<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
11-40 45th Road, Long Island City, New York 11101
- - ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
1-800-442-7787
---------------------------------------------------------------
(Registrant's telephone number, Including area code)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 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 the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. 3,201,461.
1
<PAGE>
PART I---FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ANDREA ELECTRONICS CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, 1995 December 31,1994
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,254,951 $3,313,043
Investment securities 89,125 89,125
Accounts receivable - trade,
net of allowance for doubtful
accounts of $2,183 and 1,230,019 569,505
$69,771, respectively
Inventories 567,136 267,903
Prepaid expense and other 116,211 123,219
current receivables
Total current assets 4,257,442 4,362,795
Property, plant and equipment
- - - net of accumulated
depreciation
of $812,580 and $726,750,
respectively 627,370 652,635
Other assets 1,151 1,151
Total assets $4,885,963 $5,016,581
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 246,224 $ 135,459
Salaries and wages payable 41,320 84,000
Other current liabilities 48,699 52,213
Total current liabilities 336,243 271,672
Other liabilities 46,921 55,544
Total Liabilities 383,164 327,216
Shareholders' equity
Capital stock - common -
$.50 par value
Shares authorized -
10,000,000
Shares outstanding:
1995 - 3,201,461
1994 - 3,016,360 1,605,055 1,508,180
Additional paid-in capital 4,477,355 4,126,012
Retained earnings (accumulated (1,579,611) (944,827)
deficit)
Total shareholders' equity 4,502,799 4,689,365
Total liabilities and $ 4,885,963 $ 5,016,581
shareholders' equity
</TABLE>
ANDREA ELECTRONICS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Sales $1,403,091 $ 640,053 $4,064,042 $2,209,353
Cost of 799,993 411,818 2,217,786 1,572,867
sales
Gross 603,098 228,235 1,846,256 636,486
profit
(loss)
Research 355,769 404,995 1,218,231 814,817
and
develop-
ment
General,
admini- 786,338 575,995 1,580,662 1,778,811
strative
and
selling
expenses
Operating (539,009) (752,755) (952,637) (1,957,142)
income
(loss)
Other
income
(expense)
Interest 33,360 22,938 140,294 33,583
income
Interest (841) (2,113) (2,845) (6,735)
(expense)
Rent & 9,133 46,282 180,404 173,936
miscel-
laneous
41,652 67,107 317,853 200,784
Earnings
(loss)
before (497,357) (685,648) (634,784) (1,756,358)
provision
(credit)
for
corporate
income
tax
Income tax
provision -- -- -- --
Net $(497,357) $ (685,648) $ (634,784) $(1,756,358)
earnings
(loss)
Net
earnings $ (.16) $ (.23) $ (.21) $ (.65)
(loss)
per
common
and
common
equiva-
lent
share
Weighted
average 3,201,461 2,956,578 3,078,738 2,638,485
number of
shares
out-
standing
</TABLE>
Certain line items have been reclassified for presentation purposes only.
3
<PAGE>
ANDREA ELECTRONICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (634,784) $(1,756,358)
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 85,830 94,837
(Increase) decrease in:
Accounts receivable (660,514) 904,156
Inventories (299,233) 40,840
Other current assets 7,008 51,707
Increase (decrease) in:
Accounts payable 68,085 (299,158)
Other current liabilities (3,514) (54,151)
Total cash used for operating activities (1,437,122) (1,018,127)
CASH FLOWS FROM INVESTING ACTIVITIES
Sales (Purchase) of investment securities -- 101,608
(Acquisition) of property, plant and
equipment (60,565) (22,923)
Total cash provided by (used for) investing
activities (60,565) 78,685
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Corporate Common Stock -- 4,304,306
Exercise of stock options 448,218 --
(Payments) Acquisition of capital lease
obligations (8,623) (37,027)
Total cash provided by financing activities 439,595 4,267,279
Net increase (decrease) in cash and cash (1,058,092) 3,327,837
equivalents
Cash and cash equivalents - beginning 3,313,043 524,961
Cash and cash equivalents - end $ 2,254,951 $ 3,852,798
Supplemental disclosures
Cash paid:
Interest $ 2,845 $ 6,735
Income Taxes $ -- $ 31,585
</TABLE>
<PAGE>
ANDREA ELECTRONICS CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained Total
Shares Common Paid-In Earnings Share-
Outstand- Stock Capital (Deficit) holders'
ing Equity
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1994 3,016,360 $ 1,508,180 $ 4,126,012 $ (944,827) $ 4,689,365
Exercise of
Stock
Options
(unaudited) 185,101 96,875 351,343 - 448,218
------- -------- --------- -------- --------
Net loss
(unaudited) - - - (634,784) (634,784)
Balance at
September
30, 1995
(unaudited)
3,201,461 $ 1,605,055 $ 4,477,355 $(1,579,611) $ 4,502,799
</TABLE>
5
<PAGE>
Notes to Financial Statements
- - -----------------------------
1. In the opinion of the management of Andrea Electronics Corporation, the
accompanying unaudited financial statements contain all adjustments necessary
to present fairly Andrea Electronics Corporation's financial position as of
September 30, 1995 and the results of operations for the three months and
nine months ended September 30, 1995 and 1994 and cash flows for the nine
months ended September 30, 1995 and 1994. Additionally, it should be noted
that the accompanying financial statements do not purport to be a complete
disclosure in conformity with generally accepted accounting principles.
These statements should be read in conjunction with the Company's audited
financial statements for the fiscal year ended December 31, 1994.
2. On December 3, 1990, a complaint was filed by Charles Johnson
("Plaintiff") in the Suffolk County Supreme Court ("Court") alleging wrongful
discharge by the Company in violation of his employment agreement. The
complaint seeks damages relating to loss of salary, past bonuses, lost
commissions, unused sick pay, and a reimbursement of a bank loan. In August,
1992, the Plaintiff moved for partial summary judgment on three causes of
action. On January 28, 1993, his motion was granted with respect to two
causes of action pursuant to which Plaintiff sought damages in the
approximate amount of $186,000. The Court, however, in granting Plaintiff's
motion, did not make a determination as to the amount of damages and directed
that a trial be held on the issue of damages. The Company has commenced
appropriate proceedings to appeal the Court's order and the Company intends
to continue to vigorously contest Plaintiff's claims. Resolution of these
claims is not expected to occur quickly and their ultimate outcome cannot
presently be predicted. In any event, it is the opinion of management that
any liability of the Company for claims or proceedings will not materially
affect its financial position.
3. In December 1994, a subpoena duces tecum was issued to the Company by
the United States Department of Defense, Office of the Inspector General,
seeking certain documents pertaining to contracts relating to audio frequency
amplifiers. Documents responding to the subpoena were delivered by the
Company in the first quarter of 1995 and to date no claim has been made or
threatened against the Company in connection with this matter. The Company
is unable to determine at this point if any such claim will be made or to
what extent, if any, such claim could have on the financial position of the
Company. Sales of this product to various government agencies totalled
approximately $1,500,000 for the past three years.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company's revenues grew considerably during the three month and nine
month periods ended September 30, 1995 (respectively, the "1995 Third
Quarter" and the "1995 First Three Quarters") compared to the corresponding
three-month and nine-month periods in 1994 (respectively, the "1994 Third
Quarter" and the "1994 First Three Quarters"). Most of this growth resulted
from a significant and unexpected increase in demand for products within the
Company's traditional military product line. During the second quarter of
1995, the Company introduced its Anti-Noise(R) Active Noise Cancellation
("ANC") industrial and commercial product line, and in June 1995, the Company
agreed to provide its ANC-100 headset to International Business Machines
Corporation ("IBM") under a nonbinding procurement agreement. Sales of ANC
products through September 30, 1995 were not material.
During the 1995 Third Quarter, the Company completed the first phase of
a multiphase initiative to develop and qualify its ANC and Active Noise
Reduction ("ANR") headsets and communications systems for use by the United
States military. Research and development funding for this initiative is
being provided to the Company under a contract with Northrop Grumman
Corporation. The first phase of the initiative was focused on development
of certain prototype devices. The second phase, which is focused on
qualification for sale to the U.S military, is anticipated to be completed
during the first half of 1996. While no assurance can be given that this
initiative will be successful, the Company expects to begin receiving
revenues from the sale of ANR and ANC products to the U.S. military during
the second half of 1996.
Subsequent to the close of the 1995 Third Quarter, the Company entered
into a License and Technical Support Agreement, dated as of October 3, 1995
(the "Agreement"), with BellSouth Products, Inc. ("BellSouth"), a subsidiary
of BellSouth Telecommunications Inc. Under the Agreement, the Company has
granted certain license rights for a period of three years covering the
incorporation of its Anti-Noise(R) ANC technology into residential and small
business telephones and an exclusive right to distribute these telephones to
residential and small business end users in the United States, Canada,
Mexico, South America and Israel. To maintain the exclusivity of the
distribution rights, BellSouth must meet certain minimum production
requirements. The minimum aggregate royalties payable to the Company over
the three-year term of the Agreement if these minimum production requirements
are met would be $7.0 million. No assurance can be given that such revenues
will be received. Under the Agreement, the Company is obligated to furnish
BellSouth with certain engineering and technical support relating to the ANC
technology.
The Company has devoted, and is continuing to devote, substantial
resources to the development of a line of Anti-Noise(R) computer
communication products for sale under the Andrea name. These products are
being designed for computer telephony, multimedia, speech recognition and
interactive game applications. In October 1995, the Company introduced the
Andrea Anti-Noise(R) Computer Headset - ANC 100 to the retail store and
catalog markets. The Company plans to introduce additional ANC computer
communication products in early 1996. While no assurance can be given, the
Company anticipates substantial increases in revenues from these
Anti-Noise(R) products beginning in 1996.
The market into which the Company has sold its traditional line of
military products is highly competitive. The Company's performance in this
market is subject to several factors, including dependence on government
appropriations, the time required for design and development of new products,
the complexity of product design and the rapidity with which product designs
and technology become obsolete, the intense competition for available
business, and the acceptability of manufacturing contracts by government
inspectors.
The interim results of operations of the Company presented in this
report are not necessarily indicative of the sales or results of operations
for the full year. In particular, the Company does not expect the recent
level of sales of its existing military products to continue.
RESULTS OF OPERATIONS
Sales
<PAGE>
Sales for the 1995 Third Quarter increased 119% to $1,403,091 from
$640,053 for the 1994 Third Quarter. Sales for the 1995 First Three Quarters
increased 83.9% to $4,064,042 from $2,209,353 for the 1994 First Three
Quarters. The increase was primarily attributed to a significant and
unexpected increase in demand for the Company's traditional military product
lines and, to a lesser extent, to sales of the Company's
industrial/commercial products. Sales from military orders through both
prime and subcontracted orders made up 37.4% and 62.6% of total sales for the
1995 Third Quarter and the 1995 First Three Quarters, respectively, compared
to 24.5% and 75.5% for the respective comparable periods in 1994. The
increase during 1995 in sales to the military market has been contrary to the
downward trend in the Company's sales to this market in recent year resulting
from decreases in military appropriations by the U.S. government. Management
does not believe that the increase during the 1995 First Three Quarters in
sales to the military market reflects a reversal of this downward trend.
During the second quarter of 1995, the Company began shipments of its Andrea
Anti-Noise(R) headsets. While sales of these new products have not to date
been significant, the Company expects such sales to increase. No assurance
can be given, however, that sales of these new products will increase.
Cost of Sales
Cost of sales as a percentage of sales for the 1995 Third Quarter
decreased to 57% from 69% for the 1994 Third Quarter. Cost of sales as a
percentage of sales for the 1995 First Three Quarters decreased to 54.6% from
71.2% for the 1994 First Three Quarters. The marked decreases in the cost
of sales as a percentage of sales since the 1994 Third Quarter and 1994 First
Three Quarters reflect the results of a cost-cutting and operating efficiency
improvement program implemented by the Company at the end of the first
quarter of 1994. The moderately higher cost of sales as a percentage of
sales during the 1995 Third Quarter compared to the 1995 First Three Quarters
reflects the hiring of personnel during the second quarter of 1995 and the
1995 Third Quarter to support the introduction of the Company's ANC product
line.
Research and Development
Research and development expenses for the 1995 Third Quarter decreased
12% to $355,769 from $404,995 for the 1994 Third Quarter, while research and
development expenses for the 1995 First Three Quarters increased 49.5% to
$1,218,231 from $814,817 for the 1994 First Three Quarters. The increase in
research and development for the 1995 First Three Quarters reflects expenses
incurred primarily during the first quarter of 1995 that were related to the
development and introduction of the Company's Anti-Noise(R) ANC products.
These expenses included certain non-recurring expenses such as labor costs
incurred by engineering and technical professionals and testing procedures,
special molds, designs and tooling costs directly related to the IBM and
BellSouth Products agreements. As a result of the commencement of sales of
the first of these ANC products during the second quarter of 1995, research
and development expenses decreased in both absolute and relative terms, with
research and development expenses as a percentage of sales for the 1995 Third
Quarter declining to 25.4% from 63.3% for the 1994 Third Quarter. Management
believes this decrease is temporary and that research and development
expenses will increase in both absolute terms and relative terms as the
Company continues to develop its ANC technology and product line.
General, Administrative and Selling Expenses
General, administrative and selling expenses for the 1995 Third Quarter
increased 36.5% to $786,338 from $575,995 for the 1994 Third Quarter.
General, administrative and selling expenses for the 1995 First Three
Quarters decreased 11.1% to $1,580,662 from $1,778,811 for the 1994 First
Three Quarters. The increase during the 1995 Third Quarter primarily
reflects certain startup and non-recurring expenses related to the agreements
with IBM and BellSouth Products. The Company expects to increase general,
administrative and selling expenses in order to support sales of its Andrea
Anti-Noise(R) products. Subsequent to the close of the third quarter 1995,
the Company introduced the ANC-100 Anti-Noise(R) computer headset to the
retail store and catalog markets. The Company plans to introduce additional
Anti-Noise(R) products in the first quarter of 1996 and plans to support these
product introductions with advertising and promotional efforts. No assurance
can be given that these products will be successful in the market and that
the Company's sales will increase. The decline in general, administrative
and selling expenses during the 1995 First Three Quarters reflects the cost-
cutting and operating efficiency program implemented by the Company at the
end of the first quarter of 1994.
Operating Loss
<PAGE>
Operating loss for the 1995 Third Quarter decreased 28.4% to $539,009
from $752,755 for the 1994 Third Quarter. Operating loss for the 1995 Three
Quarters decreased 51.3% to $952,637 from $1,957,142 for the 1995 First Three
Quarters. These declines in operating loss reflect the increase in sales to
date during 1995 and the positive effect from the Company's operating
efficiency improvement program implemented at the end of the first quarter
in 1994.
Other Income
Other income for the 1995 Third Quarter decreased 37.9% to $41,652 from
$67,107 for the 1994 Third Quarter. Other income for the 1995 First Three
Quarters increased 58.3% to $317,853 from $200,784 for the 1994 First Three
Quarters. The decrease during the 1995 Third Quarter compared to the 1994
Third Quarter can be attributed to the reclassification of approximately
$37,000 in product development revenues in the 1995 Third Quarter as an
offset to engineering costs including labor and material costs. The increase
during the 1995 First Three Quarters was due to interest income on the cash
received by the Company from two private offerings of its Common Stock during
the summer of 1994 and the receipt of approximately $37,500 in product
development revenues from a third party during the first quarter of 1995.
Net loss
Net loss for the 1995 Third Quarter was $497,357, compared to a net loss
of $685,648 for the 1994 Third Quarter. Net loss for the 1995 First Three
Quarters was $634,784, compared to a net loss of $1,756,358 for the 1994
First Three Quarters. This improvement resulted primarily from the decline
in operating loss during the 1995 Third Quarter and the 1995 First Three
Quarters and to a lesser extent, during the 1995 First Three Quarters, from
the increase in other income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (total current assets less total current liabilities)
at September 30, 1995 was $3,921,199 compared to $4,091,123 at December 31,
1994. This decrease during the 1995 First Three Quarters of $169,924
reflects a decrease in total current assets of $105,353 and an increase in
total current liabilities of $64,571. The decrease in total current assets
reflects a decrease in cash of $1,058,092, partially offset by an increase
in accounts receivable of $660,514 and an increase in inventory of $299,233.
The increase in inventory represents the acquisition of raw materials, the
accumulation of work-in-process and the completion of Andrea Anti-Noise(R)
products for delivery to IBM as well as in anticipation of the Company's
introduction of Andrea Anti-Noise(R) products to the retail store and catalog
markets in the fourth quarter 1995 and first quarter 1996. The increase in
total current liabilities reflects an increase of $110,765 in trade accounts
payable, partially offset by a decrease in accrued salaries and wages of
$42,680.
During the 1995 First Three Quarters, the Company's total cash decreased
by $1,058,092. This decrease reflected total cash used for operating
activities $1,437,122 and an acquisition of equipment of $60,565, partially
offset by the receipt of $448,218 from the sale of Common Stock pursuant to
the exercise of stock options.
Management believes that the Company s financial condition is adequate
to support the Company s current level of operations and demand for
resources. This belief is based in part on an anticipated decline in sales
of its traditional military products to the prior year's levels. The Company
anticipates at least a similar level investment in research and development
for the remainder of 1995 and increased sales, general and administrative
expenses to promote the Anti-Noise product line. The Company commenced
delivery of Anti-Noise(R) products to IBM during the second quarter and,
subsequent to the close of the third quarter 1995, the Company introduced its
Anti-Noise(R) computer headsets to the retail store and catalog markets. The
Company believes that it has adequate financing to support existing
production levels and demand for these products. In the event that the
Company experiences significant demand for its new Anti-Noise(R) products,
the Company will need to obtain additional working capital. In anticipation
of such a situation, the Company has been investigating a variety of
financing opportunities but has not entered into any arrangements or
commitments. No assurance can be given that demand will increase for any of
the Company's products or, that if such demand does increase, that the
Company will be able to obtain the required working capital to increase
production and marketing resources to meet such demand.
10
<PAGE>
PART II---OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company on June 19, 1995 was
adjourned to September 8, 1995 with respect to a vote on a proposal to
approve and authorize an increase in the number of shares subject to the
Company's 1991 Performance Equity Plan. The proposal was approved and the
voting was as follows: FOR, 1,517,662; AGAINST OR WITHHELD, 397,900;
ABSTENTIONS, 46,282; and BROKER NONVOTES, 913,878.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Page Number
Number Description of this Report
------- ----------- --------------
11 Computation of Fully Diluted 12
Earnings Per Common Share
27 Financial Data Schedule 13
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the
three month period ended September 30, 1995.
11
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ANDREA ELECTRONICS CORPORATION
/s/ Frank A.D. Andrea, Jr. Chairman of the Board November 13, 1995
- - -------------------------- and Chief Executive
Frank A.D. Andrea, Jr. Officer
/s/ Patrick D. Pilch Executive Vice President, November 13, 1995
- - -------------------------- and Chief Financial
Patrick D. Pilch Officer
12
<PAGE>
EXHIBIT 11
ANDREA ELECTRONICS CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1995 1994
<S> <C> <C>
EARNINGS
Pro forma income (loss) applicable $ (634,784) $(1,756,358)
to common stock*
SHARES
Weighted average number of common 3,078,738 2,683,485
shares outstanding
Assuming conversion of options 788,057 920,320
and warrants
Pro forma shares 3,866,795 3,603,805
Fully diluted income (loss) per $ (.16) $ (.49)
common share
</TABLE>
* Entire proceeds of assumed conversion of options were used to
purchase treasury shares; therefore, no adjustments are necessary in
computing pro forma loss applicable to common stock.
This calculation is submitted in accordance with Regulation S-B, Item
601(b)(11) although it is contrary to paragraph 40 of ABP Opinion No. 15
because it produces anti-dilutive results.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> $2,254,951
<SECURITIES> 89,125
<RECEIVABLES> 1,230,019
<ALLOWANCES> 2,183
<INVENTORY> 567,136
<CURRENT-ASSETS> 4,257,442
<PP&E> 627,370
<DEPRECIATION> 812,580
<TOTAL-ASSETS> 4,885,963
<CURRENT-LIABILITIES> 383,164
<BONDS> 0
<COMMON> 1,605,055
0
0
<OTHER-SE> 2,897,744
<TOTAL-LIABILITY-AND-EQUITY> 4,885,963
<SALES> 4,064,042
<TOTAL-REVENUES> 4,064,042
<CGS> 2,217,786
<TOTAL-COSTS> 2,217,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,845
<INCOME-PRETAX> (634,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (634,784)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.16)
</TABLE>
