - Effect of early retirement program settlement 511 - - Effect of assumption changes 2,026 - - - ----------------------------------------------------- ---------------------- --------------------- ------------------- Benefit obligation end of year 11,663 10,212 10,021 - ----------------------------------------------------- ---------------------- --------------------- -------------------
Change in Fair Value of Plan Assets Fair value of plan assets at beginning of year 18,087 16,815 15,642 Actual return on assets (672) 2,294 2,190 Benefits paid (2,885) (1,022) (1,017) - ----------------------------------------------------- ---------------------- --------------------- ------------------- Fair value of plan assets at end of year 14,530 18,087 16,815 - ----------------------------------------------------- ---------------------- --------------------- ------------------- Funded status 2,867 7,875 6,794 Unrecognized net actuarial loss (gain) 2,277 (3,079) (2,379) Unrecognized past service cost (111) (131) (141) - ----------------------------------------------------- ---------------------- --------------------- ------------------- Prepaid pension expense $ 5,033 $ 4,665 $ 4,274 - ----------------------------------------------------- ---------------------- --------------------- ------------------- For FY99, FY98 and FY97, the projected benefit obligations and pension income were determined using the following assumptions: 1999 1998 1997 -------------------- ------------------- - --------------------------------------------------------- ------------------- Discount rate 7.0% 7.5% 7.5% Future compensation growth rate 5.0% 5.5% 5.5% Long-term rate of return on plan assets 8.0% 8.0% 8.0% Net pension income for the Company's funded defined benefit plan for FY99, FY98 and FY97 includes the following components (in thousands): 1999 1998 1997 - ------------------------------------------------------------- -------------------- ----------------- ------------------ Service cost of benefits accrued $ 240 $ 234 $ 253 Interest cost on projected benefit obligations 781 736 723 Expected return on plan assets (1,413) (2,294) (2,190) Unrecognized net (loss) gain (42) 933 967 Effect of early retirement program 139 - - Effect of Ultrasonics curtailment (73) - - - ------------------------------------------------------------- -------------------- ----------------- ------------------ Pension (income) $ (368) $ (391) $ (247) - ------------------------------------------------------------- -------------------- ----------------- ------------------
Pension expense for all defined contribution plans totaled $189,000, $122,000 and $121,000 in FY99, FY98 and FY97, respectively. (17) 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 FY99, FY98, and FY97 was approximately $18,000, $56,000, and $53,000, respectively, including interest. At February 28, 1999 and 1998, the accumulated benefit obligation for post-retirement benefits was approximately $769,000 and $803,000, respectively. At February 28, 1999, 31 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 February 28, 1999, 1998 and 1997. At February 28, 1999, 1998 and 1997, the accumulated benefit obligation was compiled using assumed health care cost trend rates of 8%, 9% and 10%, respectively, gradually declining to 6% for the remainder of the projected payout period of the benefits. The estimated effect on the present value of the accumulated benefit obligation at March 1, 1999 of a 1% increase each year in the health care cost trend rate used would result in an estimated increase of approximately $3,000 in the service and interest cost, and approximately $43,000 in the accumulated benefit obligation. A 1% decrease each year in the health care trend rate would result in a decrease of approximately $3,000 in the service and interest costs, and a decrease of approximately $39,000 in the accumulated benefit obligation. (18) Leases 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 $299,000, $264,000, and $209,000 for FY99, FY98, and FY97, respectively, while rental income totaled $482,000, $376,000 and $342,000 for FY99, FY98, and FY97, respectively. Future minimum lease payments and rental income under the terms of the leases for each of the years ending February 28/29, are as follows (in thousands): Lease Payments Rental Income 2000 253 256 2001 185 104 2002 176 - 2003 174 - 2004 148 - Thereafter 76 - (19) Business Segments and Export Sales During FY99, 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. Ney Ultrasonics was discontinued in FY98. 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): FY99 FY98 FY97 Net sales and revenues: Electronics $26,837 $25,397 $20,643 Corporate (3,237) 3,471 (142) ------------------ ------------------- -------------------- $23,600 $28,868 $20,501 ------------------ ------------------- -------------------- Operating income (loss): Electronics $ 2,558 $ 2,860 $ 2,598 Corporate (5,271) 1,264 (2,356) ------------------ ------------------ --------------------- $ (2,713) $ 4,124 $ 242 ------------------ ------------------- -------------------- Interest expense: Electronics $ 1,228 $ 468 $ 13 Corporate 507 695 777 ------------------ ------------------- -------------------- $ 1,735 $ 1,163 $ 790 ------------------ ------------------- -------------------- Identifiable assets: Electronics $25,900 $25,337 $22,467 Ultrasonics - - 1,798 Corporate 11,219 19,434 13,412 ------------------ ------------------- -------------------- $37,119 $44,771 $37,677 ------------------ ------------------- -------------------- Depreciation, amortization and accretion: Electronics $ 1,277 $ 1,126 $ 1,142 Ultrasonics - 139 95 Corporate 157 215 240 ------------------ ------------------- -------------------- $ 1,434 $ 1,480 $ 1,477 ------------------ ------------------- -------------------- Capital expenditures: Electronics $ 1,680 $ 1,597 $ 1,512 Ultrasonics - 109 234 Corporate 22 34 24 ------------------ ------------------- -------------------- $ 1,702 $ 1,740 $ 1,770 ------------------ ------------------- --------------------
Export sales for FY99, FY98 and FY97 were $4,303,000, $4,370,000, and $3,417,000, respectively. Such sales were made primarily to customers in Europe and the Pacific Rim. During FY99, sales to two customers accounted for 16.1% and 13.9% of net sales, while during FY98 these two customers accounted for 14.9% and 12.6% of net sales. No customer accounted for greater than 10% of net sales in FY97. (20) Estimated Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, short term borrowings, 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, 1999, gains totaling $165,000 from expired or sold palladium futures contracts have been deferred from income recognition until the underlying orders for which the futures contracts served as a hedge have been shipped. At February 28, 1999, there were no open futures contracts. 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. (21) 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. (22) New Accounting Standards In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the values of those derivatives would be recognized immediately or deferred depending on the use of the derivative and if the derivative is a qualifying hedge. The Company plans to adopt SFAS No. 133 by January 1, 2000, as required. The Company is currently assessing the impact of this statement on the Company's consolidated financial statements. (23) 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): 1999 1998 1997 ---- ---- ---- Cash paid (received) for: Interest $1,702 $1,129 $ 863 Income taxes, net $ (210) $ 360 $ 85 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. 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. (24) Related Party Transactions During FY99 the Company accepted a $200,000 two-year 7% note receivable and a $50,000 demand note from an executive officer for the purchase of 62,500 shares of the Company's common stock. These amounts have been presented in the Stockholders' Equity section of the Consolidated Balance Sheet. INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Andersen Group, Inc.: We have audited the accompanying consolidated balance sheets of Andersen Group, Inc. and subsidiaries as of February 28, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the years 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 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, 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, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Hartford, Connecticut April 30, 1999 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Andersen Group, Inc.: We have audited the accompanying consolidated statements of operations, changes in stockholders' equity, and cash flows of Andersen Group, Inc. and subsidiaries for the year ended February 28, 1997. 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, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Andersen Group, Inc. and subsidiaries for the year ended February 28, 1997 in conformity with generally accepted accounting principles. /s/KPMG 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, 1999. 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, 1999, 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, 1999. 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, 1999. 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, 1999. 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, 1999 and 1998 20 Consolidated Statements of Operations or the years ended February 28, 1999, 1998 and 1997 21 Consolidated Statements of changes in Stockholders' Equity for the years ended February 28, 1999, 1998 and 1997 22 Consolidated Statements of Cash Flows for the years ended February 28, 1999, 1998 and 1997 23 Notes to Consolidated Financial Statements 24 Independent Auditors' Consents E-8 to E-9 (a)2. Consolidated Financial Statement Schedules: Schedule I Condensed Financial Information F-1 to F-4 II Valuation and Qualifying Accounts F-5 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. 3.11 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). 3.2 Restated By-laws for the State of Delaware.* 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 to Revolving Credit and Deferred Payment Sales Agreement by and among The J.M. Ney Company, BankBoston and Rhode Island Hospital Trust National Bank dated December 29, 1997. 10.13 Peter Barker Service Agreement effective January 11, 1999.* 10.14 Settlement Agreement with between CAE (U.S.) Inc. ("CAE"); Ney Technology, Inc. f/k/a Ney Ultrasonics, Inc.; and Andersen Group, Inc.* 21. Subsidiaries of the Registrant.* 23 Consent of Deloitte & Touche LLP.* 27. Financial Data Schedule.* (b) Reports on Form 8-K. None. *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 on May 19, 1999. ANDERSEN GROUP, INC. ANDERSEN GROUP, INC. Registrant Registrant /s/ Oliver R. Grace, Jr. /s/ Peter R. Barker Oliver R. Grace, Jr. Peter R. Barker Principal Executive Officer Vice President/Chief Financial Officer 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 Chairman, Secretary /s/ Francis E. Baker and Francis E. Baker Director May 19, 1999 President, Chief /s/ Oliver R. Grace, Jr. Executive Officer Oliver R. Grace, Jr. and Director May 19, 1999 /s/ Peter N. Bennett Peter N. Bennett Director May 19, 1999 /s/ John S. Grace John S. Grace Director May 19, 1999 /s/ Louis A. Lubrano Louis A. Lubrano Director May 19, 1999 /s/ James J. Pinto James J. Pinto Director May 19, 1999 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, 1999 and 1998 and for the years then ended, and have issued our report thereon dated April 30, 1999; 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. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic 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 30, 1999
ANDERSEN GROUP, INC. Schedule I - Condensed Financial Information of the Registrant Condensed Balance Sheets February 28, 1999 and 1998 (amounts in thousands) 1999 1998 - -------------------------------------------------------------------------- ----------------------- ----------------------- Assets Current assets: Cash and cash equivalents $ 1,614 $ 1,441 Marketable securities 5,916 9,001 Receivable from sale of subsidiary - 3,521 Accounts and other receivables, less allowance for doubtful accounts 230 125 Prepaid expenses and other assets 5 5 Deferred income taxes 546 - - -------------------------------------------------------------------------- ----------------------- ----------------------- Total current assets 8,311 14,093 Investment in The J. M. Ney Company 6,921 6,604 Subordinated note receivable from The J.M. Ney Company 4,000 4,000 Investments 206 1,815 Property, plant and equipment, net 2,308 2,629 Other assets 940 896 Deferred income taxes 222 - - -------------------------------------------------------------------------- ----------------------- ----------------------- $22,908 $30,037 - -------------------------------------------------------------------------- ----------------------- ----------------------- Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings $ 1,392 $ 1,487 Current maturities of long-term debt 316 441 Accounts payable 157 297 Due to The J. M. Ney Company - 656 Accrued liabilities 449 1,728 Deferred income taxes - 161 - -------------------------------------------------------------------------- ----------------------- ----------------------- Total current liabilities 2,314 4,770 Long-term debt, less current maturities 3,522 4,124 Other long-term liabilities 643 596 Deferred income taxes 351 - - -------------------------------------------------------------------------- ----------------------- ----------------------- Total liabilities 6,479 9,841 - -------------------------------------------------------------------------- ----------------------- ----------------------- Commitments and contingencies (Note 7) 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 4,769 Common stock, no par value; authorized 6,000,000 shares, issued 1,958,478 shares 20 2,103 Additional paid-in capital 5,339 3,248 Treasury stock, at cost, 30,549 shares in 1999; 21,800 shares in 1998 (142) (82) Receivable from officer (250) - Retained earnings 6,693 10,158 - -------------------------------------------------------------------------- ----------------------- ----------------------- Total stockholders' equity 16,429 20,196 - -------------------------------------------------------------------------- ----------------------- ----------------------- $22,908 $30,037 - -------------------------------------------------------------------------- ----------------------- ----------------------- See accompanying notes to condensed financial information. F-1
ANDERSEN GROUP, INC. Schedule I - Condensed Financial Information of the Registrant Condensed Statements of Operations Years ended February 28, 1999 and 1998 (amounts in thousands, except per share data) 1999 1998 - ------------------------------------------------------- ----------------------------------- ------------------------------------ Revenues: Investment (loss) income and other income $(2,376) $ 3,691 - ------------------------------------------------------- ----------------------------------- ------------------------------------ Costs and expenses: General and administrative 2,080 2,223 Interest expense 503 694 - ------------------------------------------------------- ----------------------------------- ------------------------------------ 2,583 2,917 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income from continuing operations before income taxes and equity in earnings of The J.M. Ney Company (4,959) 774 Income tax (benefit) expense (1,678) 361 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income from continuing operations before equity in earnings of The J.M. Ney Company (3,281) 413 Equity in earnings of The J.M. Ney Company 317 1,357 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income from continuing operations (2,964) 1,770 Income from discontinued operations, net of income taxes - 345 (Loss) gain on sale of discontinued segment, net of income taxes (116) 97 - ------------------------------------------------------- ----------------------------------- ------------------------------------ Net (loss) income (3,080) 2,212 Preferred dividends (385) (477) Reversal of preferred dividend - 37 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income applicable to common shares $(3,465) $ 1,772 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) earnings per common share: BASIC Continuing operations $ (1.74) $ 0.69 Discontinued operations - 0.18 (Loss) gain on sale of discontinued segment (.06) 0.05 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income per common share, basic $ (1.80) $ 0.92 - ------------------------------------------------------- ----------------------------------- ------------------------------------ DILUTED Continuing operations $ (1.74) $ 0.68 Discontinued operations - 0.18 (Loss) gain on sale of discontinued segment (.06) 0.05 - ------------------------------------------------------- ----------------------------------- ------------------------------------ (Loss) income per common share, diluted $ (1.80) $ 0.91 - ------------------------------------------------------- ----------------------------------- ------------------------------------ See accompanying notes to condensed financial information. F-2
ANDERSEN GROUP, INC. Schedule I - Condensed Financial Information of the Registrant Condensed Statements of Cash Flows Years ended February 28, 1999 and 1998 (amounts in thousands) 1999 1998 - ----------------------------------------------------------- ------------------------------- -------------------------------- Cash flows from operating activities: Net (loss) income $(3,080) $ 2,212 Adjustments to reconcile net (loss) income to net cash used in operating activities: Equity in earnings of The J. M. Ney Company (317) (1,357) Equity in earnings of Ney Ultrasonics - (345) Depreciation, amortization and accretion 157 216 Deferred income taxes (1,280) 880 (Loss) gain on sale of Ney Ultrasonics 116 (97) Net losses (gains) from securities 4,247 (2,619) Purchases of securities (1,336) (2,218) Proceeds from sales of securities 1,783 1,230 Gain on sale of property (25) - Changes in operating assets and liabilities: Accounts and notes receivable (105) (72) Prepaid expenses and other assets 1 372 Accounts payable, accrued liabilities and other long-term obligations (1,464) (409) - ----------------------------------------------------------- ------------------------------- -------------------------------- Net cash used in operating activities (1,303) (2,207) - ----------------------------------------------------------- ------------------------------- -------------------------------- Cash flows from investing activities: Proceeds from sale of Ultrasonics segment 2,800 Purchase of property, plant and equipment (22) (34) Proceeds from sale of property 223 - Proceeds from collection of investments - 1,542 Investment in other assets - (1,225) - ----------------------------------------------------------- ------------------------------- -------------------------------- Net cash provided by investing activities 3,001 283 - ----------------------------------------------------------- ------------------------------- -------------------------------- Cash flows from financing activities: Principal payments on long-term debt (727) (2,561) Proceeds from short-term debt (95) 1,486 Redemption of preferred stock - (160) Stock options exercised 50 - Treasury shares purchased, net (352) - Dividends paid (401) (1,222) Dividends received from The J. M. Ney Company - 3,518 - ----------------------------------------------------------- ------------------------------- -------------------------------- Net cash (used in) provided by financing activities (1,525) 1,061 - ----------------------------------------------------------- ------------------------------- -------------------------------- Net increase (decrease) in cash and cash equivalents 173 (863) Cash and cash equivalents, beginning of year 1,441 2,304 - ----------------------------------------------------------- ------------------------------- -------------------------------- Cash and cash equivalents, end of year $ 1,614 $ 1,441 - ----------------------------------------------------------- ------------------------------- -------------------------------- Supplemental disclosure of cash flow information Cash paid (received) for: Interest $ 538 $ 766 Income taxes, net $ (210) $ 360 - ----------------------------------------------------------- ------------------------------- -------------------------------- See accompanying notes to condensed financial information. F-3
ANDERSEN GROUP, INC Schedule I - Condensed Financial Information of the Registrant Notes to Condensed Financial Information February 28, 1999 and 1998 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 a commercial bank in October 1996 which was subsequently amended December 30, 1997. This agreement contains 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 includes 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. 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 was at the annual rate of $500,000. Thereafter, the retainer will increase by $100,000 per year. The agreement runs through November 30, 2002. During FY99 and FY98, JM Ney paid or accrued to the Registrant a total of $820,000 and $205,000, respectively under these two agreements. 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. F-4 NOTE 3 - SHORT TERM BORROWINGS At February 28, 1998, the Registrant had a $1,392,000 demand loan, which was secured by a portion of the Company's portfolio of marketable securities. At February 28, 1999 interest on this borrowing was charged at 5.8%. NOTE 4 - LONG TERM DEBT
Long-term debt consists of the following (in thousands): February 28, 1999 February 28, 1998 ----------------- ----------------- Convertible subordinated debentures, due October 2007; interest at 10.5%, payable semi-annually; annual principal payments in varying amounts through maturity, unsecured $3,759 $4,311 Other 79 254 -------- - -------- 3,838 4,565 Less current maturities 316 441 ------- - -------- $3,522 $4,124 ====== ======
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, 1999, 232,468 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): 2000 $ 316 2001 439 2002 439 2003 439 2004 440 Thereafter 1,765 ------- $3,838 NOTE 5 - CUMULATIVE CONVERTIBLE PREFERRED STOCK See Note 12 to the Registrant's Consolidated Financial Statements contained in Item 8 herein. NOTE 6 - CASH DIVIDENDS The amount of cash dividends paid to the Registrant by JM Ney during FY98 was approximately $3,518,000. No such dividends were paid or declared during FY99. 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. ANDERSEN GROUP, INC. Schedule II - Valuation and Qualifying Accounts (Amounts in thousands)
Additions Balance at Charged to Charged to beginning costs and to other Balance at Description Of year expenses accounts Deductions end of year February 28, 1999 - ----------------------- ----------------- ------------------ ------------------- ------------------- ------------------ Allowance for doubtful accounts $ 130 (22) 2(a) $110 Reserve for returns $ 95 (15) $ 80 February 28, 1998 - ----------------------- ----------------- ------------------ ------------------- ------------------- ------------------ Allowance for doubtful accounts $ 190 17 (36)(b) (41)(a) $130 Reserve for returns $ 95 $ 95 Warranty reserve $ 70 (30) (40)(b) $ 0 February 28, 1997 - ----------------------- ----------------- ------------------ ------------------- ------------------- ------------------ Allowance for doubtful accounts $124 76 (10)(a) $190 Reserve for returns $ 0 95 $ 95 Warranty reserve $100 (30) $ 70 (a) Write offs net of recoveries. (b) Transferred in connection with sale of certain assets of Ultrasonics segment.
EXHIBIT INDEX Exhibit No. Description Page 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 10.9 Securities Purchases Agreement dated as of December 29, 1997. E-3 by and between The J.M. Ney Company and BankBoston, N.A. E-4 10.10 Asset Purchase Agreement made effective as of February 28, 1998 among CAE U.S., Inc., Ney Ultrasonics Inc. and Andersen Group, Inc. E-5 10.11 Amendment to Revolving Credit and Deferred Payment Sales Agreement by and among The J.M. Ney Company, BankBoston and Rhode Island Hospital Trust National Bank dated December 29, 1997. E-6 21. Subsidiaries of the Registrant. E-7 23. Consent of Deloitte & Touche LLP. E-8 27. Financial Data Schedule. E-9 E-1 SUBSIDIARIES OF THE REGISTRANT State or Country of Name or Organization Incorporation AG Investors, Inc. Florida AGI Technology, Inc. Connecticut Andersen Realty, Inc. Delaware Ney International, Inc. U.S. Virgin Islands Ney Technology, Inc. (f/k/a Ney Ultrasonics Inc.) Delaware The J.M. Ney Company Delaware New Jersey Precious Metals, Inc. Delaware Garden State Refining, Inc. Delaware E-7 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post Effective Amendment No. 1 to Registration Statement No. 333-17659 of Andersen Group, Inc. and subsidiaries on Form S-8 of our reports dated April 30, 1999, relating to the consolidated financial statement and financial statement schedules appearing in this Annual Report on Form 10-K of Andersen Group, Inc. and subsidiaries for the year ended February 28, 1999. /s/Deloitte & Touche LLP Hartford, Connecticut May 21, 1999 E-8 EX-27 2 FDS --
5 (E-9) 0000006383 Andersen Group, Inc. 1000 US Dollars Year Feb-28-1999 Mar-01-1998 Feb-28-1999 1,000 2,541 6,014 4,208 (110) 7,821 20,574 22,731 (13,426) 37,119 5,541 11,058 0 4,769 20 11,640 37,119 26,838 23,600 18,255 26,313 0 (22) 1,735 (4,448) (1,484) (2,964) 0 (116) 0 (3,465) (1.80) (1.80)
EX-3.(II) 3 BY-LAWS Exhibit 3.2 BY-LAWS OF ANDERSEN GROUP, INC. ARTICLE I Stockholders Section 1.1. Annual Meetings. An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. Section 1.2. Special Meetings. Special meetings of stockholders may be called at any time by the Chairman of the Board, if any, the President or the Board of Directors, to be held at such date, time and place either within or without the State of Delaware as may be stated in the notice of the meeting. A special meeting of stockholders shall be called by the Secretary upon the written request, stating the purpose of the meeting, of stockholders who together own of record a majority of the outstanding shares of each class of stock entitled to vote at such meeting. Business transacted at any special meeting shall be limited to the purposes stated in the notice of the special meeting. Section 1.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Section 1.4. Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. Quorum. At each meeting of stockholders, except where otherwise provided by law or the certificate of incorporation or these by-laws, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 1.4 of these by-laws until a quorum shall attend. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the President, or in the absence of the President by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, or in the absence of the Secretary by an Assistant Secretary, or in their absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Unless otherwise provided in the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or by proxy at such meeting shall so determine. At all meetings of stockholders for the election of directors a plurality of the votes cast shall be sufficient to elect each director. With respect to other matters, unless otherwise provided by law or by the certificate of incorporation or these by-laws, the affirmative vote of the holders of a majority of the shares of all classes of stock present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, provided that (except as otherwise required by law or by the certificate of incorporation) the Board of Directors may require a larger vote upon any such matter. Where a separate vote by class is required, the affirmative vote of the holders of a majority of the shares of each class present in person or represented by proxy at the meeting shall be the act of such class, except as otherwise provided by law or by the certificate of incorporation or these by-laws. Section 1.8. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 1.10. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the certificate of incorporation, any action required by law to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II Board of Directors Section 2.1. Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the certificate of incorporation. The Board shall consist of one or more members, the number thereof to be determined from time to time by the Board. Directors need not be stockholders. Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until the annual meeting of stockholders next succeeding his or her election and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any director may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; except that, if the certificate of incorporation provides for cumulative voting and less than the entire Board is to be removed, no director may be removed without cause if the votes cast against his or her removal would be sufficient to elect him or her if then cumulatively voted at an election of the entire Board, or, if there be classes of directors, at an election of the class of directors of which he or she is a part. Whenever the holders of any class or series of stock are entitled to elect one or more directors by the provisions of the certificate of incorporation, the provisions of the preceding sentence shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Unless otherwise provided in the certificate of incorporation or these by-laws, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. Section 2.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined notice thereof need not be given. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, if any, by the President or by any two directors. Reasonable notice thereof shall be given by the person or persons calling the meeting. Section 2.5. Participation in Meetings by Conference Telephone Permitted. Unless otherwise restricted by the certificate of incorporation or these by-laws, members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors one-third of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board unless the certificate of incorporation or these by-laws shall require a vote of a greater number. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall attend. Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board by the President, or in their absence by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Action by Directors Without a Meeting. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 2.9. Compensation of Directors. The Board of Directors shall have the authority to fix the compensation of directors. ARTICLE III Committees Section 3.1. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending these bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these bylaws. ARTICLE IV Officers Section 4.1. Officers; Election. As soon as practicable after the annual meeting of stockholders in each year, the Board of Directors shall elect a President and a Secretary, and it may, if it so determines, elect from among its members a Chairman of the Board. The Board may also elect one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such other officers as the Board may deem desirable or appropriate and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person. Section 4.2. Term of Office; Resignation; Removal; Vacancies. Except as otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until the first meeting of the Board after the annual meeting of stockholders next succeeding his or her election, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Board or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board at any regular or special meeting. Section 4.3. Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board and as may be provided by law. Section 4.4. President. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. The President shall be the chief executive officer and shall have general charge and supervision of the business of the Corporation and, in general, shall perform all duties incident to the office of president of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or as may be provided by law. Section 4.5. Vice Presidents. The Vice President or Vice Presidents, at the request of the President, shall perform the duties of the President, and when so acting shall have the powers of the President. If there be more than one Vice President, the Board of Directors may determine which one or more of the Vice Presidents shall perform any of such duties; or if such determination is not made by the Board, the President may make such determination; otherwise any of the Vice Presidents may perform any of such duties. The Vice President or Vice Presidents shall have such other powers and shall perform such other duties as may, from time to time, be assigned to him or her or them by the Board or the President or as may be provided by law. Section 4.6. Secretary. The Secretary shall have the duty to record the proceedings of the meetings of the stockholders, the Board of Directors and any committees in a book to be kept for that purpose, shall see that all notices are duly given in accordance with the provisions of these by-laws or as required by law, shall be custodian of the records of the Corporation, may affix the corporate seal to any document the execution of which, on behalf of the Corporation, is duly authorized, and when so affixed may attest the same, and, in general, shall perform all duties incident to the office of secretary of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or the President or as may be provided by law. Section 4.7. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation and shall deposit or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by or under authority of the Board of Directors. If required by the Board, the Treasurer shall give a bond for the faithful discharge of his or her duties, with such surety or sureties as the Board may determine. The Treasurer shall keep or cause to be kept full and accurate records of all receipts and disbursements in books of the Corporation, shall render to the President and to the Board, whenever requested, an account of the financial condition of the Corporation, and, in general, shall perform all the duties incident to the office of treasurer of a corporation and such other duties as may, from time to time, be assigned to him or her by the Board or the President or as may be provided by law. Section 4.8. Other Officers. The other officers, if any, of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in a resolution of the Board of Directors which is not inconsistent with these by-laws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board. The Board may require any officer, agent or employee to give security for the faithful performance of his or her duties. ARTICLE V Stock Section 5.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such holder in the Corporation. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner's legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI Miscellaneous Section 6.1. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6.2. Seal. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 6.3. Waiver of Notice of Meetings of Stockholders. Directors and Committees. Whenever notice is required to be given by law or under any provision of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the certificate of incorporation or these by-laws. Section 6.4. Indemnification of Directors, Officers, and Employees and Agents. The Corporation shall indemnify its directors, officers, employees and agents in accordance with the provisions set forth in its certificate of incorporation. Section 6.5. Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. Section 6.6. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 6.7. Amendment of By-Laws. These by-laws may be amended or repealed, and new by-laws adopted, by the Board of Directors, but the stockholders entitled to vote may adopt additional by-laws and may amend or repeal any by-law whether or not adopted by them. EX-10 4 EMPLOYMENT AGREEMENT Exhibit 10.13 EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement") effective as of January 11, 1999, between ANDERSEN GROUP, INC., a Delaware Corporation, (the "Employer") with offices at 515 Madison Avenue, Suite 2000, New York, New York, 10022 and PETER R. BARKER (the "Executive"), an individual residing at 108 East 96th Street, New York, New York 10128. The Employer seeks to employ the Executive and the Executive has agreed to enter into this Agreement. Now Therefore, the parties in consideration of the mutual promises herein contained hereby agree as follows: 1. Term of Services. The Executive's "term of employment," as this phrase is used throughout this Agreement, shall be for the two (2) year period beginning January 11, 1999 and ending January 12, 2001 subject, however, to earlier termination for either "Cause" (as defined below) or not for "Cause" as expressly provided herein. 2. Employment. The Employer shall employ the Executive, and the Executive shall serve, as Vice President and Chief Financial Officer of the Employer during the term of employment. Subject to his election as such and without additional compensation, if requested, the Executive agrees to serve during the term of employment in such particular additional offices of comparable stature and responsibility consistent with his performance as Vice President and Vice President and Chief Financial Officer of the Employer to which he maybe elected from time to time in the Employer and its subsidiaries. During the term of employment, except during the transition period from January 11, 1999 through March 31, 1999, (the "Transition Period") during which the Executive shall be permitted to wind up the matters for which he has been responsible prior to term of employment, (i) the Executive's services shall be rendered on a substantially full time, exclusive basis, (ii) he will apply on a substantially full time basis all of his skill and experience to the performance of his duties in such employment, (iii) he shall have no other employment and, without the consent of a majority of the members of the Employer's Board of Directors (the "Board"), no outside business activities that require the devotion of substantial amounts of the Executive's time, and (iv) unless otherwise specified by the Board, the Executive, the headquarters for the performance of his services shall be the principal executive offices of the Employer in the greater New York metropolitan area (currently located 515 Madison Avenue, Suite 2000, New York, New York 10022), subject to such reasonable travel as the performance of his duties in the business of the Employer may require. Except during the Transition Period, during the term of employment, the Executive shall not, directly or indirectly, render any services to any other person, or acquire any interests of any type in any other person, that might be deemed in competition with the Employer or any of its subsidiaries or affiliates or in conflict with his position as Vice President and Chief Financial Officer of the Employer; provided, however, that the foregoing shall not be deemed to prohibit the Executive from (i) acquiring, solely as an investment and through market purchases, securities of any corporation that are registered under Section l2(b) or l2(g) of the Securities Exchange Act of 1934 and that are publicly traded so long as he is not part of any control group of such corporation(s) or companies, (ii) acquiring, solely as an investment, any securities of a partnership, trust, corporation (other than a corporation that has outstanding securities covered by the preceding clause (i)) or other entity so long as such entity is not, directly or indirectly, in competition with the Employer or any of its subsidiaries or affiliates or (iii) serving as a director of any corporation that is not in competition with the Employer or any of its subsidiaries or affiliates. 3. Compensation. The Compensation of the Executive shall be comprised of the following components: Base Salary; Incentive Compensation (Bonus); Incentive Stock Options; Other Fringe Benefits; Severance; the Stock Loan/Purchase Program; and the Non-Qualified Stock Options. 3.1 Base Salary. The Employer shall pay or cause to be paid to the Executive during the term of employment a base salary of not less than the annual rate of $150,000 (the "Base Salary"), payable in accordance with current practices of the Employer, as such practices may exist from time to time, it being understood and acknowledged by the Executive that currently the payment practices of the Employer call for such payments to be made monthly in arrears. Due to the short term of the Executive's employment as of February 28, 1999, the Executive will not receive a full compensation review at that time. Instead, effective as of March 1, 1999, the Executive shall receive an increase in his Base Salary equal to the "standard increase" (an amount equal to approximately 4% per annum) applied to the eligible payroll of the Employer. As of March 1, 2000, the Executive's Base Salary will be subject to a full review by the Employer and the Employer, by action of the Compensation Committee of the Employer's Board of Directors (the "Compensation Committee") taken in its discretion, may increase, but not decrease, the Base Salary at any time and from time to time during the term of employment. 3.2 Incentive Bonus Compensation ("Bonus") For Fiscal Year Ended February 28, 1999. In addition to the Base Salary, the Executive shall be entitled to receive an annual bonus for the approximate two (2) month period from January 11, 1999 through the end of the Employer's fiscal year ended February 28, 1999 in the amount of $10,000. 3.3 Incentive Bonus Compensation For Fiscal Years Ended February 29, 2000 and Thereafter. In addition to the Base Salary, the Executive shall be eligible to receive an annual bonus (the "Annual Bonus") for the twelve (12) month period, after March 1, 1999 in an amount equal to the annual rate of fifteen percent (15%) of the Base Salary in effect as of February 29, 2000. The awarding of the Annual Bonus shall be based upon the Executive achieving, as determined in the sole discretion of the Compensation Committee, the Management By Objective ("Management by Objectives" or "MBO") goals (the "MBO Goals") that have been established for the Executive for the fiscal year by mutual agreement between the Executive and the Employer. Although all of the MBO Goals for the Executive for the fiscal year ended February 29, 2000 have not been established, the Executive and the Employer agree that one of the Executive's MBO Goals for such time period shall be that The J. M. Ney Company ("Ney"), a wholly-owned subsidiary of the Employer, in a manner acceptable to the Board, shall either: (a) have completed an acquisition of a business that has annual revenues of in excess of $15 million, or (b) have completed an initial public offering of the stock of Ney. 3.4 Incentive Stock Option. In addition to the Base Salary the Employer has an incentive stock option plan ("ISO Plan") currently in existence and the Executive shall be awarded 10,000 shares pursuant to the terms and subject to the conditions of the ISO Plan, as it exists from time to time, at the mean of the Bid and Asked prices of the Employer Common Stock in effect as of the Executive's first day of work, currently scheduled to occur on January 11, 1999. 3.5 Executives Other Fringe Benefits. In addition to the Base Salary the Employer shall receive such other fringe benefits ("Other Fringe Benefits") as the Employer may have in effect from time to time, including the following fringe benefits that are currently in effect for employees of the Employer: life insurance, disability insurance, medical insurance and vacations in accordance with the Employer's standard policies relating thereto, which policies, as of the date hereof, currently provide for the following benefits (it being acknowledge by the Executive that certain of these fringe benefits will require contributions from the Executive): A. Life Insurance. $250,000 of term life insurance over and above the $50,000 of term life insurance provided by the Employer's standard benefit plan. B. Disability Insurance. Disability insurance pursuant to such plan of disability insurance that the Employer may have in effect from time to time for employees of comparable status to the Executive. C. Medical Insurance. The CIGNA Plan Major Medical (Approximately 75% of the premiums for this insurance are currently paid for the employees by the Employer.) D. Vacation. The Standard Vacation Policy of the Employer (and the exceptions, where applicable, for the Executive) is as follows: o Two Weeks Annual Vacation: during the first five (5) years of employment. (In addition, the Executive shall receive one additional week during the initial five (5) years of employment.) o Three Weeks Annual Vacation: during the next four (4) years of employment (employment years six through nine). o Four Weeks Annual Vacation: during the tenth year of employment and thereafter 3.6 Severance. A. No Severance If Termination Is For "Cause" By the Employer Or If Termination Is By Executive's Own Volition. In the event of (i) termination of the employment of the Executive by the Employer for "Cause" (as defined below) or (ii) termination of the employment of the Executive by the Executive by his own volition, there will be no severance ("Severance") payments and the Base Salary shall be paid to the Executive to the date of termination and the Executive shall not be entitled to receive any other form of compensation from the Employer whether pursuant to this Agreement or otherwise; provided however, with respect to the Stock Loan/Purchase Program (described and defined below), the rights and obligations of the parties pursuant to the various documents (including the provisions in this Agreement) that relate to such program as otherwise set forth herein (or in the other documents relating thereto) shall continue to be in full force and effect pursuant to their respective terms and subject to their respective conditions notwithstanding such termination. B. Severance Paid If Termination of Executive Is Not For "Cause" The Executive acknowledges and agrees that the Employer has and retains the right to terminate the Executive's employment not for "Cause." In the event of the termination of the employment of the Executive by the Employer not for "Cause," the following provisions shall apply: i. Severance Paid If Termination Occurs During the First Contract Year of Employment. In the event that Executive is terminated by the Employer not for "Cause" during the First Contract Year, then in that event, the Employer shall pay Executive a sum equal to: (A) 90 days of Base Salary (which amount shall be payable to the Executive in any event regardless of the amount, if any, of the Pay Differential, plus (B) the "Pay Differential," if any, (as defined and described below). "Pay Differential" (whether for the First Contract Year or the Second Contract Year) shall mean and refer to the amount, if any, by which the amount of the Base Salary (in accord with paragraph (a) below) is greater than the amount of Other Reportable Income (in accord with paragraph (b) below): (a) Base Salary: the annual rate of the Executive's Base Salary for the contract year in question either (i) the first contract year (the "First Contract Year") from January 11, 1999 through January 10, 2000 or the second contract year (the "Second Contract Year") from January 11, 2000 to January 10, 2001 (the First Contract Year and the Second Contract Year are collectively referred to as "Contract Year(s)" where applicable; and (b) Other Reportable Income: the Executive's "reportable income" (as defined by the Internal Revenue Code) from all sources for the Contract Year in question whether such "reportable income" has been paid in cash or is accrued (including but not limited to income received by the Executive pursuant to this Agreement) (such income is referred to herein as "Other Reportable Income"). In the event that Other Reportable Income exceeds the Base Salary for the Contract Year in question, then in that event, there is no Pay Differential and the Executive would only receive 90 days Base Salary as his Severance payment. ii. Severance Paid If Termination Occurs During the Second Contract Year of Employment. In the event that Executive is terminated by the Employer not for "Cause" during the Second Contract Year, then in that event, the Employer shall pay the Executive a sum equal to: (A) 90 days of Base Salary (which amount shall be payable to the Executive in any event regardless of the amount, if any, of the Pay Differential, plus (B) the "Pay Differential," if any, (as defined and described above). provided however, the payment of the Pay Differential portion of the Severance (but not the 90 days Base Salary portion of the Severance) shall be conditioned upon Executive's obligation to mitigate damages by the Executive conducting a diligent search for employment after such termination and the payment of such amount shall be paid upon the conclusion of the Contract Year in question. Timing of Severance Payments: Regardless of whether the Severance is being paid in connection with the First Contract Year or the Second Contract Year, (a) The 90 days of Base Pay portion of the Severance shall be paid to the Executive upon the termination date of the Executive. (b) The Pay Differential portion of the Severance, if any, shall be paid after the close of the Contract Year in question and then within 30 days after the Executive supplies the Employer with such information and documentation as are reasonably required by the Employer in order to be able to determine the amount, if any, of the Other Reportable Income of the Executive for the Contract Year in question. Payments of Other Compensation Components In the Event of Termination Not For Cause: In the event of termination not for Cause, in addition to the Severance described above, the following shall apply: (a) The Executive shall receive his Incentive Bonus Compensation which shall be determined on the basis that (i) all of the MBO Goals have been achieved but (ii) such amount shall be prorated to reflect only that portion of the year during which the Executive was employed by the Employer. (b) The Incentive Stock Option Plan only applies to employees and once the Executive ceases to be an employee of the Employer such plans cease to be in effect. (c) The Non-Qualified Stock Option Plan shall terminate to the extent the vesting requirements have not been met at the time of termination. Executives shall have thirty (30) days from the date of termination to exercise the non-qualified stock options which have been vested. 3.7 Stock Loan/Purchase Program: In order to effectuate this Agreement, the Employer agrees, on a best efforts basis, to locate a block of 62,500 shares of Common Stock of Employer ("Employer Common Stock") that is available for sale by existing shareholder(s) of the Employer at a price of approximately $4.00 per share. The Executive agrees with his own funds to purchase 12,500 shares of such shares at a price of approximately $4.00 per share purchase price. In addition, the Employer agrees to lend (the "Executive Loan") the Executive $200,000 for the sole and only purpose of the purchase by the Executive of the remaining 50,000 shares of Employer Common Stock from such third party pursuant to the following terms and conditions: A. Principal Maturity Date: All of the $200,000 of the principal amount of the Executive Loan shall be due and payable Two years from date of making of such $200,000 Executive Loan; B. Interest Rate: Seven percent (7%) per annum; C. Payment of Interest: The interest of seven percent (7%) per annum shall be paid quarterly in arrears on the unpaid principal balance at the end of the third, sixth, ninth, twelfth, fifteenth, eighteenth, twenty-first and twenty-fourth months after the date of the Note. D. Evidence of Obligation: The Executive shall execute and deliver a promissory note (the "Executive Note") payable to the Employer evidencing all of the terms and conditions of the $200,000 loan being made to the Executive by the Employer. E. Security: The Executive shall pledge (the "Executive Pledge") all the 62,500 shares of Employer Common Stock (including the 12,500 shares of such stock acquired by use of the Executive's own funds) in order to secure the payment of the Executive Note pursuant to the terms and subject to the conditions of a standard stock pledge agreement and such Executive Pledge shall be perfected so that the Employer obtains a first priority security interest in the such 62,500 shares pursuant to the New York Uniform Commercial Code; F. Executive Put: Subject to compliance with applicable federal securities laws and any other applicable laws, the Executive shall be able, on a dollar for dollar basis, to put (the "Executive Put") the shares of Employer Common Stock to the Employer in payment of the Executive Note at any time on or prior to the maturity date of the Executive Note pursuant to the following terms and conditions: (i) Executive Has Unlimited Upside Potential Gain: The Executive shall be entitled to receive and retain all of the benefit of any appreciation that may occur with respect to the 62,500 shares of Employer Common Stock being acquired pursuant to the Stock Loan/Purchase Program and if the Employer Common doubles in value from, for example, $4.00 per share to $8.00 per share, then in that event, the Executive shall only be required to tender 25,000 shares of the 62,500 shares of Employer Common Stock so acquired by the Executive in order to pay off the $200,000 Executive Note and the Executive shall be entitled to keep the remaining 37,500 shares of Employer Common Stock free and clear of any obligation to the Employer. (ii) Executive Has $50,000 Maximum Downside Loss Risk: The Executive shall also bear the risk of any decline in the value of the Employer Common Stock, but only to the maximum extent of the $50,000 that Executive pays for the 12,500 shares of Employer Common Stock that the Executive is purchasing with his own funds. That is to say, in the event that the Employer Common Stock declines in value from, for example, $4.00 per share to $3.00 per share, the Executive can extinguish all of his obligations under the $200,000 Executive Note by tendering all 62,500 shares of Employer Common Stock (together with a signed and guaranteed stock power signed in blank) even though the market value of the 62,500 shares of Employer Common Stock so tendered by the Executive is only $187,000. (iii) Market Value of Stock: The market value of the Employer Common Stock for the purpose of this Executive Put shall be determined by taking the average of the daily mean of the bid and asked price for such stock for the fifteen (15) days immediately preceding the business day of the sending of the notice exercising the Executive Put of such stock by the Executive. (iv) Notice: Notice of the Executive's exercise of the Executive Put shall be given pursuant to the notice provision of this Agreement. (v) Put Procedures: In the event that the Executive exercises the Executive Put by giving notice thereof pursuant to the notice provisions of this Agreement, the Executive shall tender such number of shares of Employer Common Stock necessary to extinguish the Executive Note and the Executive shall be entitled to receive the remainder of the 62,500 shares acquired by the Executive, if any, that remain after such tender. The shares of Employer Common Stock so tendered by the Executive shall be delivered to Employer together with a stock power signed in blank by the Executive (with his signature guaranteed), and the remaining shares of Employer Common Stock acquired by the Executive (being held pursuant to the Executive Pledge) shall be released from the Executive Pledge and returned to the Executive free from any restriction, lien or encumbrance. In addition, the original of the Executive Note shall be marked "paid in full" by the Employer and returned to the Executive. G. Prepayment: The Executive may prepay the Executive Note either in whole or part without premium or penalty at any time prior to the Maturity Date of the Executive Note; provided however, in the event that of a partial prepayment of the Executive Note, no shares of such stock held pursuant to the Executive Pledge shall be released to the Executive until the Executive Note is paid in full pursuant to the terms and subject to the conditions hereof and upon the occurrence of such payment in full, the number of shares of such stock so released from the Executive Pledge shall be determined as set forth elsewhere in this Agreement. (The provisions of this Section 3.6 of this Agreement shall be referred to as the "Stock Loan/Purchase Program.") 3.8 Additional Incentive/Non-Qualified Stock Option: In addition to the Base Salary, the Employer agrees to adopt a non-qualified stock option plan (the "Non-Qualified Stock Option Plan") and, as part of such plan, to award the Executive non-qualified stock options (the "Non-Qualified Stock Options") to acquire 175,000 shares of Employer's Common Stock in accordance with the following table the ("NQSO Table") and pursuant to the following terms and subject to the following conditions (the "NQSO Terms and Conditions"): NQSO Table Grant Amount Strike Price Vesting Market Price 25,000 $4.00 $8.00 50,000 $6.00 $10.00 50,000 $8.00 $12.00 50,000 $10.00 $14.00 - ------- 175,000 NQSO Terms and Conditions A. Vesting: In order for the Executive to qualify for the vesting in accordance with the NQSO Table, the Employer Stock bid price (as reported on NASDAQ) must be at or higher than the Vesting Market Price stated in the NQSO Table for fifteen (15) consecutive business days. B. Grant Date: The effective grant date of the Non-Qualified Stock Options shall be the next day following the date on which the Employer Stock price has been at the vesting price for the required fifteen (15) day period. C. MBO Goal Must Be Met To Make NQSO Plan Effective: In addition to the foregoing provisions, the Non-Qualified Stock Option Plan shall not become effective unless and until the Required MBO Goal (as defined and described below) occurs.: The "Required MBO Goal" shall mean and refer to Ney, in a manner acceptable to the Board, either: (a) having completed an acquisition of a business that has annual revenues of in excess of $15 million, or (b) having completed an initial public offering of the stock of Ney. The Executive acknowledges and understands that the occurrence of the Required MBO Goal relates solely and only to the effectiveness of the Non-Qualified Stock Option Plan and that other MBO Goals may, and probably will be established in accordance with the standard practices of the Employer, for the purpose of determining the compensation to be paid to Executive pursuant to the Incentive Bonus Compensation plan discussed and described above. 4. Definition of "Cause" The Executive and the Employer agree that the Employer may terminate the Executive either for "Cause" or not for "Cause" at any time during the term of this Agreement and the parties agree that for the purposes of this Agreement, the term, "Cause," shall mean and refer to the following: A. Executive's Conviction of a Felony (which, through lapse of time or otherwise, is not subject to appeal); B. Material dishonesty or wrongful taking by the Executive established to the satisfaction of a majority of the Board; C. Willful failure or refusal by the Executive without proper cause (i) to perform his obligations under this Agreement or (ii) because of the Executive's material breach without proper cause of any of the covenants provided for in this Agreement or (iii) because of the Executive's willful and repeated failure or refusal without proper cause to follow the instructions of the Board, all as determined by a majority of the Board. Such termination as set forth in this paragraph C. shall be effected by notice thereof delivered by the Employer to the Executive and shall be effective as of the date of such notice; provided, however, that if (i) such termination pursuant to this paragraph C. is because of the Executive's willful refusal without proper cause to perform any one or more of his obligations under this Agreement, (ii) such notice is the first such notice of termination for any reason delivered by Employer to the Executive hereunder within any six (6) month period and (iii) within seven days following the date of such notice the Executive shall cease his refusal and shall use his best efforts to perform such obligations, the termination shall not be effective. 5. Expense Reimbursement. Employer shall pay or reimburse the Executive for all reasonable expenses actually incurred or paid by the Executive during the term of employment in the performance of his services hereunder upon presentation of expense statements or vouchers or such other supporting information as Employer may reasonably require of the Executive. 6. Indemnification. The Executive shall be entitled through the term of employment to the benefit of the indemnification provisions contained on the date hereof in the By-Laws of the Employer as the same may hereafter be amended, and of any indemnification provisions that may hereafter be added to the Certificate of Incorporation of the Employer, to the extent permitted by applicable law at the time of the assertion of any liability against the Executive. The Executive shall also be entitled to the benefit of any Directors and Officers Liability Insurance that the Employer may elect to maintain in effect pursuant to the terms and subject to the conditions of such the policies that evidence such coverage. 7. Mitigation of Damages. In the event of the termination of the term of employment by the Employer not for "Cause," the Executive shall, nevertheless, be required to mitigate the Executive's damages hereunder; provided however, the obligation of the Executive to mitigate damages shall not apply to the 90 days Base Salary portion of the Severance payments required by this Agreement. 8. Legal Costs. If either party institutes any legal action to enforce his or its rights under, or to recover damages for breach of, this Agreement, each party shall pay for his or its legal cost and expenses including attorneys fees. 9. Death and Permanent Disability. In the event of the Executive's death or permanent disability, the Executive shall receive such payments hereunder as shall be awarded to him by a majority of the Board as determined in its sole and complete discretion after taking into consideration all of the relevant circumstances. The Board decision in this regard shall be final and binding on the parties hereto. 10. Office Facilities and Services. During the term of the employment the Executive shall be accorded such benefits and support services, including but not limited to office facilities, secretarial, financial, communications, security and transportation services and other allowances as are determined to be reasonable and necessary by the Board. 11. Other Benefits. During the term of employment, the Executive shall remain eligible to participate in any plan or program of the Employer now existing or established hereafter, to the extent that he is eligible under the general provisions thereof. 12. Protection of Confidential Information. The Executive acknowledges that his employment by the Employer will, throughout the term of employment, bring him into close contact with many confidential affairs of the Employer, including information about costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, technical processes and other business affairs and methods and other information not readily available to the public, and plans for future developments. The Executive further acknowledges that the services to be performed under this Agreement are of a special, unique, unusual, extraordinary and intellectual, character. The Executive further acknowledges that the business of the Employer is international in scope, that its products are marketed throughout the world, that the Employer competes in nearly all of its business activities with other organizations which are or could be located in nearly any part of the world and that the nature of the Executive's services, position and expertise are such that he is capable of competing with the Employer from nearly any location in the world. In recognition of the foregoing, the Executive covenants and agrees: A. That the Executive will keep secret all material confidential matters of the Employer and will not intentionally disclose them to anyone outside of the Employer, either during or after the term of employment except with the Employer's written consent, provided that (i) the Executive shall have no such obligation to the extent such matters are or become publicly known other than as a result of the Executive's breach of his obligations hereunder and (ii) the Executive may, after giving prior written notice to the Employer to the extent practicable under the circumstances, disclose such matters to the extent required by applicable laws or governmental regulations or judicial or regulatory process; and B. That he will deliver promptly to the Employer on termination of his employment by the Employer, or at any other time the Employer may so request, at the Employer's expense, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company's business, which he obtained while employed by, or otherwise serving or acting on behalf of, the Employer and which he may then possess or have under his control. C. Hiring Restrictions. If the term of employment is terminated pursuant to this Agreement, for a period of two years after such termination without the consent of the Employer, the Executive shall not employ, and shall not cause any entity of which he is an affiliate to employ, any person who was a full-time employee of the Employer or any of its subsidiaries at the date of such termination or within six months prior thereto. D. Specific Remedy. In addition to such other rights and remedies as the Employer may have at equity or in law with respect to any breach of this Agreement, if the Executive commits a material breach of any of the provisions of Section 4, the Employer shall have the right and remedy to have such provisions specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach threatened breach will cause irreparable injury to the Employer and that money damages will not provide an adequate remedy to the Employer. 13. Ownership of Work Product. The Executive acknowledges that during the term of employment, he may conceive of, discover, invent or create inventions, improvements, new contributions, literary property, material, ideas and discoveries, whether patentable or copyrightable or not (all of the foregoing being collectively referred to herein as "Work Product") and that various business opportunities shall be presented to him by reason of his employment by the Employer. The Executive acknowledges that, unless the Employer otherwise agrees in writing, all of the foregoing shall be owned by and belong exclusively to the Employer and that he shall have no personal interest therein, provided that they are either related in any manner to the business (commercial or experimental) of the Employer, or are, in the case of Work Product, conceived or made on the Employer's time or with the use of the Employer's facilities or materials, or, in the case of business opportunities, are presented to him for the possible interest or participation of the Employer. The Executive shall further, unless the Employer otherwise agrees in writing, (i) promptly disclose any such Work Product and business opportunities to the Employer; (ii) assign to the Employer, upon request and without additional compensation, the entire rights to such Work Product and business opportunities; (iii) sign all papers necessary to carry out the foregoing; and (iv) give testimony in support of his inventorship or creation in any appropriate case. The Executive agrees that he will not assert any rights to any Work Product or business opportunity as having been made or acquired by him prior to the date of this Agreement except for Work Product or business opportunities, if any, disclosed to and acknowledged by the Employer in writing prior to the date hereof. 14. Notices. All notices, requests, consents and other communications, required or permitted to be given hereunder, shall be in writing and shall be deemed to have been duly given if delivered personally or sent by prepaid telegram, or mailed first-class, postage prepaid, by registered or certified mail, as follows (or to such other or additional address as either party shall designate by notice in writing to the other in accordance herewith): A. If to the Employer: to the address set forth on the first page of this Agreement. B. If to the Executive, to him at his address on the personnel records of the Employer. 15. General. A. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York. B. Captions. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. C. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements and understandings, written or oral, between the parties D. No Other Representations. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. E. Assignability. This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. the Employer may assign its rights, together with its obligations, hereunder in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and such rights and obligations shall inure to, and be binding upon, any successor to the business or substantially all of the assets of the Employer, whether by merger, purchase of stock or assets or otherwise, and such successor shall expressly assume such obligations. F. Amendments; Waivers. This Agreement may be amended, modified, superseded, cancelled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. G. Changes in Capital Structure. For all purposes of this Agreement, (i) all references to "shares" of the Employer ----------------------------- Common Stock shall mean the shares of the Employer Common Stock as they exist on the date hereof, and all securities issued or exchanged with respect to such shares upon any recapitalization, reclassification, merger, consolidation, spin-off, split, dividend, distribution, subdivision or combination of such shares or the like; and all references regarding stock price information shall be equitably adjusted to take into account all events or transactions referred to in the preceding clause (i); and (iii) if sales of the Employer Common Stock are no longer reported on the Composite Tape, all references herein to "as reported on the Composite Tape" shall refer to as reported on the principal national securities exchange on which the Employer Common Stock is listed or admitted to trading, or, if the Employer Common Stock is not listed or admitted to trading on any national securities exchange, as reported by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information or if not so reported, the sales price of a share of the Employer Common Stock shall be equitably determined. H. Offsets. the Employer shall be entitled to offset and deduct from those payments due to the Executive under this Agreement for money borrowed by the Executive from the Employer. [The Remainder of this Page Intentionally Left Blank. The Next Page is the Signature Page.] IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. ANDERSEN GROUP, INC. BY: __________________________ Name: __________________ Title: ___________________ ------------------------------ PETER BARKER EX-10.14 5 SETTLEMENT AGREEMENT Exhibit 10.14 SETTLEMENT AGREEMENT AND RELEASE OF CLAIMS Date: February 28, 1999 PARTIES: 1. CAE (U.S.) Inc. ("CAE"); 2. Ney Technology, Inc. f/k/a Ney Ultrasonics, Inc. ("Ney"); and 3. Andersen Group, Inc. ("Andersen"). RECITALS: 1. CAE and Ney are currently involved in two lawsuits entitled CAE (U.S.) Inc. v. Ney Technology, Inc. f/k/a/ Ney Ultrasonics, Inc., Docket No. CV 98-584215-S, and Ney Technology, Inc. v. CAE (U.S.), Inc., Docket No. CV 98-584249-S, both in the Superior Court, Judicial District of Hartford, at Hartford ("Lawsuits"). The Lawsuits arise out of claims made by CAE and Ney relating to the purchase price adjustment provisions of ss.ss. 2.10 and 2.11 of the Asset Purchase Agreement effective as of February 28, 1998 among CAE, Ney and Andersen. CAE, Ney and Andersen deny in their entirety all allegations and claims made in the Lawsuits. 2. CAE, Ney and Andersen desire to avoid the expense, burden, and diversion of further litigation and desire to fully resolve the claims set forth in the Lawsuits. COVENANTS: 1. As part of this Settlement Agreement and Release of Claims, the parties hereby direct the Escrow Agent, Keating, Muething & Klekamp, P.L.L., as Escrow Agent under the Escrow Agreement dated as of March 4, 1998, among CAE, Ney and Keating, Muething & Klekamp, P.L.L. ("Escrow Agreement"), to distribute the $500,000.00 deposit held under the Escrow Agreement ("Deposit"), in the following manner: 1. The sum of $400,000 from the Deposit shall be paid to Ney; 2. The sum of $100,000 from the Deposit shall be paid to CAE; 3. The interest accrued on the Deposit shall be split evenly as of the date of disbursement, with one-half (1/2) paid to Ney and one-half (1/2) paid to CAE. 2. As further consideration for this Settlement Agreement and Release of All Claims, the parties hereby amend the Technology Assignment Agreement effective as of February 28, 1998 and entered into by and among, J.M. Ney Company, Andersen Group, Inc., CAE, and CAE Blackstone, Inc. ("Technology Assignment Agreement"). The terms of such amendment shall be as follows: a. CAE represents that pursuant to the Technology Assignment Agreement there is an outstanding balance of Forty-Seven Thousand Eight Hundred Seventy-Nine and 96/100 Dollars ($47,879.96) as of December 25, 1998 in accrued but unpaid payments due from CAE, pursuant to Article 4 and Article 5 of the Technology License Agreement as payments for Payment Bearing Transducers and Category I Products, as both terms are defined in the Technology License Agreement. The parties agree that one-half (1/2) of this amount, or Twenty-Three Thousand Nine Hundred Thirty-Nine and 98/100 Dollars ($23,939.98) shall be paid by CAE to Ney on the date of this Settlement Agreement, and no further payments shall be required from CAE as to such outstanding balance due under the Technology Assignment Agreement, subject to Ney's right of inspection and audit under Article 6 and the parties' rights and obligations regarding dispute resolution under Article 10 of such agreement. b. After the date of this Settlement Agreement and Release of Claims, payments due from CAE to Ney under Article 4 and Article 5 shall be applied as follows: 1) On each payment due from CAE to Ney pursuant to Articles 4 and 5 of the Technology Agreement, CAE shall pay one-half (1/2) of the actual payments due until a total of Two Hundred Thousand Dollars ($200,000.00) of deductions from the calculated payments due from CAE under Articles 4 and 5 (the Payment Bearing Transducers, Category I Products and the Category II Products), in the aggregate, has been achieved. Thereafter, the full payment by CAE shall be resumed in accordance with the terms of the Technology Assignment Agreement, including the Applicable Payment Period as defined in the Technology Assignment Agreement without reference to the modification provided herein, except for the reduction in the cap as set forth below at Subsection b.3. 2) The fifty percent (50%) reduced payment made by CAE as set forth in subsection a above shall be applied towards the aggregate reduction of Two Hundred Thousand Dollars ($200,000.00), referenced at subsection b.1) above. 3) Paragraph 4.2(c) of the Technology License Agreement shall be amended so that the maximum cumulative payment due under Article 4 of the Technology Assignment Agreement shall be One Million Nine Hundred Thousand Dollars ($1,900,000.00). c. Notwithstanding the fifty percent (50%) reduced payments due from CAE under the Technology Assignment Agreement as amended in accordance with subsection a. and subsection b. of this Paragraph 2, the full amount of the payments that would have been made for Payment-Bearing Transducers under Article 4 will be credited towards the maximum cumulative payment of One Million Nine Hundred Thousand Dollars ($1,900,000.00), as if the full payment had been made. (See attachment "A" for the numerical reconciliation of the above sections 2(a) through 2(c).) d. By way of example, assume that (i) the payment obligation arising under the Technology Assignment Agreement based on of sales of Products during the first quarter of 1999 (including sales of Payment Bearing Transducers under Article 4, and sales of Other Payment-Bearing Products under Article 5) is $50,000. Assume that this amount consists of $24,000 due under Article 4 and $26,000 due under Article 5. Assume for purposes of this example that no other payments have been credited toward the cumulative $200,000 deduction due under this Settlement Agreement on amounts otherwise due under the Technology Assignment Agreement. In this example, CAE (Assignee) will pay to Ney (Assignor) a total of $25,000 consisting of $12,000 under Article 4, and $13,000 under Article 5. CAE's payment of $25,000 will be credited towards the $200,000 cumulative deduction, leaving $175,000 remaining to be deducted from payments by CAE otherwise due under the Technology Assignment Agreement. However, although only $25,000 is paid by CAE in this example, CAE's payment obligation of $50,000 on account of the first quarter sales of 1999 Payment-Bearing Products will be considered fully satisfied. Finally, although only $12,000 is paid by CAE under Article 4, $24,000 will be credited towards the $1.9 million cumulative cap on Article 4 payments, leaving $1,822,355.00 (after applying prior period payments and credit against the cap). This same method shall apply to all subsequent quarters until the $200,000 deduction has been satisfied, and at that time the remaining total obligation of the Payment Bearing Transducers cap under Article 4 will be established for further calculation as originally set forth in the Technology Assignment Agreement. (See attachment "B" for numerical calculation of example assumed in section 2(d) above). e. The Technology Assignment Agreement is further amended as follows: (1) Exhibit D to the Technology Assignment Agreement, as referenced in Section 6.1 thereof, is attached to this Agreement and incorporated by reference in the Technology Assignment Agreement. 2) Section 8.1(a) of the Technology Assignment Agreement (at page 14) is amended so that the word "Assignor" is changed to "Assignee" in the last line thereof. f. The provisions in this Section 2 shall be an amendment to the Technology Assignment Agreement pursuant to Section 10.5 of the Technology Assignment Agreement and the signatures of Ney, CAE, Andersen, the J.M. Ney Company, and CAE Blackstone, Inc. below shall serve as written agreement by these parties to the amendments to the Technology Assignment Agreement set forth in this Section 2. Except as provided above, all of the other terms and conditions of the Technology Assignment Agreement shall remain in full force and effect and shall not be modified hereby. 3. For and in consideration of the mutual promises and covenants contained in the foregoing paragraphs, the sufficiency of which is hereby acknowledged, CAE for itself and its present and former owners, stockholders, directors, officers, employees, subsidiaries, parent corporations, divisions, affiliates, agents, representatives, assigns, predecessors, successors, insurers and attorneys, do hereby fully and forever release, hold harmless and discharge Ney and Andersen and their present and former owners, stockholders, directors, officers, employees, subsidiaries, parent corporations, divisions, affiliates, agents, representatives, assigns, predecessors, successors, insurers and attorneys, from any and all claims, demands, causes of action, or suits, arising out of or related to the claims made by CAE in the Lawsuits, or other sums of money, grievances, expenses, demands, controversies of every kind and description, whether liquidated or unliquidated, known or unknown, contingent or otherwise, and whether specifically mentioned or not, that CAE now has or has had or which may exist or might be claimed to exist at or prior to the date of this Agreement relating to the purchase price adjustment provisions of the Asset Purchase Agreement contained in ss.ss. 2.10 and 2.11 of the Asset Purchase Agreement. 4. For and in consideration of the mutual promises and covenants contained in the foregoing paragraphs, the sufficiency of which is hereby acknowledged, Ney and Andersen for themselves and their present and former owners, stockholders, directors, officers, employees, subsidiaries, parent corporations, divisions, affiliates, agents, representatives, assigns, predecessors, successors, insurers and attorneys, do hereby fully and forever release, hold harmless and discharge CAE and its present and former owners, stockholders, directors, officers, employees, subsidiaries, parent corporations, divisions, affiliates, agents, representatives, assigns, predecessors, successors, insurers and attorneys, from any and all claims, demands, causes of action, or suits, arising out of or related to the claims made by Ney and Andersen in the Lawsuits, or other sums of money, grievances, expenses, demands, controversies of every kind and description, whether liquidated or unliquidated, known or unknown, contingent or otherwise, and whether specifically mentioned or not, that Ney and Andersen now have or have had or which may exist or might be claimed to exist at or prior to the date of this Agreement relating to the purchase price adjustment provisions of the Asset Purchase Agreement contained in ss.ss. 2.10 and 2.11 of the Asset Purchase Agreement. 5. CAE, Ney and Andersen further stipulate and agree that the terms, amount, and the fact of this Agreement are to be kept confidential, and will not hereafter disclose any information concerning this Agreement to any persons, firm, coalition, governmental agency or other entity without the prior written consent of each and every party, except as may become necessary to file income tax returns, satisfy specific reporting obligations under applicable securities laws, keep related financial records, consult with legal counsel or to comply with any court order, subpoena, or at the direction of a court, administrative agency, or legislative body. If otherwise asked about, or commenting on the matter, the parties will state that the Lawsuits were amicably settled or resolved, and will state nothing further about the Lawsuits or this Agreement. 6. CAE and Ney agree that their counsel shall execute withdrawals of the Lawsuits, with prejudice, all parties to bear their own costs and attorneys' fees. 7. The undersigned parties hereby declare that they completely read, fully understood, and voluntarily accepted the terms of this Agreement for the purpose of making a full and final compromise, adjustment, and settlement among themselves of any and all claims or disputes arising from the Lawsuits and as otherwise described in paragraphs 3 and 4 above. 8. This Agreement includes the entire transaction between the parties hereto and there are no representations, warranties, covenants or conditions except as specified and referenced in this Agreement. 9. This Agreement shall be binding upon and enure to the benefit of the parties, their successors and assigns. 10. This Agreement shall be governed by, construed, and interpreted in accordance with the laws of the State of Connecticut. Any dispute relating to this Agreement shall be brought in the state or federal courts sitting in the State of Connecticut. CAE (U.S.) INC. BY: ----------------------------- Title NEY TECHNOLOGY, INC. f/k/a NEY ULTRASONICS, INC. BY: ----------------------------- Title ANDERSEN GROUP, INC. BY: ----------------------------- Title The following parties' signatures constitute consent to the amendments to the Technology Assignment Agreement set forth in paragraph 2 of the Covenants. THE J.M. NEY COMPANY BY: ------------------------------ Title CAE BLACKSTONE, INC. BY: ----------------------------- Title -----END PRIVACY-ENHANCED MESSAGE-----