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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period
from ____________ to ____________
Commission file number 1-4324
ANDREA ELECTRONICS CORPORATION
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(Exact name of registrant as specified in its charter)
New York 11-0482020
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
45 Melville Park Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-719-1800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------------------------------- -----------------------------------------
Common Stock, par value $.50 per share American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
As of March 3, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $184,300,817 (based
on the closing sale price on the American Stock Exchange).
The number of shares outstanding of the registrant's common stock as of
March 3, 2000, was 13,313,788.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11, 12, and 13 is
incorporated by reference to the registrant's proxy statement in connection with
the annual meeting of shareholders to be held on or about June 22, 2000, which
will be filed by the registrant within 120 days after the close of its fiscal
year.
EXHIBIT INDEX APPEARS IN ITEM 14
TABLE OF CONTENTS
TITLE PAGE
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
ITEM 1. BUSINESS
Overview
We develop, manufacture and market two lines of voice communications
products: our Andrea Anti-Noise line of electronic headsets and handsets; and
our recently introduced Andrea DSP Microphone and Software line of digital
signal processing microphone array products and related software.
Our Andrea AntiNoise Products have "near field" noise canceling and
noise reducing features for use in headsets and handsets where the user is
very near the microphone. Noise cancellation enhances voice-activated
computing, computerized speech recognition, and computer and Internet
telephony. Noise reduction enhances the quality of sound heard in noisy
environments and can also be used as a means of environmental sound control.
Our Andrea DSP Microphone and Software Products use "far field"
digital signal processing technology to provide high quality transmission of
voice where the user is at a distance from the microphone. Digital signal
processing, also called DSP, converts voice and other audio signals from analog
form into digital form and then processes the signals to improve their quality.
Applications for these "far field" microphones include voice-activated
computing and mobile telephony for automobiles, as well as other settings where
speakers need to be free from the constraint of having a microphone tethered to
a headset.
Andrea Electronics Corporation was established in 1934. After several
decades of manufacturing radios, televisions and high fidelity audio systems,
we were engaged primarily in the manufacture of intercom communications
products for military and industrial use. We introduced our first Andrea
Anti-Noise microphone products in 1995. Since that time, sales of our Andrea
Anti-Noise Products have become our largest source of revenue, and our sales
of intercom products have declined. We are currently seeking to apply our
knowledge of the military and industrial markets to develop applications of
our Andrea DSP Microphone and Software Products for those markets, but we
cannot assure that these efforts will succeed and we do not expect material
revenues from new military and industrial products during the year 2000.
Our Strategy
Andrea's strategic objective is to use our expertise in voice-based
audio technology to meet the needs of the emerging markets for voice-activated
computing applications, including speech recognition programs, Internet
telephony, video/audio conferencing, in-vehicle computing, home automation
systems, hand-held devices and multiplayer online games, among others. We
believe that these markets require enhanced levels of voice intelligibility
and sound quality at increasingly cost-effective prices. Our strategy for
achieving this objective includes the following elements:
- maintain and extend our market position with our Andrea Anti-Noise
Products and Andrea DSP Microphone and Software Products through
our direct sales force, our collaborative partnerships with
software publishers and original equipment manufacturers of
computers, microprocessors and related equipment, our e-commerce
channel and our retail channels, some of which are national or
global in their scope of operations;
- broaden our Andrea Anti-Noise Products and our Andrea DSP
Microphone and Software Products through internal research and
development and, from time to time, strategic acquisitions;
- design our products to satisfy specific end-user requirements
identified by our collaborative partners; and
- outsource manufacturing of our Andrea Anti-Noise Products and
Andrea DSP Microphone and Software Products in order to achieve
economies of scale.
The success of our strategy will depend on our ability to, among
other things, increase sales of our line of existing Andrea Anti-Noise
Products and Andrea DSP Microphone and Software Products, introduce additional
Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products,
maintain the competitiveness of our technologies through increasing levels of
research and development, and achieve widespread adoption of our products and
technologies. We cannot assure that we will be able to accomplish these
objectives.
Our Technologies
We design our Andrea Anti-Noise Products and Andrea DSP Microphone and
Software Products to transmit voice signals with the high level of quality,
intelligibility, and reliability required by the broad range of emerging
voice-based applications in computing and telecommunications. We achieve this
through the use of several audio technologies.
Andrea Anti-Noise Technology
Noise Cancellation ("NC") Microphone Technology. This technology is
based on the use of pressure gradient microphones that are mechanically and
acoustically designed to diminish the transmission of noise from the speaker's
location. Our NC microphones are a less costly alternative to our ANC
microphones and are well-suited for applications in which there is less
background noise in the speaker's environment.
Active Noise Cancellation ("ANC") Microphone Technology. This
technology is based on analog signal processing circuits that electronically
cancel the transmission of noise from the speaker's location. ANC is
particularly well-suited for those environments in which the speaker is
surrounded by high levels of ambient background noise. Our ANC and NC
microphones are most effectively used in "near-field" applications where the
microphone is next to, or very close to, the speaker's mouth.
Active Noise Reduction ("ANR") Earphone Technology. This technology is
based on analog signal processing circuits that electronically reduce the amount
of noise in the listener's environment that the listener would otherwise hear in
the earphone. Our ANR earphones improve the quality of speech and audio heard by
a listener in extremely noisy environments, particularly those characterized by
low frequency sounds, such as those in aircraft, automobiles, trucks and other
ground transportation equipment, machine rooms and factories.
Andrea DSP Microphone and Software Technology
This set of technologies is generally based on the use of an array
of microphones from which the analog signals are converted to digital form and
then processed using digital electronic circuitry to eliminate unwanted noise
in the speaker's environment. Our Andrea DSP Microphone and Software Products
provide clear acoustic and audio input performance where the desired audio
signal is at a distance from the microphone. We have also engineered our
Andrea DSP Microphone and Software Products to be compatible with Universal
Serial Bus, or USB, computer architecture. We believe that our Andrea DSP
Microphone and Software technology achieve far-field microphone
performance previously unattainable through NC-type microphones based on
mechanical acoustic designs and ANC-type microphones based on analog signal
processing. Our Andrea DSP Microphone and Software Products are based on the
use of the following technologies:
Digital Super Directional Array (DSDA/Trademark/) Microphone Technology
- - Patented DSDA microphone technology enables high quality far-field
communications by centering microphone sensitivity on a user's voice and
canceling noise outside of that signal. DSDA continuously samples the acoustic
environment, adaptively identifies interfering noises that are extraneous to the
voice signal, resulting in increased intelligibility of communications.
Direction Finding and Tracking (DFTA/Trademark/) - Patent-pending DFTA
technology utilizes an array of microphones, unique software algorithms and
digital signal processing to detect the presence of a user's voice, determine
the direction of the voice and track the speaker when he or she moves.
PureAudio/Trademark/ - Patent-pending PureAudio is a noise canceling
algorithm that enhances speech-centric applications by sampling an ambient noise
environment and attenuating the noise sources around the desired speech signals,
delivering a clear audio signal. Designed specifically to improve the
signal-to-noise ratio, PureAudio is effective in canceling stationary noises
such as tires, computer fans, and engines.
SuperBeam/Trademark/ - Patent-pending SuperBeam is a highly accurate
microphone beamforming digital algorithm designed to provide a fixed noise
reduction microphone solution for typical room acoustic environments where
speech is utilized. With proprietary SuperBeam software algorithms, a microphone
beamformer is generated by processing multiple microphone samples through
pre-established digital filters and summing the outputs. The result is an
optimum speech enhancement and noise reduction solution to a predefined
setting.
EchoStop/Trademark/ - Patent-pending EchoStop is an advanced acoustic
echo canceler developed for use with conferencing systems such as group audio
and videoconferencing systems and cellular car phone kits. EchoStop allows true
full duplex communication over a conferencing system, even when the system is
used in large spatial environments that may be vulnerable to extensive
reverberation. EchoStop incorporates noise reduction algorithms to reduce the
background noise of both the microphone input and the loudspeaker output, thus
preventing the accumulation of interfering noise over multi-point conferencing
systems.
Our Products and their Markets and Applications
Our Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products have been designed for speech centric applications across a broad range
of hardware and software platforms. These products incorporate our NC, ANC, ANR
and DSP microphone technologies, and are designed to cancel background noise in
a range of increasingly noisy environments, home and offices and factories. We
also manufacture a line of accessories for these products. For the consumer and
commercial markets, we have designed our Andrea Anti-Noise Products and Andrea
DSP Microphone and Software Products for the following applications:
- Speech recognition for word processing, database, and similar
applications
- Distance Learning
- Internet telephony and Voice Chat
- Voice-activated interactive games
- Cellular and other wireless telecommunications
- In-Vehicle Computing
- Hands-free car phone kits
- Speech enabled global positioning systems (GPS)
- Telematics
- Audio/videoconferencing
- Professional audio systems
- Home networking automation systems
- Hand-held and other personal assistant devices
We market and sell our products directly to end users through computer
product distributors, through value-added resellers, to original equipment
manufacturers and to software publishers. We began commercial sales of our
Andrea Anti-Noise Products in 1995 with the introduction of the ANC-100. Since
that time, a substantial amount of our revenue from Andrea Anti-Noise Products
has been from the sale of our NC microphone products, particularly to certain of
our collaborative partners. See "Collaborative Arrangements".
Andrea Anti-Noise Products
Our Andrea Anti-Noise Products include a line of headsets, handsets and
related accessories that incorporate our NC, ANC and ANR technologies. Our
headsets are mostly differentiated by the various designs of their headband,
microphone boom and earphone components, and are available in both single
earphone monaural and dual earphone stereo models.
NC Products. Several of our NC models are sold at retail, with
suggested retail prices ranging from $12.95 to $39.95. Other NC models are sold
only to original equipment manufacturers for incorporation into their products.
One of our NC headsets has a dual function microphone: when the headset is worn,
the microphone is used in the near field mode; when the headset is placed on the
desktop mount, the microphone is used in the far field mode. In some models,
customers have the unique ability to mix and match microphone boom and headband
components to meet their specific application and user comfort preferences. The
speaker-housing unit in these models can be used for digital, CD-quality sound.
By removing the speaker-housing unit, we can offer this headset for simple
speech applications at a lower price.
ANC Products. All of our ANC products are sold at retail, with
suggested retail prices ranging from $39.95 to $169.95. Two of our ANC products
are handsets consisting of a high fidelity earphone and ANC microphone system
that closely resembles the traditional telephone handset. These ANC-200 also
offers features such as near field and far field use and an "on/mute" function.
Several of our higher end ANC headsets incorporate a newly developed speaker
housing design that optimizes the acoustic performance of the earphone's
pre-equalized, digital sound capabilities. We also offer a higher end stereo
headset model that incorporate both our ANC and ANR technologies and that is
equipped with a small audio amplifier.
Andrea DSP Microphone and Software Products
Our Andrea DSP Microphone and Software Products include the following
products:
Andrea AutoArray/Trademark/ Microphone ("AutoArray"). The AutoArray is
a digital, high performance microphone system designed for in-vehicle computing,
specifically enhancing the speech recognition interface. It is the first
super-directional audio input device designed specifically for Auto PCs, global
positioning systems (GPS) and cellular car phone kits. The AutoArray
incorporates DSDA technology. The suggested retail price of the AutoArray is
$199.95.
Andrea DesktopArray/Trademark/ Microphone ("DesktopArray"). Similar
to the AutoArray, the DesktopArray incorporates DSDA technology. The Desktop
Array is designed for natural, far-field desktop speech recognition and
audio/videoconferencing computing. This is our most advanced desktop
microphone, allowing for clear speech in untethered, hands-free applications.
The suggested retail price of the DesktopArray is $149.95.
Andrea USB Microphone Array. Andrea's USB Microphone Array consists
of advanced software algorithms that enable enhanced, noise-free speech using
adaptive beamforming. It utilizes an array of microphones and unique system
design to adaptively control multiple acoustic signals. The system, which
plugs directly into a USB port, utilizes Andrea's proprietary digital audio
driver technology that benefits users running applications in Microsoft
Windows 98. These combined properties allow the user to achieve new levels of
microphone performance for hands-free, untethered, superior quality voice
input for speech applications. Relevant applications include command and
control for office and home automation systems, Internet telephony, Voice over
Internet Protocol and audio/videoconferencing systems.
Andrea Sound Card Array/Trademark/. With the Andrea Sound Card Array,
multiple streams of audio are captured by an array of microphones located in a
small desktop device, providing four channels or paired and summed into two
channels and passed to the sound card line input and converted for the host
processor to enable DSDA processing. The Sound Card Array is currently
available for speech-centric applications running Microsoft Windows 98/ 98
Second Edition or Microsfot Windows 2000 and supported by Andrea
Electronics' partner products.
Andrea PureAudio/Trademark/. Andrea's PureAudio speech enhancement
noise reduction software uses advanced algorithms to sample existing audio and
subtract background noise that is repetitive in nature, such as embedded
electrical and ambient environmental noise. PureAudio enhances the performance
of speech applications such as speech recognition, voice over Internet
protocol, Internet voice chat and videoconferencing applications by reducing
noise that would interfere with a clear voice signal. The suggested retail
price of PureAudio is $9.95.
Andrea AudioCommander/Trademark/. Offering a superior audio interface
for controlling PC multimedia applications, AudioCommander includes controls to
operate noise cancellation features, thereby enhancing microphone performance.
The software also includes an audio wizard that sets microphone levels to
optimize PC audio for speech-enabled applications including speech recognition,
Internet telephony and command and speech control functions. AudioCommander is
offered free through Andrea Electronics' e-commerce website.
Accessories
We have developed and manufacture a line of accessories for our Andrea
Anti-Noise Products and our Andrea DSP Microphone and Software Products. These
include our Andrea ConnectSolutions/Trademark/ - Personal Computer Telephone
Interface ("PCTI"), Andrea Wireless VoiceSolutions/Trademark/ AWS-100
("AWS-100"), Andrea APS-100 Auxiliary Power Supply, and Andrea MC-100 Multimedia
Audio Controller.
The PCTI is a comprehensive desktop device that integrates
speech-centric computing and traditional telephony applications by connecting
headset users to the telephone, to the computer, or to both simultaneously.
Users can alternately or simultaneously conduct telephone conversations and use
speech recognition to enter data or dictate into the PC, without having to pause
or toggle between connectivity devices. The suggested retail price of the PCTI
is $149.95.
The AWS-100 is a simple head-mounted microphone system that
incorporates infrared (IR) wireless microphone technology, as well as a unique,
untethered design to allow increased mobility and high-quality voice
transmission. The suggested retail price of the AWS-100 is $149.95.
The APS-100 is used when the computer microphone input on a user's
computer has either no power or insufficient power for correct microphone
operation. The suggested retail price of the APS-100 is $19.95.
The Andrea MC-100 Multimedia Audio Controller connects a PC headset or
handset with a PC multimedia speaker system thereby allowing a user to
conveniently switch between the headset/handset and the speaker system. The
suggested retail price of the MC-100 is $29.95.
Our Industrial and Military Communication Products
For the industrial and military markets, our intercom system and
related components are designed primarily for avionics applications. The
related components include headsets, amplifiers, electronic control boxes and
panels, and wiring harnesses. The prices of these components range from $100
to $5,000. Unfilled orders under government prime contracts and subcontracts
for these products may be terminated at the convenience of the government
under the provisions of statutes or regulations applicable to defense
procurement contracts. In the event of such termination, we are entitled to
reimbursement for costs incurred plus a percentage of profit. Sales under
defense procurement contracts are also subject, in certain instances, to price
redetermination proceedings. We believe that such proceedings, if any, would
not have a material effect upon our earnings.
We have also developed two Andrea Anti-Noise products for various
communications applications in commerce, industry and the military: ANR
Headphone Kits and ANR/ANC Headset Systems. The ANR Headphone Kit is a
lightweight, open backed headphone for use in high-noise environments, such as
airplane cabins, to reduce ambient noise and offer improved audio listening. We
have sold a limited number of these kits to a major producer of headphones. The
ANR/ANC Headset System is a high performance, communication headset system with
both ANR earphone technology and ANC microphone technology. This product is
designed to be adapted to customer specifications for use in extreme high noise
environments, such as in aircraft, manufacturing and warehouse facilities, and
military vehicles.
We are currently seeking to apply our knowledge of the military and
industrial markets to develop applications of our Andrea DSP Microphone Array
and Software Products for those markets. We cannot assure that these efforts
will succeed and we do not expect material revenues from new military and
industrial products during the year 2000.
We refer to our various voice communications products for avionics
applications as our "Aircraft Communications Products".
Our Collaborative Arrangements
An important element of our strategy is to promote widespread
adoption of our Andrea Anti-Noise technology by partnering with large
enterprises and market and technology leaders in telecommunications, computer
manufacturing, and software publishing. For example, we have entered into such
arrangements and/or relationships with International Business Machines
Corporation ("IBM"), Microsoft Corporation ("Microsoft"), Intel Corporation
and Clarion Corporation of America. We are currently discussing additional
arrangements with other companies, but we cannot assure that any of these
discussions will result in any definitive agreements.
IBM Procurement Agreement. In June 1995, we entered into a two-year
procurement agreement with IBM covering the sale to IBM of Andrea Anti-Noise
products for inclusion with IBM's personal computers. In 1996, we entered into
an additional agreement with IBM for the sale to IBM of Andrea Anti-Noise
computer headsets for inclusion with all shrink-wrapped copies of IBM's
speech-enabled OS/2 "Merlin" software product. In 1997, we expanded our
relationship with IBM by signing a procurement agreement to supply several
models of Andrea Anti-Noise PC headsets, handsets and microphones to IBM for
packaging with a full line of IBM's speech recognition software programs. We
anticipate that our agreement with IBM will be renewed, but we cannot assure
that this will happen. During 1999, 1998 and 1997, sales of our computer
headsets to IBM and certain of its affiliates, distributors, licensees, and
integrators accounted for 49%, 61%, and 56%, respectively, of our total sales.
Microsoft License Agreements. In October 1996, we entered into a
licensing agreement with Microsoft covering the distribution by Andrea of
Microsoft NetMeeting/Trademark/ Internet and Intranet conferencing software with
our Andrea Anti-Noise retail line of ANC headsets and handsets. This agreement
replaced our prior licensing agreement with Microsoft for Microsoft's MS
Phone/Trademark/ and MSVoice/Trademark/ computer telephony and speech
recognition software. In April 1997, we signed a similar licensing agreement
with Microsoft allowing us to sell Microsoft's NetMeeting 2.0/Trademark/
Internet and Intranet conferencing software with Andrea Anti-Noise headsets
which were endorsed and recommended by Microsoft's NetMeeting Group. In August
1997, Microsoft recommended Andrea's ANC headsets for use with Internet Explorer
4.0 and, in addition, Microsoft's Windows Hardware Qualifications Lab certified
Andrea ANC products for use with Windows 95 and Windows NT, all of which
incorporate NetMeeting 2.0. In June 1998, certain of our NC and all of our ANC
headsets were certified by Microsoft's Windows Hardware Qualification Lab for
use with Windows 98 and Windows NT.
Microsoft Procurement Agreement. In January 1999, we entered a
procurement agreement with Microsoft covering the sale by us to Microsoft of our
patented NC-8 headset for inclusion in Microsoft Encarta Interactive English
Learning software programs that will be marketed in various markets in various
languages. This agreement also covers the inclusion of Andrea product brochures
in the packaging for these and related Microsoft products. We intend to
collaborate with Microsoft in several co-marketing activities and joint
promotional efforts to support these products. The agreement expires in January
2000, but upon mutual agreement can be extended for successive twelve-month
periods.
Intel License Agreement. In October 1998, we entered into an agreement
with Intel Corporation under which we have been provided access to Intel's
Pentium III microprocessor technology for purposes of optimizing the performance
of our Andrea DSDA far-field microphone technology. Our objective for this
program is to significantly reduce the cost of the components required for the
Andrea DSDA microphone product and to improve its overall performance. If we
succeed, we expect that the benefits of speech recognition can be marketed to a
broader base of end users.
Clarion Purchase Agreement. On February 24, 1999, we entered into a
purchase agreement with Clarion Corporation of America for the Andrea AutoArray,
the first directional, noise canceling audio input device designed specifically
for the natural speech interface for Clarion's Auto PCs. Under this agreement,
Clarion will purchase the Andrea AutoArray and offer it to its authorized Auto
PC dealers nationwide. The agreement has an initial one-year term and
automatically renews for successive one-year terms unless earlier terminated.
Patents, Trademarks, and Other Intellectual Property Rights
We rely on a combination of patents, patent applications, trade
secrets, copyrights, trademarks, nondisclosure agreements with our employees,
licensees and potential licensees, limited access to and disclosure of our
proprietary information, and other measures to protect our intellectual property
and proprietary rights. We cannot assure, however, that these measures will
protect our intellectual property or prevent misappropriation or circumvention
of our intellectual property.
Andrea has been granted a total of 16 patents in the United States
covering claims to its Andrea Anti-Noise and digital line of products technology
and products, including nine utility patents and seven design patents.
Counterparts of certain of these patents have been granted in other
jurisdictions. Our nine U.S. utility patents cover various method and apparatus
claims to our ANC, ANR, DSDA/Trademark/ technology and products. These method
and apparatus patents expire at various dates, ranging from 2010 to 2017. Our
seven U.S. design patents cover claims to the design of various types of
headsets and handsets, including a combined boom microphone headset and stand, a
boom microphone headset, two tethered media/communications handsets with
controls, and an untethered communications/media handset. These design patents
expire at various dates, ranging from 2010 to 2013. One of the utility patents
was granted to our Lamar Signal Processing subsidiary and expires in 2016. In
addition, we have other U.S. and non-U.S. patent applications currently pending.
We cannot assure that patents will be issued with respect to these applications
or any other patent applications filed by us in the future.
Andrea, together with its subsidiaries, has 20 U.S. and 93 non-U.S.
trademark registrations and 28 U.S. and 10 non-U.S. pending trademark
applications. The U.S. and non-U.S. registered trademarks include: A AND DESIGN,
ANDREA, ANDREA ANTI-NOISE, ANDREA CONNECT SOLUTIONS, ANDREA GAMEWARE, ANDREA
PROVOICE SOLUTIONS, ANDREA WIRELESS VOICE SOLUTIONS, ANR READY, AUDIO COMMANDER,
AUTOARRAY, DSDA, NETSET, PCTI, QUIETWARE, TECHNOLOGY ENHANCING COMMUNICATIONS,
and TECHNOLOGY ENHANCING VOICE COMMUNICATIONS. The pending trademark
applications cover, among other marks: A2D CABLE, ANDREA SOUND SOLUTIONS, ANDREA
VOICE SOLUTIONS, AUDIO NAVIGATOR, AUTOSE, DESKTOPARRAY, DFTA, DSDA LOGO, DSDA
PRO, E-ARRAY, E-AUDIO, E-MIC, ECHOSTOP, FREEDOM OF VOICE, HOMEARRAY, LAMAR,
MOBILEARRAY, OFFICEARRAY, PUREAUDIO, SAFE & SOUND, SOUND CARD ARRAY, SUPERBEAM,
and VOICE FINDER. Andrea has also obtained two copyright registrations in the
United States for its AUDIO COMMANDER software. The first covers the AUDIO
COMMANDER icon. The second covers the actual software computer program and
software code.
Numerous patents have already been granted in the fields of noise
cancellation, noise reduction, digital signal processing, computer voice
recognition and adaptive interference cancelling. We expect that products in
these fields will increasingly be subject to claims under these patents as the
numbers of products and competitors in these fields grow and the functionality
of products overlap. Moreover, the laws of other countries do not protect our
intellectual property rights to the same extent as the laws of the United
States. We cannot assure that any patents issued to us will provide competitive
advantages or will not be infringed, challenged, invalidated, or circumvented by
others, that the patents or proprietary rights of others will not have an
adverse effect on our ability to do business, that we will be able to obtain
licenses to patents of others, if needed, on terms acceptable to us or at all,
or that we will be able to develop additional patentable technology that may be
needed to commercialize successfully our existing technologies. We are also
subject to the risk of adverse claims and litigation alleging infringement of
the proprietary rights of others. Litigation to establish the validity of
patents, to assert infringement claims against others, and to defend against
patent infringement claims can be expensive and time-consuming, even if the
outcome is favorable to us. See "Part I - Item 3 - Legal Proceedings" for
information concerning the litigation involving our ANR patents and trademark.
Research and Development
We consider our technology to be of substantial importance to our
competitiveness. To maintain this competitiveness, we have organized our
research and development efforts using a "market and applications" approach
for meeting the requirements of new and existing customers. Consistent with
this approach, our engineering staff interacts closely with our sales and
marketing personnel and, frequently, directly with customers. The engineering
staff is responsible for the research and development of new products and the
improvement of existing products. Since 1998, substantially all of our
research and development has been in support of developing Andrea DSP
Microphone and Software Products and Technologies. Research and development
expenses for 1999 increased 69% to $3,399,666 from $2,016,684 for 1998. We
expect research and development expenses to increase as the Company seeks to
broaden its line of Andrea Microphone Array Products and Technologies. No
assurance can be given that our research and development efforts will succeed.
See "Part II - Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Sales and Marketing
We employ a sales staff as well as outside sales representative
organizations to market our Andrea Anti-Noise Products, our Andrea DSP
Microphone and Software Products and our Aircraft Communications Products.
Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products are
marketed to computer OEMs and related peripheral devices, distributors of
personal computers and telecommunications equipment, software publishers,
computer and consumer electronic retailers, and end-users in both business and
household environments. These products are sold to end-users through
distributors and value-added resellers, software publishers, Internet Service
Providers, Internet Content Developers, and retailers. Under our existing
collaborative agreements, our collaborative partners have various marketing
and sales rights to our Andrea Anti-Noise and Andrea DSP Microphone and
Software Products. We are seeking to enter additional collaborative
arrangements for marketing and selling our Andrea Anti-Noise Products and
Andrea DSP Microphone and Software Products, but we cannot assure that we will
be successful in these efforts. Market acceptance of the Andrea Anti-Noise
Products and Andrea DSP Microphone and Software Products is critical to our
success.
We market our Aircraft Communications Products to OEMs, military
organizations, and industrial customers.
Production Operations
We conduct assembly operations at our New York facility and through
subcontractors. During initial production runs of Andrea Anti-Noise Products,
we assemble the products at our New York facility from purchased components.
As sales of any particular Andrea Anti-Noise Product increase, assembly
operations are transferred to a subcontractor in Asia. Most of the components
for the Andrea Anti-Noise Products and Andrea DSP Microphone and Software
Products are available from several sources and are not characteristically in
short supply. However, certain specialized components, such as microphones and
DSP boards, are available from a limited number of suppliers and subject to
long lead times. To date we have been able to obtain sufficient supplies of
these more specialized components, but we cannot assure that we will continue
to be able to do so. Shortages of, or interruptions in, the supply of these
more specialized components could have a material adverse effect on our sales
of Andrea Anti-Noise Products and Andrea DSP Microphone and Software Products.
We assemble our Aircraft Communications Products at our New York
facility from purchased components. Certain highly specialized components for
our Aircraft Communications Products sold for military and industrial use have
limited sources of supply, the availability of which can affect particular
products. We do not believe, however, that our earnings have been, or will be,
materially affected due to unavailability of these components.
Competition
The markets for our Andrea Anti-Noise Products, Andrea DSP Microphone
and Software Products and Aircraft Communications Products are highly
competitive. Competition in these markets is based on varying combinations of
product features, quality and reliability of performance, price, sales,
marketing and technical support, ease of use, compatibility with evolving
industry standards and other systems and equipment, name recognition, and
development of new products and enhancements. Most of our current and
potential competitors in these markets have significantly greater financial,
marketing, technical, and other resources than us. Consequently, these
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, marketing, and sale of their products than we
can. We cannot assure that one or more of these competitors will not
independently develop technologies that are substantially equivalent or
superior to our technology.
In the markets for our Aircraft Communications Products, we often
compete with major defense electronics corporations as well as smaller
manufacturing firms which specialize in supplying to specific military
initiatives. Our performance in these markets is further subject to several
factors, including dependence on government appropriations, the time required
for design and development, the complexity of product design, the rapidity
with which product designs and technology become obsolete, the intense
competition for available business, and the acceptability of manufacturing
contracts by government inspectors.
We believe that our ability to compete successfully will depend upon
our capability to develop and maintain advanced technology, develop proprietary
products, attract and retain qualified personnel, obtain patent or other
proprietary protection for our products and technologies, and manufacture,
assemble and market products, either alone or through third parties, in a
profitable manner.
Employees
At December 31, 1999, we had 125 employees, of whom 39 were engaged in
production and related operations, 46 were engaged in research and development,
and 40 were engaged in management, administration, sales and customer support
duties. None of our employees are unionized or covered by a collective
bargaining agreement. We believe that we generally enjoy good relations with our
employees.
- --------------
"NetMeeting", "Windows", "Windows 98", "Windows 2000", "MSPhone", and "MSVoice"
are registered trademarks of Microsoft Corporation.
ITEM 2. PROPERTIES
Andrea's corporate headquarters is located in Melville, New York. Our
corporate headquarters is located in approximately 40,000 square feet of leased
space which houses our production operations, research and development
activities, sales, administration and executive offices. We also lease
facilities in Utah and Israel dedicated for research and development, and in
Hong Kong for production management and limited research and development
activities. We believe that we maintain our machinery, equipment and tooling in
good operating condition and that these assets are adequate for our current
business and adequately insured. See Notes 6 and 13 to our Consolidated
Financial Statements for further information concerning our property, plant and
equipment and leased facilities.
ITEM 3. LEGAL PROCEEDINGS
On November 17, 1998 a complaint was filed against us in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. ("NCT";
formerly Noise Cancellation Technologies, Inc.) and NCT Hearing Products,
Inc., one of NCT's subsidiaries. The complaint involves two of Andrea's
patents, U.S. Patent No. 5,732,143 and U.S. Patent No. 5,825,897. These
patents relate to certain active noise reduction technology that is
particularly applicable to aircraft passenger headphones. Andrea does not
currently derive any sales or licensing revenue from aircraft passenger
headphones. The complaint requests a declaration that these two patents are
invalid and unenforceable and that NCT's products do not infringe upon these
two patents. The complaint alleges that Andrea has engaged in unfair
competition by misrepresenting the scope of the two patents, tortuously
interfering with prospective contractual rights between NCT and its existing
and potential customers, making false and disparaging statements about NCT and
its products, and falsely advertising Andrea's ANR products. The complaint
seeks to enjoin Andrea from engaging in these alleged activities and seeks
compensatory damages of not less than $5 million, punitive damages of not less
than $50 million and plaintiffs' costs and attorneys' fees. On December 30,
1998, we filed and served an answer to the NCT complaint, denying the
allegations and asserting affirmative defenses and counterclaims. Our
counterclaims allege that NCT has infringed U.S. Patents Nos. 5,732,143 and
5,825,897, and that NCT has engaged in trademark infringement, false
designation of origin, and unfair competition. The counterclaims also allege
that NCT's patent infringement has been and is willful. The counterclaims seek
injunctive relief with respect to the allegations of patent infringement,
trademark infringement, false designation of origin and unfair competition. We
are also seeking exemplary and punitive damages, prejudgment interest on all
damages, costs, reasonable attorneys' fees and expenses. During the second
half of 1999, both NCT and Andrea submitted briefs to the Court on whether to
have an early hearing on the meaning of the claims in the two Andrea patents.
This type of hearing is called a "Markman Hearing". We anticipate that the
Court will issue a decision on this question by the middle of 2000, but we
cannot assure this. We and NCT are proceeding with discovery, including
document production and depositions. If this suit is ultimately resolved in
favor of NCT, we could be materially adversely effected. We believe, however,
that NCT's allegations are without merit and we intend to vigorously defend
Andrea and to assert against NCT the claims described above.
On March 11, 1999, we were notified about a claim filed with the New
York State Environmental Protection and Spill Compensation Fund (the "Fund")
by the owners (Mark J. Mergler and Ann Mergler, the "Claimants") of property
adjoining our former Long Island City facility. This claim alleges property
damages arising from petroleum migrating from our former facility and was
purportedly detected in the basement of the Claimants' property. In their
claim to the Fund, the Claimants alleged that their property has been damaged
and that they have incurred remedial costs. In the event the Fund honors this
claim in whole or in part, we may be liable to reimburse the Fund. The New
York State Department of Environmental Conservation has asserted a demand that
we investigate and remediate the discharge of petroleum from a fuel oil
storage tank at our former Long Island City facility, and determine whether
the petroleum discharge has migrated to the Claimants' adjoining property. We
engaged environmental consultants to investigate the discharge from the fuel
oil storage tank and we are currently funding remediation work. We denied,
however, the allegations that any petroleum discharge has migrated to the
Claimant's property and objected to the claim made by the Claimant to the
Fund. On September 2, 1999, a civil action related to this matter was
commenced in the Nassau County Supreme Court by Mark J. Mergler and Ann
Mergler. The plaintiffs allege that the fuel oil released from the heating
system of our former facility has migrated beneath and onto the neighboring
property causing an excess of $1,000,000 in direct and consequential damages.
The plaintiffs' allegations against us include, negligence, nuisance and
strict liability under the New York State Navigation Law. We have submitted an
answer denying the allegations and all liability relating to the alleged
property damage. This lawsuit is at an early stage and we are unable to
evaluate the likelihood of an unfavorable outcome or estimate the amount or
range of potential loss, if any.
In addition to the litigation described above, we are from time to time
subject to routine litigation incidental to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Andrea was held on June 24, 1999.
The results of this meeting were reported in our Form 10-Q for the six-month
period ended June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Andrea's common stock is listed on the American Stock Exchange under
the symbol "AND". The table below sets forth the high and low sales prices for
Andrea's Common Stock as reported by the American Stock Exchange. On January 10,
2000, there were approximately 548 holders of record of Andrea's Common Stock.
Quarter Ended High Low
March 31, 1998 26 1/8 12
June 30, 1998 25 5/8 13 7/8
September 30, 1998 15 3/8 5 1/8
December 31, 1998 14 5/16 4
March 31, 1999 12 6 1/4
June 30, 1999 12 3/4 6 3/8
September 30, 1999 7 13/16 5
December 31, 1999 10 6 3/8
No common stock dividends were paid in 1999 or 1998.
ITEM 6. SELECTED FINANCIAL DATA
DECEMBER 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Sales 17,112,487 21,304,570 26,429,804 9,244,109 5,440,792
Cost of Sales 11,908,751 14,178,871 16,077,801 5,913,091 3,190,226
Gross Profit 5,203,736 7,125,699 10,352,003 3,331,018 2,250,566
Research and Development 3,399,666 2,016,684 1,106,880 988,483 976,344
General, Administrative
and Selling Expenses 8,954,805 13,002,959 5,753,130 3,872,919 2,925,460
Income (Loss) from
Operations (7,150,735) (7,893,944) 3,491,993 (1,530,384) (1,651,238)
Other Income (Expense) (26,258) 1,447,380 76,864 (13,833) 375,323
Income (Loss) Before
Provision (Benefit)
for Income Taxes (7,176,993) (6,445,955) 3,568,857 (1,544,217) (1,275,915)
Provision (Benefit) for
Income Taxes - - 154,461 (1,222,000) -
Net Income (Loss) (7,176,993) (6,445,955) 3,414,396 (322,217) (1,275,915)
Earnings (Loss)
Per Share:
Basic (.56) (.61) .42 (.05) (.20)
Diluted (.56) (.61) .39 (.05) (.20)
BALANCE SHEET DATA
Current Assets 19,315,415 18,818,190 14,430,645 9,926,077 5,859,612
Total Assets 49,853,402 50,681,941 17,789,184 10,794,250 6,551,110
Current Liabilities 5,293,930 4,481,074 2,643,986 1,090,003 541,942
Total Liabilities 6,001,769 7,103,040 2,682,486 3,286,289 2,585,830
Redeemable Securities 7,187,077 -- -- -- --
Total Equity 36,664,556 43,578,900 15,106,698 7,507,961 3,965,280
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our mission is to provide the emerging "voice interface" markets with
state-of-the-art communications products that facilitate natural language,
human/machine interfaces.
Examples of the applications and interfaces for which Andrea
Anti-Noise(R) Products and Andrea DSP Microphone and Software Products provide
benefits include: Internet and other computer-based speech; telephony
communications; multi-point conferencing; speech recognition; multimedia;
multi-player Internet and CD ROM interactive games; military and commercial
aircraft communications; and other applications and interfaces that
incorporate natural language processing. We believe that end users of these
applications and interfaces will require high quality microphone and earphone
products that enhance voice transmission, particularly in noisy environments,
for use with personal computers, mobile personal computing devises, military
and commercial aircraft systems, cellular and other wireless communication
devices and automotive communication systems. High quality audio communication
technologies will also be required for emerging "far field" voice
applications, ranging from continuous speech dictation, to multiparty video
teleconferencing and collaboration, to natural language-driven interfaces for
automobiles, home and office automation and other machines and devices into
which voice-controlled microprocessors are expected to be introduced during
the next several years.
Our strategy is to maintain and extend our market position with our
Andrea Anti-Noise(R) Products; broaden our Andrea Anti-Noise(R) Product lines
and Andrea DSP Microphone and Software Products lines through internal
research and development and, from time to time, strategic acquisitions;
design our products to satisfy specific end-user requirements identified by
our collaborative partners; and outsource manufacturing of certain products in
order to achieve economies of scale. An important element of our strategy for
expanding the channels of distribution and broadening the base of users for
our products is our collaborative arrangements with computer OEMs, software
publishers, and distributors and retailers actively engaged in the various
markets in which our products have application. Under some of these
arrangements, we supply our products for sale by our collaborative partners.
Under others, the collaborative partners supply us with software that we
include with our products. In addition, we have been increasing our own direct
marketing efforts.
The success of our strategy will depend on our ability to, among
other things, increase sales of our line of existing Andrea Anti-Noise(R)
Products and Andrea DSP Microphone and Software Products, contain costs,
manage growth, introduce additional Andrea Anti-Noise Products and Andrea DSP
Microphone and Software Products, maintain the competitiveness of our
technologies through successful research and development, and achieve
widespread adoption of our products and technologies.
In order to complement our internal efforts to develop digital signal
processing ("DSP") technology, in May 1998, we acquired Lamar Signal Processing,
Ltd. ("Lamar"), an Israeli corporation engaged in the development of DSP noise
cancellation microphone solutions for voice-driven interfaces covering a wide
range of audio and acoustic applications. This acquisition resulted in a
substantial amount of goodwill. The amortization of this goodwill had, and
will continue to have, a negative, non-cash impact on our results of operations.
See Note 3 to our Consolidated Financial Statements.
We outsource the assembly of most of our Andrea Anti-Noise(R)
Products from purchased components, and we are currently assembling our Andrea
DSP Microphone and Software Productss from purchased components at our New
York and Israeli facilities. We manufacture our Aircraft Communications
Products at our New York facility.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1999 and other items set forth in this Report on Form 10K are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The words "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "seeks," variations of such words, and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and
projections about our business and industry, our beliefs and certain assumptions
made by our management. Investors are cautioned that matters subject to
forward-looking statements involve risks and uncertainties including economic,
competitive, governmental, technological and other factors that may affect our
business and prospects. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. In order to obtain the benefits of these "safe harbor"
provisions for any such forward-looking statements, we wish to caution investors
and prospective investors about the following significant factors, which, among
others, have in some cases affected our actual results and are in the future
likely to affect our actual results and could cause them to differ materially
from those expressed in any such forward-looking statements. These factors
include:
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION
Our results of operations have historically been and are subject to
continued substantial annual and quarterly fluctuations. The causes of these
fluctuations include, among other things:
- - the volume of sales of our products under our collaborative marketing
arrangements;
- - the cost of development of our products under our collaborative
development arrangements;
- - the mix of products we sell;
- - the mix of distribution channels we use;
- - the timing of our new product releases and those of our competitors;
- - fluctuations in the computer and communications hardware and software
marketplace; and
- - general economic conditions.
We cannot assure that the level of sales and gross profit, if any, that we
achieve in any particular fiscal period will not be significantly lower than in
other fiscal periods. Our revenues for the year ended December 31, 1999 were
approximately $17.1 million compared to approximately $21.3 million in calendar
1998. For the year ended December 31, 1999, we had a net loss of approximately
$7.1 million versus a net loss of $6.4 million for the year ended December 31,
1998. For the fourth quarter ended December 31, 1999, our revenues were
approximately $3.8 million versus $7.1 million in the same period in 1998. For
the fourth quarter of 1999, we had a net loss of approximately $2.0 million
compared to net loss of approximately $3.3 million in the same period in 1998.
While we are examining opportunities for cost-reduction, production
efficiencies and further diversification of our business, we may continue to
accumulate losses and the market price of our common stock could decline. In
order to remain competitive, we intend to continue to incur substantial research
and development, marketing and general and administrative expenses. These
expenses may not be necessarily or easily reduced if sales revenue is below
expectations and, therefore, net income or loss may be disproportionately
affected by any reduction in sales revenue. Accordingly, we believe that
period-to-period comparisons of our results of operations may not necessarily be
meaningful and should not be relied upon as indications of future performance.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The market price of our common stock has historically been highly volatile
and could be subject to wide fluctuations in response to quarterly and annual
variations in our results of operations, losses of significant customers,
announcements of technological innovations or new products by us or our
competitors, changes in the outlook of our industry, our company and our
competitors by securities analysts, or other events or factors, including the
risk factors described in this Report. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated to the operating performance of
such companies.
MEETING OUR FUTURE CAPITAL NEEDS MAY ADVERSELY AFFECT OUR BUSINESS AND BE
DILUTIVE TO EXISTING SHAREHOLDERS
Our future capital requirements will depend on numerous factors, including:
- - the costs associated with developing, manufacturing and commercializing
our products;
- - maintaining existing, or entering into future, collaborative development,
collaborative marketing and distribution agreements;
- - protecting intellectual property rights; and
- - expanding facilities and consummating possible future acquisitions of
technologies, products or businesses.
From time to time during the past several years, we have raised additional
capital from external sources. We may continue to have to raise additional
capital from external sources. These sources may include private or public
financings through the issuance of debt, convertible debt or equity, or
collaborative arrangements. We cannot assure that additional capital will be
available on favorable terms, if at all. If adequate funds are not available, we
may be required to significantly reduce or refocus our operations or to obtain
funds through arrangements that may require us to relinquish rights to certain
of our products, technologies or potential markets, which would have a material
adverse effect on our business, results of operations and financial condition.
To the extent that additional capital is raised through the sale of equity, the
issuance of such securities would result in ownership dilution to our existing
stockholders. In June 1999, we sold $7.5 million of Series B Convertible
Preferred Stock and a related warrant for 75,000 shares of our common stock and,
under certain conditions, we have the right to sell up to an additional $7.5
million of Series B Convertible Preferred Stock and warrants for up to 75,000
shares of our common stock. We cannot assure that such conditions will be
satisfied or, if they are, that we will sell any additional Series B Convertible
Preferred Stock or warrants.
SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE AN ADVERSE EFFECT ON MARKET PRICE;
YOU MAY EXPERIENCE SUBSTANTIAL DILUTION
Sales of a substantial number of shares of our common stock in the public
market could have the effect of depressing the prevailing market price of our
common stock. Of the 25,000,000 shares of common stock presently authorized,
13,313,788 were outstanding as of March 3, 2000. This does not include (i)
4,581,750 shares of our common stock reserved for issuance upon exercise of
outstanding options granted under our 1991 Performance Equity Plan and 1998
Stock Plan and shares of our common stock reserved for further option grants
under the 1998 Stock Plan and (ii) 2,209,771 shares of common stock reserved for
issuance upon conversion of the Series B Convertible Preferred Stock and
exercise of the related warrant. To the extent that Series B Convertible
Preferred Stock is converted, the related warrant is exercised, such options are
exercised or we issue additional shares of capital stock, the ownership
interests of holders of common stock would be diluted.
We have 500 shares of Series B Convertible Preferred Stock and a warrant
for 75,000 shares of common stock outstanding and, subject to certain conditions
and limitations, we have the right during the six month period beginning March
14, 2000 to sell to the current holder of Series B Convertible Preferred Stock
up to an additional 750 shares of Series B Convertible Preferred Stock and a
warrant for up to an additional 75,000 shares of common stock. The number of
shares of common stock issuable upon the conversion of the Series B Convertible
Preferred Stock depends on the prices of the common stock as quoted on the
American Stock Exchange shortly before the date of conversion. We cannot predict
the price of the common stock in the future. If the price of our common stock
decreases over time, the number of shares of common stock issuable upon
conversion of the Series B Convertible Preferred Stock will increase and the
holders of common stock would experience substantial dilution of their
investment. On February 25, 2000, 250 shares of the Series B Convertible
Preferred Stock were converted into 371,909 shares of common stock.
In addition, in May 1998, we issued 1,800,000 shares of common stock as
part of the consideration for our acquisition of Lamar Signal Processing, Ltd.,
of which 1,200,000 shares of common stock are subject to trading restrictions
that expire with respect to 600,000 shares in May 2000 and 600,000 in May 2001.
As the restrictions expire, the shares are subject to demand and piggyback
registration rights.
WE MUST INCREASE SALES AND PROFITABILITY OF OUR PRODUCTS AND COMMERCIALIZE NEW
PRODUCTS
Our business, results of operations and financial condition depend on
successful commercialization of our Andrea Anti-Noise Products and Andrea DSP
Microphone and Software Products. Sales of the initial Andrea Anti-Noise
Products began in 1995, and since 1995 we have been expanding the number of
products in this line. The success of these products is subject to the risks
frequently encountered by companies in an early stage of product
commercialization, particularly companies in the computing and communications
industries. To achieve increased sales and profitability, we must, among other
things:
- - increase market acceptance of our Andrea Anti-Noise Products and Andrea
DSP Microphone and Software Products;
- - respond effectively to competitive pressures with the timely introduction
of new Andrea Anti-Noise Products and Andrea DSP Microphone and
Software Products; and
- - successfully market and support these products.
We cannot assure that we will achieve or sustain significant sales or
profitability of our Andrea Anti-Noise Products and Andrea DSP Microphone and
Software Products. Failure to do so would have a material adverse effect on
our business, results of operations and financial condition.
WE FACE INTENSE COMPETITION
The markets in which we sell our Andrea Anti-Noise Products, Andrea
DSP Microphone and Software Products and Aircraft Communications Products are
highly competitive. Competition in the markets for our Andrea Anti-Noise
Products, Andrea DSP Microphone and Software Products and Aircraft
Communications Products is based on:
- - varying combinations of product features;
- - quality and reliability of performance;
- - price;
- - marketing and technical support;
- - ease of use;
- - compatibility with evolving industry standards and other systems and
equipment;
- - brand recognition; and
- - development of new products and enhancements.
Most of our current and potential competitors have significantly greater
financial, technology development, marketing, technical support and other
resources than we do. Consequently, these competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, marketing, and
sale of their products than we can. We cannot assure that one or more of these
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
In the markets for our Aircraft Communications Products, we often compete
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying products and technologies for specific
military initiatives. Our performance in this market is further subject to
several factors, including:
- - dependence on government appropriations;
- - the time required for design and development;
- - the complexity of product design;
- - the rapidity with which product designs and technology become obsolete;
- - the intense competition for available business; and
- - the acceptability of manufacturing contracts by government administrators.
We believe that our ability to compete successfully will depend upon our
capability to:
- - develop and maintain advanced technology;
- - develop proprietary products;
- - attract and retain qualified personnel;
- - obtain patent or other proprietary protection for our products and
technologies; and
- - develop, manufacture, assemble and successfully market products, either
alone, in collaboration or with other parties.
We cannot assure that we will be able to compete successfully, and failure
to do so would have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO OBTAIN MARKET ACCEPTANCE OF OUR VOICE INTERFACE AND
INTERNET COMMUNICATIONS PRODUCTS
We and our competitors are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications. The
markets for these products and technologies have only recently begun to develop,
are rapidly evolving, are characterized by a number of competitors, and are
subject to a high level of uncertainty. Broad market acceptance of these
products and technologies is critical to our success and ability to generate
revenues. We cannot assure that we, or our industry in general, will be
successful in obtaining market acceptance of products and technologies. Failure
to do so would have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW PRODUCTS AND
TECHNOLOGIES
The markets for our products are characterized by rapidly changing
technology, and the introduction of products incorporating new technologies
could render our products obsolete and unmarketable and could exert price
pressures on existing products. In particular, we are currently engaged in the
development and commercialization of our Andrea DSP Microphone and Software
Products and related DSP technolgies for the voice, speech and natural
language interface markets. As part of this effort, we have established our
Andrea Digital Technologies subsidiary in the United States and have acquired
Lamar Signal Processing Ltd., in Israel. We cannot assure that we will succeed
in developing these new DSP products and technologies, or that any such new
DSP products or technologies will gain market acceptance. Further, the markets
for our products and technologies are characterized by evolving industry
standards and specifications that may require us to devote substantial time
and expense to adapt our products and technologies. We cannot assure that we
will successfully anticipate and adapt in a cost effective and timely manner
to changes in technology and industry standards, develop, introduce and gain
market acceptance of new and enhanced products and technologies, as well as
additional applications for existing products and technologies, or that the
introduction of new products or technologies by others will not render our
products and technologies obsolete. Our failure to develop new and enhanced
products and technologies would have a material adverse effect on our
business, results of operations and financial condition.
OUR SUCCESS IS HIGHLY DEPENDENT ON OUR COLLABORATIVE MARKETING ARRANGEMENTS
We have entered into several collaborative and distribution
arrangements with software publishers and computer hardware manufacturers
relating to the marketing and sale of Andrea Anti-Noise Products and Andrea DSP
Microphone and Software Products. Under these collaborative arrangements, our
products are or will be sold to end users through inclusion of the products of
our collaborators. The revenue derived by us from these arrangements will be
based in large part upon the sale of our collaborator's products. Our success
will therefore be dependent to a substantial degree on the efforts of these
collaborators in marketing existing products and new products under
development with which to include our products and technologies. We cannot
assure that any product of any of our collaborators incorporating our products
and technologies will be marketed successfully. Our collaborators generally
are not contractually obligated to any minimum level of sales of our products
or technologies. Furthermore, our collaborators may develop their own
microphone or earphone products or technologies that compete with our products
and technologies. We cannot assure that these collaborators will not replace
our products or technologies with, or give higher priority to, the sales of
these competitive products or technologies. We have also established direct
arrangements with large electronic and computer retail chains in the United
States, as well as with certain distributors in Europe and the Americas. We
cannot assure that any of these channels will devote sufficient resources to
support the sale of our products. We are also currently discussing additional
arrangements with other software companies, several major personal computer
companies, consumer electronic manufacturers, and electronic and computer
retailers. We cannot assure that any of these discussions will result in any
definitive agreements.
WE DEPEND ON A SINGLE CUSTOMER FOR A SUBSTANTIAL PORTION OF OUR SALES
We are substantially dependent on our product procurement relationship with
IBM. During the years ended December 31, 1997, 1998 and 1999, IBM and certain of
IBM's affiliates, distributors, licensees and integrators accounted for 56%, 61%
and 49%, respectively, of our sales revenue. While we are a party to a
procurement agreement with IBM covering the purchase by IBM of certain of our
Andrea Anti-Noise microphone and earphone products for inclusion with certain of
IBM's personal computer products, IBM is not obligated to purchase these
products and is free to purchase microphone and earphone products and
technologies from our competitors. Our failure to maintain sales of Andrea
Anti-Noise Products to IBM would have a material adverse effect on our business,
results of operations and financial condition.
WE MAY NOT BE ABLE TO MAINTAIN NEEDED CONTRACT MANUFACTURING
We conduct assembly operations at our facility in New York and through
subcontractors. During initial production runs of Andrea Anti-Noise Products, we
perform assembly operations at our New York facility from purchased components.
As sales of any particular Andrea Anti-Noise Product increase, assembly
operations are primarily transferred to a subcontractor in Asia. Any failure on
the part of this subcontractor to meet our production and shipment schedules
could have a material adverse effect on our business, results of operations and
financial condition.
Most of the components for the Andrea Anti-Noise Products and Andrea
DSP Microphone and Software Products are available from several sources and
are not characteristically in short supply. However, certain specialized
components for the Andrea AntiNoise Products and Andrea DSP Microphone and
Software Products, such as microphones and DSP boards, are available from a
limited number of suppliers and subject to long lead times. While we have, to
date, been able to obtain sufficient supplies of these more specialized
components, we cannot assure that we will continue to be able to do so.
Shortages of, or interruptions in, the supply of these more specialized
components could have a material adverse effect on our sales of Andrea
Anti-Noise Products and Andrea DSP Microphone and Software Products.
We assemble our Aircraft Communications Products at our New York facility
from purchased components. Certain highly specialized components for our
Aircraft Communications Products sold for military and industrial use have
limited sources of supply, the availability of which can affect certain of our
projects. While we do not believe that our results of operations have been, or
will be, materially affected if such components are unavailable, we cannot
assure that this will continue to be the case.
WE RELY ON PATENTS AND PROPRIETARY RIGHTS THAT MAY FAIL TO PROTECT OUR BUSINESS
We rely on a combination of patents, patent applications, trade secrets,
copyrights, trademarks, nondisclosure agreements with our employees, licensees
and potential licensees, limited access to and dissemination of our proprietary
information, and other measures to protect our intellectual property and
proprietary rights. We cannot assure, however, that the steps we have taken to
protect our intellectual property will prevent its misappropriation or
circumvention.
We have been granted 16 patents in the United States covering our Andrea
Anti-Noise and Andrea DSP Microphone and Software Products, and we have other
U.S. and non-U.S. patent applications currently pending. We cannot assure that
patents will be issued with respect to these applications or any patent
applications filed by us in the future.
Numerous patents have been granted in the fields of noise cancellation,
noise reduction, digital signal processing, computer voice recognition and
related subject matter. We expect that products in these fields will
increasingly be subject to claims under these patents as the numbers of
products and competitors in these fields grow and the functionality of
products overlap. Moreover, the laws of other countries do not protect our
proprietary rights to our technologies to the same extent as the laws of the
United States.
We cannot assure:
- - that any patents issued to us will provide us with competitive
advantages or will not be infringed, challenged, invalidated, or
circumvented by others;
- - that the patents or proprietary rights of others will not have an adverse
effect on our ability to do business;
- - that we will be able to obtain licenses to patents of others, if needed,
on acceptable terms or at all; or
- - that we will be able to develop additional patentable technology that
may be needed to successfully commercialize our existing technologies.
WE ARE SUBJECT TO LITIGATION RELATING TO OUR BUSINESS
From time to time to we are subject to litigation incidental to our
business. We are currently defending two lawsuits that are described in "Item
3. Legal Proceedings" of this Report. In addition, we are subject to the risk
of adverse claims, interference proceedings before the U.S. Patent and
Trademark Office, oppositions to patent applications outside the United
States, and litigation alleging infringement of the proprietary rights of
others. Litigation to establish the validity of patents, to assert
infringement claims against others, and to defend against patent infringement
claims can be expensive and time-consuming, even if the outcome is in our
favor.
OUR INTERNATIONAL OPERATIONS MAY BE SUBJECT TO CERTAIN RISKS
We have been seeking to increase our sales to regions outside the United
States, particularly in Europe and certain areas in the Americas and Asia. For
the year ended December 31, 1999, sales to customers outside the United States
accounted for approximately 35% of our sales revenue. International sales and
operations are subject to a number of risks, including:
- - trade restrictions in the form of license requirements;
- - restrictions on exports and imports and other government controls;
- - changes in tariffs and taxes;
- - difficulties in staffing and managing international operations; problems
in establishing or managing distributor relationships;
- - general economic conditions; and
- - political and economic instability or conflict.
To date, we have invoiced our international sales in U.S dollars, and have
not engaged in any foreign exchange or hedging transactions. We cannot assure
that this will continue to be the case. If we are required to invoice any
material amount of international sales in non-U.S. currencies, fluctuations in
the value of non-U.S. currencies relative to the U.S. dollar may adversely
affect our business, results of operations and financial condition or require us
to incur hedging costs to counter such fluctuations.
QUALIFIED MANAGERIAL AND TECHNICAL PERSONNEL ARE SCARCE IN OUR INDUSTRY
Our performance is substantially dependent on the performance of our
executive officers and key employees. We are dependent on our ability to retain
and motivate high quality personnel, especially management and product and
technology development teams. The loss of the services of any of our executive
officers or other key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future success also
depends on our continuing ability to attract and retain additional highly
qualified technical personnel. Competition for qualified personnel is intense
and we cannot assure that we will be able to attract, assimilate or retain
qualified personnel in the future. Our inability to attract and retain the
necessary technical and other personnel could have a material adverse effect on
our business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND NEW YORK LAW
MAY ADVERSELY AFFECT OUR STOCKHOLDERS
The New York Business Corporation Law, our Certificate of Incorporation and
our Series A Junior Participating Preferred Stock each contain certain
provisions which may, in effect, deter, or make difficult, a change in control,
merger or other acquisition of Andrea. For example, our Board of Directors may
issue up to 4,974,250 shares of preferred stock without any stockholder vote or
action. The preferred stock could have voting, liquidation, dividend and other
rights superior to those of our common stock, and, therefore, any issuance of
preferred stock could adversely affect the rights of holders of our common
stock.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales
Sales for the year ended December 31, 1999 were $17,112,487, a decrease
of 20% from sales of $21,304,570 for the year ended December 31, 1998. The
decrease in sales for the year ended December 31, 1999 reflects an approximate
23% decrease in sales of Andrea Anti-Noise(R) Products to $13,310,138, or 78% of
total sales, and an approximate 6% decrease in sales of our Aircraft
Communications Products, to $3,802,349, or 22% of total sales. The primary
reasons for the decrease of Andrea Anti Noise Product sales during 1999 were the
lower volumes and lower price/lower margin sales of PC headsets to the Company's
original equipment manufacture (OEM) customers. For the year ended December 31,
1999, sales of our computer headsets to one customer and certain of that
customer's affiliates, distributors, licensees and integrators accounted for
approximately 49% of our total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1999 increased to 70% from 67% for the year ended December 31, 1998. This
increase in cost of sales percentage is primarily a result of the shift in
product mix described above under "Sales".
Research and Development
Research and development expenses for the year ended December 31, 1999
increased 69% to $3,399,666 from $2,016,684 for the year ending December 31,
1998. This increase is due to the Company's continuing efforts to develop its
digital signal processing-based, microphone array technologies, coupled with, to
a lesser extent, efforts in computer/telephony headset technologies. Research
efforts are focused on the pursuit of commercializing a natural language-driven
human/machine interface by developing optimal far-field microphone solutions for
various voice-driven interfaces, incorporating the Company's digital
super-directional array microphone technology ("DSDA") and certain other
technologies obtained through the acquisition of Lamar in May 1998.
Correspondingly, the activities of Lamar accounted for approximately 20% of the
total research and development expenses during 1999. The Company believes that
the acquisition of Lamar significantly reinforces its position in digital signal
processing by extending the Company's marketing programs to other industries,
including the consumer electronics and professional audio markets, among others.
The Company anticipates continued significant increases in research and
development expenses, with particular emphasis on digital signal processing
efforts in the year 2000.
General, Administrative and Selling Expenses
General, administrative and selling expenses decreased approximately
31% to $8,954,805 for the year ended December 31, 1999 from $13,002,959 for the
year ended December 31, 1998. Excluding the effect of a full year of goodwill
amortization expense associated with the acquisition of Lamar in May of 1998,
during the year ended December 31, 1999, general, administrative and selling
expenses decreased approximately 40% from the same period in 1998. The decreases
are primarily attributable to cost reduction efforts and a reallocation of
resources to research and development activities.
Other Income (Expense)
Other expense for the year ended December 31, 1999 was $26,258 compared
to other income of $1,447,989 for the year ended December 31, 1998. This change
is primarily attributable to the net gain on the sale of the Company's then
corporate headquarters in Long Island City during the year ended December 31,
1998 of $1,864,767.
Provision for Income Taxes
The Company did not record income tax expense for the year ending
December 31, 1999 in light of the net loss recorded for the period. Furthermore,
the realization of a portion of the Company's reserved deferred tax assets, if
and when realized, will not result in a tax benefit in the consolidated
statement of operations, but will result in an increase in additional paid in
capital as they are related to tax benefits associated with the exercise of
stock options. The Company will be continually re-assessing its reserves on
deferred income tax assets in future periods on a quarterly basis. See Note 12
to our Consolidated Financial Statements.
Net Income (Loss)
Net loss for the year ended December 31, 1999 was $7,176,993 compared
to a net loss of $6,445,955 for the year ended December 31, 1998. The net loss
for the year ended December 31, 1999 principally reflects the factors described
above.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales
Sales for the year ended December 31, 1998 were $21,304,570, a decrease
of 19% over sales of $26,429,804 for the year ended December 31, 1997. The
decrease primarily reflects a shift in product mix to lower-priced and
lower-margin products to original equipment manufacturers (OEMs) with an
approximate 45% decrease in per unit sales prices during the year ended December
31, 1998, and was offset in part by a 17% increase in unit shipments for the
year ended December 31, 1998 over December 31, 1997. The decrease in sales for
the year ended December 31, 1998 reflects an approximate 22% decrease in sales
of Andrea Anti-Noise(R) products to $17,266,874, or 82% of total sales, and an
approximate 6% decrease in sales of our Aircraft Communications Products, to
$4,037,696, or 18% of total sales. For the year ended December 31, 1998, sales
of our computer headsets to one customer and certain of that customer's
affiliates, distributors, licensees and integrators accounted for approximately
61% of our total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1998 increased to 67% from 61% for the year ended December 31, 1997. This
increase in cost of sales percentage is primarily a result of the shift in
product mix described above.
Research and Development
Research and development expenses for the year ended December 31, 1998
increased 82% to $2,016,684 from $1,106,880 for the year ending December 31,
1997. This increase is primarily a result of our continuing efforts to develop
our digital signal processing technology, coupled with efforts in
computer/telephony headset technologies. These efforts resulted in ten new
products during the year ended December 31, 1998. In addition, 1998 included
research and development activities at our wholly-owned subsidiary, Andrea
Digital Technologies ("ADT"), that was established during the second quarter of
1998 and which operates out of a separate facility in Utah. Research efforts at
ADT are primarily focused on the pursuit of commercializing a natural
language-driven human/machine interface by developing optimal far-field
microphone solutions for various voice-driven interfaces, incorporating the
digital super-directional array microphone technology ("DSDA") obtained through
the acquisition of Lamar in May 1998. Correspondingly, the activities of Lamar,
since the date of acquisition, accounted for approximately 15% of the total
research and development expenses for the year ended December 31, 1998. We
believe that the acquisition of Lamar significantly reinforces our position in
digital signal processing by broadening our exposure to other industries,
including the consumer electronics and professional audio markets, among others.
We anticipate continued significant increases in research and development
expenses, with particular emphasis on digital signal processing efforts.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 126% to
$13,002,959 for the year ended December 31, 1998 from $5,753,130 for the year
ended December 31, 1997. This increase, primarily attributable to the ANC/ANR
product lines and the acquisition of Lamar, reflect significant increased
business development expenses relating to existing and prospective collaborative
arrangements with OEMs, software publishers and developers, distributors and
retailers. We also incurred increased promotional, marketing and sales expenses
to promote product awareness and acceptance of the ANC/ANR product lines,
particularly in the retail marketplace, and incurred significant expenses with
developing global expansion efforts. Also included in general, administrative
and selling expenses is goodwill amortization expense of approximately $1.2
million related to the acquisition of Lamar.
Other Income (Expense)
Other income for the year ended December 31, 1998 was $1,447,989
compared to other income of $76,864 for the year ended December 31, 1997. This
change is primarily attributable to the net gain on the sale of our corporate
headquarters in Long Island City during the year ended December 31, 1998 of
$1,864,767, offset by net interest expense of $476,978, primarily related to the
convertible notes issued and sold in June 1998.
Provision for Income Taxes
We did not record income tax expense for the year ended December 31,
1998 in light of the net loss recorded for the year. The realization of our
reserved deferred tax assets (excluding those generated and reserved during
1998), if and when realized, will not result in a tax benefit in the
consolidated statement of operations, but will result in an increase in
additional paid in capital as they are related to tax benefits associated with
the exercise of stock options. The income tax expense of $154,461 for the year
ended December 31, 1997 resulted from the effect of a provision for income taxes
at our 42% effective income tax rate, substantially offset by a reduction in our
reserve on previously-generated, fully-reserved deferred income tax assets. We
will be continually re-assessing our reserves on deferred income tax assets on a
quarterly basis. See Note 11 to our Consolidated Financial Statements.
Net Income (Loss)
Net loss for the year ended December 31, 1998 was $6,445,955 compared
to net income of $3,414,396 for the year ended December 31, 1997. The net loss
for the year ended December 31, 1998 principally reflects the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and proceeds from the
sale of convertible notes and preferred stock to certain financial
institutions. At December 31, 1999, we had cash and cash equivalents of
$9,153,148 compared with $5,437,423 at December 31, 1998. The balance of cash
and cash equivalents at December 31, 1999 is primarily a result of the
Company's issuance and sale in a private placement of $7,500,000 of its Series
B Redeemable Convertible Preferred Stock (the "Preferred Stock"), and from the
Company's June 1998 private placement of $10.75 million aggregate principal
amount of 6% Convertible Notes ("Notes"). All but $1.5 million of the Notes
have been converted to common stock, with the remaining outstanding principal
amount convertible into 3,000 shares of common stock, which amount is recorded
as a current liability, net of an unaccreted discount of $14,923 in the
accompanying consolidated balance sheet as of December 31, 1999. Furthermore,
on February 25, 2000, 250 shares of the Preferred Stock were converted into
371,909 shares of common stock at a conversion price of $6.91 per share. The
Company is using the net proceeds from the issuance of the Preferred Stock and
Notes for costs associated with technology development, tooling costs,
creating and maintaining strategic alliances, payment of certain debt
obligations and general working capital requirements.
In connection with the acquisition of Lamar, of the aggregate cash
consideration to be paid by the Company, $1,000,000 was paid on May 5, 1998,
the closing date, and $500,000 was paid on each of the six and twelve month
anniversaries of the closing date, with the remainder payable in two equal
installments on each of the twenty-four and thirty-six month anniversaries of
the closing. The current portion of long-term debt is comprised of
approximately $.5 million in additional cash consideration due on the
twenty-four month anniversary of the closing. The approximate $.5 million in
additional cash consideration remaining, due on the thirty-six month
anniversary of the closing, is recorded as long-term debt on the accompanying
consolidated balance sheet.
Working capital at December 31, 1999 was $14,021,485 compared to
$14,337,116 at December 31, 1998. The decrease in working capital reflects an
increase in total current assets of $497,225, offset by an increase in total
current liabilities of $812,856. The increase in total current assets reflects
an increase in cash of $3,715,725, a decrease in accounts receivable of
$2,097,079, a decrease in inventory of $890,576 and a decrease in prepaid
expenses and other current assets of $230,845. The increase in current
liabilities reflects a $1,485,077 increase in convertible notes (recorded net of
an unaccreted discount of $14,923) representing the remaining obligation from
the Notes described above, a decrease in trade accounts payable of 87,039, an
increase in the current portion of long term debt of $83,126, and a $668,308
decrease in other current liabilities.
The increase in cash of $3,715,725 reflects $2,546,053 of net cash used
in operating activities, $834,135 of net cash used in investing activities and
$7,095,913 of net cash provided by financing activities.
The cash used in operating activities, excluding non-cash charges, is
primarily attributable to the $7,176,993 net loss for the year ended December
31, 1999, a $563,619 increase in other assets and a $947,508 decrease in other
current and long term liabilities, partially offset by a $2,097,079 decrease in
accounts receivable and a $890,576 decrease in inventory. The increase in other
assets primarily reflects increases in patent and trademark costs associated
with the Company's proprietary technologies. The decrease in other current and
long term liabilities as well as the decrease in inventory primarily reflect
differences in the timing related to both the payments for and the acquisition
of raw materials as well as for other services in connection with ongoing
efforts related to the Andrea Anti-Noise Product line. The decrease in
accounts receivable primarily reflects the level of the fourth quarter sales,
coupled with timing of sales collection. Generally, the Company collects
receivables from sales within two months.
The cash used in investing activities is primarily attributable to
investments in the Company's existing information systems, as well as, to a
lesser extent, capital expenditures consisting of the ongoing upgrade of
manufacturing dies and molds for Andrea Anti-Noise Products.
The net cash provided by financing activities reflects the issuance and
sale of the Preferred Stock and the exercise of employee stock options,
partially offset by the $.5 million cash consideration paid to the former
shareholders of Lamar in connection with the acquisition in May 1998.
Demand for the Company's products and technologies has required the
Company to raise additional working capital to support operations. In
addition, the acquisition of Lamar will require the Company to continue to
provide working capital to support Lamar's operations and to repay notes to
the sellers of Lamar. In December 1995, April 1996 and August 1996, the
Company raised working capital through the issuance of convertible
subordinated debentures. In June 1998, the Company raised $10 million through
the issuance and sale of the Notes. In June 1999, the Company raised $7.5
million through the issuance and sale of Preferred Stock. In addition, the
Company entered into a revolving credit agreement in September 1997 that
provides maximum borrowings of up to $8 million based on eligible accounts
receivable and inventory, as defined. At December 31, 1999, there were no
outstanding amounts under the revolving credit agreement. We believe that our
current levels of cash, as well as our access to financing sources, provide
sufficient liquidity and capital resources to fund working capital
requirements for at least twelve to eighteen months. Notwithstanding the
significance of sales of Andrea Anti-Noise Products as a percentage of our
total sales during 1999, we cannot assure that demand will continue for these
products or any of our other products, including future products related to
our Andrea Microphone Array Products and Software Technologies, or, that if
such demand does exist, that we will be able to obtain the necessary working
capital to increase production and marketing resources to meet such demand on
favorable terms, or at all.
YEAR 2000
Our comprehensive program to address Year 2000 issues was successful
in that our business activities continued without disruption through the days
before and after January 1, 2000 and February 29, 2000. In terms of supply
chain readiness, on the basis of the information available to us, we do not
expect disruptions caused by the failures of third parties to remediate their
Year 2000 issues. Costs related to the Year 2000 program were, as anticipated,
approximately $1 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our principal source of financing activities includes debt under a
revolving credit facility that provides for interest at a spread above the prime
rate, as well as the issuance of convertible debt with major financial
institutions. We are affected by market risk exposure primarily through the
effect of changes in interest rates on amounts payable in cash by us under the
revolving credit facility, as well as the amount payable in stock by us under
convertible debt. A significant rise in interest rates could materially
adversely affect our financial condition and results of operations. At December
31, 1999, there were no outstanding borrowings under our credit facility, and
approximately $1.5 million of remaining unconverted debt (see Notes 9 and 12 to
the financial statements). We do not utilize derivative financial instruments to
hedge against changes in interest rates or for any other purpose. In addition,
substantially all transactions by us are denominated in U.S. dollars. As such,
we have shifted foreign currency exposure onto its foreign customers. As a
result, if exchange rates move against foreign customers, we could experience
difficulty collecting unsecured accounts receivable, the cancellation of
existing orders or the loss of future orders. The foregoing could materially
adversely affect our business, financial condition and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2)
are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to directors and executive
officers is incorporated by reference to the information captioned "Election of
Directors" included in the Company's definitive proxy statement in connection
with the meeting of shareholders to be held on or about June 22, 2000. The
information regarding compliance with Section 16 of the Securities and Exchange
Act of 1934 and the Rules promulgated thereunder is incorporated by reference
therein to the Company's definitive proxy statement in connection with the
meeting of shareholders to be held on or about June 22, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference
to the information captioned "Election of Directors - Executive Compensation"
included in the Company's definitive proxy statement in connection with the
meeting of shareholders to be held on or about June 22, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference
to the information captioned "Security Ownership" included in the Company's
definitive proxy statement in connection with the meeting of shareholders to be
held on or about June 22, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this Item 13 is incorporated by reference
to the information captioned "Certain Relationships and Related Party
Transactions" included in the Company's definitive proxy statement in connection
with the meeting of shareholders to be held on or about June 22, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Andrea Electronics Corporation,
the notes thereto, the related reports thereon of independent public
accountants, and financial statement schedules are filed under Item 8 of this
Report.
Page
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Shareholders' Equity for the three years ended December 31,
1999 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
On October 28, 1999, the Registrant filed a Current Report on Form 8-K
relating to the Registrant's press release, dated October 28, 1999, a copy of
this press release containing certain financial information was attached
thereto.
(c) EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's Form
10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Form 10-K for the year ended December 31,
1997)
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant (incorporated by reference to Exhibit
3.1 of the Registrant's Current Report on Form 8-K filed November
30, 1998)
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed June 22, 1999)
3.5 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed
November 30, 1998)
4.1 Securities Purchase Agreement, dated as of June 10, 1998, relating
to the sale of the Registrant's 6% Convertible Notes due June 10,
2000 (with forms of Note and Registration Rights Agreement
attached thereto) (incorporated by reference To Exhibit 4.1 of the
Registrant's Form S-3, No. 333-61115, filed August 10, 1998)
4.2 Securities Purchase Agreement, dated June 11, 1999, by and between
HFTP Investment L.L.C. and the Registrant (incorporated by reference
to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed
June 22, 1999)
4.3 Registration Rights Agreement, dated June 11, 1999, by and between
HFTP Investment L.L.C. and the Registrant (incorporated by reference
to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed
June 22, 1999)
4.4 Form of Warrant by and between HFTP Investment L.L.C. and the
Registrant (incorporated by reference to Exhibit 4.3 of the
Registrant's Current Report on Form 8-K filed June 22, 1999)
4.5 Rights Agreement dated as of April 23, 1999 between the Company
and Continental Stock Transfer and Trust Company, as Rights Agent,
including the form of Certificate of Amendment to Certificate of
Incorporation as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Shares of Series
A Preferred Stock (incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed May 7, 1999)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of the Registrant's Registration Statement
on Form S-8, No. 333-45421, filed February 2, 1998)
10.2 1998 Stock Plan of the Registrant, as amended (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-8, No. 333-82375, filed July 7, 1999)
10.3* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the three month period ended June 30, 1995)
10.4* License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.5* Software License Bundling Agreement, dated as of March 29, 1996,
by and between Voxware, Inc., and the Registrant (incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
six month period ended June 30, 1996)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant (incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant (incorporated by reference to
Exhibit 10.8 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.9 Employment Agreement, dated as of November 20, 1998, by and
between Christopher P. Sauvigne and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K filed November 30, 1998)
10.10* Production Procurement Agreement, dated as of June 11, 1997, by
and between International Business Machines Corporation and the
Registrant (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 10-K for the year ended December 31, 1997)
10.11 Revolving Loan and Security Agreement, dated as of September 23,
1997, by and between IBM Credit Corporation and the Registrant
(incorporated by reference to Exhibit 10.11 of the Registrant's
Form 10-K for the year ended December 31, 1997)
10.12 Stock Purchase Agreement, dated April 6, 1998, as amended by
Amendment No. 1 thereto dated May 5, 1998, relating to the
purchase of the shares of Lamar Signal Processing, Ltd. (including
form of Registration Rights Agreement)(incorporated by reference
to Exhibits 2.1 and 2.2 of the Registrant's Current Report on Form
8-K filed May 8, 1998)
10.13* Procurement Agreement, dated as of January 13, 1999, by and
between the Registrant and Microsoft Corporation (incorporated by
reference to Exhibit 10.15 of the Registrant's Form 10-K for the
year ended December 31, 1998)
10.14* Purchase Agreement, dated as of February 25, 1999, by and between
the Company and Clarion Corporation of America (incorporated by
reference to Exhibit 10.16 of the Registrant's Form 10-K for the
year ended December 31, 1998)
10.15* Source Code License Agreement, dated as of October 29, 1998,
between the Company and Intel Corporation (incorporated by
reference to Exhibit 10.17 of the Registrant's Form 10-K for the
year ended December 31, 1998)
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- ---------------------------
* Certain portions of this Agreement have been accorded confidential treatment.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(2).
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrea Electronics Corporation:
We have audited the accompanying consolidated balance sheets of Andrea
Electronics Corporation (a New York corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Andrea Electronics
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Melville, New York
January 31, 2000 (except with respect to the matter discussed in Note 16, as
to which the date is March 1, 2000)
F-1
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 9,153,148 $ 5,437,423
Accounts receivable, net of allowance for doubtful accounts of $202,521 2,770,703 4,867,782
Inventories 7,123,747 8,014,323
Prepaid expenses and other current assets 267,817 498,662
--------- ---------
Total current assets 19,315,415 18,818,190
PROPERTY, PLANT AND EQUIPMENT, net 1,930,506 1,919,966
DEFERRED INCOME TAXES 1,806,615 1,806,615
OTHER ASSETS 2,254,989 1,751,501
GOODWILL 24,545,877 26,385,668
---------- ----------
Total assets $ 49,853,402 $ 50,681,940
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,134,873 $ 2,221,912
Current portion of long-term debt (Note 8) 597,247 514,121
Convertible notes, net (Note 9) 1,485,077 -
Other current liabilities 1,076,733 1,745,041
---------- ----------
Total current liabilities 5,293,930 4,481,074
LONG-TERM DEBT (Note 8) 693,362 1,126,390
CONVERTIBLE NOTES, net (Note 9) - 1,455,231
OTHER LIABILITIES 14,477 40,345
---------- ---------
Total liabilities 6,001,769 7,103,040
---------- ---------
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; 750
and 0 shares issued and outstanding, respectively (Notes 10 and 16) 7,187,077 -
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 5,000,000 shares; none
issued and outstanding - -
Common stock, $.50 par value; authorized: 25,000,000 shares; issued and
outstanding: 13,242,538 and 13,210,038 shares, respectively 6,621,269 6,605,019
Additional paid-in capital 42,990,641 42,548,399
Accumulated deficit (12,947,354) (5,574,518)
----------- ----------
Total shareholders' equity 36,664,556 43,578,900
---------- ----------
Total liabilities and shareholders' equity $ 49,853,402 $ 50,681,940
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
NET SALES $17,112,487 $21,304,570 $26,429,804
COST OF SALES 11,908,751 14,178,871 16,077,801
---------- ---------- ----------
Gross profit 5,203,736 7,125,699 10,352,003
RESEARCH AND DEVELOPMENT EXPENSES 3,399,666 2,016,684 1,106,880
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 8,954,805 13,002,959 5,753,130
---------- ---------- ----------
Income (loss) from operations (7,150,735) (7,893,944) 3,491,993
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 246,882 233,346 64,873
Interest expense (306,843) (710,324) (228,029)
Rent and miscellaneous income 33,703 1,924,967 240,020
---------- ---------- ----------
(26,258) 1,447,989 76,864
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (7,176,993) (6,445,955) 3,568,857
PROVISION FOR INCOME TAXES (Note 12) - - 154,461
---------- ---------- ----------
Net income (loss) $(7,176,993) $(6,445,955) $ 3,414,396
=========== ========== ==========
PREFERRED STOCK DIVIDENDS 195,843 - -
---------- ---------- ----------
Net income (loss) available (attributable) to
common shareholders $(7,372,836) $(6,445,955) $ 3,414,396
========== ========== ==========
PER SHARE INFORMATION (Note 4):
Net Income (Loss) Per Share :
Basic $ (.56) $ (.61) $ .42
====== ====== =====
Diluted $ (.56) $ (.61) $ .39
====== ====== =====
Shares used in computing net income (loss) per share:
Basic 13,229,559 10,614,237 8,148,153
========== ========== ==========
Diluted 13,229,559 10,614,237 8,862,263
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-3
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital Deficit Equity
----------- ------ ---------- ----------- -------------
BALANCE, December 31, 1996 7,584,394 $ 3,792,197 $ 6,258,723 $ (2,542,959) $ 7,507,961
Conversion of convertible debt 189,548 94,774 1,108,521 - 1,203,295
Exercise of stock options,
net of related costs 932,750 466,375 2,514,671 - 2,981,046
Net income - - - 3,414,396 3,414,396
--------- --------- ---------- ---------- ----------
BALANCE, December 31, 1997 8,706,692 4,353,346 9,881,915 871,437 15,106,698
Conversion of convertible debt 2,334,846 1,167,423 9,211,993 - 10,379,416
Exercise of stock options,
net of related costs 350,500 175,250 934,710 - 1,109,960
Issuance of common stock for
acquisition of subsidiary (Note 3) 1,818,000 909,000 22,519,781 - 23,428,781
Net loss - - - (6,445,955) (6,445,955)
--------- --------- ---------- ---------- ----------
BALANCE, December 31, 1998 13,210,038 6,605,019 42,548,399 (5,574,518) 43,578,900
Exercise of stock options, net of
related costs 32,500 16,250 93,785 - 110,035
Issuance of warrants in connection
with Series B Redeemable
Convertible Preferred Stock (Note 10) - - 348,457 - 348,457
Preferred stock dividends - - - (195,843) (195,843)
Net loss - - - (7,176,993) (7,176,993)
--------- --------- ---------- ---------- ----------
BALANCE, December 31, 1999 13,242,538 $ 6,621,269 $ 42,990,641 $ (12,947,354) $36,664,556
========= ========= ============ ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-4
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1999 1998 1997
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,176,993) $(6,445,955) $ 3,414,396
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Non-cash interest expense 93,023 646,650 203,204
Depreciation and amortization 3,390,987 2,594,519 322,499
Gain on sale of building - (1,864,767) -
Barter transaction - - (750,000)
Deferred income taxes - - 154,461
(Increase) Decrease in:
Accounts receivable, net 2,097,079 (278,132) (1,889,984)
Inventories 890,576 (2,218,773) (1,492,752)
Prepaid expenses and other current assets (242,559) (128,400) (714,399)
Other assets (563,619) (312,350) (439,151)
Increase (Decrease) in:
Trade accounts payable (87,039) 1,154,192 144,383
Other current liabilities (947,508) (106,474) 247,514
---------- ---------- ----------
Net cash used in operating activities (2,546,053) (6,959,490) (799,829)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities - 102,717 100,000
Acquisition of business, net of cash acquired - (947,276) -
Proceeds from sale of building - 2,282,563 -
Purchases of property, plant and equipment (834,135) (1,710,389) (408,259)
---------- ---------- ----------
Net cash used in investing activities (834,135) (272,385) (308,259)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations - - (4,685)
Payment of debt obligations (Notes 3 and 8) (514,122) (500,000) -
Net proceeds from redeemable convertible preferred
stock (Note 10)
7,500,000 - -
Net proceeds from convertible notes (Note 9) - 10,000,000 -
Proceeds from issuance of common stock upon exercise of stock
options, net of related costs 110,035 1,109,960 2,251,046
---------- ---------- ----------
Net cash provided by financing activities 7,095,913 10,609,960 2,246,361
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,715,725 3,378,085 1,138,273
CASH AND CASH EQUIVALENTS, beginning of year 5,437,423 2,059,338 921,065
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 9,153,148 $ 5,437,423 $ 2,059,338
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Non-cash investing and
financing activities:
Conversion of convertible debentures and related accrued
interest into common stock (Note 9) $ - $10,379,416 $ 1,203,295
========== ========== ==========
Issuance of common stock for acquisition (Note 3) $ - $23,428,781 $ -
========== ========== ==========
Issuance of notes payable for acquisition (Notes 3 and 8) $ - $ 1,672,212 $ -
========== ========== ==========
Issuance of warrants in connection with Series B Redeemable
Convertible Preferred Stock (Note 10) $ 348,457 $ - $ -
========== ========== ==========
Cash paid for:
Interest $ 49,601 $ 3,261 $ -
========== ========== ==========
Income taxes $ 29,479 $ 32,503 $ 5,200
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-5
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND BUSINESS
Andrea Electronics Corporation (together with its subsidiaries, the "Company")
has been engaged in the electronic communications industry since 1934. The
Company is presently focused on the development, manufacture and marketing of
its Andrea Anti-Noise family of electronic headsets and handsets with noise
canceling and noise reducing properties. Noise cancellation enhances
voice-activated computing, computerized speech recognition, and computer and
Internet telephony. In addition, the Company is currently developing and
marketing a new line of digital signal processing ("DSP") products to further
its role in technology enhanced communications, and in May 1998, acquired
Lamar Signal Processing, Ltd. ("Lamar"), an Israeli corporation engaged in the
development of DSP, noise cancellation microphone solutions (Note 3). Prior to
the Company's entry into the voice-activated computing market in the 1990s,
its primary business was selling intercom systems for military and industrial
use. The Company continues to manufacture for these systems and is seeking to
apply its knowledge of the military and industrial markets to develop
applications of its Andrea Anti-Noise technologies for these markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of the Company and its
subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Marketable Securities
The Company accounts for investments according to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, marketable securities
used as part of the Company's asset management that may be sold in response to
changes in interest rates, prepayments, and other factors, have been
classified as available-for-sale. Such securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity (on an after-tax basis). Gains and
losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur. During 1998,
approximately $103,000 of the Company's marketable securities matured. Sales
of securities were $100,000 in 1997. There were no sales of securities in 1999
or 1998. At December 31, 1999 and 1998, the Company did not own any marketable
securities.
Concentration of Credit Risk
The Company is a manufacturer of audio communications equipment for several
industries. During 1998, the Company primarily generated sales from its noise
canceling and active noise canceling products as well as through sales to the
federal government. Sales of noise canceling and active noise canceling
products were significant to one customer and its affiliates, accounting for
approximately 43% and 60% of total accounts receivable at December 31, 1999
and 1998, respectively, and approximately 49%, 61% and 56% of the total sales
for 1999, 1998 and 1997, respectively. Sales to the federal government and
related subcontractors aggregated approximately 19% and 9% of total accounts
receivable at December 31, 1999 and 1998, respectively, and approximately 23%,
19% and 15% of the total sales for 1999, 1998 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out) or
market basis.
F-6
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets, which are
as follows:
Building 25 years
Building improvements 10 - 32 years
Machinery and equipment 3 - 7 years
Expenditures for maintenance and repairs that do not materially prolong the
normal useful life of an asset are charged to operations as incurred.
Improvements that substantially extend the useful lives of the assets are
capitalized. Upon sale or other disposition of assets, the cost and related
accumulated depreciation and amortization are removed from the accounts and
the resulting gain or loss, if any, is reflected in the statement of
operations.
Intangible Assets
Patents and trademarks associated with the Company's proprietary technology
are carried at cost less accumulated amortization, which is calculated on a
straight-line basis over the estimated useful lives of the assets, not to
exceed 17 years. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. Patents and trademarks approximated $1,181,000
and $778,000, net of accumulated amortization, at December 31, 1999 and 1998,
respectively, and are included in other assets on the accompanying
consolidated balance sheets. Goodwill associated with the Company's
acquisition (Note 3) is carried at cost less accumulated amortization, which
is calculated on a straight-line basis over 15 years.
Long-Lived Assets
The Company accounts for long-lived assets according to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". In accordance with SFAS No. 121, the
Company periodically reviews long-lived assets, including identifiable
intangibles (patents and trademarks) and goodwill, whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Management believes there is no impairment to goodwill and
certain identifiable intangibles as of December 31, 1999.
Revenue Recognition
Revenue is recognized upon shipment and acceptance of goods. The Company
reports its sales levels on a net sales basis, with net sales being computed
by deducting from gross sales the amount of actual sales returns and the
amount of reserves established for anticipated sales returns.
Barter Transaction
The Company records barter transactions at the estimated fair market value of
the services received. Revenue from a barter transaction approximated
$1,250,000 during 1997. The value received in this transaction was recorded as
a deferred charge and, at December 31, 1999, $770,000 is included in other
assets. The remaining balance will be amortized over the lesser of the period
of benefit or the program period, not to exceed five years. The Company did
not engage in any barter transactions during 1999 or 1998.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This pronouncement established financial
accounting and reporting standards for the effects of income taxes that result
from the Company's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting and
reporting for income taxes.
F-7
The provision for income taxes is based upon income after adjustment for those
permanent items that are not considered in the determination of taxable
income. Deferred taxes result when the Company recognizes revenue or expenses
for income tax purposes in a different year than for financial reporting
purposes.
Stock-Based Compensation
The Company complies with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," while providing the required pro forma disclosures as if the fair
value method had been applied (Note 14).
Research and Development
The Company expenses all research and development costs as incurred.
Advertising Expenses
The Company charges all media costs of newspaper and magazine advertisements
to the consolidated statements of operations when advertisements are run.
Prepaid advertising at December 31, 1999 and 1998, which represents costs for
media services purchased but not yet run, is included in prepaid expenses and
other current assets in the accompanying consolidated balance sheets.
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than the book value of those financial instruments. When
the fair value approximates book value, no additional disclosure is made. The
Company uses quoted market prices whenever available to calculate these fair
values. When quoted market prices are not available, the Company uses standard
pricing models for various types of financial instruments which take into
account the present value of estimated future cash flows. At December 31, 1999
and 1998, the carrying value of all financial instruments approximated fair
value.
Stock Split
On September 2, 1997, the Company's Board of Directors authorized a
two-for-one stock split effected in the form of a 100% stock dividend that was
distributed on September 17, 1997 to shareholders of record on September 10,
1997. All share and per share data included in the accompanying financial
statements have been restated to reflect the stock split for all periods
presented.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in a financial statement for the period in which they are recognized.
Comprehensive income is the total of net income and all other non-owner
changes in equity (or other comprehensive income) such as unrealized
gains/losses on securities available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive and other
comprehensive income must be reported on the face of the annual financial
statements or, in the case of interim reporting, in the footnotes to the
financial statements. The Company's operations did not give rise to items
includible in comprehensive income (loss) which were not already included in
net income (loss). Accordingly, the Company's comprehensive income (loss) is
the same as its net income (loss) for all periods presented.
F-8
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999 (subsequently amended by SFAS No. 137, to be effective for
all fiscal years beginning after June 15, 2000) and will not require
retroactive restatement of prior period financial statements. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the balance sheet measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. If
certain conditions are met where the derivative instrument has been designated
as a fair value hedge, the hedge items may also be marked to market through
earnings, thus creating an offset. If the derivative is designed and qualifies
as a cash flow hedge, the changes in fair value of the derivative instrument
may be recorded in comprehensive income. While the Company operates in
international markets, it does so presently without the use of derivative
instruments.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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 amount of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. ACQUISITION OF BUSINESS
On May 5, 1998, the Company acquired all of the outstanding shares of capital
stock of Lamar (the "Acquisition"). The consideration paid by the Company for
the Acquisition was approximately 1,800,000 shares of restricted common stock
and $3,000,000 in cash and notes payable. Of the approximately 1,800,000
shares issued to the sellers, one-third became freely transferable on the
first anniversary of the closing, an additional one-third becomes transferable
on the second anniversary and the last one-third on the third anniversary. Of
the aggregate cash consideration to be paid by the Company, $1,500,000 and
$500,000 was paid during 1998 and 1999, respectively, and the remaining
$1,000,000 is payable in the form of promissory notes in two equal
installments on each of the twenty-four and thirty-six month anniversaries of
the closing (Note 8). The Acquisition was accounted for under the purchase
method of accounting and, accordingly, the operating results of Lamar have
been included in the consolidating operating results since the date of
acquisition. The Acquisition was valued using an independent appraisal of the
fair value of the consideration paid and the assets purchased, and resulted in
goodwill of approximately $27.6 million, which is being amortized over 15
years. Goodwill at December 31, 1999 is approximately $24.5 million, which is
net of approximately $1.8 million of amortization. The Company made no
acquisitions in 1999 or 1997.
F-9
The pro forma results listed below, for the years ended December 31, 1998 and
1997, reflect pro forma adjustments, consisting primarily of amortization of
goodwill and interest expense on the discounted value of the $2,000,000 in
promissory notes, assuming the acquisition occurred at the beginning of each
period presented. Pro forma sales amounts would not be materially different
from the historical results reported for 1998 and 1997.
For the Year Ended December 31,
-------------------------------
1998 1997
---- ----
Net income (loss) $ (7,143,660) $ 1,166,506
Net income (loss) per share:
Basic $ (.64) $ .12
Diluted $ (.64) $ .11
Shares used in computing net income (loss) per share:
Basic 11,236,840 9,966,153
Diluted 11,236,840 10,680,263
4. NET INCOME (LOSS) PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share". In
accordance with this statement, basic net income (loss) per common share is
computed by dividing net income (loss) by the weighted-average number of
common shares outstanding. Diluted net income (loss) per common share is
computed by dividing net income (loss) by the weighted-average number of
common shares and dilutive common share equivalents and convertible securities
then outstanding.
The following chart provides a reconciliation of information used in
calculating the per share amounts:
For the Year Ending December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Numerator:
Net income (loss) $(7,176,993) $(6,445,955) $ 3,414,396
---------- --------- ----------
Preferred stock dividends 195,843 - -
---------- --------- ----------
Net income (loss) available (applicable) to common $(7,372,836) $(6,445,955) $ 3,414,396
========== ========= ==========
shareholders
Denominator:
Weighted-average common shares outstanding - Basic $13,229,559 $10,614,231 $ 8,148,153
Effect of dilutive employee stock options - - 714,110
---------- ----------- ----------
Weighted-average common shares outstanding - Diluted $13,229,559 $10,614,231 $ 8,862,263
========== ========== ==========
Net income (loss) per share:
Basic $ (.56) $ (.61) $ .42
========== ========== ==========
Diluted $ (.56) $ (.61) $ .39
========== ========== ==========
5. INVENTORIES
Inventories consist of the following:
December 31,
------------
1999 1998
---- ----
Raw materials $ 2,631,403 $ 2,795,893
Work-in-process 461,250 194,289
Finished goods 4,411,605 5,454,651
---------- ----------
7,504,258 8,444,833
Less: reserve for obsolescence 380,511 430,510
---------- ----------
$ 7,123,747 $ 8,014,323
========== ==========
F-10
6. PROPERTY, PLANT AND EQUIPMENT, net
Property, plant and equipment, net, consists of the following:
December 31,
-------------- -------------
1999 1998
---- ----
Leasehold improvements $ 79,485 $ 23,672
Machinery and equipment 4,008,014 3,283,572
---------- ----------
4,087,499 3,307,244
Less: accumulated depreciation and
amortization 2,156,993 1,387,278
---------- ----------
$ 1,930,506 $ 1,919,966
========== ==========
During 1998, the Company sold its primary operating facility in Long Island
City, New York. The Company received approximately $2,200,000 in cash paid at
the closing and $200,000 in cash in an escrow account (the "Escrow Funds").
The gain on the sale of the building was $1,864,767, which was included in
rent and miscellaneous income in the accompanying consolidated statement of
operations for the year ended December 31, 1998. The Escrow Funds are governed
by an escrow agreement whereby the buyer can claim certain expenses, as
defined. The Escrow Funds, which are included in other assets at December 31,
1999, will remain with the escrow agent until such time as certain conditions
are met, as defined.
7. OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
December 31,
--------------
1999 1998
-------------- -------------
Accrued professional fees $ 612,619 $ 831,545
Accrued interest expense 145,273 62,097
Accrued other 318,841 851,399
---------- ----------
$ 1,076,733 $ 1,745,041
========== ==========
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-------------- -------------
1999 1998
---- ----
Notes payable to sellers, net (a) $ 826,330 $ 1,167,111
Bank note (b) 464,279 473,400
--------- ----------
1,290,609 1,640,511
Less: current portion 597,247 514,121
--------- ----------
$ 693,362 $ 1,126,390
========= ==========
(a) As part of the aggregate purchase price of the Acquisition (Note 3), the
Company issued $2,000,000 in non-interest bearing promissory notes (the
"Promissory Notes") to the former shareholders of Lamar, of which
$1,000,000 has been paid as of December 31, 1999. The Promissory Notes are
recorded net of an unaccreted discount of $163,669 at December 31, 1999,
which discount reflects a 10.5% effective interest rate. In accordance
with the terms of the Acquisition, the remaining obligation is payable on
each of the twenty-four and thirty six month anniversaries of the closing
date.
(b) In connection with the Acquisition (Note 3), the Company assumed the
outstanding obligations of Lamar which, at December 31, 1999, includes
Israeli government-guaranteed loans in the amount of $464,279, bearing
interest at 8.7% per annum. These loans are part of a $1,000,000
government-guaranteed credit facility approved for Lamar, which is subject
to the implementation of an investment program in accordance with Israeli
law. The approval associated with the investment program requires certain
conditions to be met, as defined. In the event Lamar fails to meet the
conditions, immediate repayment may be required. At December 31, 1999,
management believes that Lamar was in compliance with those conditions.
Scheduled maturities of long-term debt are as follows:
2000 $ 597,247
2001 668,063
2002 151,953
2003 20,488
2004 16,527
---------
1,454,278
Less: imputed interest on notes 163,669
current portion 597,247
---------
Total $ 693,362
=========
9. CONVERTIBLE NOTES, net
On June 10, 1998, the Company issued and sold in a private placement,
$10,753,000 aggregate principal amount of 6% Convertible Notes (the "Notes")
due June 10, 2000. The Notes are convertible into shares of the Company's
common stock at a conversion price equal to the average of the two lowest
closing prices of the common stock during the thirty trading days preceding
any date of conversion, subject to a maximum conversion price of $16.125 per
share. At the option of the Company, interest is payable in the form of cash
or shares of common stock at the conversion price then in effect. The maximum
number of shares issuable upon conversion is 2,100,000 shares, and if this
maximum number of shares is issued, any remaining unconverted principal amount
of the Notes will bear interest at 17% per annum. During 1998, $9,253,000 of
the Notes, together with related accrued interest, were converted into
2,097,000 shares of the Company's common stock. At December 31, 1999, the
remaining obligation from the Notes is recorded net of an unaccreted discount
of $14,923.
F-11
10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 22, 1999, the Company issued and sold in a private placement
$7,500,000 of Series B Redeemable Convertible Preferred Stock (the "Preferred
Stock"), and a warrant covering 75,000 shares of the Company's common stock.
Each of the 750 shares of Preferred Stock has a stated value of $10,000 plus
dividends of 4% per annum, which sum is convertible into common stock at a
conversion price equal to the lower of $8.775 (the "Maximum Conversion Price")
and the average of the two lowest closing bid prices of the common stock
during the 15 consecutive trading days immediately preceding a conversion date
(the "Market Price"), subject to certain adjustments, including anti-dilution.
The 4% dividends may, at the option of the Company, be paid in cash.
The Preferred Stock becomes convertible into the Company's common stock
according to a vesting schedule, with 12.5% of the shares having become
convertible on October 17, 1999, 12.5% of the shares having become convertible
on November 17, 1999, 12.5% of the shares having become convertible on
December 17, 1999, and an additional 12.5% becoming convertible at the end of
next five succeeding 30-day periods. The vesting schedule will lapse for
conversions occurring at the Maximum Conversion Price and upon the occurrence
of certain extraordinary events, as defined. Any unconverted Preferred Stock
that remains outstanding on June 18, 2004 will automatically convert into the
Company's common stock. The Company has reserved 2,450,000 of common stock for
issuance upon conversion of the shares of the Preferred Stock.
Prior to June 22, 2000, the Company has the option to redeem any Preferred
Stock presented for conversion if the conversion price is less than or equal
to $4.725 per share, at a redemption price equal to 110% of the stated value
plus any accrued dividends. Upon the announcement of a major transaction, as
defined, the investor shall have the right to require the Company to redeem
all or a portion of the investor's Preferred Shares at a redemption price
equal to the greater of 120% of the stated value plus any accrued dividends
and the Market Price on the day of announcement. In addition, upon the
occurrence of certain triggering events, as defined, and depending on the
Company's control over such events, the investor may have the right to require
the Company to a) redeem all or a portion of the Preferred Shares at a
redemption price equal to the greater of 120% of the stated value plus any
accrued dividends and the Market Price on the day of announcement, or b) pay a
penalty equal to 1% of the remaining principal amount outstanding for a period
not to exceed 20 days in any 365 day period, and adjust the Maximum Conversion
Price, as defined.
During the six month period beginning March 14, 2000, the Company, subject to
certain conditions, may exercise an option to sell to the investor up to an
additional $7.5 million of its Preferred Stock, and warrants for up to an
additional 75,000 shares of common stock. The warrant has an exercise price of
$8.775 per share and expires on June 18, 2004.
As of December 31, 1999, the Preferred Stock is recorded net of the unaccreted
present value of the warrants of $312,923. Due to the redemption features
discussed above, the Preferred Stock is presented outside of stockholders'
equity in the accompanying consolidated balance sheet. Subsequent to December
31, 1999, 250 shares of the Preferred Stock, together with related accrued
dividends, were converted into 371,909 shares of common stock (Note 16).
11. RETIREMENT PLAN
The Company has a defined contribution profit sharing plan that is qualified
under Section 401(k) of the Internal Revenue Code and is available to
substantially all of its employees. The Company's contributions, which serve
to match a portion of participant contributions, were $153,360, $152,487 and
$161,203 for the years ended December 31, 1999, 1998 and 1997, respectively.
12. INCOME TAXES
Income tax provision (benefit) consists of the following:
Year Ended December 31,
-----------------------
-------------- ------------- --------------
1999 1998 1997
Federal:
Current $ - $ - $ -
Deferred (2,447,011) (2,191,625) 1,213,411
State and Local:
Current - - -
Deferred (359,855) (322,298) 285,509
Adjustment to valuation allowance related to
net deferred tax assets 2,806,866 2,513,923 (1,344,459)
---------- ---------- -----------
$ - $ - $ 154,461
========== ========== ==========
A reconciliation between the effective rate for income taxes and the amount
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes is as follows:
Year Ended December 31,
-----------------------
---------- ---------- ----------
1999 1998 1997
Tax provision (benefit) at statutory rate 34% 34% 34%
State and local taxes 5% 5% 8%
Change in valuation allowance for net deferred
tax assets (39%) (39%) (38%)
---------- ---------- ----------
- - 4%
========== ========== ==========
F-12
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 1999 and 1998, are as
follows:
1999 1998
---- ----
Reserve for accrued expenses and trade credit $ 433,000 $ 195,000
Allowance for doubtful accounts 79,000 79,000
Depreciation 114,000 87,000
Reserve for obsolescence 98,000 168,000
NOL carryforward 8,547,000 7,212,000
---------- ----------
9,271,000 7,741,000
Less: valuation allowance (7,464,385) (5,934,385)
---------- ----------
Deferred tax asset, net $ 1,806,615 $ 1,806,615
========== ==========
At December 31, 1999, the Company had net operating loss and credit
carryforwards of approximately $22,000,000 expiring in varying amounts
beginning in 2006 through 2019. In 1997, management of the Company determined
that, more likely than not, a portion of its previously reserved deferred tax
assets would be realized and, accordingly, reduced the valuation allowance.
The reduction in the valuation allowance is included in the income tax
provision in the accompanying consolidated statement of operations for 1997,
as well as in additional paid-in capital at December 31, 1997, for the portion
of those deferred tax assets ($730,000) which are related to tax benefits
associated with the exercise of stock options. The determination that the net
deferred tax asset of $1,806,615 at December 31, 1999 and 1998 is realizable,
is based on the Company's expectations of future earnings. Of the remaining
fully reserved deferred tax asset of approximately $7.5 million, approximately
$4.5 million relate to tax benefits associated with the exercise of stock
options, which will not result in a tax benefit in the consolidated statement
of operations in future periods but, rather, will result in further increases
to additional paid-in capital, if and when realized.
13. COMMITMENTS AND CONTINGENCIES
Line of Credit
On September 30, 1997, the Company entered into an $8,000,000 credit facility
(the "Agreement") with a financial institution, consisting of a revolving loan
based on eligible accounts receivable and inventory, as defined, with an
interest rate of the prime rate plus .75% on any amounts outstanding. The
Agreement was to mature on September 23, 1999 and renew on an annual basis
unless terminated by either party, as provided in the Agreement. On September
23, 1999, this Agreement was renewed for one year. The facility is subject to
normal banking terms and conditions, including financial covenant compliance.
At December 31, 1999, there were no outstanding borrowings under the
Agreement.
F-13
Leases
During the first quarter of 1998, the Company sold its primary operating
facility in Long Island City, New York. The Company's new corporate
headquarters is located in Melville, New York, where the Company leases space
for manufacturing, research and development, sales and executive offices from
an unrelated party. The current lease is for approximately 40,000 square feet
and expires in June 2008. Rent expense under this operating lease was
approximately $507,000 and $145,000 for the years ended December 31, 1999 and
1998, respectively. At December 31, 1999, the minimum future lease
commitments, under this lease and all other noncancellable operating leases,
are as follows:
2000 $ 635,552
2001 617,663
2002 618,558
2003 631,812
2004 605,683
Thereafter 672,621
Legal Proceedings
On November 17, 1998, a complaint was filed against the Company in the U.S.
District Court for the Eastern District of New York by NCT Group, Inc. ("NCT";
formerly Noise Cancellation Technologies, Inc.) and NCT Hearing Products,
Inc., one of NCT's subsidiaries. The complaint involves two of the Company's
patents relating to certain active noise reduction technology. The Company
does not currently derive significant sales or licensing revenue from this
technology. The complaint requests a declaration that the two patents are
invalid and unenforceable and that NCT's products do not infringe the patents.
The complaint alleges that the Company has engaged in unfair competition by
misrepresenting the scope of the two patents, tortuously interfering with
prospective contractual rights between NCT and its existing and potential
customers, making false and disparaging statements about NCT and its products,
and falsely advertising certain of the Company's technology. The complaint
seeks to enjoin the Company from engaging in these alleged activities and
seeks compensatory damages of not less than $5,000,000, punitive damages of
not less than $50,000,000 and plaintiffs' costs and attorneys' fees.
On December 30, 1998, the Company filed and served an answer to the NCT
complaint, denying the allegations and asserting affirmative defenses and
counterclaims. The affirmative defenses include that NCT failed to allege
fraud or inequitable conduct or misrepresentation with the particularity
required by Rule 9(b) of the Federal Rules of Civil Procedure, that NCT failed
to state claims upon which relief can be granted and that the statements made
by the Company were true. The counterclaims allege that NCT has infringed the
two patents, and that NCT has engaged in trademark infringement, false
designation of origin, and unfair competition with respect to the Company's
mark ANR READY. The counterclaims also allege that NCT's patent infringement
has been and is willful. The counterclaims seek injunctive relief with respect
to the allegations of patent infringement, trademark infringement, false
designation of origin and unfair competition. The Company also seeks exemplary
and punitive damages, prejudgment interest on all damages, costs, reasonable
attorneys' fees and expenses.
In March 1999, the Company was notified about a claim with respect to
environmental matters in connection with a site where the Company has been
identified as a potential responsible party under Federal and state
environmental laws and regulations. On September 24, 1999, the Company was
served with a complaint in this matter seeking $1 million in compensatory
damages. The complaint was filed in the Supreme Court of the State of New
York, County of Nassau. Based on a preliminary review of the complaint, and
while no assurance can be given as to the ultimate outcome of this matter, the
Company believes that the claim is without merit and intends to vigorously
defend itself.
While it is not feasible to predict or determine the final outcome of the
claims against the Company, management does not believe that they should
result in a materially adverse effect on the Company's financial position,
results of operations or liquidity.
F-14
In addition to the litigation noted above, the Company is from time to time
subject to routine litigation incidental to its business. These lawsuits
primarily involve claims for damages arising out of the use of the Company's
products and/or technologies, some of which include claims for punitive as
well as compensatory damages. The Company believes that the results of the
above noted litigation and other pending legal proceedings will not have a
material adverse effect on the Company's financial condition.
14. STOCK PLANS
In 1991, the Board of Directors of the Company (the "Board") adopted the 1991
Performance Equity Plan ("1991 Plan"), which was approved by the shareholders.
The 1991 Plan authorizes the granting of awards, the exercise of which would
allow up to an aggregate of 1,000,000 shares of the Company's common stock to
be acquired by the holders of those awards. The awards can take the form of
stock options, stock appreciation rights, restricted stock, deferred stock,
stock reload options or other stock-based awards. Awards may be granted to key
employees, officers, directors and consultants. On April 1, 1997, the Board
approved an increase in the number of shares available for grant under the
1991 Plan to 2,000,000 shares, which was subsequently approved by the
shareholders of the Company. Stock options granted to employees and directors
under the 1991 Plan were granted for terms of up to 10 years at an exercise
price equal to the market value at the date of grant and are exercisable in
whole or in part at stated times from the date of grant up to four years from
the date of grant.
In 1998, the Board adopted the 1998 Stock Option Plan ("1998 Plan"),
which was subsequently approved by the shareholders. The 1998 Plan, as
amended, authorizes the granting of awards, the exercise of which would allow
up to an aggregate of 3,000,000 shares of the Company's common stock to be
acquired by the holders of those awards. Similar to the 1991 Plan, the awards
can take the form of stock options, stock appreciation rights, restricted
stock, deferred stock, stock reload options or other stock-based awards.
Awards may be granted to key employees, officers, directors and consultants.
The Company accounts for stock-based awards granted to employees and directors
under APB Opinion No. 25, under which no compensation cost has been recognized
for stock options granted at market value (Note 2). Had compensation cost for
these stock options been determined consistent with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the following pro forma amounts:
Year Ended December 31,
-------------- ------------- -------------
1999 1998 1997
---- ---- ----
Net income (loss) attributable to
common shareholders: As Reported $(7,372,836) $(6,445,955) $ 3,414,396
Pro Forma (11,338,178) (11,378,844) 1,526,874
Basic net income (loss) per share: As Reported (.56) (.61) $.42
Pro Forma (.86) (1.07) .19
Diluted net income (loss) per As Reported (.56) (.61) $.39
share:
Pro Forma (.86) (1.07) .17
F-15
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. Option activity during 1999, 1998 and 1997 is
summarized as follows:
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of period 3,082,500 9.06 1,824,750 $5.57 2,200,250 $3.41
Granted 1,345,000 5.42 1,637,000 11.73 720,000 6.97
Exercised (32,500) 5.67 (351,000) 3.49 (932,750) 3.21
Forfeited (65,000) 10.93 -- -- -- --
Cancelled (30,000) 9.52 (28,250) 5.44 (162,750) .68
---------- --------- ---------
Outstanding at end of period 4,300,000 8.04 3,082,500 9.06 1,824,750 5.57
========== ========= =========
Exercisable at end of period 1,439,750 7.34 753,500 5.45 625,500 4.68
========== ========= =========
Weighted-average fair value of
options granted $4.14 $9.55 $5.38
==== ==== ====
The fair values of the stock options granted were estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 1998 1997
-------- --------- -------
Expected life in years 6 6.5 7.5
Risk-free interest rates 5.92% 5.32% 6.87%
Volatility 77% 96% 74%
Dividend yield 0% 0% 0%
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------------------- ----------- ---------------- -------- ----------- ----------
$ 0.68 to $ 1.02 173,500 2.49 $ 0.68 173,500 $ 0.68
1.03 to 3.51 -- -- -- -- --
3.52 to 5.29 41,500 6.59 $ 5.00 41,500 $ 5.00
5.30 to 7.94 2,291,500 8.26 $ 5.70 659,000 $ 5.64
7.95 to 11.93 868,500 8.41 $ 8.87 309,500 $ 8.86
11.94 to 17.91 925,000 8.29 $ 14.54 256,250 $ 14.76
--------- ---- ----- --------- -----
.68 to 17.91 4,300,000 8.05 $ 8.04 1,439,750 $ 7.34
========= ==== ===== ========= =====
F-16
15. SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131,"Disclosures
about Segments of an Enterprise and Related Information." Reportable operating
segments are determined based on the Company's management approach. The
management approach, as defined by SFAS No. 131, is based on the way that the
chief operating decision-maker organizes the segments within an enterprise for
making operating decisions and assessing performance. While the Company's
results of operations are primarily reviewed on a consolidated basis, the
chief operating decision-maker also manages the enterprise in three segments:
(i) Andrea Anti-Noise Products, (ii) military intercom products (Aircraft
Communications Products), and (iii) Far-field Digital Audio Technology
Products. The following represents selected consolidated financial information
for the Company's segments for the years ended December 31, 1999, 1998 and
1997:
Andrea Anti- Aircraft Far-field Digital
Noise Communications Audio Technology
Segment Data Products Products Products Total 1999
- ------------------------- -------------- -------------- ------------------ ----------
Net sales $ 13,310,138 $ 3,802,349 $ - $ 17,112,487
Income (loss) from
operations 1,312,588 591,502 (9,054,825) (7,150,735)
Depreciation 274,058 123,503 486,165 883,726
Andrea Anti- Aircraft Far-field Digital
Noise Communications Audio Technology
Segment Data Products Products Products Total 1998
- ------------------------- -------------- -------------- ------------------ ----------
Net sales $ 17,266,874 $ 4,037,696 $ - $ 21,304,570
Income (loss) from (8,418,844) 524,900 - (7,893,944)
operations
Depreciation 1,096,229 93,683 - 1,189,912
Andrea Anti- Aircraft Far-field Digital
Noise Communications Audio Technology
Segment Data Products Products Products Total 1997
- ------------------------- -------------- -------------- ------------------ ----------
Net sales $ 22,404,069 $ 4,025,735 $ - $ 26,429,804
Income from operations 2,968,647 523,346 - 3,491,993
Depreciation 257,727 64,772 - 322,499
Management of the Company assesses assets on a consolidated basis only, and
the Company has not restated any other prior period information, as it would
be impracticable. For the years ended December 31, 1999, 1998 and 1997, and as
of each respective year-end, sales and accounts receivable by geographic area
are as follows:
Geographic Data 1999 1998 1997
--------------------------- ------------ ------------ -------------
Sales:
United States $ 11,171,236 $ 14,720,470 $ 14,949,334
Europe 3,749,508 3,723,609 8,129,621
Other foreign 2,191,743 2,860,491 3,350,849
---------- ---------- ----------
$ 17,112,487 $ 21,304,570 $ 26,429,804
========== ========== ==========
Accounts receivable:
United States $ 1,975,971 $ 3,264,958 $ 2,749,591
Europe 529,052 898,428 1,400,144
Other foreign 265,680 704,396 418,698
---------- ---------- ----------
$ 2,770,703 $ 4,867,782 $ 4,568,433
========== ========== ==========
F-17
16. SUBSEQUENT EVENT - CONVERSION OF REDEEMABLE SECURITIES
In February 2000, 250 shares of Series B Redeemable Convertible Preferred
Stock (Note 10) were converted into 371,909 shares of common stock at a
conversion price of $6.91 per share. The pro forma effect of this transaction
is as follows:
Pro Forma
Actual (Unaudited)
------ ------------
December 31, 1999
-----------------------------------
Total current liabilities $ 5,293,930 $ 5,240,779
---------- ----------
Total liabilities 6,001,769 5,948,618
---------- ----------
Series B Redeemable Convertible Preferred Stock,
750 and 500 shares issued and outstanding as of January 1,
2000, respectively 7,187,077 4,791,385
---------- ----------
Shareholders' Equity:
Preferred stock - -
Common stock, 13,242,538 and 13,614,447 shares issued and
outstanding as of January 1, 2000, respectively 6,621,269 6,807,224
Additional paid-in-capital 42,990,641 45,253,529
Accumulated deficit (12,947,354) (12,947,354)
---------- ----------
Total shareholder's equity 36,663,556 39,113,399
---------- ----------
Total liabilities and shareholder's equity $ 49,853,402 $ 49,853,402
========== ==========
F-18
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants on Schedule S - 1
Schedule II - Valuation and Qualifying Accounts S - 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Andrea Electronics Corporation:
We have audited, in accordance with auditing standards generally accepted in
the United States, the financial statements of Andrea Electronics Corporation
and subsidiaries included in this filing and have issued our report thereon
dated January 31, 2000 (except with respect to the matter discussed in Note
16, as to which the date is March 1, 2000). Our audit was made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
schedule of valuation and qualifying accounts is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Melville, New York
January 31, 2000 (except with respect to the matter discussed in Note 16, as
to which the date is March 1, 2000)
S-1
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged to Charged to
Balance at Costs and Other Balance at
1999 January 1 Expenses Accounts Deductions December 31
- ------------------------------- ---------- ---------- ----------- ---------- -----------
Allowance for doubtful accounts $ 202,521 $ - $ - $ - $ 202,521
======= ======== ======== ======== =========
1998
- -------------------------------
Allowance for doubtful accounts $ 52,521 $ 150,000 $ - $- $ 202,521
======= ======== ======== ======== =========
1997
- -------------------------------
Allowance for doubtful accounts $ 52,521 $ - $ - $ - $ 52,521
======= ======== ======== ======== =========
S-2
SIGNATURES
Pursuant to the requirements of the 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.
ANDREA ELECTRONICS CORPORATION
By:/s/ John N. Andrea
-------------------------------
Name: John N. Andrea
Date: March 7, 2000 Title: Co-Chairman & Co-Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ Frank A.D. Andrea, Jr Chairman Emeritus of the Board March 7, 2000
- --------------------------- and Director
Frank A.D. Andrea, Jr.
/s/ John N. Andrea Co-Chairman, Co-Chief Executive March 7, 2000
- --------------------------- Officer and Director
John N. Andrea
/s/ Douglas J. Andrea Co-Chairman, Co-Chief Executive March 7, 2000
- --------------------------- Officer and Director
Douglas J. Andrea
/s/ Christopher P. Sauvigne President and Chief Operating March 7, 2000
- --------------------------- Officer
Christopher P. Sauvigne
/s/ Patrick D. Pilch Senior Vice President, Director March 7, 2000
- ---------------------------
Patrick D. Pilch
/s/ Richard A. Maue Senior Vice President, March 7, 2000
- --------------------------- Chief Financial and Chief
Richard A. Maue Accounting Officer
/s/ Christopher Dorney Director March 7, 2000
- ---------------------------
Christopher Dorney
/s/ Gary A. Jones Director March 7, 2000
- ---------------------------
Gary A. Jones
/s/ Scott Koondel Director March 7, 2000
- ---------------------------
Scott Koondel
/s/ Paul M. Morris Director March 7, 2000
- ---------------------------
Paul M. Morris
/s/ Jack Lahav Director March 7, 2000
- ---------------------------
Jack Lahav
/s/ John Larkin Director March 7, 2000
- ---------------------------
John Larkin
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's Form
10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant (incorporated by reference to Exhibit
3.2 of the Registrant's Form 10-K for the year ended December 31,
1997)
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant (incorporated by reference to Exhibit
3.1 of the Registrant's Current Report on Form 8-K filed November
30, 1998)
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed June 22, 1999)
3.5 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed
November 30, 1998)
4.1 Securities Purchase Agreement, dated as of June 10, 1998, relating
to the sale of the Registrant's 6% Convertible Notes due June 10,
2000 (with forms of Note and Registration Rights Agreement
attached thereto) (incorporated by reference To Exhibit 4.1 of the
Registrant's Form S-3, No. 333-61115, filed August 10, 1998)
4.2 Securities Purchase Agreement, dated June 11, 1999, by and between
HFTP Investment L.L.C. and the Registrant (incorporated by reference
to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed
June 22, 1999)
4.3 Registration Rights Agreement, dated June 11, 1999, by and between
HFTP Investment L.L.C. and the Registrant (incorporated by reference
to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed
June 22, 1999)
4.4 Form of Warrant by and between HFTP Investment L.L.C. and the
Registrant (incorporated by reference to Exhibit 4.3 of the
Registrant's Current Report on Form 8-K filed June 22, 1999)
4.5 Rights Agreement dated as of April 23, 1999 between the Company
and Continental Stock Transfer and Trust Company, as Rights Agent,
including the form of Certificate of Amendment to Certificate of
Incorporation as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Shares of Series
A Preferred Stock (incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed May 7, 1999)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 4 of the Registrant's Registration Statement
on Form S-8, No. 333-45421, filed February 2, 1998)
10.2 1998 Stock Plan of the Registrant, as amended (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form S-8, No. 333-82375, filed July 7, 1999)
10.3* Procurement Agreement, dated June 16, 1995, by and between
International Business Machines Corporation and the Registrant
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 10-Q for the three month period ended June 30, 1995)
10.4* License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
(incorporated by reference to Exhibit 10.4 of the Registrant's
Form 10-K for the year ended December 31, 1995)
10.5* Software License Bundling Agreement, dated as of March 29, 1996,
by and between Voxware, Inc., and the Registrant (incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
six month period ended June 30, 1996)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant (incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant (incorporated by reference to
Exhibit 10.8 of the Registrant's Form 10-K for the year ended
December 31, 1997)
10.9 Employment Agreement, dated as of November 20, 1998, by and
between Christopher P. Sauvigne and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K filed November 30, 1998)
10.10* Production Procurement Agreement, dated as of June 11, 1997, by
and between International Business Machines Corporation and the
Registrant (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 10-K for the year ended December 31, 1997)
10.11 Revolving Loan and Security Agreement, dated as of September 23,
1997, by and between IBM Credit Corporation and the Registrant
(incorporated by reference to Exhibit 10.11 of the Registrant's
Form 10-K for the year ended December 31, 1997)
10.12 Stock Purchase Agreement, dated April 6, 1998, as amended by
Amendment No. 1 thereto dated May 5, 1998, relating to the
purchase of the shares of Lamar Signal Processing, Ltd. (including
form of Registration Rights Agreement)(incorporated by reference
to Exhibits 2.1 and 2.2 of the Registrant's Current Report on Form
8-K filed May 8, 1998)
10.13* Procurement Agreement, dated as of January 13, 1999, by and
between the Registrant and Microsoft Corporation (incorporated by
reference to Exhibit 10.15 of the Registrant's Form 10-K for the
year ended December 31, 1998)
10.14* Purchase Agreement, dated as of February 25, 1999, by and between
the Company and Clarion Corporation of America (incorporated by
reference to Exhibit 10.16 of the Registrant's Form 10-K for the
year ended December 31, 1998)
10.15* Source Code License Agreement, dated as of October 29, 1998,
between the Company and Intel Corporation (incorporated by
reference to Exhibit 10.17 of the Registrant's Form 10-K for the
year ended December 31, 1998)
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
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* Certain portions of this Agreement have been accorded confidential treatment.