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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, 1996
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 (I.R.S. employer identification no.)
of incorporation or organization)
11-40 45th Road, Long Island City, New York 11101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 800-442-7787
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value American Stock Exchange
$.50 per share
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. (X)
As of March 21, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $29,416,443
(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 21, 1997 was 3,942,197.
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 June 19, 1997, which
will be filed by the registrant within 120 days after the close of its
fiscal year.
EXHIBIT INDEX ON PAGE 20
Page 1
TABLE OF CONTENTS
PAGE
TITLE PAGE 1
PART I 3-11
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ITEM 1. BUSINESS 3-10
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II 12-19
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III 19
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
ITEM 11. EXECUTIVE COMPENSATION 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
PART IV 20-22
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 20-22
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 manufacture of
electronic audio systems, intercommunication systems and related equipment.
The Company's products include its newer Andrea Anti-Noise/(Registered
Trademark)/ products for voice-activated computing, telecommunications,
computer/Internet communications, and military communications, and its
traditional products for military and industrial applications. Andrea
Anti-Noise/(Registered Trademark)/ products were commercially introduced in
1995, and sales of these products in 1996 provided a majority of the
Company's 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. The Company developed its Andrea
Anti-Noise/(Registered Trademark)/ technology in response to the decline
during the past several years in sales of its traditional products
resulting from the overall reduced requirements of the United States
Department of Defense and reduced industrial demand.
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, and for new military communications requirements.
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. To leverage its research and development resources and direct
sales efforts, the Company seeks to collaborate with large enterprises in
telecommunications, computer manufacturing, software publishing, and
defense electronics. See "Collaborative Arrangements".
The success of the Company's strategy will depend on its ability to
increase sales of its line of existing Andrea Anti-Noise/(Registered
Trademark)/ products, 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, for sale directly to end-users, through
distributors, value-added resellers, and in kit form to original equipment
manufacturers, software publishers, Internet Service Providers, and
Internet Content Developers. 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. Additionally, the Company has designed
and produced accessories that enhance the performance and integration of
the personal computer and Andrea Anti-Noise/(Registered Trademark)/
products. The markets and applications for and to which Andrea
Anti-Noise/(Registered Trademark)/ products and peripherals are marketed and
sold include the following:
Personal Computer, Work Station, and Computer-based and
Internet-based Telephony Applications
- Speech Recognition for Word Processing, Database, and Similar
Applications
- Educational Software
- Multimedia
- Computer Telephony
- Speech over the Internet
- Voice-activated Interactive Games
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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") microphone, active noise reduction
("ANR") earphone, and noise reduction ("NR") microphone technologies. ANC
microphone technology significantly enhances the quality of a speaker's
voice, particularly in those environments where the speaker is surrounded
by high levels of ambient background noise. ANR earphone technology
enhances 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. NC microphone
technology provides some, but not all, of the benefits of ANC microphone
technology.
PERSONAL COMPUTER, WORK STATION, AND COMPUTER-BASED AND
INTERNET-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 and Intranet voice communications.
These products incorporate the Company's ANC microphone technology to
cancel ambient noise in a range of increasingly noisy environments,
including homes, mobile computing environments, offices, and factories.
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 ANC
microphone. The earphone is designed to be comfortably worn on the ear or
to be placed on a desktop mount. 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. The suggested retail
price of the ANC-100 is $59.95.
Andrea Anti-Noise/(Registered Trademark)/ ANC-200 Computer Handset.
The ANC-200 consists of a high fidelity earphone and ANC 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. The suggested retail price of the ANC-200 is $49.95.
Andrea Anti-Noise/(Registered Trademark)/ ANC-500 Computer Headset.
The ANC-500 consists of a headband with a boom ANC microphone and earphone and
an "on/mute" switch. The suggested retail price of the ANC-500 is $54.95.
Andrea Anti-Noise/(Registered Trademark)/ ANC-550 Computer Headset.
The ANC-550 consists of a stereo headset with a boom ANC microphone and an
"on/mute" switch. The suggested retail price of the ANC-550 is $64.95.
Andrea Anti-Noise/(Registered Trademark)/ NC-50 Computer Headset. The
NC-50 consists of a headband with a boom NC microphone and earphone. The
suggested retail price of the NC-50 is $29.95.
Andrea Anti-Noise/(Registered Trademark)/ NC-100 Computer Headset. The
NC-100 is a lightweight, uniquely styled product that has a single, high
fidelity earphone to which is attached a dual-function boom NC microphone.
The earphone is designed to be comfortably worn on the ear or to be placed
on a desktop mount. When the NC-100 is worn, the microphone is used in the
near field mode; when the NC-100 is placed on the desktop mount, the
microphone is used in the far field mode. The NC-100 is offered only as an
OEM product.
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Andrea Anti-Noise/(Registered Trademark)/ NC-150 Computer Headset. The
NC-150 is an ultralight, PC stereo headset with a flexible NC boom
microphone. The suggested retail price of the NC-150 is $29.95.
Andrea APS-100 Auxiliary Power Supply. The APS-100 consists of a
module housing which holds two "AAA" batteries supplying three volts of power
to the headsets or handsets described above and two female inputs from the
headset and handset connectors and male output plugs to the personal
computer. The APS-100 is used when the computer microphone input has either
no power or insufficient power for correct microphone operation. The
suggested retail price of the APS-100 is $19.95.
Andrea MC-100 Multimedia Audio Controller. The MC-100 consists of a
module housing that 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 $34.95.
Andrea PC Mini Microphone M-20. The M-20 is a desktop,
omni-directional condenser microphone, which includes a monitor mount and
lapel clip. The suggested retail price of the M-20 is $12.95.
Andrea PC Desktop Microphone M-30. The M-30 is a desktop,
omni-directional condenser microphone, which includes an adjustable
microphone stand. The suggested retail price of the M-30 is $14.95.
Andrea M-150 Stereo PC Headset. The M-150 is a stereo PC headset with
flexible boom microphone and wide-frequency stereo headphones. The
suggested retail price of the M-150 is $19.95.
The Company has marketed and/or sold all of the above products directly
to end users, through computer products distributors, through value-added
resellers, to original equipment manufacturers, and to software publishers.
Commercial sales of the Company's Andrea Anti-Noise/(Registered
Trademark)/products began with the ANC-100 in 1995. See "Collaborative
Arrangements".
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 is a 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. During 1996, BellSouth
informed the Company that it had not incorporated the Andrea
Anti-Noise(Registered Trademark) technology into any BellSouth products
and, accordingly, would not retain exclusive rights under the terms of the
Agreement. No assurance can be given that the Agreement with BellSouth or
other licensees will result in any revenues to the Company or that the
Company will succeed in entering into any arrangements with other
telecommunications equipment manufacturers. 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, such as 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
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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 and market and technology leaders in
telecommunications, computer manufacturing, software publishing, and
defense systems. The Company has entered into such arrangements with
International Business Machines Corporation ("IBM"), Microsoft Corporation
("Microsoft"), Voxware, Inc. ("Voxware"), Kurzweil Applied Intelligence,
Inc., ("Kurzweil Applied Intelligence", a subsidiary of Kurzweil Inc.),
Packard Bell NEC, Inc. ("Packard Bell NEC"), The Learning Company, Inc.
("The Learning Company"), White Pine Software, Winnov, LLP, BellSouth, and
Northrop Grumman. Additionally, the Company 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. In 1996, IBM entered into an
additional agreement with the Company to purchase Andrea
Anti-Noise/(Registered Trademark)/ computer headsets for inclusion with all
shrink-wrapped copies of IBM's speech-enabled OS/2 "Merlin" software
product. During 1996, sales of the Company's computer headsets to IBM and
certain of its affiliates, distributors, licensees, and integrators
accounted for 46% of the Company's total sales. While no assurance can be
given, the Company anticipates that the two-year agreement with IBM will
be renewed.
BellSouth License Agreement. In October 1995, the Company entered into
a License and Technical Support Agreement with BellSouth. Under the
Agreement, the Company 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 was required to have met certain minimum
production requirements during the initial three-year term of the
Agreement. During 1996 BellSouth informed the Company that it had not
incorporated the Andrea Anti-Noise/(Registered Trademark)/ technology into
any products and, accordingly, would not retain exclusive rights under the
terms of the Agreement. The Company has, therefore, begun to explore
collaborative arrangements covering the licensing of its Andrea
Anti-Noise/(Registered Trademark/) technology to certain other major
telecommunications equipment manufacturers. No assurance can be given that
the Agreement with BellSouth will result in any revenues to the Company or
that the Company will succeed in entering into any arrangements with other
telecommunications equipment manufacturers.
Northrop Grumman Agreement. In 1993, the Company entered into an
agreement with Grumman Aerospace Corporation (subsequently acquired by
Northrop Grumman)for the development and marketing of military and
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commercial ANR/ANC headsets. The headsets have been developed and are
undergoing product qualification tests in accordance with U.S. military
procurement rules and procedures. Under the Agreement, subject to
successful completion of these tests, Northrop Grumman has exclusive
worldwide rights to market the ANR/ANC headsets to U.S. and non-U.S.
military markets. Although the Company had anticipated completion of the
initial product qualification process during the first half of 1996, the
Company currently believes that the process will be completed during 1997.
In order to better address the final stages of the qualification process
and perform more effectively under the Agreement in the event that the
process is successfully completed, the Company has formed Andrea
Military Communications, LLC ("AMC"), a Delaware limited liability company
that is a majority-owned subsidiary of the Company. AMC will focus on
collaborating with Northrop Grumman to qualify and market Andrea
Anti-Noise/(Registered Trademark)/ technology to military customers. No
assurance can be given that the product qualification process will be
completed or, that if so, that the Company will experience significant
revenues through AMC under the agreement with Northrop Grumman.
Voxware Agreement. In April 1996, the Company entered into an
agreement with Voxware, Inc., a developer of advanced voice-processing
software for multimedia computing, Internet, and communications
applications covering the distribution by the Company of Voxware's
TeleVox/(Registered Trademark)/ Internet telephony software with the Andrea
Anti-Noise/(Registered Trademark)/ family of computer headsets and
handsets.
Microsoft License Agreement. In October 1996, the Company entered
into a licensing agreement with the Microsoft Corporation ("Microsoft")
covering the distribution by the Company of Microsoft
NetMeeting/(Registered Trademark)/ Internet and Intranet conferencing
software with the Company's Andrea Anti-Noise/(Registered Trademark)/
retail line of ANC headsets and handsets. This agreement replaced the
Company's prior licensing agreement with Microsoft for Microsoft's MS
Phone/(Registered Trademark)/ and MSVoice/(Registered Trademark)/ computer
telephony and speech recognition software.
Kurzweil Applied Intelligence Agreement. In September 1996, the
Company entered into an agreement with Kurzweil Applied Intelligence to
cover the distribution by the Company of a special version of Kurzweil
VoicePad/(Registered Trademark)/ for Windows/(Registered Trademark)/ with
the Company's Andrea Anti-Noise/(Registered Trademark)/ retail line of ANC
headsets and handsets.
The Learning Company Agreement. In November 1996, the Company entered
into an agreement with The Learning Company to provide Andrea
microphones with The Learning Company's educational CD-ROM products
"Interactive Reading Journey 1" and "Interactive Reading Journey 2".
During 1996, the Company entered into additional OEM and/or reseller
relationships with, and began shipping Andrea Anti-Noise/(Registered
Trademark)/ computer headsets to, Packard Bell NEC, Lucent Technologies Inc.,
and FICOMP, Inc.
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 the decline in industrial demand for these
traditional products 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 "Part II-Item 7-
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
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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, patent applications,
trade secrets, copyrights, trademarks, nondisclosure agreements with its
employees, licensees and potential licensees, limited access to and
dissemination 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.
The Company has been granted six 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. The inventions covered by these two U.S. patents, both of which
expire in 2012, are covered by corresponding patents granted to the Company
in certain other countries. The third patent covers the design of the boom
microphone headset, and the fourth patent covers the design of the
untethered communications media handset. The fifth and sixth patents cover
the design of the media/communications handset with smooth surface and the
design of the tethered media/communications handset with controls,
respectively. 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 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 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" (stylized) (1957, 1977); "Andrea" (1978); and
"Andrea Anti-Noise" (1995). The duration of each of the first two trade
marks is twenty years following receipt but is renewable. The duration of
the most recent trademark is ten years following receipt but 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
Page 8
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 the improvement of existing 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 1996, the Company
expended $988,483 for research and development of new products and product
enhancements. Research and development expenses in 1996 represented a slight
increase from $976,344 in 1995. The Company expects research and development
expenses to increase as it seeks to broaden its Andrea
Anti-Noise/(Registered Trademark)/ line of products. No assurance can be
given that the Company will be successful in these efforts. See "Part II-
Item 7-Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Sales and Marketing
The Company employs its own sales staff as well as outside sales
representative organizations to market its Andrea Anti-Noise/(Registered
Trademark)/ products and its traditional intercom products. Andrea
Anti-Noise/(Registered Trademark)/ products are marketed to original
equipment manufacturers and distributors in the personal computer,
telecommunications equipment, industrial, and avionics communications
industries, military procurement organizations, software publishers,
computer and consumer electronic retailers, and end-users in both business
and household environments. 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. 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. Traditional intercom products are marketed to original
equipment manufacturers, military organizations, and industrial customers.
Manufacturing and Assembly
The Company conducts assembly operations at its facility in New York
and through subcontractors. During initial production runs of Andrea
Anti-Noise/(Registered Trademark)/ products, the products are 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 are transferred to a subcontractor in Asia.
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.
Traditional intercom products are assembled by the Company at its New
York facility from purchased components. 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.
Competition
The markets into which the Company sells its Andrea
Anti-Noise/(Registered Trademark)/ products and its traditional line of
military and industrial 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
Page 9
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 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.
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 86 persons at December 31, 1996, of which 57 were
production workers and technicians, 9 were members of the engineering
staff, and 20 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.
- --------------
"Andrea Anti-Noise" is a registered trademark of the Company. "TeleVox" is
a registered trademark of Voxware. "NetMeeting", "Windows", "MSPhone", and
"MSVoice" are registered trademarks of Microsoft. "VoicePad" is a
registered trademark of Kurzweil Applied Intelligence.
Page 10
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 of the Company as presently
conducted. It is the opinion of management that the Company's 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. In January 1996, the lessee exercised its renewal option for an
additional five years. The lease, expiring on May 31, 2001, requires a
rental payment of $243,000 for the fiscal year ended December 31, 1996. See
Notes 4 and 8 to the Consolidated Financial Statements of the Company for
further information concerning property, plant and equipment.
ITEM 3. LEGAL PROCEEDINGS
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.
Page 11
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 table below sets forth the high and low sales
prices for the Company's Common Stock as reported by the American Stock
Exchange. On March 21, 1997 there were approximately 476 holders of record
of the Company's Common Stock.
Quarter Ended High Low
------------- ------ -----
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
March 31, 1996 20 3/4 10 1/2
June 30, 1996 21 3/8 12 7/8
September 30, 1996 14 3/4 10
December 31, 1996 14 7/8 10 1/2
No dividends were paid in 1996 or 1995. 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.
Page 12
ITEM 6. SELECTED FINANCIAL DATA
December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Sales $ 9,244,109 $ 5,440,792 $ 3,278,100 $ 6,527,972 $ 3,363,675
Cost of Sales 5,913,091 3,190,226 2,394,828 3,903,585 3,144,228
---------- ---------- ---------- ---------- ----------
Gross Profit 3,331,018 2,250,566 883,272 2,624,387 219,447
Research and Development 988,483 976,344 1,422,310 720,278 460,752
General, Administrative
and Selling Expenses 3,872,919 2,925,460 1,995,434 1,472,270 661,161
---------- ---------- ---------- ---------- ----------
Income (Loss) from Operations (1,530,384) (1,651,238) (2,534,472) 491,839 (902,446)
Other Income (Expense) (13,833) 375,323 234,636 240,454 217,800
---------- ---------- ---------- ---------- ----------
Income (Loss) Before
Provision (Credit for
Income Taxes) (1,544,217) (1,275,915) (2,299,836) 732,293 (684,666)
Provision (Credit) for Income
Taxes (1,222,000) - - 55,000 6,000
---------- ----------- ----------- ---------- ----------
Net Income (Loss) $ (322,217) $ (1,275,915) $ (2,299,836) $ (677,293) $ (690,666)
========== =========== =========== ========== ==========
Primary Earnings per Share $(.09) $(.41) $(.83) $ .20 $(.27)
===== ===== ===== ===== =====
Long-Term Capital
Lease Obligations $ - $ 5,388 $ 17,044 $ 31,823 $ 78,056
Long-Term Obligations 2,196,286 2,038,500 38,500 38,500 38,500
Retained Earnings (Deficit) (2,542,959) (2,220,742) (944,827) 1,355,009 1,694,260
Total Assets 10,794,250 6,551,110 5,016,581 3,356,579 2,457,872
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Andrea Electronics Corporation is a market-focused and
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. Andrea
Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice interface" markets that are rapidly
emerging from the convergence of the telecommunications and computer
industries and for the defense electronics markets, all of which markets
are requiring increasingly higher quality voice communications products.
The Company's strategy for serving these markets is to leverage its
expertise in audio communications technology, including its patented Active
Noise Cancellation ("ANC"; also referred to as "Andrea Anti-Noise/(Registered
Trademark)/ technology") technology and Active Noise Reduction ("ANR")
technology, and to develop, manufacture, and market, either directly or
through licensees, a line of Andrea Anti-Noise ANC and ANR headsets, handsets,
and other communication devices that cost effectively enhance voice
communications for end users of the growing number of new, voice-based
computer and computer telephony applications and interfaces.
Examples of the applications and interfaces for which the Company's
products provide benefits include: Internet, Intranet, and other computer-
based speech; telephony and communications; multi-point conferencing;
multi-player Internet and CD-ROM interactive games; speech recognition;
multimedia; military and industrial communications; and other applications
and interfaces that incorporate natural language processing. The Company
believes that end users of these applications and interfaces will require
high quality microphone and earphone products that enhance voice
transmission, particularly to and from noisy environments, for use with
personal computers, business and residential telephones, military headsets,
cellular and other wireless telephones, personal communication systems, and
avionics communications systems.
An important element of the Company's strategy for expanding the
channels of distribution and broadening the base of users for its ANC and
ANR products is its set of collaborative arrangements with several hardware
OEMs, software publishers, distributors, and retailers actively engaged in
the various markets in which the Company's ANC and ANR products have
application. Under some of these arrangements, the Company supplies its
products for sale by the collaborative partners. Under others, the
collaborative partners supply the Company with software that the Company
sells with its ANC and ANR products. In addition to these collaborative
marketing arrangements, the Company is also seeking to increase its own
direct marketing efforts. See "Part I-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. Although the Company had anticipated completion of the
initial product qualification process during the first half of 1996, the
Company currently believes that the process will be completed during 1997.
In order to better address the final stages of the qualification process
and perform more effectively under the agreement with Northrop Grumman in the
event that the process is successfully completed, the Company has formed
Andrea Military Communications, LLC ("AMC"), a Delaware limited liability
company that is a majority-owned subsidiary of the Company. AMC will focus on
collaborating with Northrop Grumman to qualify and market Andrea
Anti-Noise/(Registered Trademark)/ technology to military customers. No
assurance can be given that the product qualification process will be
completed or, that if so, that the Company will experience significant
revenues through AMC under the agreement with Northrop Grumman.
Page 14
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, 1996 and other items set forth in this Report on Form 10-K
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 "believe",
"expect", "anticipate", and similar expressions identify forward-looking
statements. In order to obtain the benefits of these "safe harbor"
provisions for any such forward-looking statements, the Company wishes to
caution investors and prospective investors about the following significant
factors, which, among others, have in some cases affected the Company's
actual results and are in the future likely to affect the Company's actual
results and could cause them to differ materially from those expressed in
any such forward-looking statements. These factors include:
first, the rate at which the Company's Anti-Noise/(Registered
Trademark")/ technology is accepted by the diverse range of users and
applications within the global communications and informatics marketplace;
second, the ability of the Company to maintain a competitive position
for its Anti-Noise/(Registered Trademark)/ products in terms of technical
specifications, quality, price, reliability, and service;
third, the on-going ability of the Company to enter into and maintain
collaborative relationships with larger companies in the fields of
telecommunications, computer manufacturing, software design and
publishing, Internet and online services, defense-related manufacturers and
system providers, and retail and direct marketing distributors; and
fourth, in the event that the Company experiences continued
significant growth in demand for its Anti-Noise/(Registered
Trademark)/ technology, the ability of the Company to raise sufficient
external capital to fund the working capital requirements for meeting such
demand.
The failure of the Company to surmount the challenges posed by any one
or more of these factors could have a material adverse effect on the
Company's results of operations and growth.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales
Sales for the year ended December 31, 1996 were $9,244,109, an increase
of nearly 70% over sales of $5,440,792 for the year ended December 31,
1995. The increase in revenues was attributable to a sharp increase in
demand for the Company's Andrea Anti-Noise/(Registered Trademark)/
products. This increase was offset by an expected decrease in sales of the
Company's traditional military products. Sales of the Company's Andrea
Anti-Noise/(Registered Trademark)/ products comprised a majority portion of
total sales of the Company in 1996, and, while no assurance can be given,
management anticipates another increase in sales of these products in 1997.
For the year ended December 31, 1996, sales from government orders
through both prime and subcontracted orders was $3,840,810, or 42% of
sales, compared to $2,436,715, or 45% of sales for the year ended December
31, 1995. For the year ended December 31, 1996, sales from
industrial/commercial orders constituted $5,403,299, or 58% of sales,
compared to $3,004,077, or 55% of sales for the year ended December 31,
1995.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December
31,1996 increased to 64% from 59% for the year ended December 31, 1995.
The increase in cost of sales as a percentage of sales for the year ended
December 31, 1996 reflects increased costs associated with initial
Page 15
production runs in the Company's New York facilities of Andrea
Anti-Noise/(Registered Trademark)/ products introduced during the first six
months of 1996.
Research and Development
Research and development expenses for the year ended December 31, 1996
increased 1.02% to $988,483 from $976,344 for the year ended December 31,
1995. Management believes that research and development will increase as
the Company further develops and augments it Andrea Anti-Noise/(Registered
Trademark)/ technology and product lines.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended
December 31, 1996 increased 32% to $3,872,919 from $2,925,460 for the year
ended December 31, 1995. The increase for the year ended December 31, 1996
reflects the marketing and sales expenses such as advertising, packaging,
and promotional expenses associated with the Company's marketing,
introduction, and promotion of its Anti-Noise/(Registered Trademark)/
products to OEMs, distributors, value-added resellers, and end users. The
Company expects to at least maintain and likely 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
1997 and plans to support these product introductions with advertising and
promotional efforts.
Operating loss
Operating loss for the year ended December 31, 1996 decreased 7% to
$1,530,384 from $1,651,237 for the year ended December 31, 1995. This
decline in operating loss reflects the increase in sales for the year ended
December 31, 1996, offset by the 32% increase in general, administrative
and selling expenses associated with increased business development and
marketing expenses.
Other Income Expense
Other loss for the year ended December 31, 1996 was $13,833 versus
Other income of $375,323 for the year ended December 31, 1995. This
reversal resulted from an increase of $282,544 in interest expense
associated with the Company's subordinated convertible debentures and the
decrease in interest income of $101,865 resulting from the Company's
average lower cash and cash equivalents throughout the year ended December
31, 1996, compared to the year ended December 31, 1995. These lower levels
of cash and cash equivalents reflected the increased use of cash by the
Company to secure components and supplies for the manufacture of
Anti-Noise/(Registered Trademark)/ products.
Net loss
Net loss for the year ended December 31, 1996 was $322,217 compared to
a net loss of $1,275,915 for the year ended December 31, 1994. This
reduction in net loss reflects principally the factors described above and
the income tax benefit associated with (I) the current year loss and (ii)
changes in the reserves provided against previous income tax benefits. See
Note 7 to the Financial Statements.
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 resulted partially from 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
was contrary to the downward trend in the Company's sales to this market in
recent years resulting from decreases in military appropriations by the
Page 16
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 reflected a reversal of this downward trend in
demand for these products. Sales of the Company's Anti-Noise/(Registered
Trademark)/ products did not comprise a significant portion of total sales
of the Company in 1995.
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 reflected 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 for the year ended December 31,
1994. The decrease in research and development expenses resulted from 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.
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 as 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 an expired capital
lease.
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 reflected 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 resulted from an increase of $101,420 in interest income
attributable to 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 represented reimbursement for research and
development performed by the Company.
Page 17
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 reflected principally the factors described above.
Liquidity and Capital Resources
Working capital at December 31, 1996 was $8,836,074 compared to
$5,317,670 at December 31, 1995. The increase in working capital reflects
an increase in total current assets of $4,066,465 and an increase in total
current liabilities of $548,061. The increase in total current assets
reflects a decrease in cash of $2,479,764, an increase in investment
securities of $98,474, an increase in accounts receivable of $1,632,527, an
increase in inventory of $3,651,182, an increase in deferred tax asset of
$1,222,000, and a decrease of $57,954 in prepaid expenses and other current
assets.
The decrease in cash of $2,479,764 reflects $5,671,502 of net cash used
in operating activities and $492,472 of cash used in investing activities,
partially offset by an increase in cash from financing activities of
$3,684,210. The principal operating activity for which cash was used was
the increase in inventory of Andrea Anti-Noise/(Registered Trademark)/
computer headsets. The increase in inventory of $3,651,182 primarily
resulted from the acquisition of $901,424 of long lead components and parts
for Andrea Anti-Noise/(Registered Trademark)/ products and an increase in
work-in-process and finished goods inventory of $2,782,786 for the Andrea
Anti-Noise/(Registered Trademark)/ products. Management believes that this
inventory will cover sales into the first half of 1997. The cash used in
investing activities was for the acquisition of equipment, including
$237,329 in tooling and molds for Andrea Anti-Noise/(Registered Trademark)/
products and computer hardware, and the purchase of $98,474 in marketable
securities. The Company received $3,445,000 in net proceeds from the
issuance of convertible debentures and $279,156 from the issuance of common
stock associated with the exercise of employee stock options.
The decrease in prepaid expenses and other current assets includes the
expensing of prepaid advertising, property taxes, and prepaid insurance
premiums.
The decrease in current liabilities primarily reflects a $567,757
decrease in trade accounts payable, a decrease of $34,558 in current
maturities of capital lease obligations. The increase in trade accounts
payable is primarily attributable to the of raw materials for the Andrea
Anti-Noise/(Registered Trademark)/ products.
Although the Company is not currently committed to any material capital
expenditures, demand for Andrea Anti-Noise/(Registered Trademark)/ products
has required the Company to raise additional working capital to support its
production operations. In the event, however, that the Company continues
to experience 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. As described
above, during 1996 the Company raised additional working capital through
the issuance of convertible subordinated debentures. In addition, the
Company has been exploring various forms of bank and other debt and equity
financing. The Company believes that its ability to remedy its existing
accumulated deficit will depend on profitable growth from the sale of its
Andrea Anti-Noise/(Registered Trademark)/ products. Notwithstanding growth
in sales of Andrea Anti-Noise/(Registered Trademark)/ products during 1996,
no assurance can be given that demand will continue to increase for these
products or any of the Company's other 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 on
favorable terms or at all.
Page 18
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
19, 1997. 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 June
19, 1997.
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 19, 1997.
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 June 19, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, the Company formed Andrea Military Communications, LLC
("AMC"), a Delaware limited liability company, in which the Company has a
72.7% equity interest. The purpose of AMC is to collaborate with Northrop
Grumman in accordance with the Company's agreement with Northrop Grumman
relating to the qualification for military sales and subsequent marketing
of headsets that incorporate Andrea Anti-Noise/(Registered Trademark)/
technology to military customers. Among the members of AMC is a
corporation owned by Christopher Dorney, a director of the Company. In
exchange for this corporation acting as a manager of AMC through Mr.
Dorney, this corporation was granted a 13.6% equity interest in AMC.
In addition, commencing upon the award of a contract for the
purchase of the headsets from Northrop Grumman to AMC, this
corporation will receive an annual base compensation
of $125,000, plus monetary or other compensation sufficient to provide
insurance and other benefits to Mr. Dorney equivalent to those of the
officers of the Company, plus an annual bonus in a range between 0% and 40%
of the base compensation. Also immediately upon the award of such purchase
contract, this corporation will be awarded warrants to purchase 50,000
shares of Andrea Common Stock at an exercise price of $10.00 per share,
which warrants will vest at an annual rate of 20% beginning on the first
anniversary of the date of the award. No assurance can be given that the
headsets that are the subject of the agreement with Northrop Grumman will
be qualified for purchase by the military or that a contract for the purchase
of the headsets will by awarded by Northrop Grumman to AMC. See "Part I-
Item 1-Business-Collaborative Arrangements-Northrop Grumman Agreement".
Certain other 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 June 19, 1997.
Page 19
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, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, 1994 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, 1994 F-6
Notes to Consolidated 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
None.
(c) 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 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-Q for the three months
ended March 31, 1996)
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) (incorporated by reference to Exhibit 4.1 of the
Registrant's Form 10-K for the year ended December 31, 1995)
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
(incorporated by reference to Exhibit 4.2 of the Registrant's Form
10-K for the year ended December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due October 16, 1997 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Six Months ended June 30, 1996)
Page 20
4.4 Securities Purchase Agreement, dated as of August 7, 1996,
relating to the sale of the Registrant's 10% Convertible
Subordinated Debentures due February 9, 1998 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Nine Months ended September 30, 1996)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-K for the
year ended December 31, 1995)
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
(incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-K for the year ended December 31, 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 between Voxware, Inc., and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
Six Months ended June 30, 1996)
11 Computation of Fully Diluted Earnings for Common Share
21 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
Page 21
23.2 Independent Auditors' Consent
27 Financial Data Schedule
- --------------
* Certain portions of this Agreement have been accorded confidential
treatment.
(d) Financial Statement Schedules
See Item 14(a)(2).
Page 22
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, 1994 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, 1994 F-6
Notes to Consolidated Financial Statements F-7
INDEX TO FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
Page 23
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, 1996 and 1995 and the related consolidated statements of
operations, 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 and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Melville, New York
February 21, 1997
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Andrea Electronics Corporation
We have audited the accompanying statements of income, shareholders' equity
and cash flows of Andrea Electronics Corporation for the year ended
December 31, 1994. 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 results of operations and cash flows of
Andrea Electronics Corporation for the year ended December 31, 1994,
in conformity with generally accepted accounting principles.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
February 2, 1995
F-2
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1996 1995
-------------- -------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 921,065 $3,400,829
Marketable securities 197,697 99,223
Accounts receivable, net of allowance
for doubtful accounts of $52,521 and
$32,183, respectively 2,678,449 1,045,922
Inventories, net 4,774,175 1,122,993
Deferred income taxes 1,222,000 -
Prepaid expenses and other current assets 132,691 190,645
-------------- -------------
Total current assets 9,926,077 5,859,612
PROPERTY, PLANT AND EQUIPMENT, net 868,173 691,498
-------------- -------------
Total assets $10,794,250 $6,551,110
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of capital lease
obligations $ 4,685 $ 39,243
Trade accounts payable 822,400 254,643
Accrued salaries and wages payable 62,920 50,571
Other current liabilities 199,998 197,485
-------------- -------------
Total current liabilities 1,090,003 541,942
CAPITAL LEASE OBLIGATIONS,
net of current maturities - 5,388
CONVERTIBLE DEBENTURES, net (Note 5) 2,157,786 2,000,000
OTHER LIABILITIES 38,500 38,500
-------------- -------------
Total liabilities 3,286,289 2,585,830
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and
outstanding: 3,792,197 and 3,286,860
shares, respectively 1,896,099 1,643,430
Additional paid-in capital 8,154,821 4,542,592
Accumulated deficit (2,542,959) (2,220,742)
-------------- -------------
Total shareholders' equity 7,507,961 3,965,280
-------------- -------------
Total liabilities and
shareholders' equity $10,794,250 $6,551,110
============== =============
The accompanying notes are an integral part of these balance sheets.
F-3
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
SALES $ 9,244,109 $ 5,440,792 $ 3,278,100
COST OF SALES 5,913,091 3,190,226 2,394,828
----------- ----------- -----------
Gross profit 3,331,018 2,250,566 883,272
RESEARCH AND DEVELOPMENT EXPENSES 988,483 976,344 1,422,310
GENERAL, ADMINISTRATIVE AND SELLING
EXPENSES 3,872,919 2,925,460 1,995,434
----------- ----------- -----------
Loss from operations (1,530,384) (1,651,238) (2,534,472)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 57,599 159,464 58,044
Interest (expense) (293,290) (10,746) (8,208)
Rent and miscellaneous income 221,858 226,605 184,800
----------- ----------- -----------
(13,833) 375,323 234,636
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,544,217) (1,275,915) (2,299,836)
INCOME TAX BENEFIT 1,222,000 - -
----------- ----------- -----------
NET LOSS $ (322,217) $(1,275,915) $(2,299,836)
=========== =========== ===========
NET LOSS PER SHARE $ (.09) $ (.41) $ (.83)
=========== =========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 3,564,767 3,129,540 2,767,387
========= ========= =========
The accompanying notes are an integral part of these statements.
F-4
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
--------- ----------- ----------- ----------- -----------
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
Conversion of convertible
debentures 317,837 158,919 3,426,823 - 3,585,742
Exercise of stock options 187,500 93,750 185,406 - 279,156
Net loss - - - (322,217) (322,217)
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 3,792,197 $ 1,896,099 $ 8,154,821 $(2,542,959) $ 7,507,961
========= =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-5
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 322,217 $(1,275,915) $(2,299,836)
Adjustments to reconcile net loss to
cash used in operating activities:
Non-cash interest expense on
convertible debentures 162,543 - -
Depreciation and amortization 353,308 112,380 126,271
Deferred income taxes (1,222,000) - -
(Increase) decrease in:
Accounts receivable, net (1,632,527) (476,417) 680,951
Inventories, net (3,651,182) (855,090) 248,829
Prepaid expenses and other
current assets 57,954 (66,275) 11,052
Increase (decrease) in:
Trade accounts payable 567,757 112,196 (261,810)
Other current liabilities 14,862 161,197 (52,686)
----------- ----------- -----------
Net cash used in
operating activities (5,671,502) (2,287,924) (1,547,229)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (98,474) - -
Proceeds from sale of marketable
securities - - 114,091
Purchases of property, plant and
equipment (393,998) (161,341) (36,852)
----------- ----------- -----------
Net cash provided by (used in)
investing activities (492,472) (161,341) 77,239
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (39,946) (14,779) (46,234)
Net proceeds from convertible
debentures (Note 5) 3,445,000 2,000,000 -
Issuance of common stock 279,156 551,830 4,304,306
----------- ----------- -----------
Net cash provided by (used in)
financing activities 3,684,210 2,537,051 4,258,072
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,479,764) 87,786 2,788,082
CASH AND CASH EQUIVALENTS,
beginning of year 3,400,829 3,313,043 524,961
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 921,065 $ 3,400,829 $ 3,313,043
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Conversion of convertible
debentures and accrued interest
into common stock (Note 5) $ 3,585,742 $ - $ -
=========== =========== ===========
Cash paid for:
Interest $ - $ 10,746 $ 8,208
=========== =========== ===========
Income taxes $ 3,145 $ 1,400 $ 3,134
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS:
Andrea Electronics Corporation (together with its subsidiaries, 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 ("ANR") into the field of active noise
cancellation ("ANC") for the purpose of engaging in the design, development,
production and marketing of active noise cancellation and digital audio
systems. In 1995, the Company formed three wholly-owned subsidiaries,
ANC Manufacturing, Inc., Andrea Marketing, Inc. and Andrea Direct Marketing,
Inc., each for the purpose of expanding the Company's efforts in the active
noise cancellation/reduction markets. In 1996, the Company formed Andrea
Military Communications, LLC for purposes of expanding the Company's efforts
in the military communications market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The financial statements for 1994 include the accounts of the Company. The
financial statements for 1996 and 1995 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
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 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 1996 and 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, 1996 and 1995, the carrying values of
the Company's marketable securities approximate fair value. The
securities mature as follows:
Within 1 year $100,000
After 5 years through 10 years 97,697
-------
$197,697
=======
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out) or
market basis.
F-7
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using
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
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.
Revenue Recognition
Revenue is recognized upon shipment and acceptance of goods.
Concentration of Credit Risk
The Company is a manufacturer of audio communications equipment for several
industries. During 1996, the Company primarily sold to the United States
Government and one company. Sales to the federal government and one company
aggregated approximately 64% and 41% of the total accounts receivable at
December 31, 1996 and 1995, respectively, and approximately 88%, 45% and 20%
of the total sales for the years ended December 31, 1996, 1995 and 1994,
respectively.
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.
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 recognizes revenue or
expenses for income tax purposes in a different year than for financial
reporting purposes.
Accounting for Long-Lived Assets
During March 1995, the Financial Accounting Standards Board issued 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. The effect of the adoption of this pronouncement was not
material to the financial statements.
Stock-Based Compensation
In October 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".
F-8
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
Companies electing to continue to use 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 (Note 10). These disclosure requirements are effective for
years beginning after December 15, 1995. The Company has elected to continue
accounting for its stock-based compensation awards to employees and directors
under the accounting prescribed by APB Opinion No. 25 and to provide the
disclosures required by SFAS No. 123.
Net Loss Per Share
Net 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 the primary earnings per
share. For the years ended December 31, 1996, 1995 and 1994, the weighted
average number of common shares and common equivalent shares outstanding were
3,564,767, 3,129,540 and 2,767,387, respectively.
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,
1996 and 1995, 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 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 and 1996, the carrying value of all financial instruments
approximated fair value.
Reclassification
Certain prior year amounts have been reclassified to conform with 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 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.
F-9
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
3. INVENTORIES, NET:
Inventories, net consisted of the following:
December 31,
------------------------
1996 1995
---- ----
Raw materials $2,048,253 $1,230,805
Work-in-process 120,610 133,942
Finished goods 2,870,905 18,334
---------- ----------
5,039,768 1,383,081
Less: reserve for obsolescence 265,593 260,088
---------- ----------
$4,774,175 $1,122,993
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT, NET:
Property, plant and equipment, net consisted of the following:
December 31,
-----------------------------
1996 1995
------------- ------------
Land $ 109,000 $ 109,000
Building 453,000 453,000
Building improvements 387,978 372,928
Machinery and equipment 984,746 605,798
------------- ------------
1,934,724 1,540,726
Less: accumulated depreciation 1,066,551 849,228
------------- ------------
$ 868,173 $ 691,498
============= ============
5. CONVERTIBLE DEBENTURES, NET:
Convertible debentures, net, consisted of the following:
December 31,
-----------------------------
1996 1995
------------- ------------
Series A Debentures (a) $ - $2,000,000
Series B Debentures (b) 612,276 -
Series C Debentures (c) 1,545,510 -
---------- ----------
$2,157,786 $2,000,000
========== ==========
(a) On December 22, 1995, the Company issued $2,198,000 of 15% Convertible
Subordinated Debentures (the "Series A Debentures") due on June 23, 1997.
The bonds and related accrued interest were convertible into shares of the
Company's common stock at a price of 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 was the conversion price to be less than $5.625
per share (the minimum conversion price). Conversion of these Series A
Debentures into the Company's common stock could, 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 could occur at any time after
135 days and through maturity. These Series A Debentures were 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
F-10
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
unaccreted discount of $198,000. In 1996, all of these debentures, together
with related accrued interest, were converted into shares of common stock.
(b) On April 16, 1996, the Company issued $2,198,000 of 15% Convertible
Subordinated Debentures (the "Series B Debentures") due on October 16, 1997.
The bonds and the related accrued interest are convertible into shares of the
Company's common stock at a price of the lesser of (i) $14.438 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 $6.563
per share (the minimum conversion price). Conversion of these Series B
Debentures into the Company's common stock can, at the holder's option, be
effected in increments of up to $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 could occur at any time after
135 days and through maturity. These Series B Debentures are subordinated in
right of payment to all future senior indebtedness, as incurred by the
Company. During fiscal 1996, $1,550,000 of the Series B Debentures,
together with related accrued interest, were converted into the Company's
common stock. At December 31, 1996, this obligation is reflected net of an
unaccreted discount of $35,724.
(c) On August 7, 1996, the Company issued $1,687,500 of 10% Convertible
Subordinated Debentures (the "Series C Debentures") due on February 9, 1998.
The bonds and the related accrued interest are convertible into shares of the
Company's common stock at a price of the lesser of (i) $12.075 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 $5.75
per share (the minimum conversion price). Conversion of these Series C
Debentures into the Company's common stock can, at the holder's option, be
effected in an amount of up to $843,750 beginning 135 days following the date
of original issuance and up to the entire original principal amount beginning
180 days following the date of original issuance through maturity. These
Series C Debentures are subordinated in right of payment to all future senior
indebtedness, as incurred by the Company. At December 31, 1996, this
obligation is reflected net of an unaccreted discount of $141,990.
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 $110,831, $91,225 and
$89,352 for 1996, 1995 and 1994, respectively.
F-11
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
7. TAXES:
Income tax benefit consists of the following:
December 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
Federal
Current $ - $ - $ -
Deferred (525,000) - -
State and Local:
Current - - -
Deferred (144,000) - -
Adjustment to valuation
allowance related to opening
net deferred tax assets (553,000) - -
----------- ----------- -----------
$(1,222,000) $ - $ -
============ =========== ===========
A reconciliation between the provision for income taxes and the
amount computed by applying the statutory Federal income tax rate
to loss before income taxes is as follows:
Year ended December 31,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
Tax benefit at statutory rate $ (525,000) $ (434,000) $ (781,000)
Loss without tax benefit - 434,000 781,000
State and local taxes (144,000) - -
Change in valuation allowance
For opening net deferred
tax assets (553,000) - -
------------ --------- -----------
$(1,222,000) $ - $ -
============ ========= ===========
The tax effects of temporary differences that give rise to
significant portions of the deferred tax asset, net, at
December 31, 1996, are as follows:
Allowance for doubtful accounts $ 22,000
Reserve for obsolescence 112,000
NOL carryforward 3,000,000
-----------
3,134,000
Less: Valuation allowance (1,912,000)
-----------
Deferred tax asset, net $1,222,000
===========
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $7,000,000 expiring in varying amounts beginning in 2006
through 2010. In 1996, management of the Company determined that it has
become more likely than not that a portion of the previously-reserved
deferred tax assets will be realized and has, accordingly, reduced the
valuation allowance on those previously reserved deferred tax assets by
$553,000, which is included in the income tax benefit in the accompanying
statement of operations for 1996. The determination that the net deferred
tax asset of $1,222,000, which includes the deferred benefit for the current
year loss and the reduction in the valuation allowance on previously-reserved
deferred tax assets, is realizable is based on the Company's profitability in
the latter part of 1996 and the impact of the sales performance of its
F-12
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
products. The realization of certain of the fully reserved deferred tax
assets related to tax benefits associated with the exercise of stock options
will not result in a tax benefit in the consolidated statement of operations,
but will result in an increase in additional paid in capital, if and when
realized.
8. 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 and 1994 required annual rentals of
approximately $184,800. The tenant pays one-third of increases in real
estate taxes over the base year and pays all of its proportionate share of
operating expenses.
9. COMMITMENTS AND CONTINGENCIES:
Manufacturing Agreement
The Company is a party to an agreement with 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. Through
December 31, 1996, no sales were recognized pursuant to this agreement.
License Agreement
In October 1996, the Company entered into a licensing agreement with the
Microsoft Corporation ("Microsoft") covering the distribution by the Company
of Microsoft NetMeeting(/Registered Trademark/) Internet and Intranet
conferencing software with the Company's Andrea Anti-Noise(/Registered
Trademark/) retail line of ANC PC Headsets and Handsets.
Distribution Agreements
In April 1996, the Company entered into an agreement with Voxware, Inc., a
developer of advanced voice-processing software for multimedia computing,
Internet and communications applications covering the distribution by the
Company of Voxware's TeleVox(/Registered Trademark/) Internet telephone
software with the Andrea Anti-Noise(/Registered Trademark/) family of
computer headsets and handsets.
In September 1996, the Company entered into an agreement with Kurzweil
Applied Intelligence to cover the distribution by the Company of a special
version of Kurzweil VoicePad(/Registered Trademark/) for Windows(/Registered
Trademark/) with the Company's Andrea Anti-Noise(/Registered Trademark/)
retail line of ANC headsets and handsets.
In November 1996, the Company entered into an agreement with The Learning
Company, Inc. to provide PC microphones with The Learning Company's
educational CD-ROM products "Interactive Reading Journey 1" and
"Interactive Reading Journey 2".
During 1996, the Company entered into additional OEM and/or reseller
relationships with, and began shipping Andrea Anti-Noise(/Registered
Trademark/) computer headsets to, Packard Bell NEC, Inc., Lucent
Technologies Inc. and FICOMP, Inc.
Legal Proceedings
On February 21, 1996, the Company settled a case brought by a former employee
for $167,500, including the amount of an expired capital lease of $27,588.
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.
F-13
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
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, but in any event, believes
that such impact would not be material.
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, 1996, the Company had outstanding letters of
credit of approximately $250,000, which are fully collateralized by cash held
with the same bank.
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. Stock options
granted to employees and directors under the 1991 Plan are 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. At December 31, 1996,
721,000 stock options granted to employees and directors were exercisable.
The Company accounts for equity-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 loss and net loss per share would have been
reduced to the following pro forma amounts:
1996 1995
---------- ------------
Net loss: $ (322,217) $(1,275,915)
Pro Forma (1,093,868) (1,569,716)
Net loss per share:
As Reported (.09) (.41)
Pro Forma (.31) (.50)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
F-14
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
Option activity in the 1991 Plan during 1996, 1995, and 1994 is summarized as
follows:
For the Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of period 1,065,000 $ 8.24 1,233,000 $ 5.61 1,000,000 $ 4.12
Granted 222,625 11.01 137,500 17.88 273,000 12.00
Exercised (187,500) 1.50 (270,500) 2.04 - -
Canceled - - (35,000) 1.35 (40,000) 1.35
--------- --------- ---------
Outstanding at end of period 1,100,125 6.81 1,065,000 8.24 1,233,000 5.61
========= ========= =========
Exercisable at end of year 721,000 3.65 763,875 1.63
========= ========
Weighted average fair value
of options granted $ 8.13 $13.23
====== ======
The fair value of the stock options granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1996 1995
-------- --------
Expected life (years) 7.5 7.5
Risk-free interest rates 6.90% 5.95%
Volatility 69% 71%
Dividend yield 0% 0%
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------------------------------- ---------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of Exercise Prices 12/31/96 Contractual Life Price 12/31/96 Price
------------------------ -------- ---------------- -------- -------- --------
$ 1.35 to $ 2.03 575,750 6.64 years $ 1.39 575,750 $ 1.39
2.04 to 6.91 - - - - -
6.92 to 10.37 36,375 9.95 10.00 11,875 10.00
10.38 to 15.58 370,500 8.93 11.67 104,000 11.67
15.59 to 23.38 117,500 8.93 17.01 29,375 17.01
--------------- --------- -------- -------- -------- -------
$1.35 to $23.38 1,100,125 7.77 years $ 6.81 721,000 $ 3.65
=============== ========= ======== ======== ======== =======
F-15
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996
Warrants
In connection with an overseas equity offering in 1994, the Company issued
five-year warrants to purchase 23,750 shares of common stock at prices of
$9.84 to $10.98 per share. During fiscal 1996, 50% of these warrants were
converted into an equal number of options at an equivalent value. At
December 31, 1996, all of the 11,875 options granted are exercisable and
will expire on July 30, 2006. At December 31, 1996, the remaining 11,875
of the warrants are exercisable and will expire on June 15, 1999.
F-16
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, 1997. 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
February 21, 1997
S-1
ANDREA ELECTRONICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged to Charged to
Balance at costs and other Balance at
January 1, expenses accounts Deductions December 31,
---------- ----------- ---------- ---------- ------------
1996
- ----
Allowance for doubtful accounts $ 32,183 $ 51,483 $ - $ 31,145 $ 52,521
1995
- ----
Allowance for doubtful accounts $ 69,771 $ 30,000 $ - $ 67,588 $ 32,183
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, 1997 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, 1997
- ------------------------- and Chief Executive Officer
Frank A.D. Andrea, Jr.
/s/ Patrick D. Pilch Executive Vice President March 27, 1997
- ------------------------- and Chief Financial Officer
Patrick D. Pilch
/s/ John N. Andrea Co-President March 27, 1997
- -------------------------
John N. Andrea
/s/ Douglas J. Andrea Co-President March 27, 1997
- -------------------------
Douglas J. Andrea
/s/ Jeffrey S. Gosman Vice President, March 27, 1997
- ------------------------- Controller
Jeffrey S. Gosman and Secretary
/s/ Christopher Dorney Director March 27, 1997
- -------------------------
Christopher Dorney
/s/ Gary A. Jones Director March 27, 1997
- -------------------------
Gary A. Jones
/s/ Scott Koondel Director March 27, 1997
- -------------------------
Scott Koondel
/s/ Paul M. Morris Director March 27, 1997
- -------------------------
Paul M. Morris
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 Amended By-Laws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Form 10-Q for the three months
ended March 31, 1996)
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) (incorporated by reference to Exhibit 4.1 of the
Registrant's Form 10-K for the year ended December 31, 1995)
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
(incorporated by reference to Exhibit 4.2 of the Registrant's Form
10-K for the year ended December 31, 1995)
4.3 Securities Purchase Agreement, dated as of April 16, 1996,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due October 16, 1997 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Six Months ended June 30, 1996)
4.4 Securities Purchase Agreement, dated as of August 7, 1996,
relating to the sale of the Registrant's 10% Convertible
Subordinated Debentures due February 9, 1998 (with forms of
Debenture and Registration Rights Agreement attached thereto)
(incorporated by reference to Exhibit 4.1 of the Registrant's Form
10-Q for the Nine Months ended September 30, 1996)
10.1 1991 Performance Equity Plan, as amended (incorporated by
reference to Exhibit 10.1 of the Registrant's Form 10-K for the
year ended December 31, 1995)
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
(incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-K for the year ended December 31, 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 between Voxware, Inc., and the Registrant (incorporated
by reference to Exhibit 10.1 of the Registrant's Form 10-Q for the
Six Months ended June 30, 1996)
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.