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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
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, 1995
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
--------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
- --------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
11-40 45th Road,Long Island City, New York 11101
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-442-7787
------------
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 American Stock Exchange
$.50 per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. (X)
As of March 27, 1996, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $29,222,901.75
(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 27, 1996 was 3,343,650.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III by Items 10, 11 and 12 is
incorporated by reference to the registrant's proxy statement in connection
with the annual meeting of shareholders to be held on June 20, 1996, which
will be filed by the registrant within 120 days after the close of its fiscal
year.
EXHIBIT INDEX ON PAGE 18
Page 1
TABLE OF CONTENTS
PAGE
TITLE PAGE 1
PART I 3-10
- ------
ITEM 1. BUSINESS 3-9
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II 10-16
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III 16
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 16
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV 17-18
- -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 17-18
Page 2
PART I
ITEM 1. BUSINESS
CORPORATE HISTORY
Since its organization in 1934, Andrea Electronics Corporation (the
"Company") has been engaged in the design, development and production of
electronic audio systems, intercommunication systems and related equipment.
The Company's products include its traditional products for military and
industrial applications and its newer Andrea Anti-Noise/(Registered
Trademark)/ products for voice-activated computing, telecommunications and
computer/Internet communications. Marketing of Andrea Anti-Noise/(Registered
Trademark)/ products began during 1995. The Company has developed its Andrea
Anti-Noise/(Registered Trademark)/ technology in response to the decline
during the past several years in its sales of traditional products that has
resulted from the overall reduced requirements of the United States
Department of Defense and reduced industrial demand. While sales of the
Company's traditional products still provide a majority of its revenue, the
Company believes that its Andrea Anti-Noise/(Registered Trademark)/ products,
consisting of products for both military and nonmilitary applications, will
become its primary source of revenue during the next several years.
STRATEGY
The Company's strategy is focused on applying its expertise in voice-
based audio technology to developing and commercializing a line of Andrea
Anti-Noise/(Registered Trademark)/ products for emerging computer and
telecommunication applications such as voice-driven interfaces and Internet-
based telephony. The Company believes that these applications require the
enhanced levels of voice quality, intelligibility and reliability that are
cost-effectively provided by its patented Andrea Anti-Noise/(Registered
Trademark)/ technology. In order to achieve widespread adoption of its
Andrea Anti-Noise/(Registered Trademark)/ technology, the Company seeks to
collaborate with large enterprises in telecommunications, computer
manufacturing and software publishing. These arrangements are expected to
allow the Company to leverage its research and development resources and
direct sales efforts. See "Collaborative Arrangements".
The success of the Company's strategy will depend on its ability to
increase sales of it first Andrea Anti-Noise/(Registered Trademark)/ product,
the ANC-100 Computer Headset, commercially introduce additional Andrea Anti-
Noise/(Registered Trademark)/ products, maintain the competitiveness of its
Andrea Anti-Noise/(Registered Trademark)/ technology through further research
and development, and achieve widespread adoption of these products and
technology. No assurance can be given that the Company will be able to
accomplish these objectives. See "Competition".
ANDREA ANTI-NOISE/(REGISTERED TRADEMARK)/ PRODUCTS
Andrea Anti-Noise/(Registered Trademark)/ products include headsets,
handsets and microphones, both for direct sale to end-users and in kit form
for original equipment manufacturers. These products are designed 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. The markets and applications within
these markets include the following:
Personal Computer, Work Station and Computer-based Telephony
Applications
- Speech Recognition for Word Processing, Database and Similar
Applications
- Educational Software
- Multimedia
- Computer Telephony
Page 3
- Speech over the Internet
- Voice-activated Interactive Games
Consumer, Residential and Commercial Telephony Applications
- Wire-based Telecommunications
- Cellular and other Wireless Telecommunications
Commercial, Industrial and Military Communications Applications
- Avionics
- Ground Transportation Communications
- Warehouse and Factory Communications
Andrea Anti-Noise/(Registered Trademark)/ products embody the Company's
active noise cancellation ("ANC"), active noise reduction ("ANR"), and noise
reduction ("NR") technologies. ANC microphone technology enhances the
quality of a speaker's voice in environments having relatively high levels
of ambient background noise. ANR earphone technology enhances the quality
of speech 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. NR earphone technology provides some, but not all, of the
benefits of ANR earphone technology.
PERSONAL COMPUTER, WORK STATION AND COMPUTER-BASED TELEPHONY PRODUCTS
Andrea Anti-Noise/(Registered Trademark)/ products have been designed
for voice-based computer applications and computer-based telephony across a
broad range of hardware and software platforms. Andrea Anti-
Noise/(Registered Trademark)/ products that are designed for voice-activated
computer interfaces to operate application software, such as word processors,
database managers, educational software, multimedia and games, can also be
used for Internet telephony. These products incorporate the Company's ANC
microphone technology to cancel ambient noise in a range of increasingly
noisy environments, from homes and offices to factory floors.
Andrea Anti-Noise/(Registered Trademark)/ ANC-100 Computer Headset. The
ANC-100 is a lightweight, uniquely styled product that has a single, high
fidelity earphone to which is attached a dual-function boom microphone. The
earphone is designed to be comfortably worn on the ear or to be placed on a
desktop mount. When worn, the microphone is used in the near field mode;
when placed in the desktop mount, the microphone is used in the far field
mode. The suggested retail price of the ANC-100 is $59.95.
Andrea Anti-Noise/(Registered Trademark)/ANC 200 Computer Handset. This
product consists of a high fidelity earphone and microphone system that
closely resembles the traditional telephone handset. The ANC 200, however,
offers features such as near field and far field use and an "on/mute"
function.
Andrea Anti-Noise/(Registered Trademark)/ANC 500 Computer Headset. This
product consists of a headband with a boom microphone and earphone.
During 1995 the Company commenced sales of the ANC 100 and also entered
into a procurement agreement with International Business Machines Corporation
("IBM") relating to the procurement of ANC 100 products by IBM. While no
assurance can be given, the Company plans to begin selling the ANC 200 and
ANC 500 during 1996. See "Collaborative Arrangements".
Page 4
CONSUMER, RESIDENTIAL AND COMMERCIAL TELEPHONY PRODUCTS
The Company has developed two Andrea Anti-Noise/(Registered Trademark)/
products for various applications in telephony: the ANC Telecommunications
Kit; and the ANC 321 - Public Payphone Transmitter Module. Each of these
products has been designed for enhancing voice intelligibility in high noise
environments, such as train stations, airports and city streets. The ANC
Telecommunications Kit is a customized kit for business, residential and
cellular telephones. The ANC 321 - Public Payphone Transmitter Module isa
kit containing a module that can be easily retrofitted into public payphone
handsets. While the Company has not achieved any sales of these two
products, during 1995 the Company licensed certain of its ANC technology to
BellSouth Products, Inc. ("BellSouth"), a subsidiary of BellSouth
Telecommunications, Inc., for use in residential and small business
telephones. See "Collaborative Arrangements".
COMMERCIAL, INDUSTRIAL AND MILITARY COMMUNICATIONS APPLICATIONS
The Company has developed two Andrea Anti-Noise/(Registered Trademark)/
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, for example, airplane cabins, to reduce ambient noise and offer
improved audio listening. The Company has 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.
The Company is currently collaborating with Northrop Grumman Corporation
("Northrop Grumman") to develop military and commercial versions of the
ANR/ANC Headset Systems. See "Collaborative Arrangements".
COLLABORATIVE ARRANGEMENTS
One of the elements of the Company's strategy is to promote widespread
adoption of its Andrea Anti-Noise/(Registered Trademark)/ technology by
partnering with large enterprises in telecommunications, computer
manufacturing, software publishing, and defense systems. The Company has
entered into such arrangements with IBM, BellSouth and Northrop Grumman and
is currently discussing additional arrangements with several major personal
computer companies, software companies, consumer electronic companies and
electronic and computer retailers. No assurance can be given that any of
these discussions will result in any definitive agreements.
IBM Procurement Agreement. In June 1995, the Company executed a
procurement agreement with IBM for the Company's Andrea Anti-
Noise/(Registered Trademark)/ products for the personal computer market.
This agreement contains a non-obligatory, two-year procurement schedule for
approximately $14 million in Andrea Anti-Noise/(Registered Trademark)/
products. Under the agreement, the Company granted IBM certain exclusive
worldwide distribution rights to market, sell, distribute and support Andrea
Anti-Noise/(Registered Trademark)/ products in the personal computer market
and the Company retained the right to distribute these products under the
Company's label to the retail market for personal computers. The Company
began delivery under this agreement in the second quarter of 1995. Sales to
IBM during the first six months under the Agreement, while significant to
the Company, did not meet the established thresholds for IBM to retain its
exclusivity. The Company has, therefore, broadened its sales and marketing
efforts of its Andrea Anti-Noise/(Registered Trademark)/ products to include
all major computer hardware and software manufacturers and providers. Except
for the original exclusivity provisions, Andrea's procurement agreement
remains in place with IBM. Orders from and shipments to IBM under this
procurement agreement for 1996 delivery have substantially increased from
those in 1995.
Page 5
BellSouth License Agreement. In October 1995, the Company entered into
a License and Technical Support Agreement with BellSouth. Under the
Agreement, the Company has granted BellSouth certain license rights for a
period of three years covering the incorporation of the Company's Andrea
Anti-Noise(Registered Trademark) ANC technology into residential and small
business telephones and an exclusive right to distribute these telephones to
residential and small business end users in the United States, Canada,
Mexico, South America and Israel. To maintain the exclusivity of these
distribution rights, BellSouth must meet certain minimum production
requirements. The minimum aggregate royalties payable to Andrea over the
three year term of the Agreement if these minimum production requirements are
met would be $7 million. Under the Agreement, Andrea is obligated to furnish
BellSouth with certain engineering and technical support relating to ANC
technology. The introduction of BellSouth telephones incorporating ANC
technology was first announced in September 1994. While the Company
anticipates a substantial increase in licensing revenue from its agreement
with BellSouth, no assurance can be given that this increase will occur.
Northrop Grumman Agreement. In 1993, the Company entered into an
agreement with Grumman Aerospace (subsequently acquired by Northrop Grumman)
for the development of military and commercial ANR/ANC headsets. Under the
Agreement, Northrop Grumman has exclusive worldwide rights to market the
developed ANR/ANC headsets to U.S. and non-U.S. military markets. The
Company's goal with respect to this collaboration is to qualify the developed
ANR/ANC headsets for sale to the U.S. and, eventually, non-U.S. armed forces.
The Company originally had anticipated completion of the initial product
qualification process under its collaborative relationship with Northrop
Grumman during the first half of 1996. This qualification process, however,
has been delayed, and although the process is continuing, no assurance can
be given that it will be completed or, if so, as to the approximate date of
such completion. Moreover, while the Company anticipates that it will
realize a signficant increase in sales revenue from military demand for ANR
and ANC technology, no assurance can be given that such an increase will
occur or, if it does, as to the timing of such increase.
TRADITIONAL PRODUCTS AND GOVERNMENT CONTRACTS
The Company's traditional products have historically included intercom
systems and related components, such as headsets, amplifiers, electronic
control boxes and panels, and wiring harnesses, for military and industrial
applications. The prices of these components range from $100 to $6,000. As
a result of the overall decline in procurement by the United States Department
of Defense and decline in industrial demand during the past several years, most
of the Company's recent sales of its traditional products have been replacement
components for existing intercom systems and equipment previously sold by the
Company. The Company anticipates a downward trend in sales of its
traditional products in both absolute and relative terms. See "Management's
Discussion and Analysis of Financial Position and Results of Operations".
Unfilled orders under government prime contracts and subcontracts 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, the Company is 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. In the opinion of the Company, such proceedings, if any, would
not have a material effect upon the earnings of the Company.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patents, trade secrets, copyright
and trademark law, nondisclosure agreements with its employees, licensees and
potential licensees, limited access to and distribution of its proprietary
information, and other measures to protect its intellectual property and
proprietary rights. There can be no assurance, however, that the steps taken
by the Company to protect its intellectual property will prevent
misappropriation or circumvention of the Company's intellectual property.
Page 6
The Company has been granted two patents in the United States covering
its Andrea Anti-Noise/(Registered Trademark)/ technology. The first covers
adaptive noise cancellation and speech enhancement systems and apparatus.
The second covers noise cancellation apparatus for telephony products and
applications. Both of these patents expire in 2012. The Company has also
been granted corresponding patents on the inventions covered by its two U.S.
patents in certain other countries. In addition, the Company has also filed
a number of applications in the U.S. and other countries for patents on other
inventions in the field of noise cancellation and noise reduction technology.
These applications are currently pending, and no assurance can be given that
patents will be issued with respect to them or future patent applications
filed by the Company. Numerous patents have been granted in the fields of
noise cancellation, noise reduction and computer voice recognition, and the
Company expects that products in these fields will increasingly be subject
to such claims as the number of products and competitors in these fields
grows and the functionality of products overlap. Moreover, the laws of other
countries do not protect the Company's proprietary rights to its technologies
to the same extent as do the laws of the United States. There can be no
assurance that any patents issued to the Company will provide it 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 the ability of the Company to do business, that
the Company will be able to obtain licenses to patents of others, if needed,
on terms acceptable to the Company or at all, or that the Company will be
able to develop additional patentable technology that may be needed to
commercialize successfully its existing technologies. The Company is 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 the Company.
In connection with marketing its noise cancellation and noise reduction
technologies, the Company has obtained the following trademarks in the years
indicated: "Andrea Anti-Noise" (1994); "QuietWare" (1995); and "Technology
Enhancing Communication" (1995). The duration of each of these trademarks
is ten years following receipt, but it is renewable.
RESEARCH AND DEVELOPMENT
The Company considers its Andrea Anti-Noise/(Registered Trademark)/
technology to be of substantial importance to its competitiveness in the
markets in which this technology has application. To maintain its
competitiveness in each of these markets, the Company has organized its
research and development efforts using a market and applications approach for
meeting the requirements of new and existing customers. Consistent with this
approach, the Company's engineering staff interacts closely with the
Company's sales and marketing personnel and, frequently, directly with
customers. The engineering staff is responsible for the research and
development of new products and designs, and the improvement of current
products. Since 1991, substantially all of the Company's research and
development has been in support of developing Andrea Anti-Noise/(Registered
Trademark)/ technology and applications engineering. In 1995, the Company
expended $976,344 for research and development of new products, designs,
systems and product enhancement. Of these expenses, the Company was
reimbursed $38,000. The level of research and development expense in 1995
represented a decline from $1,422,310 of such expenses in 1994, as products
were commercially introduced in 1995 and were no longer in the research and
development phase of their respective life cycles. The Company expects
research and development expenses to increase as it seeks to broaden its
Andrea Anti-Noise/(Registered Trademark)/ products. No assurance can be
given that the Company will be successful in these efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Page 7
SALES AND MARKETING
The Company employs its own sales staff as well as outside sales
representative organizations to market both its traditional intercom products
and its Andrea Anti-Noise/(Registered Trademark)/ products. Traditional
intercom products are marketed to original equipment manufacturers, military
organizations and industrial customers. Andrea Anti-Noise/(Registered
Trademark)/ products are marketed to original equipment manufacturers of
computers, telecommunications equipment and defense systems, software
publishers, retailers and end-users. In addition, under its current
collaborative agreements, the Company's collaborative partners have various
manufacturing, marketing and sales rights to the products covered by the
respective agreements. The Company's collaborative arrangement with IBM
covers the non-exclusive marketing and sale by IBM of Andrea Anti-
Noise/(Registered Trademark)/ products to the personal computer market; the
Company's collaborative arrangement with BellSouth covers the exclusive
manufacturing, marketing and sale by BellSouth of Andrea Anti-
Noise/(Registered Trademark)/ products for use in residential and small
business sold into certain nations; and the collaborative arrangement with
Northrop Grumman covers the development of ANC/ANR headsets for military and
commercial use. While no assurance can be given, the Company anticipates
that it will enter into additional collaborative arrangements for its Andrea
Anti-Noise/(Registered Trademark)/ products. Market acceptance of the Andrea
Anti-Noise/(Registered Trademark)/ products is critical to the success of the
Company.
MANUFACTURING AND ASSEMBLY
The Company conducts assembly operations at its facility in New York
and through subcontractors. Traditional intercom products are assembled by
the Company from purchased components. During initial production runs of
Andrea Anti-Noise/(Registered Trademark)/ products, these products will
also be assembled by the Company at its New York facility from purchased
components. As sales of any particular Andrea Anti-Noise/(Registered
Trademark)/ product increases, assembly operations will be transferred to a
subcontractor in Asia. Assembly of the ANC-100 Computer Headset is currently
performed by this subcontractor.
Certain highly specialized components for the Company's traditional
intercom products sold for military and industrial use have limited sources
of supply, the availability of which can affect particular projects of the
Company. The Company does not believe, however, that its earnings have been,
or will be, materially affected if such components were unavailable.
Most of the components for the Andrea Anti-Noise/(Registered Trademark)/
products are available from several sources and are not characteristically
in short supply. However, certain more specialized components for the Andrea
Anti-Noise/(Registered Trademark)/ products, such as microphones, are
available from a limited number of suppliers and subject to long lead times.
While the Company has to date been able to obtain sufficient supplies of these
more specialized components, no assurance can be given that it 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 the Company's
sales of Andrea Anti-Noise/(Registered Trademark)/ products.
COMPETITION
The markets into which the Company sells its traditional line of
military and industrial products and into which the Company sells its Andrea
Anti-Noise/(Registered Trademark)/ 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 the Company's current and
potential competitors in these markets have significantly greater financial,
marketing, technical and other resources than the Company. Consequently,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in
Page 8
customer requirements, or to devote greater resources to the development,
marketing and sale of their products than the Company. No assurance can
be given that one or more of these competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology.
In the markets for its traditional products, the Company often competes
with major defense electronics corporations as well as smaller manufacturing
firms which specialize in supplying to specific military initiatives.
The Company's 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 inspectors. In the markets for Andrea
Anti-Noise/(Registered Trademark)/ products, purchasers include: original
equipment manufacturers and distributors in the personal computer and
telecommunications industry and the industrial and avionics communications
industry; military procurement organizations; and direct end users such as
individuals and corporations.
The Company believes that its ability to compete successfully will
depend upon its capability to develop and maintain advanced technology,
develop proprietary products, attract and retain qualified personnel, obtain
patent or other proprietary protection for its products and technologies, and
manufacture, assemble and successfully market products, either alone or
through third parties.
EMPLOYEES
The Company employed 81 persons at December 31, 1995, of which 60 were
production workers and technicians, 7 were members of the engineering staff,
and 14 were concerned with administrative and sales duties. None of the
employees are unionized or covered by a collective bargaining agreement. The
Company believes that it generally enjoys good relations with its employees.
ITEM 2. PROPERTIES
The Company owns and occupies the building located at 11-40 45th Road,
Long Island City, New York 11101. The machinery and equipment used by the
Company are maintained in good operating condition and are considered to be
adequate for the business as presently conducted. It is the opinion of
management that the property, plant and equipment are adequately covered by
insurance. As part of the Company's expense reduction program, the Company,
as lessor, entered into a five-year lease agreement in May 1991 for
approximately one-third of its premises at $184,800 per annum. In January
1996, the lessee exercised its renewal option for an additional five years
at the initial annual rate of $231,000 with a 5% annual escalation for the
remainder of the renewal term. See Note 7(b) to the notes to the financial
statements for further information concerning property, plant and equipment.
Page 9
ITEM 3. LEGAL PROCEEDINGS
On December 3, 1990, a complaint was filed against the Company by an
individual (the "Plaintiff") in the Suffolk County Supreme Court (the
"Court") alleging wrongful discharge by the Company in violation of his
employment agreement. The complaint seeks damages relating to loss of
salary, past bonuses, lost commissions, unused sick pay and a reimbursement
of a bank loan. In August 1992, the Plaintiff moved for partial summary
judgment on three causes of action. On January 28, 1993, his motion was
granted with respect to two causes of action pursuant to which the Plaintiff
sought damages in the approximate amount of $186,000. The court, however,
in granting the Plaintiff's motion, did not make a determination as to the
amount of damages and directed that a trial be held on the issue of damages.
On February 21, 1996, the Company settled this case for $167,500, including
the amount of the expired capital lease of $27,588 described in Note 8 to the
financial statements. The additional amount of $139,912 due this individual
under the settlement was charged to operations in 1995 and is included in
other current liabilities at December 31, 1995.
In December, 1994, a subpoena duces tecum was issued to the Company by
the United States Department of Defense, Office of the Inspector General,
seeking certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered in January
1995 and to date no claim has been made or threatened against the Company in
connection with this matter. The Company is unable to determine at this
point if any such claim will be made or to what extent, if any, such claim
could have an effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the American Stock Exchange
under the symbol "AND". The tables below set forth the high and low sales
prices for the Company's Common Stock as reported by the American Stock
Exchange. On March 27, 1996 there were approximately 518 holders of record
of the Company's Common Stock.
Quarter Ended High Low
------------- ------ -----
March 31, 1994 26 7/8 15 1/4
June 30, 1994 21 9 7/8
September 30, 1994 27 5/8 11 5/8
December 31, 1994 28 1/4 18 1/4
March 31, 1995 26 5/8 18
June 30, 1995 26 3/4 15 1/2
September 30, 1995 22 1/2 16 1/4
December 31, 1995 18 3/4 11 3/8
Page 10
No dividends were paid in 1995 or 1994. The above prices have been
adjusted to reflect a five-for-one stock split effected in the form of a 400%
stock dividend to stockholders of record on May 21, 1993.
ITEM 6. SELECTED FINANCIAL DATA
December 31,
1995 1994 1993 1992 1991
SALES $5,440,792 $3,278,100 $6,527,972 $3,363,675 $2,440,288
COST OF SALES 3,190,226 2,394,828 3,903,585 3,144,228 2,609,488
---------- ---------- ---------- ---------- ---------
GROSS PROFIT (LOSS) 2,250,566 883,272 2,624,387 219,447 (169,200)
RESEARCH AND DEVELOPMENT 976,344 1,422,310 720,278 460,752 115,728
GENERAL, ADMINISTRATIVE
AND SELLING EXPENSES 2,925,460 1,995,434 1,412,270 661,161 518,774
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) FROM
OPERATIONS (1,651,238) (2,534,472) 491,839 (902,446) (803,702)
OTHER INCOME 375,323 234,636 240,454 217,800 62,236
---------- ---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
PROVISION (CREDIT) FOR
INCOME TAXES (1,275,915) (2,299,836) 732,293 (684,666) (741,466)
PROVISION (CREDIT) FOR
INCOME TAXES - - - - 55,000 6,000 (251,000)
---------- ---------- ---------- ---------- ---------
NET INCOME (LOSS) $(1,275,915) $(2,299,836) $677,293 $(690,666) $(490,466)
========== ========== ========== ========== =========
PRIMARY EARNINGS PER SHARE (.41) (.83) .20 (.27) (.96)
CAPITAL LEASES $ 5,388 $ 17,044 $ 31,823 $ 78,056 $ 21,206
LONG-TERM OBLIGATIONS 2,038,500 38,500 38,500 38,500 38,500
RETAINED EARNINGS
(DEFICIT) $ (2,220,742) $ (944,827) $ 1,355,009 $ 1,694,260 $2,384,926
---------- ---------- ---------- ---------- ---------
TOTAL ASSETS $ 6,551,110 $ 5,016,581 $ 3,356,579 $ 2,457,872 $2,979,433
---------- ---------- ---------- ---------- ---------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Andrea Electronics Corporation is an end user-focused, applications-
driven technology company. During its six decades of operations, the Company
believes that it has compiled a record of audio excellence in radio,
television, military communications, and most recently, telecommunications
and personal computer communications. Today, the Company's mission is to
provide state-of-the-art communications products for the "voice interface"
markets that are emerging from the convergence of the telecommunications and
personal computer industries. Applications that exemplify this convergence
include computer telephony, speech recognition, speech over the Internet with
additional extensions to multimedia, voice dictation, voice interactive games
and educational software. The Company believes that end users of these and
other voice-driven applications will require microphone and earphone products
that provide high levels of voice quality, particularly, in noisy
environments, for use with personal computers, business and residential
telephones, military headsets, cellular and other wireless telephones, and
avionics communications systems. While no assurance can be given, the
Company believes that its Active Noise Cancellation and Active Noise
Page 11
Reduction technologies will allow the Company to meet the demand for such
products.
The Company's product development and marketing strategy seeks to
leverage its own research and development resources and direct marketing and
sales staff by seeking collaborative relationships with large enterprises in
the personal computer, telecommunications, software publishing, and defense
industry. Reflecting the implementation of this strategy, the Company began
to distribute its Andrea Anti-Noise/(Registered Trademark)/ Products to the
personal computer and electronics retail and direct market during the second
half of 1995, executed a procurement agreement with IBM Corporation in June
1995, began a collaborative relationship with BellSouth Products, Inc. in
1994 and entered into a licensing and technical support agreement with
BellSouth in October 1995, and began a collaborative relationship with
Grumman Aerospace Corporation (subsequently acquired by Northrop Grumman
Corporation) in 1993. Following the expiration of the exclusivity provisions
of the IBM agreement in December 1995, the Company has extended its sales and
marketing efforts to include all major computer hardware and software
manufacturers and providers. See "Part Item 1-Business-Collaborative
Arrangements".
While the demand for its traditional intercom products by the military
market has declined, the Company believes that there are a significant number
of military applications for its ANC and ANR headsets and communications
systems. A primary purpose of the Company's collaborative relationship with
Northrop Grumman is to develop products specifically for these applications.
The Company believes that these new ANC/ANR products and systems, together
with other ANC microphone products that are being marketed to the U.S.
military under other initiatives, can be marketed to new military customers
as well as the Company's traditional military customers. The Company
originally had anticipated completion of the initial product qualification
process under the collaborative relationship with Northrop Grumman during the
first half of 1996. This qualification process, however, has been delayed,
and although the process is continuing, no assurance can begiven that it will
be completed or, if so, the approximate date of such completion.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales
Sales for the year ended December 31, 1995 were $5,440,792, an increase
of nearly 66% over sales of $3,278,100 for the year ended December 31, 1994.
The increase was attributed partially to a significant and unexpected
increase in demand for the Company's traditional military business lines and
to the introduction of the Company's Anti-Noise/(Registered Trademark)/
products. The increase for the year ended December 31, 1995 in sales to the
Company's customer base for its traditional military products has been
contrary to the downward trend in the Company's sales to this market in
recent years resulting from decreases in military appropriations by the U.S.
government. Management does not believe that the increase for the year ended
December 31, 1995 in sales of its traditional products to its military
customer base reflects a reversal of this downward trend in demand for these
products. While the sales of the Company's Anti-Noise/(Registered Trademark)/
products have not comprised a significant portion of total sales of the
Company, management does anticipate an increase in sales of these products
to military and industrial, personal
Page 12
computer and telecommunications markets. No assurance can be given, however,
that sales of these new products will increase.
For the year ended December 31, 1995, sales from government orders
through both prime and subcontracted orders was $2,436,715, or 45% of sales,
compared to $662,525, or 20% of sales for the year ended December 31, 1994.
For the year ended December 31, 1995, sales from industrial/commercial orders
constituted $3,004,077, or 55% of sales, compared to $2,615,575, or 80% of
sales for the year ended December 31, 1994.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1995 decreased to 59% from 73% for the year ended December 31, 1994. The
marked decrease in cost of sales as a percentage of sales for the year ended
December 31, 1995 reflects the results of a cost-cutting and operating
efficiency improvement program implemented by the Company at the end of the
first quarter of 1994.
Research and Development
Research and development expenses for the year ended December 31, 1995
decreased 31% to $976,344 from $1,422,310. The decrease in research and
development expenses can be attributed to the progression of products and
designs of Andrea Anti-Noise/(Registered Trademark)/ products from the
conceptual, prototype, and market test phases into final production release.
Management believes that the decrease in research and development is
temporary and that research and development will increase as the Company
further develops and augments it Andrea Anti-Noise/(Registered Trademark)/
technology and product line.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1995 increased 47% to $2,925,460 from $1,995,434 for the year ended
December 31, 1994. The increase for the year ended December 31, 1995
reflects the marketing and sales expenses such as advertising, packaging, and
promotional expenses associated with the Company's introduction of its Anti-
Noise/(Registered Trademark)/ products to the direct and consumer
electronics retail and catalog markets as well certain non-recurring expenses
related to the agreements with IBM and BellSouth. In addition, an amount
of $139,912 was included in general, administrative and selling expenses for
the year ended December 31, 1995 reflecting the settlement on February 21,
1996 of certain litigation with a former employee of the Company. The total
amount of the settlement was $167,500, including the $139,912 amount and an
additional $27,588 in respect of the expired capital lease described in Note
8 to the financial statements. See "Part I-Item 3-Legal Proceedings". The
Company expects to increase recurring general, administrative and selling
expenses in order to support its sales of its Andrea Anti-Noise/(Registered
Trademark)/ products. The Company plans to introduce additional Anti-
Noise(Registered Trademark) products during 1996 and plans to support these
product introductions with advertising and promotional efforts.
Operating loss
Operating loss for the year ended December 31, 1995 decreased 35% to
$1,651,238 from $2,534,472 for the year ended December 31, 1994. This
decline in operating loss reflects the increase in sales and the improvement
in cost of sales for the year ended December 31, 1995.
Other Income
Other income for the year ended December 31, 1995 increased 60% to
$375,323 from $234,636 for the year ended December 31, 1994. The increase
in other income can be attributed an increase of $101,420 in interest income
resulting from the Company's average higher cash levels and cash equivalents
throughout the year ended December 31, 1995, compared to the year ended
December 31, 1994. These higher levels of cash and cash equivalents
reflected the proceeds to the Company from financings in 1994 and 1995. Rent
and miscellaneous income increased by $41,805 for the year ended December 31,
1995 compared to the year ended December 31, 1994. Of this increase, $38,000
represents reimbursement for research and development performed by the
Company.
Page 13
Net loss
Net loss for the year ended December 31, 1995 was $1,275,915 compared
to a net loss of $2,299,836 for the year ended December 31, 1994. This
reduction in net loss reflects principally the factors described above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Sales
Sales for the year ended December 31, 1994 were $3,278,100, a decrease
of 50% from sales of $6,527,972 for the year ended December 31, 1993. The
decrease was attributed to a decrease in new orders for the Company's
traditional products due to the reduced requirements of the United States
Department of Defense for these products combined with the overall general
decline in industrial demand for these products.
For the year ended December 31, 1994, sales from government orders
through both prime and subcontracted orders was $662,525, or 20% of sales,
compared to $2,758,113, or 42% of sales for the year ended December 31, 1993.
For the year ended December 31, 1994, sales from industrial/commercial orders
was $2,615,575, or 80% of sales, compared to $3,769,859, or 58 %, for the
comparable period in year ended December 31, 1993. Sales of Andrea Anti-
Noise products were immaterial during both years.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1994 increased to 73% from 60% for the year ended December 31, 1993. The
increase in cost of sales as a percentage of sales for the year ended
December 31, 1994 can be attributed to higher per unit expense allocations
resulting from the decrease in new orders for the Company's traditional
products. Due to this decrease in orders, the Company reduced its work force
at the end of the first quarter 1994. Additionally, the Company increased
its reserve for obsolete inventory by $200,000 as a result of the decline in
new orders for the Company's traditional products.
Research and Development
Research and development expenses for the year ended December 31, 1994
increased 97% to $1,422,310 from $720,278 for the year ended December 31,
1993. The increase can be attributed to the Company's increased activity in
the development and design of Andrea Anti-Noise/(Registered Trademark)/
products.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1994 increased 41% to $1,995,434 from $1,412,310 for the year ended
December 31, 1993. The increase reflects the hiring of additional sales and
sales support personnel, increased promotional and marketing expenses to
support the Company's presence at computer trade shows and increased travel
expense for sales and marketing personnel to potential customers, all in
anticipation of the commercial introduction of Andrea Anti-Noise/(Registered
Trademark)/ products.
Operating loss
Operating loss for the year ended December 31, 1994 was $2,534,472
compared to a $677,293 profit for the year ended December 31, 1993. This
operating loss reflects the significant decrease in sales and the
deterioration in cost of sales for the year ended December 31, 1994.
Other Income
Other income for the year ended December 31, 1994 decreased 2% to
$234,636 from $240,454 for the year ended December 31, 1993. In 1993, the
Company participated in an energy saving and cost improvement program
Page 14
provided by a local electric utility company and received approximately
$46,000 in rebates for participation in this program. This difference is
reflected in rent and miscellaneous income for the year ended December 31,
1994 and for the year ended December 31, 1993. This decrease was partially
offset by an increase in interest income for the year ended December 31, 1994
to $58,044 from $23,591 for the year ended December 31, 1993.
Net loss/ Net Income
Net loss for the year ended December 31, 1994 was $2,299,836 compared
to $677,293 in net income for the year ended December 31, 1993, reflecting
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (total current assets less total current liabilities)
at December 31, 1995 was $5,316,519 compared to $4,091,123 at December 31,
1994. This increase in working capital as of December 31, 1995 reflects an
increase in current assets of $1,495,666 and an increase in current
liabilities of $270,270 during the year ended December 31, 1995. The
increase in current assets reflects an increase in cash of $87,786, an
increase in marketable securities of $10,098, an increase in net accounts
receivable of $476,417, an increase in inventory of $855,090 and an increase
in prepaid expenses and other current assets of $66,275.
The increase in cash of $87,786 reflects net cash used in operating
activities of $2,287,924 and net cash used in investing activities for the
acquisition of equipment (including production tooling and molds and
computers in support of the Andrea Anti-Noise/(Registered Trademark)/
products) of $161,341, offset by the receipt of $2,000,000 in proceeds from
the issuance of convertible debentures and $551,830 from the sale of Common
Stock pursuant to the exercise of stock options.
The increase in accounts receivable reflects shipments of Andrea Anti-
Noise/(Registered Trademark)/ products including military ANC headsets of
$368,000. The increase in inventory of $855,090 reflects an increase of
$615,125 for raw materials purchased for the Company's Anti-Noise/(Registered
Trademark)/ products and an increase of $100,053 almost entirely for personal
computer communication and telephony applications. The Company has sourced
long lead-time items in anticipation of sales of its Anti-Noise/(Registered
Trademark)/ products in 1996.
The increase in prepaid expenses and other current assets includes
$40,139 in prepaid advertising at December 31, 1995 which represents costs
for media services purchased but not yet performed.
The increase in total current liabilities reflects an increase of
$112,196 in trade accounts payable and an increase in other current
liabilities of $194,626, partially offset by a decrease in accrued salaries
and wages payable of $33,429. The increase in trade accounts payable was due
primarily to a build up of raw materials inventory for the Company's Andrea
Anti-Noise/(Registered Trademark)/ products while the increase in other
current liabilities includes an accrual of $139,912 as described in described
in Note 8 to the financial statements.
Management believes that the Company's financial condition is adequate
to support the Company's current level of operations and demand for
resources. The Company expects 1996 expenditures on research and development
to be at least those in 1995 and anticipates a significant increase in
general, administrative and selling expenses in 1996 to advertise, promote,
market, sell, distribute and service the Company's Andrea Anti-
Noise/(Registered Trademark)/ products and technologies.
The Company is not currently committed to any material capital
expenditures. In the event, however, that the Company experiences a
significant increase in demand for its Andrea Anti-Noise/(Registered
Trademark)/ products, the Company will need to raise additional working
capital to support production operations. In addition, the Company
believes that its ability to remedy its existing retained earnings deficit
will depend on profitable growth from the sale of its Andrea Anti-
Noise/(Registered Trademark)/ products and any future equity financings.
While the Company has been exploring various forms of debt and equity
financing, no assurance can be given that, if the Company needs to raise
additional capital, it will be able to do so on favorable terms or at all.
No assurances can be given that demand will increase for any of the Company's
products or, that if such demand does increase, that the Company will be
able to obtain the necessary working capital to increase production and
marketing resources to meet such demand.
Page 15
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
On May 5, 1995, the Company filed a report on Form 8-K to report that,
on May 4, 1995, the Company dismissed Raich Ende Malter Lerner & Co. as its
independent accountants and subsequently engaged Arthur Andersen LLP as its
new independent accountants for its fiscal year ending December 31, 1995.
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 June 20, 1996.
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 May 16, 1996.
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 June 20, 1996.
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 "Voting Securities" included in the
Company's definitive proxy statement in connection with the meeting of
shareholders to be held on June 20, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
None.
Page 16
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 report 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
Balance Sheets at December 31, 1995 and 1994 F-3
Statements of Operations for the years ended
December 31, 1995, 1994, 1993 F-4
Statements of Shareholders' Equity for the
three years ended December 31, 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1995, 1994, 1993 F-6
Notes to Financial Statements F-7
(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 20, 1995, the Registrant filed a report on Form 8-K to report
that, on October 3, 1995, the Registrant entered into a License and Technical
Support Agreement with BellSouth Products, Inc. ("BellSouth"), a subsidiary
of BellSouth Telecommunications Inc., relating to the Registrant's grant to
BellSouth of certain license rights covering the incorporation of Andrea
Anti-Noise(Registered Trademark) Active Noise Cancellation ("ANC") technology
into residential and small business telephones.
On December 28, 1995, the Registrant filed a report on Form 8-K to
report that, on December 22, 1995, the Registrant issued and sold in an
offshore transaction $2,198,000 aggregate principal amount of its
15% Convertible Subordinated Debentures due June 23, 1997 (the "Debentures").
(c) EXHIBITS
Exhibit
No. Description
3.1 Amended and Restated Certificate of
Incorporation of Registrant
Page 17
(incorporated by reference to Exhibit 3.1 of
the Registrant's Form 10-K to December 31, 1992)
3.2 Amended By-Laws of Registrant (incorporated by
reference to Exhibit 3.2 of the Registrant's
Form 10-K for December 31, 1992)
4.1 Securities Purchase Agreement, dated as of December
22, 1995, relating to the sale of the Registrant's
15% Convertible Subordinated Debentures due 1997
(with form of Debenture attached thereto)
4.2 Registration Rights Agreement, dated as of December
22, 1995, relating to registration rights granted to
the holders of the Registrant's 15% Convertible
Subordinated Debentures due 1997
10.1 1991 Performance Equity Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-K for December 31, 1991)
10.2* 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 Months ended June 30, 1995)
10.3** Memorandum of Agreement, dated as of September 14, 1993, by
and between Grumman Aerospace Corporation and the Registrant
10.4** License and Technical Support Agreement, dated as of October 3,
1995, by and between BellSouth Products, Inc. and the Registrant
11 Computation of Fully Diluted Earnings for Common Share
21 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Consent
27 Financial Data Schedule
______________
* Certain portions of this Agreement have been accorded confidential
treatment.
** The Registrant has requested confidential treatment of certain
portions of this Agreement.
(d) Financial Statement Schedules
See Item 14(a)(2).
Page 18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ----------------------------------------
To Andrea Electronics Corporation:
We have audited the accompanying balance sheet of Andrea Electronics
Corporation (a New York corporation) as of December 31, 1995 and the related
statements of operations, shareholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Andrea Electronics
Corporation as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
February 21, 1996
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Andrea Electronics Corporation:
We have audited the accompanying balance sheet of Andrea Electronics
Corporation as of December 31, 1994 and the related statements of
income, shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Andrea
Electronics Corporation as of December 31, 1994, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
February 2, 1995
F-2
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
BALANCE SHEETS
------- ------
December 31,
------------------------------
1995 1994
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $3,400,829 $3,313,043
Marketable securities 99,223 89,125
Accounts receivable, net of allowance
for doubtful accounts of $32,183 and
$69,771, respectively 1,045,922 569,505
Inventories, net 1,122,993 267,903
Prepaid expenses and other current assets 189,494 123,219
-------------- -------------
Total current assets 5,858,461 4,362,795
PROPERTY, PLANT AND EQUIPMENT, net 691,498 652,635
OTHER ASSETS 1,151 1,151
-------------- -------------
Total assets $6,551,110 $5,016,581
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
----------- --- ------------- ------
CURRENT LIABILITIES:
Current maturities of capital lease
obligations $ 39,243 $ 42,366
Trade accounts payable 254,643 142,447
Accrued salaries and wages payable 50,571 84,000
Other current liabilities 197,485 2,859
-------------- -------------
Total current liabilities 541,942 271,672
CAPITAL LEASE OBLIGATIONS,
net of current maturities 5,388 17,044
CONVERTIBLE DEBENTURES, net (Note 5) 2,000,000 -
OTHER LIABILITIES 38,500 38,500
-------------- -------------
Total liabilities 2,585,830 327,216
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and
outstanding: 3,286,860 and 3,016,360
shares, respectively 1,643,430 1,508,180
Additional paid-in capital 4,542,592 4,126,012
Accumulated deficit (2,220,742) (944,827)
-------------- -------------
Total shareholders' equity 3,965,280 4,689,365
Total liabilities and
shareholders' equity $6,551,110 $5,016,581
============== =============
The accompanying notes are an integral part of these balance sheets.
F-3
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF OPERATIONS
---------- -- ----------
For the Years Ended
December 31,
1995 1994 1993
SALES $5,440,792 $3,278,100 $6,527,972
COST OF SALES 3,190,226 2,394,828 3,903,585
---------- ---------- ----------
Gross profit 2,250,566 883,272 2,624,387
RESEARCH AND DEVELOPMENT EXPENSES 976,344 1,422,310 720,278
GENERAL, ADMINISTRATIVE AND SELLING
EXPENSES 2,925,460 1,995,434 1,412,270
---------- ---------- ----------
Income (loss) from operations (1,651,238) (2,534,472) 491,839
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 159,464 58,044 23,591
Interest (expense) (10,746) (8,208) (13,678)
Rent and miscellaneous income 226,605 184,800 230,541
---------- ---------- ----------
375,323 234,636 240,454
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,275,915) (2,299,836) 732,293
PROVISION FOR INCOME TAXES - - 55,000
----------- ----------- ----------
NET INCOME (LOSS) $(1,275,915) $(2,299,836) $ 677,293
========== ========== ==========
PRIMARY EARNINGS (LOSS) PER SHARE $ (.41) $ (.83) $ .20
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-4
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF SHAREHOLDERS' EQUITY
---------- -- ------------- ------
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
--- --- ----- ----- ----- -------- --- ----
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
----------- ----- ------- -------- ------
BALANCE, December 31, 1992 2,541,360 $1,270,680 $ 59,206 $ 677,716 $ 2,007,602
Net income - - - 677,293 677,293
----------- --------- --------- --------- ---------
BALANCE, December 31, 1993 2,541,360 1,270,680 59,206 1,355,009 2,684,895
Issuance of common stock 475,000 237,500 4,066,806 - 4,304,306
Net loss - - - (2,299,836) (2,299,836)
----------- --------- --------- --------- ---------
BALANCE, December 31, 1994 3,016,360 1,508,180 4,126,012 (944,827) 4,689,365
Exercise of stock options 270,500 135,250 416,580 - 551,830
Net loss - - - (1,275,915) (1,275,915)
----------- --------- --------- --------- ---------
BALANCE, December 31, 1995 3,286,860 $1,643,430 $4,542,592 $(2,220,742) $3,965,280
=========== ========= ========= ========= ==========
The accompanying notes are an integral part of these statements.
F-5
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
STATEMENTS OF CASH FLOWS
---------- -- ---- -----
For the Years Ended
December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,275,915) $(2,299,836) $ 677,293
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 112,380 126,271 120,145
(Increase) decrease in:
Accounts receivable, net (476,417) 680,951 (678,622)
---------- ---------- ----------
Inventories, net (855,090) 248,829 189,188
Prepaid expenses and other
current assets (66,275) 11,052 (58,696)
Increase (decrease) in:
Trade accounts payable 112,196 (261,810) 242,984
Other current liabilities 161,197 (52,686) 22,214
---------- ---------- ----------
Net cash provided by (used in)
operating activities (2,287,924) (1,547,229) 514,506
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable
securities - 114,091 105,108
Purchases of property, plant and
equipment (161,341) (36,852) (121,424)
---------- ---------- ----------
Net cash provided by (used in)
investing activities (161,341) 77,239 (16,316)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (14,779) (46,234) (43,784)
Net proceeds from convertible
debentures (Note 5) 2,000,000 - -
Issuance of common stock 551,830 4,304,306 -
Net cash provided by (used in) --------- ---------- ----------
financing activities 2,537,051 4,258,072 (43,784)
---------- ---------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 87,786 2,788,082 454,406
CASH AND CASH EQUIVALENTS,
beginning of year 3,313,043 524,961 70,555
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $3,400,829 $3,313,043 $ 524,961
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $ 10,746 $ 8,208 $ 22,690
========== ========== ==========
Income taxes $ 1,400 $ 3,134 $ 62,783
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-6
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
NOTES TO FINANCIAL STATEMENTS
----- -- --------- ----------
DECEMBER 31, 1995
-------- --- ----
1. ORGANIZATION AND BUSINESS:
------------ --- --------
Andrea Electronics Corporation (the "Company") was founded and
incorporated in the state of New York in 1934 by Frank A. D. Andrea,
an electrical engineer, inventor and innovator in the development of
radio and television products in the United States. The Company's
primary focus was the consumer radio and television market, and with
the advent of the Second World War, the Company expanded its market to
include applications for the U.S. military. Since then, the Company
continues to do business in electronic audio systems,
intercommunication systems and related equipment for airborne, mobile
and naval applications to military and industrial companies. In 1991,
the Company extended its product development for active noise
reduction into the field of active noise cancellation and formed an
active noise cancellation division for the purpose of engaging in the
design, development, production and marketing of active noise
cancellation and digital audio systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------- -- ----------- ---------- --------
Cash and Cash Equivalents
- ---- --- ---- -----------
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less.
Marketable Securities
- ---------- ----------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". In connection with the adoption of this
pronouncement, 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.
There were no sales of securities in 1995, and sales of securities
were $114,091 in 1994. The cumulative effect of the adoption of this
pronouncement at January 1, 1994 was not material to the financial
statements. At December 31, 1995 and 1994, the book value of the
Company's one marketable security approximated fair value. This
security matures on July 28, 2007.
Inventories
- -----------
Inventories are stated at the lower of cost (on a first-in, first-out)
or market basis.
F-7
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 and accelerated methods 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 which do not materially
prolong the normal useful life of an asset are charged to operations
as incurred. Additions and improvements which substantially extend
the useful lives of the properties 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.
Revenue Recognition
- ------- -----------
Revenue and profits on fixed price and cost reimbursement type
contracts are recognized using the unit-of-delivery method. Other
revenue is recognized upon the transfer of title.
Concentration of Credit Risk
- ------------- -- ------ ----
The Company is a manufacturer of audio communications equipment for
several industries. During 1995, the Company primarily sold to the
United States Government. Sales to the federal government comprised
approximately 41% and 19% of the total accounts receivable at December
31, 1995 and 1994, respectively, and approximately 45%, 20% and 42% of
the total sales for the years ended December 31, 1995, 1994 and 1993,
respectively.
Use of Estimates
- --- -- ---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes
- ------ -----
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 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.
The provision for income taxes is based upon income after adjustment
for those permanent items which are not considered in the
determination of taxable income. Deferred taxes result when the
Company charges deductions or recognizes revenue for income tax
purposes in a different year than for financial reporting purposes.
F-8
Dividends
- ---------
No cash dividends were declared or paid during the years ended
December 31, 1995, 1994 and 1993.
Primary Earnings (Loss) Per Share
- ------- -------- ------ --- -----
Primary earnings (loss) per share is based on the weighted average
number of common shares outstanding during each year after giving
effect to dilutive stock options and warrants considered to be common
stock equivalents. Fully diluted earnings per share are not
materially different from primary earnings per share. For the years
ended December 31, 1995, 1994 and 1993, the weighted average number of
common shares and common equivalent shares outstanding were 3,129,540,
2,767,387 and 3,432,931, respectively.
Stock Dividend
- ----- --------
In 1993, the Board of Directors of the Company approved a five-for-one
stock split in the form of a 400% dividend to stockholders which was
effected on June 2, 1993. All information contained in the
accompanying financial statements and notes thereto has been
retroactively restated to give effect to this transaction.
Research and Development
- -------- --- -----------
Research and development costs are charged to operations when
incurred.
Advertising Expenses
- ----------- --------
The Company charges all media costs of newspaper and magazine
advertisements to expense when advertisements are run. Prepaid
advertising at December 31, 1995 and 1994, which represents costs for
media services purchased but not yet run, is included in prepaid
expenses and other current assets in the amounts of $40,139 and $0,
respectively.
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 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, 1995, the carrying value of all financial instruments approximated
fair value (Note 5).
Reclassification
- ----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F-9
Recently Issued Accounting Standards
- -------- ------ ---------- ---------
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". This statement establishes financial
accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement is
effective for financial statements for fiscal years beginning after
December 15, 1995, although earlier application is encouraged.
In November 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement
establishes a fair value based method of accounting for an employee
stock option or similar equity instrument but allows companies to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees". Companies
electing to remain with the accounting under APB Opinion No. 25 must,
however, make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in SFAS
No. 123 had been applied. These disclosure requirements are effective
for years beginning after December 15, 1995. Management intends to
continue accounting for its stock-based compensation plans under the
accounting prescribed by APB Opinion No. 25.
3. INVENTORIES:
-----------
Inventories consisted of the following:
December 31,
------------------------
1995 1994
---- ----
Raw materials $1,230,805 $615,680
Work-in-process 133,942 52,223
Finished goods 18,334 -
---------- --------
1,383,081 667,903
Less: reserve for obsolescence 260,088 400,000
---------- --------
$1,122,993 $267,903
========== ========
F-10
4. PROPERTY, PLANT AND EQUIPMENT:
--------- ----- --- ---------
Property, plant and equipment consisted of the following:
December 31,
-----------------------------
1995 1994
------------- ------------
Land $ 109,000 $ 109,000
Building 453,000 453,000
Building improvements 372,928 372,928
Machinery and equipment 605,798 444,457
------------- ------------
1,540,726 1,379,385
Less: accumulated depreciation 849,228 726,750
------------- ------------
$ 691,498 $ 652,635
============= ============
5. CONVERTIBLE DEBENTURES:
----------- ----------
On December 22, 1995, the Company issued $2,198,000 of 15% Convertible
Subordinated Debentures (the "Debentures") due on June 23, 1997. The
bonds are convertible into shares of the Company's common stock at a
price which shall be the lesser of (i) $12.375 per share (the maximum
conversion price) and (ii) the closing price, which is defined as the
last reported bid price for a given day on the exchange the Company's
common stock is listed. In no event will the conversion price be less
than $5.625 per share (the minimum conversion price). Conversion of
these Debentures into the Company's common stock can, at the holder's
option, be effected in increments of $549,500 beginning 45 days
following the date of original issuance and on each of the succeeding
30 day interim periods. Conversion of any remaining principal amount
can occur at any time after 135 days and through maturity. The
Debentures are subordinated in right of payment to all future senior
indebtedness, as incurred by the Company. At December 31, 1995, this
obligation is reflected net of an unamortized discount of $198,000.
6. RETIREMENT PLAN:
---------- ----
The Company has a defined contribution profit sharing plan which 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 $91,225, $89,352 and $71,639 for 1995, 1994 and
1993, respectively.
7. TAXES:
-----
Provision (benefit) for income taxes consists of the following:
December 31,
--------------------------------------
1995 1994 1993
------------ ----------- -----------
Federal $ - $ - $ 5,000
New York State (5,000) (3,000) 43,000
New York City 5,000 3,000 7,000
------------ ----------- -----------
$ - $ - $ 55,000
============ =========== ===========
F-11
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to earnings
(loss) before income taxes is as follows:
December 31,
--------------------------------------
1995 1994 1993
---------- ----------- ----------
Provision (benefit) at stated tax rates $(434,000) $(781,000) $ 249,000
Benefit of loss carryforward - - (244,000)
Loss without tax benefit 434,000 781,000 -
State and local taxes -
net of federal income tax benefit - - 50,000
---------- ---------- ----------
Provision for income taxes $ - $ - $ 55,000
========== =========== ==========
At December 31, 1995, the Company had net operating loss carryforwards
of approximately $3,600,000 expiring in varying amounts beginning in
2006 through 2010. A full valuation allowance has been provided
against any deferred tax assets which might result from the
utilization of these net operating loss carryforwards due to
uncertainty as to the amount and timing of future earnings.
8. LEASES:
------
Capital Leases
- ------- ------
The Company is obligated under two capital leases for the purchase of
machinery and equipment. Effective March 1990, the Company suspended
payments on one of the leases pending the ultimate resolution of the
legal proceeding described in Note 9. The other capital lease bears
interest at 15.7% and expires in May of 1997. The following is a
schedule of the future minimum capital lease payments:
Expired $27,588
1996 13,512
1997 5,599
-------
46,699
Less: amount representing interest (2,068)
-------
$44,631
=======
Property Lease
- -------- -----
Effective January 30, 1996, the Company, as lessor, amended a tenant's
lease for the rental of approximately one-third of its building. The
new lease, expiring on May 31, 2001, requires a rental payment of
approximately $243,000 for fiscal 1996, with a 5% annual escalation
for the remainder of the lease term. The agreement in effect for
1995, 1994 and 1993 required annual rentals of approximately $184,800.
The tenant pays one-third of increases in real estate taxes over the
base year and pays 100% of its proportionate share of operating
expenses.
F-12
9. COMMITMENTS AND CONTINGENCIES:
----------- --- -------------
Development and License Agreement
- ----------- --- ------- ---------
Effective September 1, 1995, the Company entered into a development
and license support agreement with a certain manufacturer in the
telecommunications industry. The agreement requires the Company to
grant to the licensee a nontransferable license to produce certain
intellectual properties, as defined in the agreement. The license is
exclusive until December 31, 1996, and during each subsequent year,
the license remains exclusive provided that the minimum production of
the licensed products for the prior year was achieved. In exchange
for the license, the Company will receive royalties for each product
manufactured.
Procurement Agreement
- ----------- ---------
Effective June 16, 1995, the Company entered into a procurement
agreement with a certain manufacturer in the computer technology
industry. The agreement provided the manufacturer the exclusive
worldwide right to market, sell, distribute and support the Andrea
Microphone Products with certain of its own personal computer
products. Effective December 16, 1995, the manufacturer did not meet
the specific purchasing requirements and, as a result, lost their
exclusivity under this agreement. The Company continues to produce
and sell to this manufacturer under the terms of the agreement, but is
not obligated under the exclusivity clause.
Legal Proceedings
- ----- -----------
On December 3, 1990, a complaint was filed against the Company by an
individual (the "Plaintiff") in the Suffolk County Supreme Court (the
"Court") alleging wrongful discharge by the Company in violation of
his employment agreement. The complaint seeks damages relating to
loss of salary, past bonuses, lost commissions, unused sick pay and a
reimbursement of a bank loan. In August 1992, the Plaintiff moved for
partial summary judgment on three causes of action. On January 28,
1993, his motion was granted with respect to two causes of action
pursuant to which the Plaintiff sought damages in the approximate
amount of $186,000. The court, however, in granting the Plaintiff's
motion, did not make a determination as to the amount of damages and
directed that a trial be held on the issue of damages. On February
21, 1996, the Company settled this case for $167,500, including the
amount of the expired capital lease of $27,588 described in Note 8.
The additional amount due the Plaintiff under the settlement was
charged to operations in 1995 and is included in other current
liabilities at December 31, 1995.
In December 1994, a subpoena was issued to the Company by the United
States Department of Defense, Office of the Inspector General, seeking
certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered in
January 1995 and to date, no claim has been made or threatened against
the Company in connection with this matter. The Company is unable to
determine at this point if any such claim will be made or to what
extent, if any, such claim could have an impact on the financial
position of the Company.
Letters of Credit
- ------- -- ------
Letters of credit are issued by the Company during the ordinary course
of business through a major domestic bank as required by certain
vendor contracts. As of December 31, 1995, the Company had
outstanding letters of credit of approximately $920,000, which are
fully collateralized by cash held with the same bank.
F-13
10. STOCK PLANS:
----- -----
Options
- -------
On December 31, 1991, the Board of Directors of the Company adopted
the 1991 Performance Equity Plan ("1991 Plan"), which was approved by
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 said
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 September 12, 1994,
the Board of Directors of the Company approved an increase of the
number of shares available for grant under the 1991 Plan to 1,500,000
shares, which subsequently was approved by the shareholders of the
Company.
Activity in the 1991 Plan was as follows:
For the Years Ended December 31,
---------------------------------------
1995 1994 1993
---------- ---------- ----------
Outstanding at beginning of period 1,233,000 1,000,000 920,000
Granted 137,500 273,000 80,000
Exercised (270,500) - -
Canceled (35,000) (40,000) -
--------- --------- ---------
Outstanding at end of period 1,065,000 1,233,000 1,000,000
========== ========== ==========
Range of Exercise Prices $16.00-$19.25 $ 12.00 $4.55-$7.60
============= ========== ===========
Warrants
- --------
In connection with an overseas equity offering in 1994, the Company
has issued 5 year warrants to purchase 23,750 shares of common stock
at prices of $9.84 to $10.98 per share. These warrants expire on June
15, 1999.
F-14
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 generally accepted auditing
standards, the financial statements of Andrea Electronics Corporation
included in this filing and have issued our report thereon dated
February 21, 1996. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
schedule listed in the accompanying index 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
February 21, 1996
S-1
ANDREA ELECTRONICS CORPORATION
------ ----------- -----------
SCHEDULE II
-------- --
VALUATION AND QUALIFYING ACCOUNTS
--------- --- ---------- --------
Balance at Charged to Charged to Balance at
January 1, costs and other December 31,
1995 expenses accounts Deductions 1995
---------- ----------- ---------- ---------- ------------
Allowance for doubtful accounts $ 69,771 $ 30,000 $ - $ 67,588 $ 32,183
Inventory reserve 400,000 - - 139,912 260,088
S-2
SIGNATURES
In accordance with the requirements of the Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
By: /s/ Frank A.D. Andrea, Jr.
------------------------------------
Date: March 27, 1996 Frank A.D. Andrea, Jr.
Chairman of the Board
and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capabilities
and on the dates indicated.
/s/ Frank A.D. Andrea, Jr. Chairman of the Board March 27, 1996
- ------------------------------
Frank A.D. Andrea, Jr. and Chief Executive Officer
/s/ Patrick D. Pilch Executive Vice President March 27, 1996
- -------------------------
Patrick D. Pilch and Chief Financial Officer
/s/ John N. Andrea Co-President March 27, 1996
- --------------------
John N. Andrea
/s/ Douglas J. Andrea Co-President March 27, 1996
- -------------------------
Douglas J. Andrea
/s/ Jeffrey S. Gosman Vice President, March 27, 1996
- -------------------------
Jeffrey S. Gosman Controller
and Secretary
/s/ Christopher Dorney Director March 27, 1996
- -------------------------
Christopher Dorney
/s/ George Feinman Director March 27, 1996
- --------------------
George Feinman
/s/ Scott Koondel Director March 27, 1996
- --------------------
Scott Koondel
/s/ Paul M. Morris Director March 27, 1996
- --------------------
Paul M. Morris