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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period
from ____________ to ____________
Commission file number 1-4324
--------
ANDREA ELECTRONICS CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-0482020
- ----------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
45 Melville Park Road, Melville, New York 11747
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 631-719-1800
--------------------------------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Indicate the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: As of November 12, 2002, there
are 20,043,864 common shares outstanding.
ITEM 1. FINANCIAL STATEMENTS
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
----------------- -----------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,711,370 $ 3,724,130
Accounts receivable, net of allowance for doubtful accounts of $70,848 and
$176,292 558,858 2,094,146
Inventories 3,617,130 3,389,729
Prepaid expenses and other current assets 398,737 547,892
------------ ------------
Total current assets 9,286,095 9,755,897
PROPERTY AND EQUIPMENT, net 586,152 811,392
DEFERRED INCOME TAXES - 1,806,615
GOODWILL 12,458,872 12,317,843
INTANGIBLE ASSETS 8,397,648 8,969,950
OTHER ASSETS 285,811 357,962
------------ ------------
Total assets $ 31,014,578 $ 34,019,659
============ ============
LIABILITIES, REDEEMABLE SECURITIES,
AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 959,765 $ 1,147,160
Current portion of long-term debt 31,364 158,802
Accrued restructuring charges 388,593 499,724
Deferred revenue 1,666,680 258,221
Other current liabilities 2,780,712 2,061,075
------------ ------------
Total current liabilities 5,827,114 4,124,982
LONG-TERM DEBT 21,681 37,619
DEFERRED REVENUE 2,796,634 741,779
OTHER LIABILITIES 34,871 41,509
------------ ------------
Total liabilities 8,680,300 4,945,889
------------ ------------
COMMITMENTS AND CONTIGENCIES - -
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized:
1,000 shares; issued and outstanding: 86 and 249 shares, respectively;
liquidation value: $860,000 and $2,490,000, respectively 839,546 2,421,009
------------ ------------
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK, net, $.01 par value; authorized:
1,500 shares; issued and outstanding: 750 shares; liquidation value:
$7,500,000 7,383,615 7,364,011
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized: 4,997,500 shares; none issued
and outstanding - -
Common stock, $.50 par value; authorized: 70,000,000 shares; issued and
outstanding: 20,011,948 and 16,308,968 shares, respectively 10,005,974 8,154,484
Additional paid-in capital 54,479,117 54,642,571
Deferred stock compensation (95,857) (52,334)
Accumulated deficit (50,278,117) (43,455,971)
------------- -------------
Total shareholders' equity 14,111,117 19,288,750
------------ ------------
Total liabilities, redeemable securities, and shareholders' equity $ 31,014,578 $ 34,019,659
============ ============
See Notes to Condensed Consolidated Financial Statements
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
------------------------------------ ------------------------------------
September 30, September 30,
2002 2001 2002 2001
-------------- -------------- ------------- ------------
REVENUES
Net product revenues $1,009,676 $2,937,199 $4,402,993 $8,170,767
License revenues 360,353 - 536,686 -
----------- ----------- ----------- -----------
Total revenues, net $1,370,029 $2,937,199 $4,939,679 $8,170,767
COST OF SALES 671,631 2,105,848 2,984,500 5,897,960
----------- ----------- ----------- -----------
Gross profit 698,398 831,351 1,955,179 2,272,807
RESEARCH AND DEVELOPMENT EXPENSES 884,772 774,108 2,677,128 2,654,392
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES 1,391,966 2,117,360 4,314,416 6,739,458
----------- ----------- ----------- -----------
Loss from operations (1,578,340) (2,060,117) (5,036,365) (7,121,043)
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Interest (expense) income, net (30,756) (3,365) (13,538) 117,505
Other 14,809 (5,669) 34,372 20,220
----------- ----------- ----------- -----------
(15,947) (9,034) 20,834 137,725
------------ ------------ ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,594,287) (2,069,151) (5,015,531) (6,983,318)
PROVISION FOR INCOME TAXES 1,806,615 - 1,806,615 -
----------- ----------- ----------- -----------
Net loss $(3,400,902) $(2,069,151) $(6,822,146) $(6,983,318)
============ ============ ============ ============
PREFERRED STOCK DIVIDENDS 115,328 140,755 357,854 430,653
NON-CASH CHARGE ATTRIBUTABLE TO BENEFICIAL
CONVERSION FEATURE - 7,500,000 - 7,500,000
----------- ----------- ----------- -----------
Net loss attributable to
common shareholders $(3,516,230) $(9,709,906) $(7,180,000) $(14,913,971)
============ ============ ============ =============
PER SHARE INFORMATION:
Net Loss Per Share:
Basic and Diluted $(.18) $(.64) $(.39) $(1.00)
============ ============ ============ =============
Shares used in computing net loss per share:
Basic and Diluted 19,216,925 15,137,578 18,356,233 14,848,707
=========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements
-2-
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2002
(UNAUDITED)
Shares Additional Deferred Stock
Outstanding Common Stock Paid-In Capital Compensation
----------- ------------ --------------- --------------
BALANCE, January 1, 2002 16,308,968 $8,154,484 $54,642,571 $(52,334)
Conversions of Series B Redeemable
Convertible Preferred Stock, net
of related costs 3,365,480 1,682,740 91,450 -
Preferred stock dividends - - (357,854) -
Employee Stock Grant 337,500 168,750 60,750 (229,500)
Option Grant to Consultants - - 42,200 (42,200)
Amortization of deferred stock compensation - - - 200,589
Amortization of Option Grant to Consultants - - - 27,588
Net loss - - - -
----------- ------------ -------------- -------------
BALANCE, September 30, 2002 20,011,948 $10,005,974 $54,479,117 $(95,857)
=========== ============ ============== =============
Total
Accumulated Shareholders'
Deficit Equity
------------- ------------
BALANCE, January 1, 2002 $(43,455,971) $19,288,750
Conversions of Series B Redeemable
Convertible Preferred Stock, net
of related costs - 1,774,190
Preferred stock dividends - (357,854)
Employee Stock Grant - -
Option Grant to Consultants - -
Amortization of deferred stock compensation - 200,589
Amortization of Option Grant to Consultants - 27,588
Net loss (6,822,146) (6,822,146)
------------- ------------
BALANCE, September 30, 2002 $(50,278,117) 14,111,117
============= ============
See Notes to Condensed Consolidated Financial Statements
-3-
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
----------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,822,146) $(6,983,318)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Non-cash stock compensation expense 228,177 5,760
Depreciation and amortization 936,081 2,048,841
Deferred income taxes 1,806,615 -
Change in:
Accounts receivable, net 1,535,288 1,729,912
Inventories, net (227,401) 156,714
Prepaid expenses and other current assets 149,155 (209,062)
Other assets 72,151 62,183
Trade accounts payable (187,395) (370,386)
Accrued restructuring charges (111,131) -
Deferred revenue 3,463,314 -
Other current and long-term liabilities 567,476 245,143
----------- -----------
Net cash provided by (used in) operating activities 1,410,184 (3,314,213)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (132,686) (108,313)
Patents and trademarks (146,882) (361,661)
------------ ------------
Net cash used in investing activities (279,568) (469,974)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt obligations (143,376) (601,717)
Proceeds from issuance of common stock upon exercise of stock options,
net of related costs - 16,483
----------- -----------
Net cash used in financing activities (143,376) (585,234)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 987,240 (4,369,421)
CASH AND CASH EQUIVALENTS, beginning of period 3,724,130 9,151,835
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,711,370 $ 4,782,414
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
Conversion of Series B Redeemable Convertible Preferred Stock and
related accrued dividends into common stock $ 1,774,190 $2,204,740
=========== ==========
Stock grant to employees $ 229,500 $ 32,250
=========== ==========
Option grant to consultant $ 42,400 $ -
=========== ==========
See Notes to Condensed Consolidated Financial Statements
-4-
ANDREA ELECTRONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation - The accompanying condensed consolidated financial
statements include the accounts of Andrea Electronics Corporation and its
subsidiaries ("Andrea"). All intercompany balances and transactions have
been eliminated in consolidation.
These unaudited, condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and accordingly,
they do not include all of the information and footnotes normally provided
in annual financial statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses reported in those
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
Management Estimates - Among other things, estimates are used in accounting
for allowances for bad debts, inventory obsolescence, restructuring
reserves, product warranty, depreciation, deferred income taxes, expected
realizable values for assets (primarily goodwill and intangible assets),
contingencies, revenue recognition as well as the recording and
presentation of our convertible preferred stock. Estimates and assumptions
are periodically reviewed and the effects of any material revisions are
reflected in the consolidated financial statements in the period that they
are determined to be necessary. Actual results could differ from those
estimates and assumptions.
Andrea believes that adequate disclosures are made to keep the information
fairly presented. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the fiscal year.
For further information, refer to the consolidated financial statements and
accompanying footnotes included in Andrea's annual report on Form 10-K for
the year ended December 31, 2001.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation.
Revenue Recognition - Non software-related revenue is recognized upon
shipment. Andrea reports such sales levels on a net sales basis, with net
sales being computed by deducting from gross sales, the amount of actual
sales returns and the amount of reserves established for anticipated
returns. With respect to license revenues, Andrea recognizes revenue in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended, and Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition in Financial Statements." License revenue is
recognized based on the terms and conditions of individual contracts (see
Note 10). In addition, fee-based services are performed on a
time-and-material basis or on a fixed-fee basis, under separate service
arrangements.
2. Deferred Tax Assets - Statement of Financial Accounting Standards ("SFAS")
No. 109 "Accounting for Income Taxes" ("FAS 109") requires that a valuation
allowance be established when it is "more likely than not" that all or a
portion of deferred tax assets will not be realized. A review of all
available positive and negative evidence needs to be considered, including
a company's performance, the market environment in which the company
operates, the length of carryback and carryforward periods, and
expectations of future profits, etc.
FAS 109 further states that forming a conclusion that a valuation allowance
is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. Therefore, cumulative losses weigh
heavily in the overall assessment. Pursuant to a change in circumstances
during the third quarter, which caused a change in our judgment regarding
the realizability of deferred tax assets, and after considering all other
positive and negative evidence (including, in particular, cumulative losses
in recent years) available to us at September 30, 2002, we concluded that
it was appropriate to record a full valuation allowance against our net
deferred tax assets. As a
-5-
result, we recorded an additional valuation allowance of $1.8 million for
the quarter ended September 30, 2002. In addition, we expect to provide a
full valuation allowance on future tax benefits until we can sustain a
level of profitability that demonstrates our ability to utilize the assets,
or other significant positive evidence arises that suggests our ability to
utilize such assets.
3. Earnings Per Common Share - Basic net loss per common share is computed by
dividing net loss attributable to common shareholders by the
weighted-average number of common shares outstanding. Diluted net loss per
common share is computed by dividing net loss attributable to common
shareholders by the weighted-average number of common shares and dilutive
common share equivalents and convertible securities then outstanding. The
following chart provides a reconciliation of information used in
calculating the per share amounts:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
------------- ------------- ------------- ---------------
Numerator:
Net loss $(3,400,902) $(2,069,151) $(6,822,146) $ (6,983,318)
Preferred stock dividends 115,328 140,755 357,854 430,653
Non-cash charge attributable
to beneficial conversion
feature - 7,500,000 - 7,500,000
------------ ------------ ------------ -------------
Net loss attributable to
common shareholders $(3,516,230) $(9,709,906) $(7,180,000) $(14,913,971)
============ ============ ============ =============
Denominator:
Weighted-average common shares
outstanding - Basic and Diluted/*/ 19,216,925 15,137,578 18,356,233 14,848,707
=========== =========== =========== ============
Net loss per share - Basic and
Diluted $(.18) $(.64) $(.39) $(1.00)
============ ============ ============ ============
*The effect of dilutive securities (stock options, Redeemable Convertible
Preferred Stock and warrants) have not been included herein as their inclusion
would be anti-dilutive.
4. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("FAS 141") and No. 142, "Goodwill and
Other Intangible Assets" ("FAS 142"). FAS 141 requires all business
combinations initiated after September 30, 2001 to be accounted for using
the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue
to be amortized over their useful lives (but with no maximum life). Andrea
has adopted FAS 142 effective January 1, 2002, and accordingly, those
intangible assets that continue to be classified as goodwill or as other
intangibles with indefinite lives are no longer amortized. Other intangible
assets, which do not have indefinite lives (such as core technology),
continue to be amortized. As of January 1, 2002, we made an assessment of
our intangible assets to identify goodwill separately from other
identifiable intangibles. No adjustment was deemed necessary, although
-6-
the intangible asset "Workforce in Place", which amounted to $141,029, was
reclassified as goodwill. In accordance with FAS 142, intangible assets,
including purchased goodwill, is evaluated annually for impairment, or more
often if circumstances warrant. We performed initial transitional
impairment testing of goodwill and intangible assets during the first
quarter of fiscal 2002. That effort, and preliminary assessments of our
identifiable intangible assets, indicated that little or no adjustment would
be required upon adoption of this pronouncement. The impairment testing is
performed in two steps: (step one) the determination of impairment, based
upon the fair value of a reporting unit as compared to its carrying value,
and (step two) if there is an impairment, this step measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. FAS 142 required that an entity
complete step one of the transitional goodwill impairment test within six
months of adoption, and that if there is an indication that the carrying
amount of the net assets of a reporting unit exceeds its fair value, step
two must be completed by the end of the fiscal year. In the second
quarter of fiscal 2002, we determined that the carrying
value of this unit might be greater that its fair value. In order to
finalize our determination of fair value, we will require the assistance of
a third-party valuation firm. We anticipate completing this analysis during
the fourth quarter of 2002.
The following table presents adjusted net loss and net loss per share data
restated to include the pro forma retroactive impact of the adoption of FAS
142:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------ ---------------
Reported Net Loss attributable to common shareholders $ (3,516,230) $ (9,709,906) $ (7,180,000) $ (14,913,971)
Goodwill and Workforce in Place Amortization - 282,047 - 846,141
-------------- ------------- ------------ ---------------
Adjusted Net Loss $ (3,516,230) $ (9,427,859) $ (7,180,000) $ (14,067,830)
============== ============= ============ ===============
Net Loss Per Share - Basic and Diluted $(.18) $(.64) $(.39) $(1.00)
Goodwill and Workforce in Place Amortization - .02 - .06
-------------- ------------- ------------ ---------------
Adjusted Net Loss Per Common Share $(.18) $(.62) $(.39) $(.94)
============== ============= ============ ===============
Weighted-average common shares outstanding - Basic and
Diluted 19,216,925 15,137,578 18,356,233 14,848,707
============== ============= ============ ===============
The changes in the carrying amount of Goodwill and Intangible assets during the
nine months ended September 30, 2002 were as follows:
Core Trademarks and Workforce in
Goodwill Technology Patents Place Totals
----------- ------------- ---------------- -------------- ------------
Balance as of December 31, 2001 $12,317,843 $ 8,326,587 $ 502,334 $141,029 $21,287,793
Additions during the period - - 146,882 - 146,882
Reclassifications 141,029 - - (141,029) -
Amortization - (550,581) (27,574) - (578,155)
----------- ------------ ---------- --------- ------------
Balance as of September 30, 2002 $12,458,872 $ 7,776,006 $ 621,642 $ - $20,856,520
=========== =========== ========= ========= ===========
-7-
Intangible assets as of September 30, 2002 and December 31, 2001 consisted
of the following:
September 30, December 31,
2002 2001
--------------- -------------
Core Technology $7,776,006 $8,326,587
Trademarks and Patents 621,642 502,334
Workforce in Place - 141,029
---------- ----------
Total Intangible Assets $8,397,648 $8,969,950
========== ==========
Amortization of core technology is expected to be approximately $734,000
a year for the next 11 years. Trademarks and Patents are amortized
using the straight-line method over 17 years.
5. Inventories are stated at the lower of cost (on a first in, first out) or
market.
September 30, December 31,
2002 2001
----------------- ----------------
Raw materials $ 2,308,079 $ 2,000,375
Work-in-process 294,381 130,167
Finished goods 1,794,629 1,845,720
---------------- ----------------
4,397,089 3,976,262
Less: reserve for obsolescence (779,959) (586,533)
---------------- ----------------
$ 3,617,130 $ 3,389,729
================ ================
6. New Accounting Pronouncements - In August
2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Statement retains the fundamental
provisions of SFAS No. 121 for recognition and measurement of impairment,
but amends the accounting and reporting standards for segments of a
business to be disposed of. The provisions of this statement are required
to be adopted no later than fiscal years beginning after December 31, 2001.
The impact of adopting this standard was not material to the financial
statements.
On April 30, 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 63, Amendments of FASB Statement No. 13, and
Technical Corrections" ("FAS 145"). FAS 145 eliminates the requirement that
gains and losses from the extinguishment of the debt be aggregated and, if
material, classified as an extraordinary item, net of the related income
tax effect and eliminates an inconsistency between the accounting for
sale-leaseback transactions and certain lease modifications that have
economic effects that are similar to sale-leaseback transactions.
Generally, FAS 145 is effective for transactions occurring after May 15,
2002. The adoption of this standard is expected to have no impact to
Andrea.
SFAS No. 146, " Accounting for Costs Associated with Exit of Disposal
Activities" ("FAS 146"), provides guidance on the recognition and
measurement of liabilities for cost associated with the exit of disposal
activities. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. Andrea is
currently reviewing FAS 146 to determine the impact upon adoption.
7. Restructuring Accrual - During the fourth quarter of fiscal 2001, Andrea
recorded restructuring charges in connection with exiting a PC headset
channel, or customer-type, within the Anti-Noise Headset Product segment.
The restructuring charge was recorded as accrued restructuring charges or
as a reduction of assets, as applicable. During the first nine months of
fiscal 2002, we made payments of $111,131, which reduced the restructuring
-8-
liability that had been established during the fourth quarter of fiscal
2001. As of September 30, 2002, there were no material revisions to the
plan, exit costs, or the anticipated timing of our plan's execution.
8. Series B Redeemable Convertible Preferred Stock - On September 22, 1999,
Andrea issued and sold in a private placement $7,500,000 of Series B
Redeemable Convertible Preferred Stock (the "Series B Preferred Stock"),
and a warrant covering 75,000 shares of Andrea's Common Stock. Each of the
750 shares of Series B Preferred Stock has a stated value of $10,000 plus
dividends of 4% per annum, which sum is convertible into Common Stock at a
conversion price equal to the lower of $8.775 (the "Maximum Conversion
Price") and the average of the two lowest trade prices of the Common Stock
during the 15 consecutive trading days immediately preceding a conversion
date (the "Market Price"), subject to certain adjustments, including
anti-dilution. The 4% dividends may, at the option of Andrea, be paid in
cash. The warrant has an exercise price of $8.775 per share and expires on
June 18, 2004.
All of the Series B Preferred Stock is currently convertible into Andrea's
Common Stock, and Andrea has reserved 3,560,152 shares of Common Stock for
issuance upon conversion.
Upon the announcement of a major transaction, as defined in Andrea's
Certificate of Incorporation, the holders of the Series B Preferred Stock
have the right to require Andrea to redeem all or a portion of the holders'
Series B Preferred Stock at a redemption price equal to the greater of 120%
of the stated value plus any accrued dividends or the Market Price on the
day of announcement. In addition, upon the occurrence of certain triggering
events, and depending on Andrea's control over such events, the holders of
Series B Preferred Stock may have the right to require Andrea to (i) redeem
all or a portion of the Series B Preferred Stock at a redemption price
equal to the greater of 120% of the stated value plus any accrued dividends
or the Market Price on the day of announcement, or (ii) pay a penalty equal
to 1% of the remaining principal amount outstanding for a period not to
exceed 20 days in any 365 day period, and adjust the Maximum Conversion
Price.
Andrea is actively seeking to obtain additional capital and funding which,
if successful, could involve the triggering of the redemption rights. If
such redemption rights are triggered and Andrea has insufficient funds to
satisfy the redemption, Andrea will be required to obtain a waiver from the
holders of the Series B Preferred Stock. If the Series B Preferred Stock
holders do not consent to such a waiver, Andrea's efforts to obtain
additional funding and capital will be materially adversely affected and
its ability to continue its current operations will be materially adversely
affected.
In the nine-month period ended September 30, 2002, the following number of
shares of Series B Preferred Stock, together with related accrued
dividends, were converted:
Number of Series B Number of
Date of Conversion Preferred Stock Conversion Common
Converted Price Shares
------------------------ ---------------------- ---------------- -------------------
January 11, 2002 40 $0.59 747,657
March 15, 2002 37 $0.51 805,075
May 22, 2002 52 $0.655 886,898
September 17, 2002 34 $0.415 925,850
-- -------
Total 163 3,365,480
=== =========
The original value of the warrants upon issuance was $348,457. As of
September 30, 2002, the Series B Preferred Stock is recorded net of the
unaccreted present value of the warrants of $20,454. Due to the redemption
features described above, the Series B Preferred Stock is presented outside
of shareholders' equity in the accompanying condensed consolidated balance
sheets.
-9-
9. Series C Redeemable Convertible Preferred Stock - On October 10, 2000,
Andrea issued and sold in a private placement $7,500,000 of Series C
Redeemable Convertible Preferred Stock (the "Series C Preferred Stock").
Each of the 750 shares of Series C Preferred Stock (par value $0.01 per
share) has a stated value of $10,000 plus dividends of 5% per annum, which
sum is convertible into Common Stock (par value $0.50 per share) at a
conversion price which was initially equal to $7.0565 or 110% of the
average of the two lowest closing bid prices of the Common Stock during the
5 consecutive trading days immediately preceding the issuance date, for the
first nine months. The conversion price reset every six months thereafter
to the lesser of the then existing conversion price or the average of the
two lowest closing bid prices of the Common Stock during the 5 consecutive
trading days immediately preceding the six-month reset dates or, for the
period beginning on the day two years after the initial issuance and ending
on the maturity of the Series C Preferred Stock, the least of: (i) the then
existing conversion price, (ii) the average of the two lowest closing bid
prices of the Common Stock during the 15 consecutive trading days
immediately preceding such two year date or (iii) the closing bid price on
the day of conversion, subject in each case to certain adjustments. The 5%
dividend amount may, at the option of Andrea, be paid in cash or in shares
of Andrea's Common Stock. The Series C Preferred Stock is convertible or
redeemable at maturity by Andrea, based upon certain circumstances at that
time, and is redeemable by the holder upon certain events. As of September
30, 2002, all of the Series C Preferred Stock is currently convertible into
Andrea's Common Stock, and Andrea has reserved 10,890,411 shares of Common
Stock for issuance upon conversion of the shares of the Series C Preferred
Stock. On October 10, 2002, 81.24% of one share of the Series C Preferred
Stock was converted into 31,916 shares of Common Stock at a conversion
price of $0.28.
In accordance with EITF Issue 00-27, "Application of EITF Issue No. 98-5 to
Certain Convertible Instruments", in the third quarter of 2001, Andrea
recorded a non-cash charge of $7,500,000 to accumulated deficit. This
pronouncement values the economic benefit of the contingent beneficial
conversion feature that the holders of the Series C Preferred Stock
received when the conversion price of the Series C Preferred Stock was
reset from $7.0565 to $1.44 in July 2001. This charge represented the
maximum charge under this standard.
The original value of the transaction costs upon issuance was $175,000. As
of September 30, 2002, the Series C Preferred Stock is recorded net of the
unaccreted present value of the transaction costs of $116,385. Due to the
redemption features discussed above, the Series C Preferred Stock is
presented outside of shareholders' equity in the accompanying condensed
consolidated balance sheet.
Upon the announcement of a major transaction or upon certain triggering
events, as defined, the investors have the right to require Andrea to
redeem all or a portion of the investors' Series C Preferred Stock at a
redemption price equal to the greater of (i) 120% of the Liquidation Value,
as defined, or (ii) the product of the applicable conversion rate in effect
on the date of the major transaction or the triggering event and the
closing bid price of the Common Stock of Andrea on the trading day
immediately preceding the major transaction or triggering event or the
closing bid price of Andrea's Common Stock on the date the holder's
delivery to Andrea of notice. In addition, if Andrea is unable to effect
such redemption (i) interest will accumulate on the value of the Series C
Preferred Stock that Andrea is unable to redeem at the rate of 2% per
month and (ii) the holders of the Series C Preferred Stock are entitled to
void their redemption notices and receive a reset of their applicable
conversion price.
On March 15, 2002, Andrea announced that a triggering event had occurred
and that as a result of the trigger, the investor had the right to require
Andrea to redeem all of the Series C Preferred Stock. The investor has
agreed, in a Waiver Agreement, to waive its right to receive the aggregate
Triggering Event Redemption Price (as defined in the Certificate of
Amendment) (together with any interest and related cash payments or
penalties thereon) the investor was otherwise entitled to as a result of
the existing triggering event until April 7, 2007. In addition, the
investor agreed to waive, until April 7, 2007, its right to receive the
aggregate triggering event Redemption Price, as defined, (together with any
interest and related cash payments or penalties thereon) with respect to
(1) any future triggering event relating to additional registration
failures, provided that the existing registration statements remain
effective and available to the investor for the number of shares covered by
such registration statements as of the date of the waiver (less any future
sales made pursuant to such registration statements), and (2) any future
Triggering Event relating to the delisting of Andrea's Common Stock,
provided that the Common Stock is thereafter authorized for trading on the
OTC Bulletin Board. In addition, the investor agreed to waive, until April
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7, 2007, Andrea's obligation to register any additional shares and Andrea's
obligation to make certain cash payments, if any, for its failure to
register any additional shares. Finally, the investor acknowledged that no
Maturity Date Redemption Price (as defined) was due on October 10, 2002.
The investor's waivers described above shall be null and void immediately,
however, upon the earlier of April 7, 2007, if such Triggering Event
Redemption Price is not paid on April 7, 2007, the first date on which
Andrea fails to comply in any material respect with the terms of the Waiver
Agreement, and related agreements entered into between Andrea and the
investor (the "Agreements"), and the first date on which Andrea is
insolvent.
As consideration for the Waiver Agreement, Andrea agreed to grant the
investor a security interest in all of Andrea's assets; however, the
investor agreed to have its lien on Andrea's assets subordinated to (1) any
lien granted in the future to a non-affiliated third party in connection
with a strategic transaction with a financing component, provided that such
third-party lien relates only to the amount of the financing component of
such transactions, and (2) any lien granted in the future to a bank or
other similar institution pursuant to any asset-based financing
transaction. In addition, the investor agreed to release its lien in
connection with any sale of any assets subject to the investor's lien,
provided the investor receives a lien on the proceeds of the sale. The
investor acknowledged that its lien in any portion of Andrea's intellectual
property is effectively subordinate to the interest of any current or
future licensee of such intellectual property, as any interest the investor
may have in such intellectual property cannot be greater than Andrea's
interest therein.
Given that the waiver granted by the investor does not cover all triggering
events set forth in the Certificate of Amendment and that the Waiver
Agreement will be null and void in the event Andrea fails to comply in any
material respect with the terms of the Agreements, among other things,
there is a risk that the investor could declare a triggering event that
would trigger the redemption rights.
If such redemption rights are triggered and Andrea has insufficient funds
to satisfy the redemption, Andrea will be required to obtain a new waiver
from the holders of the Series C Preferred Stock. If the Series C Preferred
Stockholders do not consent to such a waiver, Andrea's efforts to obtain
additional funding and capital will be materially adversely affected and
its ability to continue its current operations will be materially adversely
affected.
10. In December 2001 and March 2002, Andrea entered into two agreements with
Analog Devices, Inc. ("Analog Devices"). These license agreements relate to
Andrea's high performance noise canceling technologies that enable clear
voice communications and high-performance audio in small home-office and
regular office environments. Under our agreements with Analog Devices, they
paid us a total of $5 million in license fees during the first nine months
of 2002. The unamortized portion of the license agreements, as amended, is
recorded as deferred revenue ($1,666,680 of which is classified as current
and $2,796,634 classified as long-term as of September 30, 2002) in the
accompanying condensed consolidated balance sheets. All license revenues
are being recognized on a straight-line basis over three-years, $3 million
of which started to be recognized during the first quarter of 2002, and $2
million which started in the third quarter of 2002.
11. Commitments And Contingencies-
Leases - Andrea's corporate headquarters is located in Melville, New York,
where Andrea leases space for manufacturing, research and development,
sales and executive offices from an unrelated party. The lease is for
approximately 40,000 square feet and expires in June 2008. For the three
months and nine months ended September 30, 2002, rent expense under this
operating lease was approximately $148,000 and $435,000, respectively. As
of September 30, 2002, the minimum future lease commitments, under this
lease and all other noncancellable operating leases, are as follows:
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2002 (fourth quarter of 2002) $ 192,954
2003 768,195
2004 744,021
2005 657,530
2006 683,832
Thereafter 1,050,375
----------------
Total $ 4,096,907
================
Legal Proceedings - As previously reported in Andrea's Annual Report on
Form 10-K for the year ended December 31, 2001, Andrea was engaged in a
lawsuit filed in the U.S. District Court for the Eastern District of New
York by NCT Group, Inc. ("NCT") and its subsidiary NCT Hearing Products,
Inc. Andrea filed and served an answer to the NCT complaint, denying the
allegations and asserting affirmative defenses and counterclaims. Effective
July 29, 2002, Andrea executed a non-cash settlement of the lawsuit with
NCT which dismissed both NCT's claims and Andrea's counterclaims.
12. Segment Information- Andrea follows the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). Performance measurement and resource allocation for our
reportable segments are based on many factors. The primary financial
measure is income (loss) from operations, which includes the
revenues, costs and expenses directly attributable to each segment,
as well as an allocation of costs and operating expenses, which are
not managed at a segment level, but are shared services such as, for
example, general corporate functions and corresponding costs that are
determined to be related to the products or services sold for each
segment. Income (loss) from operations for our segments excludes any
provision for income taxes. Reportable operating segments are
determined based on Andrea's management approach. The management
approach, as defined by FAS 131, is based on the way that the chief
operating decision-maker organizes the segments within an enterprise
for making operating decisions and assessing performance. While our
results of operations are primarily reviewed on a consolidated basis,
the chief operating decision-maker also manages the enterprise in
three segments: (i) Andrea Anti-Noise Headset Products, (ii) Aircraft
Communications Products, and (iii) Andrea DSP Microphone and Audio
Software Products. The following represents selected consolidated
financial information for Andrea's segments for the three months
ended September 30, 2002, and 2001:
Andrea DSP
Microphone
Andrea Anti- Aircraft and Audio
Noise Headset Communications Software September 30,
Segment Data Products Products Products 2002
- --------------------------------- -------------------- -------------------- --------------- ----------------
Net sales $519,254 $347,116 $503,659 $1,370,029
Income (loss) from operations 25,077 (54,685) (1,548,732) (1,578,340)
Depreciation 41,175 23,177 43,631 107,983
Andrea DSP
Microphone
Andrea Anti- Aircraft and Audio
Noise Headset Communications Software September 30,
Segment Data Products Products Products 2001
- ------------------------------- ------------------- -------------------- --------------- ----------------
Net sales $1,537,844 $1,201,895 $197,460 $2,937,199
Income (loss) from operations (365,430) 250,098 (1,944,785) (2,060,117)
Depreciation 98,612 27,720 50,756 177,088
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The following represents selected consolidated financial information for
Andrea's segments for the nine months ended September 30, 2002, and 2001:
Andrea DSP
Microphone
Andrea Anti- Aircraft and Audio
Noise Headset Communications Software September 30,
Segment Data Products Products Products 2002
- ------------------------------- -------------------- -------------------- ---------------- ----------------
Net sales $1,772,156 $2,171,450 $996,073 $4,939,679
Income (loss) from operations (350,312) 320,698 (5,006,751) (5,036,365)
Depreciation 132,172 72,103 153,651 357,926
Andrea DSP
Microphone
Andrea Anti- Aircraft and Audio
Noise Headset Communications Software September 30,
Segment Data Products Products Products 2001
- ------------------------------ --------------------- -------------------- ------------------ ---------------
Net sales $4,030,262 $3,542,012 $598,493 $8,170,767
Income (loss) from operations (1,861,075) 1,137,319 (6,397,287) (7,121,043)
Depreciation 299,982 100,605 165,835 566,422
International revenues are based on the country in which the end-user is
located. For the three months ended September 30, 2002 and 2001, sales and
accounts receivable by geographic area are as follows:
September 30, September 30,
Geographic Data 2002 2001
------------------ ---------------- ---------------
Sales:
United States $ 1,238,137 $ 2,513,906
Europe 60,526 136,783
Other foreign 71,366 286,510
----------------- -----------------
$ 1,370,029 $ 2,937,199
================= =================
Accounts receivable:
United States $ 433,492 $ 1,576,703
Europe 60,871 102,702
Other foreign 64,495 94,396
----------------- -----------------
$ 558,858 $ 1,773,801
================= =================
For the nine months ended September 30, 2002 and 2001, sales by geographic area
are as follows:
September 30, September 30,
Geographic Data 2002 2001
------------------ ------------------ -----------------
Sales:
United States $ 4,223,722 $ 6,549,833
Europe 239,420 506,755
Other foreign 476,537 1,114,179
------------------ -----------------
$ 4,939,679 $ 8,170,767
================== =================
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The assets and liabilities of Andrea are managed centrally and are reported
internally in the same manner as the consolidated financial statements,
thus no additional information is produced for the Chief Executive or
included herein.
13. Concentration of Credit Risk - Sales of Andrea Anti-Noise Headset products
to one customer and its affiliates were approximately 2% and 40% of the
total sales for the 2002 and 2001 third quarter, respectively, and 7% and
29% for the 2002 and 2001 first nine months, respectively. Sales to the
federal government and related subcontractors were approximately 6% and 14%
of the total sales for the 2002 and 2001 third quarter, respectively, and
18% and 20% for the 2002 and 2001 first nine months, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview of Our Products, Technologies and Markets
We design, develop and manufacture state-of-the-art microphone
technologies and products for enhancing speech-based applications software
and communications that require high quality, clear voice signals. Our
technologies eliminate unwanted background noise to enable the optimum
performance of various speech-based and audio applications.
Andrea's products and technologies optimize the performance of
speech-based applications and audio applications in primarily the following
markets:
. personal computing (primarily for speech recognition applications
and voice communication over the Internet);
. audio and video conferencing;
. in-vehicle communications (to enable untethered, hands-free
communication);
. military and commercial aircraft communications systems; and
. call centers.
Our patented and patent-pending digital noise canceling technologies
enable a speaker to be several feet from the microphone, and free the speaker
from having to hold the microphone (we refer to this capability as "far-field"
microphone use). Our DSDA and DFTA microphone products convert sound received
by an array of microphones in a product into digital signals that are then
processed to cancel background noise from the signal to be transmitted. These
two adaptive technologies represent the core technologies within our portfolio
of far-field technologies. In addition to DSDA and DFTA, Andrea has developed
and commercialized several other digital, far-field noise canceling
technologies, including, among others, Andrea EchoStop, a high-quality acoustic
echo canceller, and Andrea PureAudio, a leading technology for canceling
unwanted stationary noises. All of our digital, far-field microphone
technologies are software-based and operate using either a dedicated DSP or a
general purpose processor (for example, the Pentium) and the software, which
may encompass one or all of our far-field noise canceling technologies, can be
applied to improve the performance of a single microphone or multiple
microphones. In addition, our digital, far-field, noise canceling technologies
can be tailored and implemented into various form factors, for example, into
the monitor of a PC, a rear view mirror, or a personal digital assistant, and
can be used individually or combined depending on particular customer
requirements. We are currently targeting our far-field technologies primarily
at 1) the desktop computing market (primarily through our relationship with
Analog Devices, Inc., 2) the market for personal computers designed for use in
automobiles, trucks and buses to control satellite-based navigation systems and
other devices within vehicles, 3) the market for mobile devices, such as a
personal digital assistants and 4) the military and commercial aircraft
communication systems market. Our far-field, digital noise canceling
technologies and related products, together with implementations of other
high-end audio technologies (for example, our Active Noise Reduction
technology), comprise our Andrea Digital Signal Processing (DSP) Microphone and
Audio Software line of business,
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and sales of such technologies and products during the Third Quarter 2002 and
the Third Quarter 2001 approximated 37% and 7%, respectively, of our total net
revenues. We dedicate the majority of our marketing and research and
development resources to this business segment, as we believe that
communication products will increasingly require high performance, untethered
(hands-free and headset-free) microphone technology.
Our headset microphone products help to ensure clear speech in
personal computer and telephone headset applications. Our Active Noise
Cancellation microphone technology uses electronic circuits that distinguish a
speaker's voice from background noise in the speaker's environment and then
cancels the noise from the signal to be transmitted by the microphone. Our
Active Noise Reduction headphone products use electronic circuits that
distinguish the signal coming through an earphone from background noise in the
listener's environment and then reduces the noise heard by the listener.
Together with our lower-end noise canceling headset products and our call
center headset products that we launched during 2002, these products comprise
our Andrea Anti-Noise Headset line of business. During the fourth quarter 2001,
we recorded restructuring charges relating to repositioning our business plan
for our Andrea Anti-Noise Headset Product business segment as part of our
overall effort to drive high margin product sales and become profitable. The
restructuring focused on exiting from an increasingly unprofitable PC
OEM/retail headset channel within Andrea's Anti-Noise Headset product segment.
This was primarily a result of the increasing competitive nature of the PC
headset market, coupled with Andrea's ongoing strategic efforts to focus on
being primarily a supplier of digital, far-field noise canceling microphone
technologies. This PC OEM/retail headset channel primarily purchased our
lower-end, low margin headset products, and required substantial support which,
when combined with decreasing volumes realized during 2001, became
unprofitable. During the Third Quarter 2002 and the Third Quarter 2001 our
Andrea Anti-Noise Headset Product segment approximated 38% and 52%,
respectively, of our total net revenues.
For several decades prior to our entry into the voice-activated
computing market in the 1990's, our primary business was selling intercom
systems for military aircraft communications. During 2000 and 2001, we dedicated
development efforts aimed at increasing the manufacturability of certain
intercom products as well as to accommodate future implementation of our
digital, far field noise canceling technologies. We refer to this line of
business as our Aircraft Communications line of business, and sales of such
products during the Third Quarter 2002 and Third Quarter 2001 approximated 25%
and 41%, respectively, of our total net revenues.
We are incorporated under the laws of the State of New York and have
been engaged in the electronic communications industry since 1934.
The interim results of operations of Andrea presented in this report
are not necessarily indicative of the actual sales or results of operations to
be realized for the full year.
Our Critical Accounting Policies
Our condensed consolidated financial statements and the notes to our
condensed consolidated financial statements contain information that is
pertinent to management's discussion and analysis. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities. In addition to the recording and presentation of our
convertible preferred stock, we believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
affect our financial condition and results of operations. We have discussed
the application of these critical accounting policies with our Audit Committee.
Revenue Recognition - Non license-related revenue is recognized upon
shipment. Andrea reports such sales levels on a net sales basis, with net sales
being computed by deducting from gross sales the amount of actual sales returns
and the amount of reserves established for anticipated returns. With respect to
license revenues, Andrea recognizes revenue in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," as amended, and Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statement." In addition, fee-based services are performed on a time-and
material basis or on a fixed-fee basis, under separate service arrangements. We
recognize license-related revenues primarily based on an evaluation of the
terms of individual
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contracts (see Note 10 of our condensed consolidated financial statements, for
example) considering, specifically, whether 1) significant obligations remain,
2) evidence of an arrangement exists, 3) the fees are fixed or determinable,
and 4) collectibility is reasonably assured.
Accounts Receivable - We are required to estimate the collectibility
of our trade receivables. Judgment is required in assessing the realization of
these receivables, including the current creditworthiness of each customer and
related aging of the past due balances. We evaluate specific accounts when we
become aware of a situation where a customer may not be able to meet its
financial obligations due to a deterioration of its financial viability, credit
ratings or bankruptcy. The reserve requirements are based on the best facts
available to us and reevaluated and adjusted as additional information is
received. Our reserves also are determined by using percentages applied to
certain aged receivable categories. At September 30, 2002 our allowance for
doubtful accounts was approximately $71 thousand.
Inventory - We are required to state our inventories at the lower of
cost or market. In assessing the ultimate realization of inventories, we are
required to make considerable judgments as to future demand requirements and
compare that with our current inventory levels. Our reserve requirements
generally increase as our projected demand requirements decrease due to market
conditions, technological and product life cycle changes as well as longer than
previously expected usage periods. We experienced significant inventory charges
in 2001 due to our change in strategic direction resulting, in part, from
declining market conditions. In connection with our restructuring effort, we
incurred inventory charges of approximately $2.6 million during fiscal 2001.
Inventories of approximately $3.6 million at September 30, 2002, are net of
reserves of approximately $780 thousand. It is possible that additional charges
to inventory may occur in the future if there is further declines in market
conditions, or if additional restructuring actions are taken.
Statement of Financial Accounting Standards, or SFAS, No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144")
supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("FAS 121") and Accounting Principles
Board Opinion No. 30 "Reporting Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". FAS 144 retains the
fundamental provisions of FAS 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for segments of a
business to be disposed of. The provisions of this statement require management
judgments regarding the future operating and disposition plans for marginally
performing assets, and estimates of expected realizable values for assets to be
sold. The impact of adopting this standard was not material to the financial
statements.
Under SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142") requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under FAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over
their useful lives (but with no maximum life). Andrea has adopted this standard
effective January 1, 2002, and, accordingly, those intangible assets that
continue to be classified as goodwill or as other intangibles with indefinite
lives are no longer amortized. The adoption of this pronouncement, to date,
resulted in a $846 thousand decrease in amortization expense for the first nine
months of 2002 over the same period in the prior year. Other intangible assets,
which do not have indefinite lives, continue to be amortized. Andrea has made
an assessment of its intangible assets to identify goodwill separately from
other identifiable intangibles. Andrea determined no adjustment was necessary,
although the intangible asset "Workforce in Place" is reclassified as goodwill
pursuant to FAS 142. We performed initial transitional impairment testing of
goodwill and intangible assets during the first quarter of fiscal 2002. That
effort, and preliminary assessments of our identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (step one) the
determination of impairment, based upon the fair value of a reporting unit as
compared to its carrying value, and (step two) if there is an impairment, this
step measures the amount of impairment loss by comparing the implied fair value
of goodwill with the carrying amount of that goodwill. FAS 142 required that an
entity complete step one of the transitional goodwill impairment test within six
months of adoption, and that if there is an indication that the carrying amount
of the net assets of a reporting unit exceeds its fair value, step two must be
completed by the end of the fiscal year. In the second quarter of fiscal 2002,
we determined that the carrying value of our Andrea DSP Microphone and Audio
segment might be
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greater that its fair value. In order to finalize our determination of fair
value, we will require the assistance of a third-party valuation firm. We
anticipate completing this analysis during the fourth quarter of 2002.
Deferred Tax Assets - We currently have significant deferred tax
assets. SFAS No. 109, "Accounting for Income Taxes"("FAS 109"), requires a
valuation allowance be established when it is more likely than not that all or
a portion of deferred tax assets will not be realized. Furthermore, FAS 109
provides that it is difficult to conclude that a valuation allowance is not
needed when there is negative evidence such as cumulative losses in recent
years. Therefore, cumulative losses weigh heavily in the overall assessment.
Accordingly, and after considering recent changes in existing positive evidence,
we recorded a full valuation allowance against our deferred tax assets during
the third quarter ended September 30, 2002, recognizing a $1.8 million, non-cash
charge. In addition, we expect to provide a full valuation allowance on future
tax benefits until we can sustain a level of profitability that demonstrates our
ability to utilize the assets, or other significant positive evidence arises
that suggests our ability to utilize such assets. The future realization of a
portion of our reserved deferred tax assets related to tax benefits associated
with the exercise of stock options, if and when realized, will not result in a
tax benefit in the consolidated statement of operations, but rather will result
in an increase in additional paid in capital. We will continue to re-assess our
reserves on deferred income tax assets in future periods on a quarterly basis.
During 2001, we recorded significant charges in connection with a
restructuring program. The related reserves established in that restructuring
reflect various estimates, primarily those pertaining to inventory and
settlements of contractual obligations. We reassess the reserve requirements
under our restructuring program at the end of each reporting period. Actual
experience may be different from our estimates used and, accordingly,
additional charges related to our restructuring may be incurred.
We are subject to proceedings, lawsuits and other claims, including
proceedings under laws and government regulations related to securities,
environmental, labor, product and other matters. We are required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is based on an analysis of each
individual issue with the assistance of legal counsel. The amount of any
reserves may change in the future due to new developments in each matter.
The impact of changes in the estimates and judgments pertaining to
revenue recognition, receivables and inventories is directly reflected in our
segments' income (loss) from operations. Although any charges related to our
deferred tax assets are not reflected in our segment results, the long-term
forecasts supporting the realization of those assets and changes in them are
significantly affected by the actual and expected results of each segment.
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 three months ended
September 30, 2002 (the "2002 Third Quarter") compared to the three months
ended September 30, 2001 (the "2001 Third Quarter") and for the nine months
ended September 30, 2002 (the "2002 First Nine Months") compared to the nine
months ended September 30, 2001 (the "2001 First Nine Months") are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The words "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "seeks," variations of such words, and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements on our current expectations, estimates and
projections about our business and industry, our beliefs and certain
assumptions made by our management. Investors are cautioned that matters
subject to forward-looking statements involve risks and uncertainties including
economic, competitive, governmental, technological and other factors that may
affect our business and prospects. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. In order to obtain the benefits of
these "safe harbor" provisions for any such forward-looking statements, we wish
to caution investors and prospective investors about the following significant
factors, which, among others, have in some cases affected our actual results
and are in the future likely to affect our actual results and
-17-
could cause them to differ materially from those expressed in any such
forward-looking statements. These factors include the following:
Because our operating results are subject to significant fluctuation,
period-to-period comparisons of our operating results may not necessarily be
meaningful and you should not rely on them as indications of our future
performance.
Our results of operations have historically been and are subject to
continued substantial annual and quarterly fluctuations. The causes of these
fluctuations include, among other things:
- the volume of sales of our products;
- the cost of development of our products;
- the mix of products we sell;
- the mix of distribution channels we use;
- the timing of our new product releases and those of our
competitors;
- fluctuations in the computer and communications hardware and
software marketplace;
- fluctuations in Department of Defense spending/funding; and
- general economic conditions.
We cannot assure that the level of sales and gross profit, if any,
that we achieve in any particular period will not be significantly lower than in
other periods. Our revenues for the 2002 Third Quarter, were approximately $1.4
million compared to approximately $2.9 million in the 2001 Third Quarter. Net
loss applicable to common shareholders for the 2002 Third Quarter was
approximately $3.5 million, or $0.18 per share on a diluted basis, versus net
loss applicable to common shareholders of approximately $9.7 million, or $0.64
per share on a diluted basis, for the 2001 Third Quarter. In the 2001 Third
Quarter there was a special, one-time, non-cash accumulated deficit charge of
$7.5 million. Our revenues for the 2002 First Nine Months were approximately
$4.9 million compared to approximately $8.2 million in the 2001 First Nine
Months. For the 2002 First Nine Months, we had a net loss attributable to common
shareholders of approximately $7.2 million, or $0.39 per share on a diluted
basis compared to a net loss attributable to common shareholders of $14.9
million, or $1.00 per share on a diluted basis in the 2001 First Nine Months.
Because of increased competition and a shift in business strategy, operating
results are subject to significant fluctuation, period-to-period comparisons of
our operating results may not necessarily be meaningful and you should not rely
on them as indications of our future performance.
In response to significant declines in our sales of Andrea Anti-Noise
Headset Products as a result of increased competition with respect to a
specific customer channel, as well as our overall shift in strategic direction
to primarily deliver digital, far-field microphone solutions, during the fourth
quarter of 2001, we recorded restructuring charges of approximately $4.5
million. This restructuring is expected to result in further decreases in sales,
on a comparable period basis, during the remainder of fiscal 2002. We are
examining additional opportunities for cost-reduction, production efficiencies
and further diversification of our business. But to remain competitive, we
intend to continue incurring substantial research and development, marketing and
general and administrative expenses. We may not be able to easily and quickly
reduce these expenses if our sales revenue continues to fall below our
expectations and, therefore, our net income or loss may be disproportionately
affected by any further reduction in sales revenue. Furthermore, amortization of
our intangible assets has had, and will continue to have, a negative, non-cash
impact on our results of operations (other than goodwill). As a result of these
factors, we expect to continue to accumulate losses and the market price of our
common stock could decline.
-18-
If we fail to obtain additional capital or maintain access to funds sufficient
to meet our operating needs, we may be required to significantly reduce, sell,
or refocus our operations and our business, results of operations and financial
condition could be materially and adversely effected, and could result in our
delisting from the American Stock Exchange or inability to continue operations.
In recent years, we have sustained significant operating losses. We
have been unable to generate sufficient cash flow from operations to meet our
operating needs and, correspondingly, from time to time during the past several
years, we have raised additional capital from external sources. We expect to
continue to have to raise additional capital from external sources. These
sources may include private or public financings through the issuance of debt,
convertible debt or equity, or collaborative arrangements. Additional capital
and funding may not be available on favorable terms, if at all. Additionally,
we may only be able to obtain additional capital or funds through arrangements
that require us to relinquish rights to our products, technologies or potential
markets, in whole or in part, or result in the sale of Andrea. Additionally,
Andrea's funding and capital raising efforts could trigger change in control
payments due to certain executive officers of Andrea under their employment
contracts, or redemptions of Andrea's Series B and Series C Redeemable
Convertible Preferred Stock. Given our current financial condition and market
conditions, it may be difficult to attract additional financings on favorable
terms, or at all, as compared to prior periods. We have revised our business
strategies to reduce our expenses and capital expenditures, but we still do not
generate sufficient cash flow from operations to meet our operating needs and
we cannot assure you that we will be successful in obtaining financings or
access to additional sources of funding in amounts necessary to continue our
operations. Failure to maintain sufficient access to funding may also result in
our delisting from the American Stock Exchange.
We face the risk that Andrea could be required to redeem the Series B
Redeemable Convertible Preferred Stock.
On June 22, 1999, Andrea issued and sold in a private placement
$7,500,000 of Series B Redeemable Convertible Preferred Stock (the "Series B
Preferred Stock"), and a warrant covering 75,000 shares of Andrea's Common
Stock. Each of the 750 shares of Series B Preferred Stock (par value $0.01 per
share) has a stated value of $10,000 plus dividends of 4% per annum, which sum
is convertible into Common Stock (par value $0.50 per share) at a conversion
price equal to the lower of $8.775 (the "Maximum Conversion Price") and the
average of the two lowest closing bid prices of the Common Stock during the 15
consecutive trading days immediately preceding a conversion date (the "Market
Price"), subject to certain adjustments, including anti-dilution. The 4%
dividends may, at the option of Andrea, be paid in cash. The warrant has an
exercise price of $8.775 per share and expires on June 18, 2004.
Upon the announcement of a major transaction, as defined in Andrea's
Certificate of Incorporation, the investors have the right to require Andrea
to redeem all or a portion of the investor's Preferred Shares at a redemption
price equal to the greater of 120% of the stated value plus any accrued
dividends or the Market Price on the day of announcement. In addition, upon the
occurrence of certain triggering events, as defined, and depending on Andrea's
control over such events, the investors may have the right to require Andrea to
i) redeem all or a portion of the Preferred Shares at a redemption price equal
to the greater of 120% of the stated value plus any accrued dividends or the
Market Price on the day of announcement, or ii) pay a penalty equal to 1% of
the remaining principal amount outstanding for a period not to exceed 20 days
in any 365 day period, and adjust the Maximum Conversion Price, as defined. If
we are forced to redeem the Series B Preferred Stock, we would not have
sufficient cash to satisfy the cost of redemption.
We face the risk that Andrea could be required to redeem the Series C
Redeemable Convertible Preferred Stock.
On October 10, 2000, Andrea issued and sold in a private placement
$7,500,000 of Series C Redeemable Convertible Preferred Stock (the "Series C
Preferred Stock"). The Series C Preferred Stock is convertible or redeemable at
maturity by Andrea, based upon certain circumstances at that time, and is
redeemable by the holder upon certain events, including the announcement of a
major transaction, as defined in the Certificate of Amendment, or upon certain
other triggering events. In the first quarter of 2002, a triggering event
occurred and we obtained a waiver from the Series C Preferred Stock holders of
their redemption right. A final agreement regarding the waiver arrangement was
reached on March 28, 2002. The waiver related to the existing triggering event,
as well as certain possible future triggering events, however, the waiver will
be null and void upon the earlier of April 7, 2007, the first date on which
-19-
Andrea fails to comply in any material respect with the terms of the waiver and
related documents, and the first date on which Andrea is insolvent.
As consideration for the Series C Preferred Stock holder's agreement
to waive its current and, in certain circumstances, any future right to receive
the aggregate Triggering Event Redemption Price for the Series C Preferred
Stock, Andrea agreed to grant a security interest in all of Andrea's assets.
However, the Series C Preferred Stock holder agreed to have its lien on
Andrea's assets subordinated to (1) any lien granted in the future to a
non-affiliated third party in connection with a strategic transaction with a
financing component, provided that such third-party lien relates only to the
amount of the financing component of such transactions, and (2) any lien
granted in the future to a bank or other similar institution pursuant to any
asset based financing transaction. In addition, the Series C Preferred Stock
holder agreed to release its lien in connection with any sale of any assets
subject to its lien, provided they receive a lien on the proceeds of the sale.
The Series C Preferred Stock holder acknowledged that its lien in any portion
of Andrea's intellectual property is effectively subordinate to the interest of
any current or future licensee of such intellectual property, as any interest
the investor may have in such intellectual property cannot be greater than
Andrea's interest therein.
Given that the waiver granted by the Series C Preferred Stock holder
does not cover all triggering events that could require the redemption of the
Series C Preferred Stock, and that the waiver will be null and void in the
event Andrea fails to comply in any material respect with the terms of the
agreements relating to the waiver, among other things, there is a risk that the
Series C Preferred Stock holder could declare a triggering event that would
trigger the redemption rights. If such redemption rights are triggered and
Andrea has insufficient funds to satisfy the redemption, which would be the
case if a redemption occurred at this time, Andrea will be required to obtain a
new waiver from the holder of the Series C Preferred Stock. If no such waiver
can be obtained, Andrea's ability to continue its current operations will be
materially adversely affected and if Andrea has insufficient funds to redeem
the Series C Preferred Stock, it could result in Andrea's inability to meet its
operating obligations and, consequently, delisting from the American Stock
Exchange.
Shares Eligible For Future Sale May Have An Adverse Effect On Market Price; You
May Experience Substantial Dilution.
Sales of a substantial number of shares of our common stock in the
public market could have the effect of depressing the prevailing market price
of our common stock. Of the 70,000,000 shares of common stock presently
authorized, 20,043,864 were outstanding as of November 12, 2002. The number of
shares outstanding does not include 6,632,375 shares of our common stock
reserved for issuance upon exercise of outstanding awards granted under our
1991 Performance Equity Plan and 1998 Stock Plan and shares of our common
stock reserved for further awards under the 1998 Stock Plan; nor does it
include 14,410,947 shares of common stock reserved for issuance upon conversion
of the Series B and Series C convertible preferred stock and exercise of
related warrants.
Conversions of our Series B Preferred Stock and Series C Preferred Stock may
result in substantial dilution to other holders of our common stock.
As of November 12, 2002, we had 86 shares of Series B Preferred Stock
and 749.19 shares of Series C Preferred Stock outstanding. Both the Series B
Preferred Stock and the Series C Preferred Stock are convertible into shares of
common stock, subject to ownership limitations that prohibit the holders of the
preferred stock from owning more than 4.99% of the outstanding shares of common
stock at the time of conversion or 9.99% over the sixty day period prior to the
conversion. These restrictions do not prevent purchasers from converting and
selling some of their holdings and then later converting the rest of their
holdings.
-20-
As the price of our common stock decreases, the number of shares of common
stock issuable upon conversion of our Series B Preferred Stock and Series C
Preferred Stock increases.
The variable conversion price of the Series B Preferred Stock and the
Series C Preferred Stock are functions of the market price of our common stock.
If the price of our common stock decreases over time, the number of shares of
common stock issuable upon conversion of each series will increase.
The following table illustrates the varying amounts of shares of
common stock issuable upon conversion of all 86 shares of Series B Preferred
Stock at the indicated conversion prices (without regard to any limitations on
conversion) and assuming that the 4% dividend is paid in cash:
Number of Shares of Common
Stock Issuable Upon Percentage of Outstanding
Conversion Price Conversion(/1/) Common Stock(/2/)
- --------------------- ----------------------------- --------------------------
$0.25 3,440,000 15%
$0.30 2,866,667 13%
$0.35 2,457,143 11%
$0.40 2,150,000 10%
$0.45 1,911,111 9%
$0.50 1,720,000 8%
(1) The holder of Series B Preferred Stock is prohibited from converting its
holdings of the Series B Preferred Stock if after giving effect to such
conversion it would beneficially own in excess of 4.99% or, over the sixty
day period prior to the conversion, 9.99% of the outstanding shares of our
Common Stock following such conversion. The numbers in this column do not
reflect these limitations.
(2) Based on 20,043,864 shares of common stock outstanding as of November 12,
2002.
The following table illustrates, as of any reset date and assuming the
conversion price indicated is lower than the then applicable conversion price on
that date, the varying amounts of shares of common stock that would be issuable
upon conversion of all outstanding 749.19 shares of Series C Preferred Stock at
the indicated conversion prices (without regard to any limitations on
conversion) and assuming that the 5% dividend amount is paid in cash:
Number of Shares of Common
Stock Issuable Upon Percentage of Outstanding
Conversion Price Conversion(/1/) Common Stock(/2/)
- --------------------- ----------------------------- --------------------------
$0.25 29,967,504 60%
$0.26 28,814,907 59%
$0.27 27,747,689 58%
$0.28 26,756,700 57%
$0.29 25,834,055 56%
$0.30 24,972,920 55%
(1) The holder of Series C Preferred Stock is prohibited from converting its
holdings of the Series C Preferred Stock if after giving effect to such
conversion it would beneficially own in excess of 4.99% or, over the sixty
day period prior to the conversion, 9.99% of the outstanding shares of our
common stock following such conversion. The numbers in this column do not
reflect these limitations.
(2) Based on 20,043,864 shares of common stock outstanding as of November 12,
2002.
The maximum conversion price of the Series C Preferred Stock is $0.30.
The following table illustrates the varying amounts of shares of Common
Stock that would be issuable upon conversion of all 86 outstanding shares of
Series B Preferred stock and all 749.19 outstanding shares of Series C Preferred
Stock at the indicated conversion prices (without regard to any limitations on
conversion) and assuming that all additional amounts are paid in cash:
Number of Shares of Common
Stock Issuable Upon Percentage of Outstanding
Conversion Price Conversion(/1/)(/2/)(/3/) Common Stock(/4/)
- --------------------- ----------------------------- --------------------------
$0.25 33,407,504 63%
-21-
$0.26 32,122,600 62%
$0.27 30,932,874 61%
$0.28 29,828,128 60%
$0.29 28,799,572 59%
$0.30 27,839,586 58%
$0.35 27,430,063 58%
$0.40 27,122,920 58%
$0.45 26,884,031 57%
$0.50 26,692,920 57%
(1) The calculation assumes that the conversion price of the Series B and
Series C Preferred Stock are the same at the assumed conversion prices of
$0.25, $0.26, $0.27, $0.28, $0.29 and $0.30.
(2) The calculation assumes that for any conversion of the Series B Preferred
Stock when the prevailing market price is above $ 0.30, the Series C
Preferred Stock would still be converted at its maximum conversion price of
$ 0.30.
(3) The holders of Series B and Series C Preferred Stock is prohibited from
converting the Series C or Series B Preferred Stock, or from exercising the
warrants issued in connection with the Series B Preferred Stock, if after
giving effect to such conversion it would beneficially own in excess of
4.99% or, over the sixty day period prior to the conversion, 9.99% of the
outstanding shares of our Common Stock following such conversion.
(4) Based on 20,043,864 shares of common stock outstanding as of November 12,
2002.
The conversion rate at November 12, 2002 of the Series B Preferred
Stock and the Series C Preferred Stock was $0.28. If all of the outstanding
shares of the Series B Preferred Stock and the Series C Preferred Stock were
converted on November 12, 2002, we would have issued a total of 33,043,141
shares of common stock. If the market price of our common stock continues to
decline, the conversion rates would increase, resulting in our issuing a greater
number of shares upon conversion of the Series B Preferred Stock and the Series
C Preferred Stock
Sales of an increased number of shares of common stock issued upon conversion of
the Series B Preferred Stock and the Series C Preferred Stock resulting from a
declining market price for our common stock can cause the market price of our
common stock to decline further.
Disregarding the manner in which the shares of common stock issued upon
conversion of the Series B Preferred Stock and the Series C Preferred Stock are
sold as well as any other factors such as reactions to our operating results and
general market conditions which may be operative in the market at such time, an
increase in the number of shares of common stock eligible for sale can cause a
decrease in the market price of our common stock. This decrease could reduce the
conversion prices of the Series B Preferred Stock and the Series C Preferred
Stock, leading to a further increase in the number of shares of common stock
issuable upon future conversions and a further decline in our stock price.
Short sales of our common stock may be attracted by or accompany conversions of
Series B Preferred Stock and Series C Preferred Stock, which sales may cause
downward pressure upon the price of our common stock.
Short sales of our common stock may be attracted by or accompany the
sale of converted common stock, which in the aggregate could cause downward
pressure upon the price of the common stock, regardless of our operating
results, thereby attracting additional short sales of the common stock. The
result of conversions of the Series B and Series C Preferred Stock at declining
conversion prices would be increasing and substantial dilution of the interests
of the other holders of common stock.
If we fail to market and commercialize our Andrea DSP Microphone and Audio
Software products, or continue to develop Andrea Anti-Noise Headset and Andrea
Aircraft Communications products, our revenues may not increase at a high enough
rate to improve our results of operations or may not increase at all.
Our business, results of operations and financial condition depend on
successful commercialization of our Andrea DSP Microphone and Audio Software
products and technologies. We introduced our first Andrea Digital
-22-
Super Directional Array products in 1998 and we are initially targeting these
and our other Andrea DSP Microphone and Audio Software products at the desktop
computer market, the market for in-vehicle computing and the audio and video
conferencing markets, among others. Since we began sales of our initial Andrea
Anti-Noise Headset products in 1995, we have developed and introduced new
products in this line. However, in the fourth quarter of 2001, we also
restructured this business segment which resulted in a significant reduction in
revenues. In addition, we recently developed and introduced a new aircraft
intercom system aimed at increasing overall manufacturability as well as to
enable future implementations of our Andrea DSP Microphone and Audio Software
technologies. The success of these products is subject to the risks frequently
encountered by companies in an early stage of product commercialization,
particularly companies in the computing and communications industries.
If we are unable to obtain market acceptance of Andrea DSP Microphone and Audio
Software products and technologies or if market acceptance of these products and
technologies occurs at a slow rate, then our business, results of operations and
financial condition will be materially and adversely affected.
We, and our competitors, are focused on developing and commercializing
products and technologies that enhance the use of voice, particularly in noisy
environments, for a broad range of computer and communications applications.
These products and technologies have been rapidly evolving and the number of our
competitors has grown, but the markets for these products and technologies are
subject to a high level of uncertainty and have been developing slowly. We,
alone or together with our industry, may be unsuccessful in obtaining market
acceptance of these products and technologies.
If we fail to develop and successfully introduce new products and technologies
in response to competition and evolving technology, we may not be able to
attract new customers or retain current customers.
The markets in which we sell our Andrea Anti-Noise Headset, Andrea DSP
Microphone and Audio Software and our Aircraft Communication products are highly
competitive. We may not compete successfully with any of our competitors. Most
of our current and potential competitors have significantly greater financial,
technology development, marketing, technical support and other resources than we
do. Consequently, these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or devote greater
resources to the development, marketing, and sale of their products than we can.
One or more of these competitors may independently develop technologies that are
substantially equivalent or superior to our technology. The introduction of
products incorporating new technologies could render our products obsolete and
unmarketable and could exert price pressures on existing products.
We are currently engaged in the development of digital signal
processing products and technologies for the voice, speech and natural language
interface markets. We may not succeed in developing these new digital signal
processing products and technologies, and any of these new digital signal
processing products or technologies may not gain market acceptance.
In the markets for Aircraft Communications Products, we often compete
with major defense electronics corporations as well as smaller manufacturing
firms, which specialize in supplying products and technologies for specific
military initiatives.
Further, the markets for our products and technologies are
characterized by evolving industry and governmental standards and specifications
that may require us to devote substantial time and expense to adapt our products
and technologies. For example, our Aircraft Communications business segment is
subject to the Federal Aviation Administration (FAA). We may not successfully
anticipate and adapt our products and technologies in a cost effective and
timely manner to changes in technology and industry standards or to
introductions of new products and technologies by others that render our then
existing products and technologies obsolete.
-23-
If our marketing collaborators do not effectively market their products with
which our products are included or incorporated, our sales growth could be
adversely affected.
We have entered into collaborative and distribution arrangements with
software publishers and computer hardware manufacturers relating to the
marketing and sale of Andrea DSP Microphone and Audio Software products through
inclusion or incorporation with the products of our collaborators. Our success
will therefore be dependent to a substantial degree on the efforts of these
collaborators to market their products with which our products are included or
incorporated. Our collaborators may not successfully market these products. In
addition, our collaborators generally are not contractually obligated to any
minimum level of sales of our products or technologies, and we have no control
over their marketing efforts. Furthermore, our collaborators may develop their
own microphone, earphone or headset products that may replace our products or
technologies or to which they may give higher priority.
If we fail to maintain sales of Aircraft Communication Products to the U.S.
Government, we would experience a material adverse effect on our business,
results of operations and financial condition.
We experienced a 71% decline in sales of Aircraft Communication
products in the 2002 Third Quarter when compared to the comparable prior year
period. We are dependent on product sales to the U.S. Government. During the
Third Quarter 2002, the U.S. Government accounted for 6% of our net sales. The
U.S. Government is not obligated to continue to purchase these products and is
free to purchase similar products from our competitors. Our failure to maintain
sales of Aircraft Communication Products to the U.S. Government would have a
material adverse effect on our business, results of operations and financial
condition.
Shortages of, or interruptions in, the supply of more specialized components for
our products could have a material adverse effect on our sales of these
products.
We conduct assembly operations at our facilities in New York and Israel
and through subcontractors (primarily in the Far East) using purchased
components. Some specialized components for the Andrea Anti-Noise Headset,
Aircraft Communications, and Andrea DSP Microphone products, such as
microphones, digital signal processing boards and specialty switches, are
available from a limited number of suppliers (in some cases foreign) and subject
to long lead times. We may not be able to continue to obtain sufficient supplies
of these more specialized components, particularly if the sales of our products
increase substantially or market demand for these components otherwise
increases.
If our subcontractor fails to meet our production and shipment schedules, our
business, results of operations and financial condition would be materially and
adversely affected.
We conduct assembly operations at our facilities in New York and Israel
and through subcontracting. During initial production runs of Andrea Anti-Noise
Headset and Andrea DSP Microphone products, we perform assembly operations at
our New York facility from purchased components. As sales of any particular
product increase, assembly operations are primarily transferred to a
subcontractor in Asia.
Our ability to compete may be limited by our failure to adequately protect our
intellectual property or by patents granted to third parties.
We rely on a combination of patents, patent applications, trade
secrets, copyrights, trademarks, nondisclosure agreements with our employees,
licensees and potential licensees, limited access to and dissemination of our
proprietary information, and other measures to protect our intellectual property
and proprietary rights. However, the steps that we have taken to protect our
intellectual property may not prevent its misappropriation or circumvention. In
addition, numerous patents have been granted to other parties in the fields of
noise cancellation, noise reduction, computer voice recognition, digital signal
processing and related subject matter. We expect that products in these fields
will increasingly be subject to claims under these patents as the numbers of
products and competitors in these fields grow and the functionality of products
overlap. Claims of this type could have an adverse effect on our ability to
manufacture and market our products or to develop new products and technologies,
because the parties holding these patents may refuse to grant licenses or only
grant licenses with onerous royalty requirements. Moreover, the laws of
-24-
other countries do not protect our proprietary rights to our technologies to
the same extent as the laws of the United States.
An unfavorable ruling in any current litigation proceeding or future proceeding
may adversely affect our business, results of operations and financial
condition.
From time to time we are subject to litigation incidental to our
business. For example, we are subject to the risk of adverse claims,
interference proceedings before the U.S. Patent and Trademark Office,
oppositions to patent applications outside the United States, and litigation
alleging infringement of the proprietary rights of others. Litigation to
establish the validity of patents, to assert infringement claims against others,
and to defend against patent infringement claims can be expensive and
time-consuming, even if the outcome is in our favor.
Changes in economic and political conditions outside the United States could
adversely affect our business, results of operations and financial condition.
We generate sales to regions outside the United States, particularly in
Europe and areas in the Americas and Asia. For the three months and nine months
ended September 30, 2002, sales to customers outside the United States accounted
for approximately 10% and 15%, respectively of our net sales. International
sales and operations are subject to a number of risks, including:
. trade restrictions in the form of license requirements;
. restrictions on exports and imports and other government controls;
. changes in tariffs and taxes;
. difficulties in staffing and managing international operations;
. problems in establishing and managing distributor relationships;
. general economic conditions; and
. political and economic instability or conflict.
To date, we have invoiced our international sales in U.S. dollars, and
have not engaged in any foreign exchange or hedging transactions. We may not
continue to be able to invoice all of our sales in U.S. dollars and to avoid
engaging in foreign exchange or hedging transactions. If we are required to
invoice any material amount of international sales in non-U.S. currencies,
fluctuations in the value of non-U.S. currencies relative to the U.S. dollar
may adversely affect our business, results of operations and financial
condition or require us to incur hedging costs to counter such fluctuations.
We face risk from operating in Israel
Our principal research and development facility is located in the State
of Israel and, as a result, certain of our key research and development
employees are located in Israel. Although substantially all of our sales
currently are being made to customers outside Israel, we are nonetheless
directly influenced by the political, economic and military conditions affecting
Israel. Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, between Israel and Arab
countries. Although Israel has entered into various agreements with certain Arab
countries and the Palestinian Authority, and various declarations have been
signed in connection with efforts to resolve some of the economic and political
problems in the Middle East, we cannot predict whether or in what manner these
problems will be resolved.
-25-
If we are unable to attract and retain the necessary managerial, technical and
other personnel necessary for our business, then our business, results of
operations and financial condition will be harmed.
Our performance is substantially dependent on the performance of our
executive officers and key employees. The loss of the services of any of these
executive officers or key employees could have a material adverse effect on our
business, results of operations and financial condition. Our future success
depends on our continuing ability to attract and retain highly qualified
managers and technical personnel. As of the date of this filing, Andrea is in
the process of negotiating contracts with each of Douglas J. Andrea, Chairman of
the Board of Directors, Christopher P. Sauvigne, President and Chief Executive
Officer, Joseph Marash, Chief Technology Officer and Richard A. Maue, Chief
Financial Officer. Competition for qualified personnel is intense and we may not
be able to attract, assimilate or retain qualified personnel in the future.
Results Of Operations
Quarter Ended September 30, 2002 Compared to the Quarter Ended
September 30, 2001 and Nine Months Ended September 30, 2002 Compared to
the Nine Months Ended September 30, 2001.
Sales
Sales for the 2002 Third Quarter were $1,370,029, a decrease of 53%
from sales of $2,937,199 for the 2001 Third Quarter. Sales for the 2002 First
Nine Months were $4,939,679, a decrease of 40% from the 2001 First Nine Months
sales of $8,170,767. The decrease in sales for the 2002 Third Quarter reflects
an approximate 66% decrease in sales of Andrea Anti-Noise Headset Products to
$519,254, or 38% of total sales, an approximate 71% decrease of Aircraft
Communications Product to $347,116, or 25% of total sales, both partially offset
by an approximate 155% increase in sales of our Andrea DSP Microphone and Audio
Software Products, to $503,659 , or 37% of total sales. The decrease in sales
for the 2002 First Nine Months reflects an approximate 56% decrease of Andrea
Anti-Noise Headset Products to $1,772,156, or 36% of total sales, an approximate
39% decrease of Aircraft Communications Product to $2,171,450, or 44% of total
sales, both partially offset by an approximate 66% increase in sales of our
Andrea DSP Microphone and Audio Software Products, to $996,073, or 20% of total
sales.
The primary reason for the decreases in sales of Andrea Anti-Noise
Headset Product is substantially due to our decision, during the fourth quarter
2001, to exit from an unprofitable, PC OEM/retail headset channel within
Andrea's Anti-Noise Headset product segment. This customer channel included IBM,
and for the Third Quarter 2002, sales to IBM and certain of IBM's affiliates,
such sales representing contractual obligations which we accepted during 2001,
accounted for approximately 2% of our total sales, or $27,361. This reflects an
approximate 98% decrease from $1,164,703 for the Third Quarter 2001.
The decreases in our Aircraft Communication Product revenues is
primarily a result of a decrease in U.S. Department of Defense funding which
affected programs where Andrea's products are used, primarily during the 2002
Third Quarter. For the 2002 Third Quarter, sales of our Aircraft Communications
Products to the U.S. Government accounted for approximately 6% of our total
sales.
The increases in sales of Andrea DSP Microphone and Audio Software
Products is primarily due to licensing revenue recognized during the Third
Quarter 2002 associated with our agreements with Analog Devices.
Cost of Sales
Cost of sales as a percentage of sales for the 2002 Third Quarter
decreased to 49% from 72% in the 2001 Third Quarter. Cost of Sales as a
percentage of sales for the 2002 First Nine Months decreased to 60% from 72% for
the 2001 First Nine Months. These decreases primarily reflect the impact of the
significant changes in the composition of our revenues as described under
"Sales" above, in particular, the significant increase in high-margin license
revenues associated with our agreements with Analog Devices (primarily
attributable to the 2002 Third Quarter), coupled with
-26-
the elimination of sales of low-margin Andrea Anti-Noise Headset Products
associated with our restructuring activity in the fourth quarter of 2001.
Research and Development
Research and development expenses for the 2002 Third Quarter increased
14% to $884,772 from $774,108 for the 2001 Third Quarter. Research and
development expenses for the First Nine Months were $2,677,128, an increase of
1% from the 2001 First Nine Months research and development expenses of
$2,654,392. The substantial amount of research and development is a reflection
of our continuing efforts to develop and commercialize DSP microphone and audio
technologies, coupled with, to a lesser extent, efforts in Aircraft
Communication product technologies and Andrea Anti-Noise Headset Product
technologies. For the 2002 Third Quarter, the Andrea DSP Microphone and Audio
Software Technology efforts were $727,378, or 82% of total research and
development expenses, Aircraft Communications technology efforts were $104,766
or 12% of total research and development expenses and Andrea Anti-Noise Headset
Product efforts were $52,628, or 6% of total research and development expenses.
With respect to DSP Microphone and Audio Software Technologies, research efforts
are primarily focused on the pursuit of commercializing a natural
language-driven human/machine interface by developing optimal far-field
microphone solutions for various voice-driven interfaces, incorporating Andrea's
digital super directional array microphone technology ("DSDA") and certain other
related technologies obtained through the acquisition of Lamar in May 1998. We
believe that the acquisition of Lamar significantly reinforces our position in
digital signal processing by extending our marketing programs to other
high-growth industries, including automotive telematics, mobile device markets,
the business videoconferencing market and Internet telephony, among others.
Specifically, the core technology acquired produces noise filtering capabilities
that management believes is preferred to other known digital, far-field noise
canceling technologies in the market, and is unattainable in products using
traditional mechanical solutions. In addition, the nature of a DSP-based
solution, together with the people acquired supporting our technology, offers a
solution that is highly scalable and embeddable, and therefore enables the
technology to be integrated into many different applications and form factors.
We believe that continued research and development spending should provide
Andrea with a competitive advantage.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the 2002 Third Quarter
decreased 34% to $1,391,966 from $2,117,360 for the 2001 Third Quarter. General,
administrative and selling expenses for the 2002 First Nine Months were
$4,314,416 a decrease of 36% from the 2001 First Nine Months general,
administrative and selling expenses of $6,739,458. These decreases are primarily
due to cost reduction efforts, as well as our adoption, on January 1, 2002, of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed for impairment
from time to time. The adoption of this pronouncement resulted in decreases of
$282,047 and $846,141 in amortization expense for the 2002 Third Quarter and
2002 First Nine Months, respectively, when compared to the same periods in the
prior year. Notwithstanding the beneficial impact of this pronouncement to our
2002 Third Quarter and 2002 First Nine Months, goodwill and intangible assets
which are no longer subject to periodic amortization will be reviewed for
impairment as part of a transitional assessment and from time to time (at least
annually) thereafter, and such reviews may result in adjustments that would
negatively impact future operating results.
Other Income (Expense)
Other expense for the 2002 Third Quarter was $15,947 compared to other
expense of $9,034 for the 2001 Third Quarter. Other income for the 2002 First
Nine Months was $20,834 compared to other income of $137,725 for the 2001 First
Nine Months. These declines are a result of unfavorable market conditions for
our invested cash balances experienced in the 2002 First Nine Months.
Provision for Income Taxes
We recorded a full valuation allowance against our net deferred tax
assets during the 2002 Third Quarter, recognizing a $1,806,615 non-cash charge
to provision for income taxes.
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In addition, we expect to provide a full valuation allowance on future tax
benefits until we can sustain a level of profitability that demonstrates our
ability to utilize the assets, or other significant positive evidence arises
that suggests our ability to utilize such assets. The future realization of a
portion of our reserved deferred tax assets related to tax benefits associated
with the exercise of stock options, if and when realized, will not result in a
tax benefit in the consolidated statement of operations, but rather will result
in an increase in additional paid in capital. We will continue to re-assess our
reserves on deferred income tax assets in future periods on a quarterly basis.
Net Income (Loss)
Net loss for the 2002 Third Quarter was $3,400,902 compared to a net
loss of $2,069,151 for the 2001 Third Quarter. Net loss for the 2002 First Nine
Months was $6,822,146 compared to a net loss of $6,983,318 for the 2001 First
Nine Months. The levels of net loss for the 2002 Third Quarter and 2002 First
Nine Months principally reflect the factors described above.
Liquidity And Capital Resources
Andrea's principal sources of funds have historically been, and are
expected to continue to be, gross cash flows from operations and proceeds from
the sale of convertible notes, preferred stock or other securities to certain
financial institutions and potential industry partners. At September 30, 2002,
we had cash and cash equivalents of $4,711,370 compared with $3,724,130 at
December 31, 2001. The balance of cash and cash equivalents at September 30,
2002 is primarily a result of our recently executed license transactions with
Analog Devices, Inc, together with gross cash flows from operations.
Working capital at September 30, 2002, was $3,458,981 compared to
$5,630,915 at December 31, 2001. The decrease in working capital reflects an
increase of total current liabilities of $1,702,132, partially offset by a
decrease in total current assets of $469,802. The decrease in total current
assets reflects an increase in cash and cash equivalents of $987,240, a decrease
in accounts receivable of $1,535,288 (such decrease is primarily a result of our
collection of license fees from Analog Devices, Inc.), an increase in inventory
of $227,401, and a decrease in prepaid expenses and other current assets of
$149,155. The increase in total current liabilities reflects a decrease in trade
accounts payable of $187,395, a decrease in current portion of long-term debt of
$127,438, a decrease of $111,131 in accrued restructuring charges, an increase
of $1,408,459 in deferred revenue and an increase of $719,637 in other current
liabilities.
The increase in cash from December 31, 2001 to the period ending
September 30, 2002 of $987,240 reflects $1,410,184 of net cash provided by
operating activities, $279,568 of cash used in investing activities and $143,376
of cash used in financing activities.
The cash provided by operating activities, excluding non-cash charges,
is primarily comprised of the $6,822,146 net loss for the 2002 Third Quarter, a
$1,535,288 decrease in accounts receivable, a $227,401 increase in inventory, a
$149,155 decrease in prepaid and other current assets, a $72,151 decrease in
other assets, a $187,395 decrease in accounts payable, a $111,131 decrease in
accrued restructuring charges, a $3,463,314 increase in deferred revenue and a
$567,476 increase in other current and long-term liabilities. The change in
accounts receivable and change in deferred revenue primarily reflects the impact
of our license agreements with Analog Devices, Inc. The changes in inventory,
accounts payable and other current and long-term liabilities primarily reflect
differences in the timing related to both the payments for and the acquisition
of raw materials as well as for other services in connection with ongoing
efforts related to Andrea's various product lines.
The cash used in investing activities reflects an increase property and
equipment of $132,686 and an increase in patents and trademarks of $146,882. The
increase in property and equipment primarily relates to capital expenditures
related to manufacturing dies for our Andrea Anti Noise Headset business line
and our Andrea DSP
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Microphone and Audio Software business line. The increase in patents and
trademarks reflects capital expenditures associated with intellectual property
related to our Andrea DSP Microphone and Audio Software business line.
We believe that it will be necessary to raise additional working
capital to support operations. In December 1995, April 1996, August 1996 and
June 1998, Andrea raised working capital through the issuance of convertible
subordinated debentures. In June 1999, Andrea raised $7.5 million through the
issuance and sale of Series B Preferred Stock. In October 2000, Andrea raised
$7.5 million through the issuance and sale of Series C Preferred Stock. Andrea
has incurred significant losses in each of the last three fiscal years. In the
year ended December 31, 2001, Andrea incurred losses from operations, excluding
the impact of restructuring charges, of $9.3 million, and used $4.5 million in
cash from its operating activities. Management currently expects that operating
losses and negative cash flows will continue at least through the first quarter
of Fiscal 2003 as Andrea continues to market its products and technologies.
Notwithstanding, in December 2001 and March 2002, we entered into two agreements
with Analog Devices, Inc. whereby Analog Devices paid us a total of $5 million
in license fees during calendar 2002 (which generated positive operating cash
flow in the 2002 First Nine Months). If we fail to develop revenues from sales
of our products to generate adequate funding from operations, or if we fail to
obtain additional financing through a capital transaction or other type of
funding, we will be required to either significantly reduce our current
operating expenses and/or operations or we may have to relinquish our products,
technologies or markets. We have no commitment for additional financing, and we
may experience difficulty in obtaining additional financing on favorable terms,
if at all. Any financing we obtain may contain covenants that restrict our
freedom to operate our business or may have rights, preferences or privileges
senior to our common stock and may dilute our current shareholders' ownership
interest in Andrea. We cannot assure that demand will continue for any of our
products, including future products related to our Andrea DSP Microphone and
Audio Software Technologies, or, that if such demand does exist, that we will be
able to obtain the necessary working capital to increase production and
marketing resources to meet such demand on favorable terms, or at all.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk
Our principal source of financing activities is the issuance of
convertible debt with financial institutions. We are affected by market risk
exposure primarily through any amounts payable in stock, or cash by us under
convertible securities. We do not utilize derivative financial instruments to
hedge against changes in interest rates or for any other purpose. In addition,
substantially all transactions by us are denominated in U.S. dollars. As such,
we have shifted foreign currency exposure onto our foreign customers. As a
result, if exchange rates move against foreign customers, we could experience
difficulty collecting unsecured accounts receivable, the cancellation of
existing orders or the loss of future orders. The foregoing could materially
adversely affect our business, financial condition and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Andrea
maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive officer and the chief financial
officer of Andrea concluded that Andrea's disclosure controls and
procedures were adequate.
b) Changes in internal controls. Andrea made no significant changes
in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of those controls by the chief executive officer and
chief financial officer.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Cautionary Statement Regarding
Forward-Looking Statements--An unfavorable ruling in any current litigation
proceeding or future proceeding may adversely affect our business, results of
operations and financial condition" and Note 11 to the unaudited condensed
consolidated financial statements in this quarterly report for a discussion of
the legal proceedings of Andrea.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On October 11, 2002, at the Annual Meeting of Shareholders of the
Company, the shareholders elected as directors of the Company for terms of one
year, the following individuals Douglas J. Andrea (14,812,643 shares for,
1,888,362 shares withheld); Christopher P. Sauvigne (16,272,476 shares for,
428,529 shares withheld); John R. Croteau (16,305,292 shares for, 395,713 shares
withheld); James M. Griffin (16,184,274 shares for, 516,731 shares withheld);
Gary A. Jones (16,205,492 shares for, 495,513 shares withheld); Scott Koondel
(15,993,945 shares for, 707,060 shares withheld); Jack Lahav (16,302,892 shares
for, 398,113 shares withheld); Louis Libin (16,073,067 shares for, 627,938
shares withheld). The shareholders authorized an amendment to the 1998 Stock
Plan of the Company to increase the number of shares of common stock issuable
thereunder to 5,275,000 shares from 4,375,000 shares (14,388,351 shares for,
2,259,688 shares against, 52,966 shares abstained). In addition, the
shareholders ratified the selection of Marcum & Kliegman LLP as the Company's
independent accountants for the year ending December 31, 2002 (16,471,409 shares
for, 142,015 shares against, and 87,521 shares abstained).
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K
On August 12, 2002, Andrea filed a Current Report on Form 8-K
reporting that Arthur Andersen LLP was no longer its independent
accountant and that PricewaterhouseCoopers LLP had been engaged as
Andrea's independent accountants.
On August 15, 2002, Andrea filed a Current Report on Form 8-K
reporting that it had dismissed PricewaterhouseCoopers LLP as it's
independent accountant.
On August 15, 2002, Andrea filed a Current Report on Form 8-K
reporting that Marcum & Kliegman LLP had been engaged as Andrea's
independent accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ Christopher P. Sauvigne Chief Executive Officer and President November 13, 2002
--------------------------------
Christopher P. Sauvigne
/s/ Richard A. Maue Executive Vice President, Chief November 13, 2002
-------------------------------- Financial Officer, and Secretary
Richard A. Maue
CERTIFICATION
I, Christopher P. Sauvigne, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Andrea Electronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Christopher P. Sauvigne
---------------------------
Christopher P. Sauvigne
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Chief Executive Officer and President
(principal executive officer)
CERTIFICATION
I, Richard A. Maue, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Andrea Electronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Richard A. Maue
-----------------------------------------
Richard A. Maue
Executive Vice President, Chief
Financial Officer and Secretary
(principal financial officer)
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