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1
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, 1997
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
- -------------------- -----------------------------------------
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. ( )
As of March 30, 1998, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $175,477,430
(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 30, 1998 was 9,053,230.
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 18, 1998, which
will be filed by the registrant within 120 days after the close of its
fiscal year.
EXHIBIT INDEX ON PAGE 21
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TABLE OF CONTENTS
PAGE
TITLE PAGE 1
PART I 3-12
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ITEM 1. BUSINESS 3-11
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
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 14-19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III 20-21
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
ITEM 11. EXECUTIVE COMPENSATION 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
PART IV 21-23
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 21
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PART I
ITEM 1. BUSINESS
Overview
Andrea Electronics Corporation (together with its subsidiaries, the
"Company" or "Andrea") is engaged in the development, manufacture and
marketing of its Andrea Anti-Noise/(Registered Trademark)/ family of
electronic headsets and handsets with noise canceling and noise reducing
features. Noise cancellation enhances voice-activated computing,
computerized speech recognition, and computer and Internet telephony.
The Company believes that its noise cancellation products, which were
commercially introduced in 1995, have become leading products for these
applications because Andrea noise cancellation products generate the high
levels of voice quality, intelligibility and reliability required by these
applications and are very competitively priced. Noise reduction enhances
the quality of sound heard in noisy environments and can also be used as
a means of environmental sound control. One of the Company's newest headsets
combines its active noise cancellation technology with its Andrea QuietWare/
(Registered Trademark)/ active noise reduction technology. The Company is
also developing a new line of Andrea DSP/(Trademark)/ products with digital
signal processing features to further its role in technology enhanced
communications.
The Company has been engaged in the electronic communications industry
since 1934. For three decades prior to the Company's entry into the
voice-activated computing market in the 1990's, its primary business was
selling intercom systems for military and industrial use. The Company
continues to manufacture replacement parts for these systems, but does not
expect revenue from this business to be material. The Company is, however,
seeking to apply its knowledge of the military and industrial markets to
develop applications of its Andrea Anti-Noise technologies for these markets.
No assurance can be given that these efforts will succeed, and the Company
does not expect any material revenues from such new products for the
foreseeable future.
Strategy
The Company's strategy is to maintain and extend its lead in noise
cancellation and noise reduction technologies and products. The Company
intends to continue to broaden its Andrea Anti-Noise product line with its
existing Andrea Anti-Noise technologies and to introduce new products based
on digital signal processing technology currently under development by the
Company.
To leverage its research and development resources and direct sales
efforts, the Company collaborates with large enterprises in software
publishing and computer manufacturing and is seeking to increase on a global
scale its relationships with large retail chains and distributors.
The success of the Company's strategy will depend on its ability to
increase sales of its line of existing Andrea Anti-Noise products, introduce
additional Andrea Anti-Noise products and new Andrea DSP products, maintain
the competitiveness of its technologies through further research and
development, and achieve widespread adoption of its products and
technologies. No assurance can be given that the Company will be able to
accomplish these objectives. See "Collaborative Arrangements" and
"Competition."
Andrea Anti-Noise Products
Andrea Anti-Noise products include headsets, handsets and microphones,
for sale directly to end-users, through distributors and 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.
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Additionally, the Company has designed and produced accessories that enhance
the performance and integration of the personal computer and Andrea
Anti-Noise products. The markets and applications for and to which Andrea
Anti-Noise 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
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 products embody the Company's active noise cancellation
("ANC") and noise cancellation ("NC") microphone technologies and active
noise reduction ("ANR") earphone 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.
PERSONAL COMPUTER, WORK STATION, AND COMPUTER-BASED AND INTERNET-BASED
TELEPHONY PRODUCTS
Andrea Anti-Noise products have been designed for voice-based computer
applications and computer-based telephony across a broad range of hardware
and software platforms. These products have been designed for
voice-activated computer interfaces to operate application software, such as
word processors, database managers, educational software, multimedia, and
games, as well as for Internet and Intranet voice communications. The
following products incorporate the Company's NC or ANC microphone
technologies to cancel ambient noise in a range of different environments,
including homes, mobile computing environments, offices, and factories. Also
included in the following list are several accessories that enhance the
performance and integration of the personal computer and Andrea Anti-Noise
products.
Andrea Anti-Noise 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 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.
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Andrea Anti-Noise ANC-300 Hand-held Microphone. The ANC-300 is a
dual-function ANC hand-held microphone with both near field and far field
capabilities. Near field operation is utilized when holding the ANC-300; far
field operation can be achieved by setting the microphone in an accompanying
stand for amplified desktop performance. The suggested retail price of the
ANC-300 is $39.95.
Andrea Anti-Noise 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 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 ANC-600 Computer Headset. The ANC-600 is an active
noise canceling monaural headset with an ultra-flex boom microphone. Its
durable headband and "on/mute" switch differentiate this product. This
headset can be used on either the left or right side of the head. The
suggested retail price of the ANC-600 is $79.95.
Andrea Anti-Noise ANC-650 Computer Headset. The ANC-650 is an active
noise canceling stereo headset with an ultra-flex boom microphone. Like the
ANC-600, it has a durable headband and "on/mute" switch, and can be used on
either the left or right side of the head. The suggested retail price of the
ANC-650 is $89.95.
Andrea Anti-Noise QW-1000 Computer Headset. The QW-1000 is an Andrea
QuietWare active noise reduction headphone system with a small external audio
amplifier. Its superior stereo sound capabilities differentiate this
product. The suggested retail price of the QW-1000 is $69.95.
Andrea Anti-Noise QW-1000ANC Computer Headset. The QW-1000ANC combines
Andrea QuietWare active noise reduction with Andrea active noise cancellation
headset. This product, like the QW-1000, is differentiated by its stereo
sound capabilities, "on/mute" switch and small external audio amplifier, and
also includes an ultra-flex boom microphone. The suggested retail price of
the QW-1000ANC is $99.95
Andrea Anti-Noise NC-6 Computer Headset. The NC-6 consists of a
back-of-the-head headband with a flex boom NC microphone. The NC-6 is a
microphone-only headset. The suggested retail price of the NC-6 is $12.95.
Andrea Anti-Noise NC-8 Computer Headset. The NC-8 is a lightweight,
uniquely styled headset consisting of a headband with an around-the-ear style
mount, and a flex boom NC microphone. The NC-8 is offered only as an OEM
product.
Andrea Anti-Noise NC-10 Computer Headset. The NC-10 is a miniature
ear-bud headset with a flex boom NC microphone. The suggested retail price
of the NC-10 is $19.95.
Andrea Anti-Noise NC-12 Computer Headset. The NC-12 is a monaural
in-ear headset consisting of a headband with a flex boom NC microphone. The
suggested retail price of the NC-12 is $14.95.
Andrea Anti-Noise NC-14 Computer Headset. The NC-14 is a dual in-ear
headset consisting of a headband with a flex boom NC microphone. The
suggested retail price of the NC-14 is $19.95.
Andrea Anti-Noise 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 NC-65 Computer Headset. The NC-65 is a stereo headset
with a flex boom NC microphone. Its durable headband and higher quality
stereo sound features differentiate this headset. The suggested retail price
of the NC-65 is $34.95.
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Andrea Anti-Noise NC-80 Computer Headset. The NC-80 consists of a
headband with a boom NC microphone and earphone. This headset can be used on
either the left or right side of the head. The suggested retail price of the
NC-80 is $19.95.
Andrea Anti-Noise 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.
Andrea Anti-Noise NC-150 Computer Headset. The NC-150 is an ultralight,
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 M-20 PC Mini Microphone. 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 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.
Andrea AWS-100 Wireless Voice Solutions Microphone. The AWS-100 is an
ultralight one-half duplex headmounted microphone only product. The
suggested retail price of the AWS-100 is $99.00 (without the rechargeable
battery pack) and $149.00 (with the rechargeable battery pack).
The Company markets all of the above products to end users through
computer products distributors and value-added resellers, original equipment
manufacturers and to publishers. Commercial sales of Andrea Anti-Noise
products began with the ANC-100 in 1995. See "Collaborative Arrangements".
CONSUMER, RESIDENTIAL AND COMMERCIAL TELEPHONY PRODUCTS
As part of the Company's initial Andrea Anti-Noise development program
it created two products for various applications in telephony: the ANC
Telecommunications Kit and the ANC 321 Public Payphone Transmitter Module.
Each of these products was designed to enhance 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. In 1995, the Company licensed certain of this ANC technology to a
subsidiary of BellSouth Products, Inc. for use in residential and small
business telephones. This license, which expires at the end of 1998, was not
utilized by the licensee and consequently became non-exclusive. The Company
does not expect to receive any revenue under this license.
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COMMERCIAL, INDUSTRIAL AND MILITARY COMMUNICATIONS APPLICATIONS
The Company has developed two Andrea Anti-Noise products for various
communications applications in commerce, industry and the military: ANR
Headphone Kits and ANR/ANC Headset Systems. The ANR Headphone Kit is a
lightweight, open backed headphone for use in high-noise environments, such
as airplane cabins, to reduce ambient noise and offer improved audio
characteristics. Although the Company sold a limited number of these kits to
a major producer of headphones, it does not expect any material revenue from
these kits for the foreseeable future. The ANR/ANC Headset System is a high
performance communication headset system with both ANR earphone technology
and ANC microphone technology. This product is designed to be adapted to
customer specifications for use in extreme, high noise environments, such as
in aircraft, manufacturing and warehouse facilities, and military vehicles.
The Company has been collaborating with Northrop Grumman Corporation
("Northrop Grumman") to develop military and commercial versions of the
ANR/ANC Headset Systems, but does not expect any material revenue from these
products for the foreseeable future. See "Collaborative Arrangements."
Collaborative Arrangements
An important element of the Company's strategy is to promote widespread
adoption of its Andrea Anti-Noise technology through collaborative
arrangements with market and technology leaders. The Company has entered
into several collaborative and distribution arrangements with software
publishers and hardware manufacturers relating to the marketing and sale of
Andrea Anti-Noise products. These companies include, among others:
International Business Machines Corporation ("IBM"); Microsoft Corporation
("Microsoft"); Lernout & Hauspie, Inc. ("Lernout & Hauspie", formerly
Kurzweil Applied Intelligence, Inc.); Dragon Systems, Inc. ("Dragon Sytems");
Voxware, Inc. ("Voxware"); The Learning Company, Inc. ("The Learning
Company"); Mplayer; Packard Bell NEC; Lucent Technologies Inc.; and FICOMP,
Inc. The Company has also established direct arrangements with large
electronic and computer retail chains in the United States, including CompUSA
and Staples, as well as with certain major distributors in Europe and the
Americas. The Company is currently discussing additional arrangements with
other software companies, several major personal computer companies, consumer
electronic manufacturers, 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
two-year procurement agreement with IBM covering the purchase by IBM of
certain Andrea Anti-Noise products for the personal computer market. In
1997, the Company and IBM executed a new, expanded procurement agreement
covering additional Andrea Anti-Noise products. During 1996 and 1997, sales
of the Company's computer headsets to IBM and certain of IBM's affiliates,
distributors, licensees, and integrators accounted for 46% and 56%,
respectively, of the Company's total sales. In addition, in 1997 the Company
entered into a Revolving Loan and Security Agreement with IBM Credit
Corporation ("IBM Credit") under which the Company may borrow up to $8
million against eligible accounts receivable and inventory. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Microsoft License Agreement. In October 1996, the Company entered into
a licensing agreement with Microsoft covering the distribution by the Company
of Microsoft NetMeeting/(Registered Trademark)/ Internet and Intranet
conferencing software with the Andrea Anti-Noise 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. In April 1997, the Company signed a similar licensing agreement
with Microsoft allowing the Company to sell Microsoft's NetMeeting
2.0/(Registered Trademark)/Internet and Intranet conferencing software with
Andrea Anti-Noise headsets. Andrea Anti-Noise headsets have been endorsed
and recommended by Microsoft's NetMeeting Group. In August 1997, Microsoft
recommended Andrea's ANC headsets for use with Internet Explorer 4.0 and, in
addition, Microsoft's Windows Hardware Qualifications Lab certified Andrea
ANC products for use with Windows 95/(Registered Trademark)/ and Windows NT
/(Registered Trademark)/.
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Lernout & Hauspie Agreement. In September 1996, the Company entered into
an agreement with Kurzweil Applied Intelligence, Inc., a predecessor of
Lernout & Hauspie, covering the distribution by the Company of a special
version of Kurzweil VoicePad/(Registered Trademark)/ for Windows/(Registered
Trademark)/ with the Andrea Anti-Noise retail line of ANC headsets and
handsets. In December 1997, this arrangement was complemented with a joint
licensing and marketing agreement with Lernout & Hauspie under which Lernout
& Hauspie bundles various Andrea Anti-Noise products with Lernout & Hauspie
continuous speech recognition software products, including
VoiceXpress/(Registered Trademark)/ and VoiceCommands/(Registered
Trademark)/). In addition, Lernout & Hauspie resells various Andrea
Anti-Noise products through its direct sales group to OEM, corporate and
retail customers for use with Lernout & Hauspie's speech recognition
dictation, voice verification and telecommunications software programs.
Voxware Agreement. In April 1996, the Company entered into an agreement
with Voxware, 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 family of computer
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".
Northrop Grumman Agreement. In 1993, the Company entered into a six-year
agreement with Grumman Aerospace Corporation (subsequently acquired by
Northrop Grumman) for the development and marketing of ANR/ANC headsets for
military applications. Under this agreement, Northrop Grumman has exclusive
worldwide rights to market these headsets to U.S. and non-U.S. military
markets. The first headset developed under this agreement was targeted at
one of the U.S. military procurement programs on which Northrop Grumman is a
contractor. During the second half of 1997, after various product
qualification testing, Northrop Grumman submitted a purchase order to the
Company for a very limited number of these headsets for further testing for a
second program with which Northrop Grumman is involved and indicated that it
would not proceed with the Andrea headset for the first program. The Company
does not anticipate any material revenue from sales of these headsets for the
foreseeable future.
Traditional Products and Government Contracts
The Company's traditional products include 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 ten 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.
Unfilled orders under government prime contracts and subcontracts may be
terminated at the convenience of the government under the provisions of
statutes or regulations applicable to defense procurement contracts. In the
event of such termination, the Company is entitled to reimbursement for
costs incurred plus a percentage of profit. Sales under defense procurement
contracts are also subject, in certain instances, to price redetermination
proceedings. In the opinion of the Company, such proceedings, if any, would
not have a material effect upon the earnings of the Company.
Patents, Trademarks, and Other Intellectual Property Rights
The Company relies on a combination of patents, 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,
9
however, that the steps taken by the Company to protect its intellectual
property will prevent misappropriation or circumvention of the Company's
intellectual property.
Since the beginning of 1997, the Company has been granted four patents
in the United States covering its Andrea Anti-Noise technology. The first
covers a noise cancellation apparatus and expires in 2014. The second covers
a noise cancellation and noise reduction apparatus and expires in 2015. The
third covers a noise cancellation headset for use with a stand or worn on the
ear and expires in 2015. The fourth covers a design for a tethered media
communication handset with controls and expires in 2010. In addition, the
Company was granted three patents outside the United States. The first and
second are in Canada and Mexico, covering a design for an untethered
communications/media handset. They expire in 2007 and 2001, respectively.
The third is in Taiwan covering a design for a boom microphone headset, and
it expires in 2005. There are other U.S. and non-U.S. applications currently
pending, and no assurance can be given that patents will be issued with
respect to them or that future patent applications filed by the Company.
Numerous patents have been granted in the fields of noise cancellation,
noise reduction, computer voice recognition and related subject matter. 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 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, interference
proceeds before the U.S. Patent and Trademark Office, oppositions to patent
applications outside the United States, and litigation alleging infringement
of the proprietary rights of others. Litigation to establish the validity of
patents, to assert infringement claims against others, and to defend against
patent infringement claims can be expensive and time-consuming, even if the
outcome is favorable to the Company.
The Company markets its products under several trademarks, including,
among others, Andrea AntiNoise. During 1997, the Company obtained a trademark
for "Technology Enhancing Communications" for consumer electronics,
specifically devices utilizing noise cancellation technology. The duration
of the registration is ten years and is renewable indefinitely for ten-year
periods.
Research and Development
Andrea Anti-Noise technology is substantially important to the Company's
competitiveness. To maintain its competitiveness, the Company has organized
its research and development efforts using a market and applications approach
for meeting the requirements of new and existing customers. Under this
approach, the Company's engineering staff interacts closely with the
Company's sales and marketing personnel and, frequently, directly with
customers. The engineering staff is responsible for the research and
development of new products and the improvement of existing products. Since
1991, substantially all of the Company's research and development has been
focused on developing Andrea Anti-Noise technology and applications
engineering. In 1997, the Company expended $1,106,880 for research and
development of new products and product enhancements, representing a 12%
increase from $988,483 in 1996. The Company expects research and development
expenses to increase as it seeks to broaden its line of products and to
develop Andrea DSP technology and 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".
10
Sales and Marketing
The Company employs its own marketing and sales staff as well as outside
sales representative organizations to market Andrea Anti-Noise products and
Andrea's traditional intercom products. In addition to the Company's direct
marketing and sales efforts, Andrea Anti-Noise products are also marketed
through software publishers, distributors in the personal computer,
telecommunications equipment, computer and consumer electronic retailers, and
original equipment manufacturers. Under 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 and Andrea
DSP products. Market acceptance of the Andrea Anti-Noise and Andrea DSP
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
products, the products are assembled by the Company at its New York facility
from purchased components. As sales of any particular Andrea Anti-Noise
product increase, assembly operations are transferred to a subcontractor in
Asia. Most of the components for the Andrea Anti-Noise products are
available from several sources and are not characteristically in short
supply. However, certain more specialized components for the Andrea
Anti-Noise 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 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 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 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.
11
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 93 persons at December 31, 1997, of which 55 were
production workers and technicians, 13 were members of the engineering staff,
and 25 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", "Andrea QuietWare", and "Technology Enhancing
Communications" are registered trademarks of the Company. "Andrea DSP" is a
trademark of the Company. "NetMeeting", "NetMeeting 2.0", "MS Phone",
"MSVoice", "Windows", "Windows 95" and "Windows NT" are registered trademarks
of Microsoft. "VoiceXpress" and "VoiceCommands" are registered trademarks of
Lerner & Hauspie. "VoicePad" is a registered trademark of Kurzweill Applied
Intelligence. "TeleVox" is a registered trademakr of Voxware.
12
ITEM 2. PROPERTIES
The Company currently owns and occupies the building located at 11-40
45th Road, Long Island City, New York 11101. The Company leases
approximately one-third of these premises and receives rental income of
$243,000 per annum, subject to annual adjustment. The machinery and
equipment used by the Company are maintained in good operating condition and
are adequate for the business of the Company as presently conducted. In
addition, it is the opinion of management that the Company's property, plant
and equipment are adequately covered by insurance.
The Company intends to sell the building located at 11-40 45th Road,
Long Island City, and relocate to a larger leased facility in Suffolk County
on Long Island, New York (the "New Facility"). The lease expense associated
with the New Facility is anticipated to range between $450,000 to $550,000
per year. The proceeds from the sale of the building is anticipated to range
between $2 million and $2.2 million, net of applicable taxes. The sale of
the building is expected to close during the first quarter of 1998 and the
relocation to the New Facility is anticipated to occur during the second
quarter of 1998. See Notes 5 and 9 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. On August 12, 1997, the Company and claimant reached an agreement to
settle certain claims relating to the contracts for an amount that was not
material to the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's 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 16, 1997, there were approximately 494 holders of record of the
Company's Common Stock.
QUARTER ENDED HIGH LOW
March 31, 1996 10 3/8 5 1/4
June 30, 1996 10 11/16 6 7/16
September 30, 1996 7 3/8 5
December 31, 1996 7 7/16 5 1/4
March 31, 1997 7 1/2 4 15/16
June 30, 1997 6 7/8 5 1/16
September 30, 1997 34 1/4 5 7/8
December 31, 1997 29 1/8 16 1/8
No dividends were paid in 1997 or 1996. The above prices have been
adjusted to reflect a two-for-one stock split effected in the form of a 100%
stock dividend to stockholders of record on September 10, 1997 and paid on
September 17, 1997.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data in the following table has been derived from
the Company's audited financial statements for each of the years in the
five-year period ended December 31, 1997.
DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
INCOME STATEMENT DATA
Sales $26,429,804 $ 9,244,109 $ 5,440,792 $ 3,278,100 $6,527,972
Cost of Sales 16,077,801 5,913,091 3,190,226 2,394,828 3,903,585
----------- ----------- ----------- ----------- ----------
Gross Profit 10,352,003 3,331,018 2,250,566 883,272 2,624,387
Research and Development 1,106,880 988,483 976,344 1,422,310 720,278
General, Administrative
and Selling Expenses 5,753,130 3,872,919 2,925,460 1,995,434 1,472,270
----------- ----------- ----------- ----------- ----------
Income (Loss) from
Operations 3,491,993 (1,530,384) (1,651,238) (2,534,472) 491,839
Other Income (Expense) 76,864 (13,833) 375,323 234,636 240,454
----------- ----------- ----------- ----------- ----------
Income (Loss) Before
Provision (Benefit)
for Income Taxes 3,568,857 (1,544,217) (1,275,915) (2,299,836) 732,293
Provision (Benefit) for
Income Taxes 154,461 (1,222,000) - - 55,000
----------- ----------- ----------- ----------- ----------
Net Income (Loss) $ 3,414,396 $ (322,217) $(1,275,915) $(2,299,836) $ 677,293
=========== =========== =========== =========== ==========
Basic Earnings Per Share $ .42 $ (.05) $ (.20) $ (.42) $ .27
Diluted Earnings Per Share $ .39 $ (.05) $ (.20) $(.42) $ .20
BALANCE SHEET DATA
Long Term Capital Lease
Obligations $ - $ - $ 5,388 $ 17,044 $ 31,823
Long Term Obligations,
including current
portions $ 38,500 $ 2,196,286 $ 2,038,500 $ 38,500 $ 38,500
Retained Earnings
(Deficit) $ 871,437 $(2,542,959) $(2,220,742) $ (944,827) $ 1,355,009
Total Assets $17,789,184 $10,794,250 $ 6,551,110 $ 5,016,581 $ 3,356,579
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice-activated, natural language-driven,
human/machine interface" markets that are rapidly emerging from the
convergence of the telecommunications and computer industries, and for the
defense electronics markets that are requiring increasingly higher quality
voice communication products. The Company's strategy for serving these
markets is to leverage its expertise in audio communications technology,
including its patented Andrea Anti-Noise Active Noise Cancellation ("ANC")
and Andrea Anti-Noise Active Noise Reduction ("ANR") technologies, and to
continue developing, manufacturing and marketing a line of Andrea Anti-Noise
headsets, handsets and other communication devices to cost-effectively
enhance voice communications for end users of the growing number of new,
voice-based computer and computer telephony applications and interfaces. In
addition, to extend the Company's position in technology enhancing
communications, the Company has begun to develop its Andrea DSP products
based on digital signal processing technology.
Examples of the applications and interfaces for which Andrea Anti-Noise
products provide benefit include: Internet and other computer-based
speech; telephony 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. High quality audio communication technologies will
also be required for emerging "far field" voice applications, ranging from
continuous speech dictation, to multiparty video teleconferencing and
collaboration, to natural language-driven interfaces for automobiles, home
and office automation and other machines and devices into which
voice-controlled microprocessors are expected to be introduced during the
next several years.
An important element of the Company's strategy for expanding the
channels of distribution and broadening the base of users for its products is
its set of collaborative arrangements with software publishers, distributors
and retailers actively engaged in the various markets in which the Company's
products have application, and hardware OEMs. 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 includes with its products. In addition, the
Company is also seeking to increase its own direct marketing efforts.
The Company outsources the manufacturing of Andrea Anti-Noise products
for its OEM, consumer and commercial customers. The Company also
manufactures and distributes intercom systems and related components for
military applications and industrial applications ("Traditional Military
Products"). In contrast to the outsourced manufacturing of its Andrea
Anti-Noise products for the non-military markets, the Company continues to
manufacture its Traditional Products in its own facility. To the extent that
the Company succeeds in developing a new line of products for military use
that incorporate ANC and ANR technology, management anticipates that it will
manufacture these new military products through both outsourcing and
self-manufacturing.
15
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, 1997 and other items set forth in this Report on Form 10K are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The words "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:
- -the rate at which the Company's Anti-Noise technology is accepted by the
diverse range of users and applications within the global communications and
informatics marketplace;
- -the ability of the Company to maintain a competitive position for its Andrea
Anti-Noise products in terms of technical specifications, quality, price,
reliability and service and to develop similarly competitive Andrea DSP
products, which ability will require the Company to have sufficient funds to
expend on research and development;
- -the ongoing 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
- -in the event that the Company experiences continued significant growth in
demand for Andrea Anti-Noise products, 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, 1997 Compared to Year Ended December 31, 1996
Sales
Sales for the year ended December 31, 1997 were $26,429,804, an increase
of 186% over sales of $9,244,109 for the year ended December 31, 1996. The
increase primarily reflects increasing market acceptance of Andrea Anti-Noise
products for providing the technology enhanced audio signals required for
voice-driven computer applications, coupled with new product launches that
were particularly strong in the latter half of 1997 due to retail
introduction of several of the Company's products. For the year ended
December 31, 1997, sales from Andrea Anti-Noise products comprised
approximately 85% of total sales, while sales from the Company's traditional
military products comprised approximately 15% of total sales.
Cost of Sales
Cost of sales as a percentage of sales for the year ended December 31,
1997 decreased to 61% from 64% for the year ended December 31, 1996. The
improvement during 1997 principally reflects the efficiencies resulting from
the Company's continuing efforts to globalize its sourcing and manufacturing
activities, as well as maximizing the benefits of shifts in product mix.
Also contributing to the improvement is the higher gross margins realized as
a result of the retail introduction of the Company's products during the
latter half of 1997.
16
Research and Development
Research and development expenses for the year ended December 31, 1997
increased 12% to $1,106,880 from $988,483 for the year ended December 31,
1996. This increase is primarily related to technological investments that
resulted in 12 new product launches during 1997. Management believes
increases in research and development will continue throughout 1998, with the
expectation of several new product launches in order to continue providing
state-of-the-art communications products for the various voice interface
markets.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the year ended December
31, 1997 increased 49% to $5,753,130 from $3,872,919 for the year ended
December 31, 1996. This increase, primarily attributable to Andrea Anti-Noise
products, reflects increased business development expenses related to
existing and prospective collaborative arrangements with hardware OEMs,
software publishers, distributors and retailers. In addition, the Company
incurred increased promotional, marketing and sales expenses to promote
product awareness and acceptance of the Andrea AntiNoise product line. As a
percentage of sales, however, general, administrative and selling expenses
decreased to 22% for the year ended December 31, 1997 from 42% for the year
ended December 31, 1996. In light of the Company's intention to introduce
and support additional product launches during 1998, the Company expects to
at least maintain and likely increase general, administrative and selling
expenses, in terms of both absolute dollars and relative percentage of sales.
Other Income (Expense)
Other income for the year ended December 31, 1997 was $76,864 compared
to Other expense of $13,833 for the year ended December 31, 1996. This
change is primarily attributable to decreases in interest expense as a result
of conversion rights exercised during 1997, and the lower effective interest
rate on the outstanding convertible debentures during fiscal 1997.
Provision for Income Taxes
The income tax expense of $154,461 for the year ended December 31, 1997
resulted from the effect of a provision for income taxes at the Company's 42%
effective income tax rate, substantially offset by a reduction in the
Company's reserve on previously-generated, fully-reserved deferred income tax
assets. As a part of the normal assessment of the Company's reserves,
management 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. This determination is based on the Company's
profitability in recent quarters and the impact of the sales performance of
its products. Realization of remaining reserved deferred tax assets at
December 31, 1997, if and when realized, will not result in a tax benefit in
the consolidated statement of operations, but will result in an increase in
additional paid in capital as they are related to tax benefits associated
with the exercise of stock options. The income tax benefit of $1,222,000 for
the year ended December 31, 1996 represented benefit generated from the 1996
loss as well as a reduction of the valuation allowance on previously reserved
deferred tax assets at December 31, 1996 (see Note 8 to the financial
statements).
Net Income (Loss)
Net income for the year ended December 31, 1997 was $3,414,396, compared
to a net loss of $322,217 for the year ended December 31, 1996. The
improvement principally reflects the factors described above.
17
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 was attributable to a sharp increase in demand for Andrea
Anti-Noiseproducts. This increase was partially offset by an expected
decrease in sales of the Company's traditional military products. Sales of
Andrea Anti-Noise 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 the Company's Anti-Noise product line comprised
approximately 68% of total sales while sales from the Company's traditional
military products comprised approximately 42% of total sales.
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 production
runs in the Company's New York facilities of Andrea Anti-Noise 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% 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 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 Andrea Anti-Noise products to OEMs, distributors,
value-added resellers and end users.
Operating loss
Operating loss for the year ended December 31, 1996 decreased 7% to
$1,530,384 from $1,651,238 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 expense 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 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, 1995. This reduction
in net loss reflects principally the factors described above and the income
tax benefit associated with (a) the current year loss and (b) changes in the
reserves provided against previous income tax benefits.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have historically been, and are
expected to continue to be, cash flow from operations and borrowings provided
by certain financial institutions. At December 31, 1997, the Company had
cash and cash equivalents of $2,059,338 compared with $921,065 at December
31, 1996. The Company expects to realize cash proceeds during the second
quarter of 1998 from the sale of its facility in Long Island City, New York.
See "Item 2. Properties."
Working capital at December 31, 1997 was $11,786,659 compared to
$8,836,074 at December 31, 1996. The increase in working capital reflects an
increase in total current assets of $4,504,568 offset by an increase in total
current liabilities of $1,553,983. The increase in total current assets
principally reflects an increase in cash of $1,138,273, an increase in
accounts receivable of $1,889,984, an increase in inventory of $992,752, an
decrease in deferred income taxes of $312,431 and an increase of $890,970 in
prepaid expenses and other current assets. The increase in current
liabilities principally reflects a $144,383 increase in trade accounts
payable, a $1,193,472 increase in convertible debentures and a $225,742
increase in other current liabilities.
The increase in cash of $1,138,273 reflects $799,829 of net cash used in
operating activities, $308,259 of cash used in investing activities and
$2,246,361 of cash provided by financing activities. The principal operating
activities, excluding non-cash charges, for which cash was used were the
increases in inventory and accounts receivable as a result of the significant
demand for the Company's Andrea Anti-Noise products. The cash used in
investing activities is a result of the maturity of one of the Company's
marketable securities, offset by capital expenditures, primarily comprised of
the ongoing upgrade of manufacturing dies and molds for Andrea Anti-Noise
products, as well as investments in the Company's existing information
systems. The cash provided by financing activities resulted from the
exercise of stock options.
The increase in accounts receivable primarily reflects the significant
increase in sales during 1997. Generally, the Company collects receivables
from sales within three months.
The increase in prepaid expenses and other current assets primarily
includes increases in deferred advertising costs, as well as the recognition
of increased premiums for prepaid property taxes and insurance, increased
fulfillment costs associated with global marketing and sales expansion, and
increases in other service costs related to future periods.
The increase in deferred tax assets represents a further reduction of
the valuation allowance on previously-reserved deferred tax assets in light
of the Company's profitability over recent quarters and the expectation of
realizing those assets through continued earnings. The Company will be
continually re-assessing its remaining reserves on deferred income tax assets
as the year progresses.
The increase in trade accounts payable primarily reflects differences in
the timing related to both the payments for and the acquisition of raw
materials for Andrea Anti-Noise products.
Demand for Andrea Anti-Noise products has required the Company to raise
additional working capital to support its production operations. In December
1995, April 1996 and August 1996, the Company raised additional working
capital through the issuance of convertible subordinated debentures. In
addition, the Company entered into a revolving credit agreement in September
1997 that provides maximum borrowings of up to $8 million based on eligible
accounts receivable and inventory, as defined. At December 31, 1997, there
were no borrowings outstanding under this facility.
Notwithstanding growth in sales of Andrea Anti-Noise products during the
year ended December 31, 1997, 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.
19
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 96-14, "Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000," which
requires that costs associated with modifying computer software for the Year
2000 be expensed as incurred. The Company believes, based upon its internal
reviews and other factors, that future external and internal costs to be
incurred relating to the modification of internal-use software for the Year
2000 will not have a material effect on the Company's results of operations
or financial position.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2)
are included in this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 as to directors and executive
officers is incorporated by reference to the information captioned
"Election of Directors" included in the Company's definitive proxy
statement in connection with the meeting of shareholders to be held on June
18, 1998. 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
18, 1998.
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 18, 1998.
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 18, 1998.
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 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 be awarded
by Northrop Grumman to AMC. See "Part I-Item 1-Business-Collaborative
Arrangements-Northrop Grumman Agreement".
During 1997 the Company paid an aggregate of $194,206 to Digital
Technologies, Inc., a software development company of which Gary A. Jones, a
director of the Company, is the President. Of this amount, approximately 90%
was for software development fees and approximately 10% was for reimbursable
expenses.
21
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 18, 1998.
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, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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
On October 21, 1997, the Registrant filed a Current Report on Form 8-K
relating to the Registrant's press release, dated October 21, 1997,
containing financial information of the Registrant with respect to the
quarter ended September 30, 1997.
(c) EXHIBITS
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant
3.3 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)
22
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 4 of Registrant's Registration Statement on
Form S-8, No. 333-45421, filed February 2, 1998)
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 and 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)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant
10.9** Direct Sales and License Agreement, dated as of October 13, 1997,
by and between Lernout & Hauspie Speech Products and the Registrant
10.10** Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the
Registrant
10.11 Revolving Loan and Security Agreement, dated as of September 23,
1997, by and between IBM Credit Corporation and the Registrant
21 Subsidiaries of Registrant
23
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- ---------------
* Certain portions of this Agreement have been accorded confidential
treatment.
** Confidential treatment has been requested for certain portions of
this Agreement.
(d) Financial Statement Schedules
See Item 14(a)(2).
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
24
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
January 27, 1998
F-1
25
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
------------------------------------
ASSETS 1997 1996
------ ------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,059,338 $ 921,065
Marketable securities 102,717 197,697
Accounts receivable, net of allowance for
doubtful accounts of $52,251 4,568,433 2,678,449
Inventories, net 5,766,927 4,774,175
Deferred income taxes 909,569 1,222,000
Prepaid expenses and other current assets 1,023,661 132,691
--------------- ---------------
Total current assets 14,430,645 9,926,077
PROPERTY, PLANT AND EQUIPMENT, net 1,022,342 868,173
DEFERRED INCOME TAXES 897,046 -
OTHER ASSETS 1,439,151 -
--------------- ---------------
Total assets $ 17,789,184 $ 10,794,250
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations $ - $ 4,685
Trade accounts payable 966,783 822,400
Accrued salaries and wages payable 57,991 62,920
Convertible debentures, net (Note 6) 1,193,472 -
Other current liabilities 425,740 199,998
--------------- ---------------
Total current liabilities 2,643,986 1,090,003
CONVERTIBLE DEBENTURES, net (Note 6) - 2,157,786
OTHER LIABILITIES 38,500 38,500
--------------- ---------------
Total liabilities 2,682,486 3,286,289
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Common stock, $.50 par value; authorized:
10,000,000 shares; issued and
outstanding: 8,706,692 and 7,584,394
shares, respectively 4,353,346 3,792,197
Additional paid-in capital 9,881,915 6,258,723
Retained earnings (accumulated deficit) 871,437 (2,542,959)
--------------- ---------------
Total shareholders' equity 15,106,698 7,507,961
--------------- ---------------
Total liabilities and shareholders' equity $ 17,789,184 $ 10,794,250
=============== ===============
The accompanying notes are an integral part of these consolidated
balance sheets.
F-2
26
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
SALES $ 26,429,804 $ 9,244,109 $ 5,440,792
COST OF SALES 16,077,801 5,913,091 3,190,226
------------- ------------- -------------
Gross profit 10,352,003 3,331,018 2,250,566
RESEARCH AND DEVELOPMENT EXPENSES 1,106,880 988,483 976,344
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 5,753,130 3,872,919 2,925,460
------------- ------------- -------------
Income (loss) from operations 3,491,993 (1,530,384) (1,651,238)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 64,873 57,599 159,464
Interest expense (228,029) (293,290) (10,746)
Rent and miscellaneous income 240,020 221,858 226,605
------------- ------------- -------------
76,864 (13,833) 375,323
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION
(BENEFIT) 3,568,857 (1,544,217) (1,275,915)
INCOME TAX PROVISION (BENEFIT) (Note 8) 154,461 (1,222,000) -
------------- -------------- -------------
NET INCOME (LOSS) $ 3,414,396 $ (322,217) $ (1,275,915)
============= ============= =============
PER SHARE INFORMATION (Note 3):
Net Income (Loss) Per Share:
Basic $ .42 $ (.05) $ (.20)
============= ============= =============
Diluted $ .39 $ (.05) $ (.20)
============= ============= =============
Shares used in computing net income (loss) per share:
Basic 8,148,153 7,129,534 6,259,080
============= ============= =============
Diluted 8,862,263 7,129,534 6,259,080
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-3
27
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
-------------------------------------------
Retained
Additional Earnings Total
Shares Common Paid-In (Accumulated Shareholders'
Outstanding Stock Capital Deficit) Equity
--------- ----------- ----------- ----------- -----------
BALANCE,
December 31, 1994 6,032,720 $ 3,016,360 $ 2,617,832 $ (944,827) $ 4,689,365
Exercise of stock options,
net of related costs 541,000 270,500 281,330 - 551,830
Net loss - - - (1,275,915) (1,275,915)
--------- ----------- ---------- ------------ ----------
BALANCE,
December 31, 1995 6,573,720 3,286,860 2,899,162 (2,220,742) 3,965,280
Conversion of convertible
debentures 635,674 317,837 3,267,905 - 3,585,742
Exercise of stock options,
net of related costs 375,000 187,500 91,656 - 279,156
Net loss - - - (322,217) (322,217)
--------- ----------- ---------- ------------ ----------
BALANCE,
December 31, 1996 7,584,394 3,792,197 6,258,723 (2,542,959) 7,507,961
Conversion of convertible
debentures 189,548 94,774 1,108,521 - 1,203,295
Exercise of stock options,
net of related costs 932,750 466,375 2,514,671 - 2,981,046
Net income - - - 3,414,396 3,414,396
--------- ------------- ---------- ------------- ---------
BALANCE,
December 31, 1997 8,706,692 $ 4,353,346 $ 9,881,915 $ 871,437 $15,106,698
========= ============ =========== ============= ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
28
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,414,396 $ (322,217) $ (1,275,915)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Non-cash interest expense on
convertible debentures 203,204 162,543 -
Depreciation and amortization 322,499 353,308 112,380
Barter transaction (750,000) - -
Deferred income taxes 154,461 (1,222,000) -
(Increase) decrease in:
Accounts receivable, net (1,889,984) (1,632,527) (476,417)
Inventories, net (1,492,752) (3,651,182) (855,090)
Prepaid expenses and other current assets (714,399) 57,954 (66,275)
Other assets (439,151) - -
Increase in:
Trade accounts payable 144,383 567,757 112,196
Other current liabilities 247,514 14,862 161,197
--------------- ------------- --------------
Net cash used in operating activities (799,829) (5,671,502) (2,287,924)
--------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities - (98,474) -
Proceeds from sale of marketable securities 100,000 - -
Purchases of property, plant and equipment (408,259) (393,998) (161,341)
--------------- ------------- --------------
Net cash used in investing activities (308,259) (492,472) (161,341)
--------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (4,685) (39,946) (14,779)
Net proceeds from convertible debentures
(Note 6) - 3,445,000 2,000,000
Issuance of common stock upon exercise of
stock options, net of related costs 2,251,046 279,156 551,830
--------------- ------------- --------------
Net cash provided by financing activities 2,246,361 3,684,210 2,537,051
--------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,138,273 (2,479,764 87,786
CASH AND CASH EQUIVALENTS, beginning of year 921,065 3,400,829 3,313,043
--------------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 2,059,338 $ 921,065 $ 3,400,829
=============== ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Conversion of convertible debentures and
related accrued interest into common stock
(Note 6) $ 1,203,295 $ 3,585,742 $ -
=============== ============= ==============
Cash paid for:
Interest $ - $ - $ 10,746
=============== ============= ==============
Income taxes $ 5,200 $ 3,145 $ 1,400
=============== ============= ==============
The accompanying notes are an integral part of these consolidated statements.
F-5
29
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997
-----------------
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") and
formed an active noise cancellation division for the purpose of engaging in
the design, development, production and marketing of active noise cancellation
and digital audio systems. 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 include the accounts of the Company and its
subsidiaries. All intercompany balances and transactions have been eliminated
in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Marketable Securities
- ---------------------
The Company accounts for investments according to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, marketable securities
used as part of the Company's asset management that may be sold in response to
changes in interest rates, prepayments, and other factors have been classified
as available-for-sale. Such securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of stockholders' equity (on an after-tax basis). Gains and losses on
the disposition of securities are recognized on the specific identification
method in the period in which they occur. Sales of securities were $100,000 in
1997. There were no sales of securities in 1996 and 1995. At December 31, 1997
and 1996, the carrying values of the Company's marketable securities
approximate fair value. The securities mature as follows:
1996 1997
---- ----
Within 1 year $ 100,000 $ -
After 5 years through 10 years 97,697 102,717
----------- -----------
$ 197,697 $ 102,717
=========== ===========
F-6
30
Inventories
- -----------
Inventories are stated at the lower of cost (on a first-in, first-out) or
market basis.
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.
Intangible Assets
- -----------------
Patents and trademarks associated with the Company's proprietary technology
are carried at cost less accumulated amortization which is calculated on a
straight-line basis over the estimated useful lives of the assets, not to
exceed 17 years. The recoverability of carrying values of intangible assets is
evaluated on a recurring basis. Patents and trademarks approximated $415,000
and $0 at December 31, 1997 and 1996, respectively, and are included in other
assets on the accompanying consolidated balance sheets.
Revenue Recognition
- -------------------
Revenue is recognized upon shipment and acceptance of goods.
Barter Transaction
- ------------------
The Company records barter transactions at the estimated fair market value of
the services received. Barter revenue from a barter transaction approximated
$1,250,000 during 1997. The value received in this transaction has been
recorded as a deferred charge, $250,000 included in prepaid and other current
assets and $1,000,000 included in other assets. This charge will be amortized
over the lesser of the period of benefit or the program period, not to exceed
five years. The Company did not engage in any barter transactions during 1996
or 1995.
Concentration of Credit Risk
- ----------------------------
The Company is a manufacturer of audio communications equipment for several
industries. During 1997, the Company primarily generated sales from its noise
canceling and active noise canceling products as well as through sales of its
military products to the federal government. Sales of noise canceling and
active noise canceling products to one customer and accounted
for approximately 51% and 45% of total accounts receivable at December 31,
1997 and 1996, respectively, and approximately 56%, 46% and 3% of the
total sales for 1997, 1996 and 1995, respectively. Sales of its military
products aggregated approximately 10% and 19% of the total accounts
receivable at December 31, 1997 and 1996, respectively, and approximately
15%, 42% and 45% of the total sales for the three years ended December 31,
1997, 1996 and 1995, respectively.
F-7
31
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
- --------------------------------
The Company accounts for long-lived assets according to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset in question may not be recoverable. The
adoption of SFAS No. 121, in 1996, did not have a material effect on the
Company's results of operations, cash flows or financial position.
Stock-Based Compensation
- ------------------------
In 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), by continuing to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," while providing the required pro forma
disclosures as if the fair value method had been applied (see Note 11).
Research and Development
- ------------------------
The Company expenses all research and development costs as they are 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,
1997 and 1996, 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, 1997
and 1996, the carrying value of all financial instruments approximated fair
value.
F-8
32
Stock Split
- -----------
On September 2, 1997, the Company's Board of Directors authorized a
two-for-one stock split effected in the form of a 100% stock dividend that was
distributed on September 17, 1997 to shareholders of record on September 10,
1997. All share and per share data included in the accompanying financial
statements have been restated to reflect the stock split for all periods
presented.
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.
3. NET INCOME (LOSS) PER SHARE:
---------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". Basic net income (loss) per common share ("Basic EPS") is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) by the weighted average number of
common shares and dilutive common share equivalents and convertible securities
then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and
Diluted EPS on the face of the consolidated statements of operations. The
impact of the adoption of this statement was not material to all previously
reported EPS amounts.
The following chart provides a reconciliation of information used in
calculating the per share amounts for the twelve months ended December 31,
1997. No information is presented for 1996 or 1995 as those
calculations would present anti-dilutive results:
Net Net Income
Income Shares Per Share
------ ------ ----------
Basic EPS
- ---------
Net income $ 3,414,396 8,148,153 $ .42
Effect of dilutive
employee stock options - 714,110 (.03)
-------------- ----------- -------
Diluted EPS
- -----------
Net income $ 3,414,396 8,862,263 $ .39
============== =========== =======
Diluted EPS for 1996 and 1995 is the same as Basic EPS for those years, as the
inclusion of the impact of stock options, warrants and convertible securities
then outstanding would be anti-dilutive.
F-9
33
4. INVENTORIES, NET:
----------------
Inventories, net consists of the following:
December 31,
----------------------------
1997 1996
----------- -----------
Raw materials $2,438,290 $2,048,253
Work-in-process 276,745 120,610
Finished goods 3,332,403 2,870,905
----------- -----------
6,047,438 5,039,768
Less: reserve for
obsolescence 280,511 265,593
----------- -----------
$5,766,927 $4,774,175
=========== ===========
5. PROPERTY, PLANT AND EQUIPMENT, NET:
----------------------------------
Property, plant and equipment, net consists of the following:
December 31,
----------------------------
1997 1996
----------- ----------
Land $ 109,000 $ 109,000
Building 453,000 453,000
Building improvements 372,928 387,978
Machinery and equipment 1,406,389 984,746
---------- ----------
2,341,317 1,934,724
Less: accumulated depreciation 1,318,975 1,066,551
---------- ----------
$1,024,008 $ 868,173
========== ==========
6. CONVERTIBLE DEBENTURES, NET:
---------------------------
Convertible debentures, net, consists of the following:
December 31,
----------------------------
1997 1996
----------- -----------
Series B Debentures (a) $ - $ 612,276
Series C Debentures (b) 1,193,472 1,545,510
----------- -----------
$ 1,193,472 $ 2,157,786
=========== ===========
(a) 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 were 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 was the
conversion price to be less than $6.563 per share (the minimum conversion
price). During 1996, $1,550,000 of the Series B Debentures, together with
related accrued interest, were converted into the Company's common stock
and during 1997, the remaining $648,000 of the Series B Debentures,
together with related accrued interest, were converted into the Company's
common stock.
F-10
34
(b) 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. During 1997, $437,500 of the Series C Debentures,
together with the related accrued interest, were converted into the
Company's common stock. At December 31, 1997, the remaining obligation
from converted debentures is recorded net of an unaccreted discount of
$56,528.
7. 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 $161,203, $110,831 and
$91,225 for 1997, 1996 and 1995, respectively.
8. TAXES:
-----
Income tax provision (benefit) consists of the following:
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ----------- --------
Federal:
Current $ - $ - $ -
Deferred 1,213,411 (525,000) -
State and Local:
Current - - -
Deferred 285,509 (144,000) -
Adjustment to valuation
allowance related to opening
net deferred tax assets (1,344,459) (553,000) -
---------- ----------- ---------
$ 154,461 $(1,222,000) $ -
========== =========== =========
A reconciliation between the provision (benefit) for income taxes and the
amount computed by applying the statutory Federal income tax rate to income
(loss) before income taxes is as follows:
Year Ended December 31,
------------------------------------------
1997 1996 1995
---------- ------------- -----------
Tax provision (benefit) at
statutory rate $1,213,411 $ (525,000) $(434,000)
Loss without tax benefit - - 434,000
State and local taxes 285,509 (144,000) -
Change in valuation allowance
for opening net deferred
tax assets (1,344,459) (553,000) -
---------- ----------- ---------
$ 154,461 $(1,222,000) $ -
========== =========== =========
F-11
35
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset, net, at December 31, 1997 and 1996, are as
follows:
1997 1996
---- ----
Allowance for doubtful accounts $ 22,000 $ 22,000
Reserve for obsolescence 118,000 112,000
NOL carryforward 2,147,000 3,000,000
--------------- ---------------
2,287,000 3,134,000
Less: valuation allowance (480,385) (1,912,000)
--------------- ---------------
Deferred tax asset, net $ 1,806,615 $ 1,222,000
=============== ===============
At December 31, 1997, the Company had net operating loss and credit
carryforwards of approximately $4,400,000 expiring in varying amounts
beginning in 2006 through 2010. In 1997 and 1996, management of the Company
determined that, more likely than not, a portion of its previously-reserved
deferred tax assets would be realized and, accordingly, reduced the related
valuation allowance. The reduction in the valuation allowance is included in
the income tax provision (benefit) in the accompanying consolidated statement
of operations for 1997 and 1996, as well as in additional paid-in capital at
December 31, 1997, for the portion of those deferred tax assets ($730,000)
which are related to tax benefits associated with the exercise of stock
options. The determination that the net deferred tax asset of $1,806,615 at
December 31, 1997 is realizable is based on the Company's profitability during
1997, and the continued positive impact of the sales performance of its
products. The remaining fully-reserved deferred tax assets, all of which are
related to tax benefits associated with the exercise of stock options, will
not result in a tax benefit in the consolidated statements of operations in
future periods but, rather, will result in further increases to additional
paid in capital, if and when realized.
9. 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 lease, expiring
on May 31, 2001, requires annual rental payments of approximately $240,000.
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 its entire proportionate share of operating
expenses.
10. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Legal Proceedings
- -----------------
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. On
August 12, 1997, the Company and claimant reached an agreement to settle
certain claims relating to the contracts for an amount that was not material
to the Company's results of operations.
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, 1997, the Company had outstanding letters of
credit of approximately $900,000, which are fully collateralized by cash held
with the same bank.
F-12
36
Line of Credit
- --------------
On September 30, 1997, the Company entered into an $8,000,000 credit facility
(the "Agreement") with a financial institution consisting of a revolving loan
based on eligible accounts receivable and inventory, as defined, with an
interest rate of the prime rate + .75% on any amounts outstanding. The
Agreement matures on September 23, 1998 and automatically renews on an annual
basis unless terminated by either party, as provided in the Agreement. The
facility is subject to normal banking terms and conditions, including
financial covenant compliance. At December 31, 1997, there were no outstanding
borrowings under the Agreement.
11. 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 those awards. The awards can take the form of stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options or other stock-based awards. Awards may be granted to key
employees, officers, directors and consultants. On 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 were granted for terms
of up to 10 years at an exercise price equal to the market value at the date
of grant and are exercisable in whole or in part at stated times from the date
of grant up to four years from the date of grant. At December 31, 1997,
625,500 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 income (loss) and net income (loss) per share would
have been reduced to the following pro forma amounts:
1997 1996 1995
---- ---- ----
Net income (loss): As Reported $ 3,414,396 $ (322,217) $ (1,275,915)
Pro Forma 1,526,874 (1,093,868) (1,569,716)
Basic net income (loss) per share: As Reported $.42 $(.05) $(.20)
Pro Forma .19 (.16) (.25)
Diluted net income (loss) per share: As Reported $.39 $(.05) $(.20)
Pro Forma .17 (.16) (.25)
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-13
37
Option activity in the 1991 Plan during 1997, 1996 and 1995 is summarized as
follows:
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at
beginning of period 2,200,250 $3.41 2,130,000 $4.12 2,466,000 $2.81
Granted 720,000 6.97 445,250 5.51 275,000 3.94
Exercised (932,750) 3.21 (375,000) .75 (541,000) 1.02
Canceled (162,750) .68 - - (70,000) .68
--------- --------- ---------
Outstanding at end
of period 1,824,750 5.57 2,200,250 3.41 2,130,000 4.12
========= ========= =========
Exercisable at end
of year 625,500 4.68 1,442,000 1.83 1,527,750 .82
========= ========= =========
Weighted average
fair value of
options granted $5.38 $4.07 $6.62
===== ===== =====
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:
1997 1996
---- ----
Expected life (years) 7.5 7.5
Risk-free interest rates 6.87% 6.90%
Volatility 74% 69%
Dividend yield 0% 0%
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at
Exercise
Range of Exercise Prices 12/31/97 Contractual Life Price 12/31/97 Price
------------------------ ----------- ---------------- -------- -----------
- ---------
$ 0.68 to $ 1.02 349,500 4.49 .68 224,500 .68
1.03 to 3.48 - - - - -
3.49 to 5.24 41,500 8.58 5.00 4,750 5.00
5.25 to 7.88 1,188,750 7.93 5.67 351,250 5.67
7.89 to 11.84 145,000 7.33 8.95 45,000 8.95
11.85 to 16.75 100,000 9.66 16.75 - -
--------- ---- ----- ---------- -------
.68 to 16.75 1,824,750 6.98 5.57 625,500 4.68
========= ==== ===== ========== =======
F-14
38
Warrants
- --------
In connection with an overseas equity offering in 1994, the Company issued 5
year warrants to purchase 47,500 shares of common stock at prices of $4.92 to
$5.49 per share. During 1997, 5,000 of these warrants were exercised into an
equivalent number of common shares. During 1996, 50% of the original number of
warrants were converted into an equal number of options at an equivalent
value. As of December 31, 1997, all of these 23,750 options are exercisable,
and will expire on July 30, 2006. As of December 31, 1997, 18,750 of the
warrants are exercisable and will expire on June 15, 1999.
F-15
39
INDEX TO FINANCIAL STATEMENT SCHEDULE
-------------------------------------
Report of Independent Public Accountants on Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
40
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 January 27, 1998. 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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Melville, New York
January 27, 1998
S-1
41
ANDREA ELECTRONICS CORPORATION
------------------------------
SCHEDULE II
-----------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
Charged to Charged to
Balance at Costs and Other Balance at
1997 January 1 Expenses Accounts Deductions December 31
---- --------- ---------- ---------- ---------- -----------
Allowance for doubtful
accounts $ 52,521 $ - $ - $ - $ 52,521
========= ========== ========= ======== ==========
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
42
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 31, 1998 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 31, 1998
- ------------------------- and Chief Executive Officer
Frank A.D. Andrea, Jr.
/s/ Patrick D. Pilch Executive Vice President March 31, 1998
- ------------------------- and Chief Financial Officer
Patrick D. Pilch
/s/ John N. Andrea Co-President March 31, 1998
- -------------------------
John N. Andrea
/s/ Douglas J. Andrea Co-President March 31, 1998
- -------------------------
Douglas J. Andrea
/s/ Richard A. Maue Vice President, March 31, 1998
- ------------------------- Controller
Richard A. Maue and Secretary
/s/ Christopher Dorney Director March 31, 1998
- -------------------------
Christopher Dorney
/s/ Gary A. Jones Director March 31, 1998
- -------------------------
Gary A. Jones
/s/ Scott Koondel Director March 31, 1998
- -------------------------
Scott Koondel
/s/ Paul M. Morris Director March 31, 1998
- -------------------------
Paul M. Morris
43
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K for the year ended December 31, 1992)
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant
3.3 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 4 of Registrant's Registration Statement on
Form S-8, No. 333-45421, filed February 2, 1998)
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 and 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)
10.6 Employment Agreement, dated as of January 1, 1998, by and between
John N. Andrea and the Registrant
10.7 Employment Agreement, dated as of January 1, 1998, by and between
Douglas J. Andrea and the Registrant
44
10.8 Employment Agreement, dated as of January 1, 1998, by and between
Patrick D. Pilch and the Registrant
10.9** Direct Sales and License Agreement, dated as of October 13, 1997,
by and between Lernout & Hauspie Speech Products and the Registrant
10.10** Production Procurement Agreement, dated as of June 11, 1997, by and
between International Business Machines Corporation and the
Registrant
10.11 Revolving Loan and Security Agreement, dated as of September 23, 1997,
by and between IBM Credit Corporation and the Registrant
21 Subsidiaries of Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
- ---------------
* Certain portions of this Agreement have been accorded confidential
treatment.
** Confidential treatment has been requested for certain portions of
this Agreement.