<PAGE> 1
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 June 30, 1996
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. 3,586,302.
<PAGE> 2
PART I---FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> ASSETS
June 30, 1996 December 31,1995
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,157,217 $ 3,400,829
Investment securities 192,215 99,223
Accounts receivable - trade, net of
allowance for doubtful accounts of
$32,183 and $32,183, respectively 785,243 1,045,922
Inventories 4,087,626 1,122,993
Prepaid expense and other current assets 158,110 189,494
--------- ---------
Total current assets 6,380,411 5,858,461
Property, plant and equipment - net of
accumulated depreciation
of $928,945 and $849,228, respectively 660,616 691,498
Other assets 1,151 1,151
--------- ---------
Total assets $ 7,042,178 $ 6,551,110
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of capital lease obligations $ 11,443 $ 39,243
Trade accounts payable 41,667 254,643
Accrued salaries and wages payable 62,545 50,571
Other current liabilities 27,265 197,485
--------- ---------
Total current liabilities 142,920 541,942
Capital Lease Obligations, net of current maturities - 5,388
Convertible Debentures, net 1,479,279 2,000,000
Other Liabilities 38,500 38,500
--------- ---------
Total Liabilities 1,660,860 2,585,830
--------- ---------
Shareholders' equity
Common stock - $.50 par value, authorized:
10,000,000 shares, issued and outstanding:
3,586,302 and 3,286,860 shares, respectively 1,793,151 1,643,430
Additional paid-in capital 7,277,126 4,542,592
Accumulated deficit (3,688,959) (2,220,742)
--------- ---------
Total shareholders' equity 5,381,318 3,965,280
--------- ---------
Total liabilities and shareholders' equity $ 7,042,178 $ 6,551,110
========= =========
</TABLE>
Page 2
<PAGE> 3
<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales $ 994,526 $1,374,323 $ 2,744,409 $2,660,951
Cost of sales 900,366 745,807 2,181,663 1,417,793
--------- --------- --------- ---------
Gross profit (loss) 94,160 628,516 562,746 1,243,158
Research and development 237,950 363,060 522,833 862,461
General, administrative and selling expenses 752,265 428,274 1,399,007 794,323
--------- --------- --------- ---------
Operating income (loss) (896,055) (162,818) (1,359,094) (413,626)
--------- --------- --------- ---------
Other income (expense)
Interest income 10,372 40,052 28,701 106,934
Interest (expense) (174,967) (936) (254,462) (2,006)
Rent & miscellaneous 70,503 125,071 116,799 171,271
--------- --------- --------- ---------
(94,092) 164,187 (108,962) 276,199
--------- --------- --------- ---------
Earnings (loss) before provision
(credit) for corporate income tax (990,147) 1,369 (1,468,056) (137,427)
Income tax provision - - - -
--------- --------- --------- ---------
Net earnings (loss) $ (990,147) $ 1,369 $(1,468,056) $ (137,427)
========= ========= ========== =========
Net earnings (loss) per common and
common equivalent share $ (.28) $ -0- $ (.43) $ (.05)
========= ========= ========= =========
Weighted average number of shares
outstanding 3,503,950 3,016,360 3,399,608 3,016,360
========= ========= ========= =========
</TABLE>
Page 3
<PAGE> 4
<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Six Months Ended
June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,468,056) $ (137,427)
Adjustments to reconcile net earnings to net cash provided by
(used by) operating activities:
Depreciation and amortization 79,717 63,139
(Increase) decrease in:
Investment securities (92,992) -
Accounts receivable 260,679 (563,577)
Inventories (2,964,633) (129,295)
Prepaid expenses and other current assets (31,384) (100,044)
Increase (decrease) in:
Trade accounts payable (212,976) (81,422)
Accrued salaries and wages payable 11,974 -
Other current liabilities (170,220) 57,090
--------- ---------
Net cash flows from operating activities (4,525,123) (891,536)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Acquisition) of property, plant and equipment (48,835) (73,750)
--------- ---------
Total cash flows from investing activities (48,835) (73,750)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations (33,188) (9,597)
Net proceeds from convertible debentures 2,222,784 -
Exercise of stock options 140,750 -
--------- ---------
Total cash flows from financing activities 2,330,185 (9,597)
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,243,612) (974,883)
Cash and cash equivalents - beginning 3,400,829 3,313,043
--------- ---------
Cash and cash equivalents - end $ 1,157,127 $ 2,338,160
========= =========
Supplemental disclosures
Cash paid:
Interest $ - $ 936
========= =========
Income Taxes $ - $ -
========= =========
</TABLE>
Page 4
<PAGE> 5
<TABLE>
ANDREA ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
Additional Total
Shares Common Paid-In Accumulated Shareholders'
Outstanding Stock Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 3,286,860 $ 1,643,430 $ 4,542,592 $ (2,220,742) $ 3,965,280
Exercise of stock
options 72,500 36,250 120,656 0 156,906
Issuance of common
stock due to conversion
of debentures and
accrued interest
thereon 226,942 113,471 2,613,878 0 2,727,349
Net loss (unaudited) (1,468,056) (1,468,056)
--------- --------- --------- --------- ---------
Balance at
June 30, 1996
(unaudited) 3,586,302 $ 1,793,151 $ 7,277,126 $ (3,688,798) $ 5,381,479
========= ========= ========= ========== =========
</TABLE>
Page 5
<PAGE> 6
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
June 30, 1996 and the results of operations for the three and six months
ended June 30, 1996 and 1995 and cash flows for the six months ended June 30,
1996 and 1995. 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, 1995.
2. 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.
Page 6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Andrea Electronics Corporation's mission is to provide state-of-the-art
communications products for the "voice interface" markets that are rapidly
emerging from the convergence of the telecommunications and personal computer
industries. Examples of these dynamic markets include computer telephony,
speech recognition, voice interactive games, multimedia, Internet speech and
telephony, and other applications that incorporate natural language
processing. The Company believes that end users of these applications will
require high quality microphone and earphone products that enhance voice
transmission, particularly in noisy environments for use with personal
computers, business and residential telephones, military headsets, cellular
and other wireless telephones, and avionics communications systems. The
Company's strategy is to leverage its expertise in audio communication and
its patented Active Noise Cancellation (ANC) and Active Noise Reduction (ANR)
technology (together referred to as "Andrea Anti-Noise(Registered Trademark)"
technology) and to develop and commercialize a line of Andrea
Anti-Noise(Registered Trademark) headsets, handsets and other communication
devices to enhance voice communications for end users of these applications on
a cost-effective basis. The Company designs, markets and distributes products
which feature ANC and ANR to original equipment manufacturers (OEMs), consumer
retailers, and directly to consumer and commercial users. The Company
outsources the manufacture of its ANC and ANR products for its OEM, consumer
and commercial customer base, using a virtual corporation model.
The Company also designs, manufactures and distributes intercom systems
and related components for military applications ("Traditional Military
Products") and industrial applications ("Traditional Industrial Products";
together with Traditional Military Products, "Traditional Products"). In
contrast to its ANC and ANR products for the non-military market, the Company
has followed a vertically-integrated model for its Traditional Products. The
Company is engaged in developing products for military use that incorporate ANC
and ANR technology, and anticipates that it will use a hybrid
outsourcing/vertically integrated model for commercializing these new military
products.
The Company experienced a decline of 28% in sales for the three months
ended June 30, 1996 (the "1996 Second Quarter") compared to the three months
ended June 30, 1995 (the "1995 Second Quarter"). For the six months ended
June 30, 1996 (the "1996 First Half"), the Company experienced an increase of
3% in sales compared to the six months ended June 30, 1995 (the "1995 First
Half"). Sales of the Andrea Anti-Noise(Registered Trademark) computer headsets
comprised 44.6% of the Company's $994,526 1996 Second Quarter sales
while for the 1995 Second Quarter sales of these products were immaterial. The
Company's Traditional Products comprised 55.4% of total sales in the 1996
Second Quarter compared to 99% during the 1995 Second Quarter.
In 1995, the Company entered into a Procurement Agreement with
International Business Machines ("IBM") to supply Andrea Anti-Noise(Registered
Trademark) computer headsets to IBM for sale with certain of IBM's products.
During the 1996 First Half, IBM has been purchasing Andrea
Anti-Noise(Registered Trademark) computer headsets for inclusion with its
VoiceType(Registered Trademark) products for speech recognition. During the
1996 Second Quarter, IBM informed the Company that IBM intends to include
Andrea Anti-Noise(Registered Trademark) computer headsets with all shrink-
wrapped copies of IBM's "Merlin" software product. The Company anticipates
that it will begin shipping headsets for inclusion with this IBM product
in the quarter ending September 30, 1996 (the "1996 Third Quarter").
7
<PAGE> 8
The Company is also marketing its Andrea Anti-Noise(Registered Trademark)
computer headsets, handsets, and communications devices to many major computer
hardware and software manufacturers and providers. The Company has increased
and expects to continue to expand its retail distribution to include additional
major computer superstores in the 1996 Third Quarter. The Company anticipates
that it will experience a significant increase in sales of its Andrea
Anti-Noise(Registered Trademark) in 1996 compared to 1995.
During the 1996 Second Quarter, the Company entered into
licensing and product sales agreements with Voxware, Inc. ("Voxware") and
Microsoft Corporation ("Microsoft"). The Company will include Voxware's
Internet telephony software ("TeleVox(Registered Trademark)") and Microsoft's
MSPhone(Registered Trademark) and MSVoice(Registered Trademark) computer
telephony software with the Andrea Anti-Noise(Registered Trademark) computer
product lines for retail and direct distribution. Total revenues realized
from these two agreements were immaterial during the 1996 Second Quarter.
As had been anticipated, the Company experienced a significant decrease in
sales of some of its Traditional Products during the 1996 Second Quarter due
primarily to a delay in the receipt of a $661,000 contract for a military
intercom system. This contract was executed subsequent to the end of the 1996
Second Quarter, and the system will be included in shipments for the 1996 Third
Quarter. Nonetheless, management believes that sales of its Traditional
Products during 1996 will remain the same or decrease slightly compared to
1995.
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.
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 1996 Second Quarter
and the 1996 First Half are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act"), which became
law in December 1995. In order to obtain the benefits of the "safe harbor"
provisions of the Act for any such forward-looking statements, the Company
wishes to caution investors and prospective investors about the following
significant factors, which, among others, have in some cases affected the
Company's actual results and are in the future likely to affect the Company's
actual results and cause them to differ materially from those expressed in any
such forward-looking statements. These factors include:
first, the rate at which the Company's Anti-Noise(Registered Trademark)
technology is accepted by the diverse range of users and applications within
the global communications and informatics marketplace;
second, the ability of the Company to maintain a competitive position for
its Anti-Noise(Registered Trademark) products in terms of technical
specifications, quality, price, reliability and service;
third, the on-going ability of the Company to enter into and maintain
collaborative relationships with larger companies in the fields of
telecommunications, computer manufacturing, software design and publishing,
Internet and online services, defense-related manufacturers and system
providers, and retail and direct marketing distributors; and
fourth, in the event that the Company does experience significant growth
in demand for its Anti-Noise(Registered Trademark) technology, the ability of
the Company to raise sufficient external capital to fund the working capital
requirements for meeting such demand.
The failure of the Company to surmount the challenges posed by any one or
more of these factors could have a material adverse effect on the Company's
results of operations and growth.
8
<PAGE> 9
RESULTS OF OPERATIONS
Sales
Sales for the 1996 Second Quarter were $994,526, a decrease of 27.6%
from the comparable 1995 period. Sales for the 1996 First Half were
$2,744,409, an increase of 3.1% over the comparable 1995 period. The decrease
in sales during the 1996 Second Quarter reflects a decrease in sales of
Traditional Military Products from $846,250, or 61.6% of total sales, for the
1995 Second Quarter to $284,274, or 28.6% of total sales, for the 1996 Second
Quarter, offset by an increase in sales of industrial and commercial products
from $527,973 for the 1995 Second Quarter to $710,200 for the 1996 Second
Quarter. Most of this increase in industrial and commercial products was
attributed to an increase in sales of the Company's Andrea
Anti-Noise(Registered Trademark) products during the 1996 First Half, which
sales accounted for 44.6% of total sales in both the 1996 Second Quarter and
the 1996 First Half. Sales of Andrea Anti-Noise(Registered Trademark)
prodoucts were immaterial during the comparable 1995 periods. The modest
increase in total sales during the 1996 First Half reflects the growth of sales
of the Company's Andrea Anti-Noise(Registered Trademark) products, offset by a
decrease in sales of the Company's Traditional Products during the 1996 First
Half. During the first quarter of 1996, the Company had received a $661,000
government order for an intercom system. The Company, however, did not receive
the executed contract for this order until July 1996. This system will be
included in shipments for the third quarter of 1996.
Cost of Sales
Cost of sales as a percentage of sales for the 1996 Second Quarter
increased to 90.5% from 54.3% for the 1995 Second Quarter. Cost of sales as a
percentage of sales for the 1996 First Half increased to 79.5% from 53.2% for
the 1995 First Half. These increases in the cost of sales as a percentage of
sales were due to a decrease in production capacity utilization for the
Company's Traditional Products arising from lower sales and the costs
associated with the initial production runs of new Andrea Anti-Noise(Registered
Trademark) computer products, some of which have been recently introduced and
some of which will be introduced during the 1996 Second Half.
Research and Development
Research and development expenses decreased 34.4% to $237,950 in the 1996
Second Quarter from $363,060 in the 1995 Second Quarter, and decreased 39% to
$522,833 in the 1996 First Half from $862,461 in the 1995 First Half. These
decreases in research and development expenses for the 1996 Second Quarter and
1996 First Half are attributed to increased allocation of engineering and
technician time associated with the natural migration from design and
development to production in connection with the Company's Andrea Anti-
Noise(Registered Trademark) products. It is anticipated that research and
development expenses for the 1996 Second Half will at least remain at 1996
First Half levels in connection with development of certain future products and
applications.
General, Administrative and Selling Expenses
General, administrative and selling expenses increased 75.6% to $752,265
for the 1996 Second Quarter from $428,274 for the 1995 Second Quarter, and
increased 76.1% to $1,399,007 for the 1996 First Half from $794,323 for the
1995 First Half. These increases reflect increased promotional, marketing,
sales, sales representative and commission expenses to market, promote and
support Andrea Anti-Noise(Registered Trademark) in personal computer magazines,
on the Internet, at major trade shows, to major retail superstores, and to
potential customers for personal computer, telecommunications and military
electronics applications.
Page 9
<PAGE> 10
Operating loss
Operating loss for the 1996 Second Quarter was $918,943 compared to
$162,818 for the 1995 Second Quarter. Similarly, operating loss for the 1996
First Half was $1,359,093 compared to $413,626 for the 1995 First Half. These
increases in operating loss reflect the decrease in total sales, the increase
in cost of sales, and the increase in general, administrative and selling
expenses.
Other Income(Expense)
Other expense for the 1996 Second Quarter was $94,092 compared to other
income of $164,187 for the Second Quarter 1995. For the 1996 First Half,
other expense was $108,962 compared to other income of $276,199 for the 1995
First Half. These reversals during the respective 1996 periods were due to an
increase in interest expense to $174,967 for the 1996 Second Quarter from $936
for the 1995 Second Quarter and an increase in interest expense to $254,462 for
the 1996 First Half from $2,006 for the 1995 First Half. These increases
reflect accrued interest on the Company's convertible subordinated debentures
and an expense of $90,472 for amortization of the placement fee associated with
the issuance of the Company's convertible subordinated debentures in April
1996. During the 1996 Second Quarter, $2,150,000 in face value of the Company's
convertible subordinated debentures were converted and interest accrued was
paid in common stock of the Company. Interest income for the 1996 Second
Quarter and the 1996 First Half decreased due to a decrease in the Company's
average cash position during those periods in order to fund the increased
working capital and production requirements associated with filling orders for
the Company's Anti-Noise(Registered Trademark) products from IBM and other OEMs
and computer retailers for delivery in the 1996 Second Half.
Net loss
Net loss for the 1996 Second Quarter was $990,147, compared to net earnings
of $1,369 for the 1995 Second Quarter. Net loss for the 1996 First Half was
$1,468,056, compared to a net loss of $137,427 for the 1995 First Half. The
levels of net loss in the 1996 Second Quarter and the 1996 First Half reflect
principally the factors described above.
Liquidity And Capital Resources
Working capital (total current assets less total current liabilities) at
June 30,1996 was $6,237,491 compared to $5,316,519 at December 31,1995. The
increase in working capital reflects an increase in total current assets of
$521,950 and a decrease in total current liabilities of $399,022. The increase
in total current assets reflects a decrease in cash of $2,243,612, an increase
in investment securities of $92,992, a decrease in accounts receivable of
$260,679, an increase in inventory of $2,964,633, and a decrease of $31,384 in
prepaid expenses and other current assets.
The decrease in cash of $2,243,612 reflects $4,525,123 of net cash used in
operating activities and $48,835 of cash used in investing activities,
partially offset by an increase in cash from financing activities of
$2,330,185. The principal operating activity for which cash was used was the
increase in inventory of Andrea Anti-Noise(Registered Trademark) computer
headsets for 1996 Second Half distribution. The increase in inventory of
$2,964,633 primarily resulted from the acquisition of $1,678,961 of long lead
components and parts for Andrea Anti-Noise(Registered Trademark)
products and an increase in work-in-process and finished goods inventory of
$1,064,897 for the Andrea Anti-Noise(Registered Trademark) products. The cash
used in investing activities was for the acquisition of equipment, primarily
tooling and molds for Andrea Anti-Noise(Registered Trademark) products.
The decrease in prepaid expenses and other current assets includes the
expensing of $40,139 in prepaid advertising.
Page 10
<PAGE> 11
The decrease in current liabilities reflects a $212,976 decrease in
trade accounts payable and a decrease of $170,220 in other current liabilities.
The decrease in trade accounts payable is associated with payments for
acquisition of raw materials for the Andrea Anti-Noise(Registered Trademark)
products. The decrease in other current liabilities includes $167,500 for the
settlement of a previously disclosed complaint by a former employee of the
Company.
Subsequent to the close of the 1996 Second Quarter, the Company
received $1,500,000 in net proceeds from an issuance of subordinated
convertible debentures.
Demand for Andrea Anti-Noise(Registered Trademark) products has required
the Company to raise additional working capital to support its production
operations. Since December 1995, the Company has raised additional working
capital through the issuance of convertible subordinated debentures. In
addition, the Company has been exploring various forms of bank and other debt
and equity financing. The Company believes that its ability to remedy its
existing accumulated deficit will depend on profitable growth from the sale of
its Andrea Anti-Noise(Registered Trademark) products. Notwithstanding growth
in sales of Andrea Anti-Noise(Registered Trademark) during the 1996 First Half,
no assurance can be given that demand will continue to increase for these
products or any of the Company's other products or, that if such demand does
increase, that the Company will be able to obtain the necessary working capital
to increase production and marketing resources to meet such demand on favorable
terms or at all.
Page 11
<PAGE> 12
PART II---OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of shareholders of the Company on June 20, 1996
the shareholders were asked to vote on the following two proposals: Proposal
One to elect Frank A.D. Andrea, Jr., John N. Andrea, Douglas J. Andrea,
Patrick D. Pilch, Paul Morris, Christopher Dorney, Scott Koondel, and Gary Jones
as directors of the Company; and Proposal Two to ratify the selection of Arthur
Andersen LLP as the Company's independent accountants for the year ending
December 31, 1996.
<TABLE>
<CAPTION>
Matter For Against or Withheld Absentions Broker Nonvotes
<S> <C> <C> <C> <C>
Proposal One:
Election of Directors
Frank A.D. Andrea, Jr. 3,248,496 38,037 175,975 -0-
John N. Andrea 3,247,896 38,637 175,975 -0-
Douglas J. Andrea 3,247,796 38,737 175,975 -0-
Patrick D. Pilch 3,248,816 37,717 175,975 -0-
Paul M. Morris 3,247,916 38,617 175,975 -0-
Christopher Dorney 3,243,516 43,017 175,975 -0-
Scott Koondel 3,243,516 43,017 175,975 -0-
Gary Jones 3,241,341 45,192 175,975 -0-
Proposal Two:
Ratification of
Selection Independent
Accountants 3,245,921 15,602 200,985 -0-
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
- ----- ---------
4.1 Securities Purchase Agreement, dated as of April 16, 1996,
relating to the sale of the Registrant's 15% Convertible
Subordinated Debentures due October 16, 1997 (with forms of Debenture
and Registration Rights Agreement attached)
* 10.1 Software License Bundling Agreement, dated as of March 29,
1996 by and between Voxware, Inc. and the Registrant
11 Computation of Fully Diluted Earnings Per Common Share
27 Financial Data Schedule
- --------------------
* The Registrant has requested confidential treatment of certain
portions of this Agreement.
(b) Reports on Form 8-K.
On April 23, 1996, the Registrant filed a report on Form 8-K to
report that, on April 16, 1996, the Registrant issued and sold in an
offshore transaction $2,198,000 aggregate principal amount of its
15% Convertible Subordinated Debentures due October 16, 1997.
Page 12
<PAGE> 13
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/ John N. Andrea Co-President August 13, 1996
------------------------
John N. Andrea
/s/ Patrick D. Pilch Executive Vice President, August 13, 1996
-------------------- and Chief Financial Officer
Patrick D. Pilch
Page 13
<PAGE> 14
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of April 16,
1996, between ANDREA ELECTRONICS CORPORATION, a New York corporation (the
"Company"), and each purchaser executing a counterpart of the signature page
hereto (each, a "Purchaser" and collectively, the "Purchasers").
W I T N E S S E T H :
WHEREAS, the Company proposes to issue and sell to the Purchasers, and
the Purchasers desire to purchase from the Company, an aggregate of U.S.
$2,198,000 aggregate principal amount of the Company's 15% Convertible
Subordinated Debentures Due October 16, 1997 (the "Notes"), on the terms and
subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Certain Definitions. For purposes of this Agreement,
the following terms shall have the following meanings:
"Affiliate" of a Person means a Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned Person. The term "control" (including
the terms "controlling," "controlled by" and "under common control with") means
the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such Person.
"Closing" has the meaning set forth in Section 2.02.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, $.50 par value per share, of the
Company.
"Conversion Shares" means the shares of Common Stock issuable upon
conversion of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Authority" means any federal, state or other political
subdivision thereof and any agency or other entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" within the meaning of paragraphs (1), (2), (3) or (7) of
Rule 501(a) of Regulation D under the Securities Act.
"Legend" has the meaning set forth in Section 4.02(h).
"Material Adverse Effect" has the meaning set forth in Section 3.01.
"Non-U.S. Person" means a Person that is not a U.S. Person.
1
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
Governmental Authority or other entity of any kind.
"Registration Rights Agreement" means that certain Registration Rights
Agreement substantially in the form of Exhibit B hereto, dated as of the date
hereof, between the Company and Purchaser, as such Registration Rights Agreement
may be modified or amended from time to time pursuant to its terms.
"SEC Reports" means the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
"Securities Act" means the Securities Act of 1933, as amended.
"Transaction Documents" means, collectively, this Agreement, the
Registration Rights Agreement and the Notes.
"United States" has the meaning ascribed to such term in Rule 902(p) of
Regulation S under the Securities Act.
"U.S. Person" has the meaning ascribed to such term in Rule 902(o) of
Regulation S under the Securities Act.
ARTICLE II
SALE AND PURCHASE
SECTION 2.01. Agreement to Sell and to Purchase; Purchase Price. On
the terms and subject to the conditions set forth in this Agreement, the Company
hereby agrees to issue and sell to the Purchasers, and the Purchasers hereby
agree to purchase and accept from the Company, an aggregate of U.S. $2,198,000
aggregate principal amount of Notes at a purchase price equal to 90.9918% of the
aggregate principal amount thereof, payable in immediately available funds (the
"Purchase Price"). A copy of the form of Note is attached as Exhibit A hereto
and the terms thereof are hereby expressly incorporated by reference herein.
SECTION 2.02. Closing. The closing of the sale and purchase of the
Notes (the "Closing") shall be deemed to take place concurrently with the
execution and delivery of this Agreement by the parties hereto. At the Closing,
the following closing transactions shall take place, each of which shall be
deemed to occur simultaneously with the Closing: (i) the Company shall execute,
issue and deliver the Notes to the Purchasers; (ii) the Purchasers shall pay the
Purchase Price by wire transfer to the account designated by the Company in
writing prior to the Closing; (iii) the Company shall pay the expenses set forth
in Section 6.02 hereof by wire transfer to the account designated by the
Purchasers in writing prior to the Closing; provided that if the Company and the
Purchasers so agree, such expenses may be netted against the Purchase Price;
(iv) the Company and the Purchasers shall execute and deliver the Registration
Rights Agreement; (v) the Company shall deliver to the Purchasers a certificate
executed by the secretary of the Company, signing in such capacity, dated the
date of the Closing (A) certifying that attached thereto are true and complete
copies of the resolutions duly adopted by the Board of Directors of the Company
authorizing the execution and delivery of the Transaction Documents and the
consummation of the transactions contemplated thereby (including, without
limitation, the issuance and sale of the Notes and the reservation and issuance
of the Conversion Shares upon conversion of the Notes), which authorization
shall be in full force and effect on and as of the date of such certificate, and
(B) certifying and attesting to the office, incumbency, due authority and
specimen signatures of each Person who executed any Transaction Document for or
on behalf of the Company; and (vi) Brown & Wood, as counsel to the Company,
shall deliver to the Purchasers an opinion, dated the date of the Closing and
addressed to the Purchasers, in form and substance acceptable to the Purchasers.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to the Purchasers to purchase the Notes, the
Company hereby represents and warrants to the Purchasers that on and as of the
date hereof:
2
SECTION 3.01. Organization and Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York and has all requisite corporate power and authority, and all
authorizations, licenses, permits and certifications necessary to own its
properties and assets and to carry on its business as it is now being conducted
and proposed to be conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it or the nature of its businesses makes such
qualification necessary, except where the failure to so qualify or be in good
standing would not have a material adverse effect on the business, assets,
operations, properties, condition (financial or otherwise) or prospects of the
Company (a "Material Adverse Effect").
SECTION 3.02. Securities of the Company. The authorized Capital Stock
of the Company consists of 10,000,000 shares of Common Stock, of which
3,343,650 shares were issued and outstanding as of March 27, 1996.
Except as set forth in the SEC Reports, the Company has no other authorized,
issued or outstanding equity securities or securities containing any equity
features, or any other securities convertible into, exchangeable for or
entitling any person to otherwise acquire any other securities of the Company
containing any equity features. All of the outstanding shares of Capital
Stock of the Company have been duly and validly authorized and issued, and are
fully paid and nonassessable. The Notes and all of the Conversion Shares
have been duly and validly authorized. When issued against payment therefor as
provided in this Agreement, the Notes will be validly issued and will
constitute valid and enforceable obligations of the Company, enforceable
against the Company in accordance with their terms (subject to the effects of
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity). When issued upon conversion of the Notes, the
Conversion Shares will be validly issued, fully paid and nonassessable, free
and clear all preemptive rights, claims, liens, charges, encumbrances and
security interests of any nature whatsoever. A sufficient number of shares of
Common Stock has been duly reserved and will remain available for issuance upon
conversion of the Notes.
Except as set forth in the SEC Reports, there are no outstanding options,
warrants, agreements, conversion rights, subscription rights, preemptive rights,
rights of first refusal or other rights or agreements of any nature outstanding
to subscribe for or to purchase any shares of Capital Stock of the Company or
any other securities of the Company of any kind, other than options to purchase
Common Stock granted under the Company's 1991 Performance Equity Plan. Except
as otherwise requied by law, there are no restrictions upon the voting or
transfer of any shares of the Company's Capital Stock pursuant to the Company's
organizational and other governing documents or any agreement or other
instruments to which the Company is a party or by which the Company or its
properties or assets are bound. There are no agreements or other obligations
(contingent or otherwise) that may require the Company to repurchase or
otherwise acquire any shares of its Capital Stock.
SECTION 3.03. Authorization; Enforceability. The Company has the
corporate power and authority to execute, deliver and perform the terms and
provisions of each of the Transaction Documents, and has taken all necessary
corporate action to authorize the execution, delivery and performance by it of
each of the Transaction Documents and to consummate the transactions
contemplated thereby. No other corporate proceedings on the part of the Company
are necessary and no consent of the shareholders of the Company is required for
the valid execution and delivery by the Company of the Transaction Documents and
the performance and consummation by the Company of the transactions contemplated
thereby. The Company has duly executed and delivered each of the Transaction
Documents. The Transaction Documents constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
SECTION 3.04. No Violation; Consents.
(a) The execution, delivery and performance by the Company of the
Transaction Documents and the consummation of the transactions contemplated
thereby do not and will not (i) contravene the applicable provisions of any law,
statute, rule, regulation, order, writ, injunction, judgment or decree of any
3
court or Governmental Authority to or by which the Company or any of its
property or assets is bound, (ii) violate, result in a breach of or constitute
(with due notice or lapse of time or both) a default or give rise to an event of
acceleration under any contract, lease, loan or credit agreement, mortgage,
security agreement, trust indenture or other agreement or instrument to which
the Company is a party or by which it is bound or to which any of its properties
or assets is subject, nor result in the creation or imposition of any lien,
security interest, charge or encumbrance of any kind upon any of the properties,
assets or Capital Stock of the Company, or (iii) violate any provision of the
organizational and other governing documents of the Company.
(b) No consent, approval, authorization or order of, or filing or
registration with, any court or Governmental Authority or other Person is
required to be obtained or made by the Company for the execution, delivery and
performance of the Transaction Documents or the consummation of any of the
transactions contemplated thereby, except for those consents or authorizations
previously obtained and those filings previously made.
SECTION 3.05. Securities Act Representations. The Company is a
"reporting issuer" as that term is defined in Rule 902(l) of Regulation S under
the Securities Act. No form of general or public solicitation or advertising
was used by the Company or any Person acting on its behalf in connection with
the offer or sale of the Notes. Neither the Company nor any Person acting on
its behalf has (i) offered Notes to any Person (including Purchaser) in the
United States or offered or sold Notes to or for the account or benefit of any
U.S. Person or (ii) made any "directed selling efforts" (as defined in Rule
902(b) of Regulation S under the Securities Act) in the United States with
respect to the Notes. The Company has not sold and will not sell any Notes in
this offering other than the Notes being sold to the Purchasers hereunder.
Assuming the accuracy of the Purchasers' representations pursuant to Section
4.02 hereof, the sale of the Notes hereunder is, and the issuance of the
Conversion Shares upon conversion of the Notes will be, exempt from the
registration requirements of the Securities Act.
SECTION 3.06. Solvency; No Default. (a) The Company is, and upon
giving effect to the transactions contemplated hereby will be, Solvent (as
defined below). "Solvent" means that, as of the date of determination, (i) the
then fair saleable value of the assets of the Company exceeds the then total
amount of its debts and other liabilities (including any guarantees and other
contingent, subordinated, unmatured or unliquidated liabilities whether or not
reduced to judgment, disputed or undisputed, secured or unsecured), (ii) the
Company has sufficient funds and cash flow to pay its liability on its existing
and anticipated debts as they become absolute and matured, (iii) final judgments
against the Company in pending or threatened actions for money damages will not
be rendered at a time when, or in an amount such that the Company will be unable
to satisfy any such judgments promptly in accordance with their terms (taking
into account the maximum reasonable amount of such judgments in any such actions
(other than amounts that would be remote) and the earliest reasonable time at
which such judgments would be rendered), and (iv) the Company does not have
unreasonably small capital with which to engage in its present or anticipated
business.
(b) The Company is not, and immediately after the consummation of
the transactions contemplated hereby will not be, in default under or with
respect to its organizational and other governing documents, or any provision of
any security issued by the Company, or of any agreement, instrument or other
undertaking to which the Company is a party or by which it or any of its
property or assets is bound which, either individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.
SECTION 3.07. No Brokers. No broker, finder, agent or similar
intermediary is entitled to any broker's, finder's, placement or similar fee or
other commission in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with the Company.
SECTION 3.08. Financial Condition; No Adverse Changes. (a) The
audited financial statements of the Company and the related notes thereto as at
December 31, 1995 reported on by Arthur Andersen LLP, independent accountants,
4
copies of which have heretofore been furnished to the Purchasers (the "Financial
Statements"), present fairly the financial condition, results of operations and
cash flows of the Company at such dates and for the periods set forth therein.
The Financial Statements, including the related schedules and notes thereto (if
any), have been prepared in accordance with generally accepted accounting
principles as set forth in the opinions and pronouncements of the Accounting
Principles Board of American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board as in
effect on the date of the Closing, applied on a consistent basis (except for
changes concurred in by the Company's independent public accountants) unless
otherwise expressly stated therein. During the period from December 31, 1995 to
and including the date hereof, there has been no sale, transfer or other
disposition by the Company of any material part of the business, property or
securities of the Company and no purchase or other acquisition of any business,
property or securities by the Company material in relation to the financial
condition of the Company.
(b) Except as are fully reflected or reserved against in the
Financial Statements and the notes thereto, there are no liabilities or
obligations with respect to the Company of any nature whatsoever (whether
absolute, accrued, contingent or otherwise and whether or not due) which, either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
(c) Since December 31, 1995, there has been no development or
event, nor any prospective development or event known to the Company, or any
litigation, proceeding or other action seeking an injunction or other
restraining order, damages or other relief from a court or administrative agency
of competent jurisdiction pending or, to the best knowledge of the Company,
threatened, or any action of any Governmental Authority, which has had or could
reasonably be expected to have a Material Adverse Effect.
SECTION 3.09. Use of Proceeds; Federal Regulations. No part of the net
proceeds from the sale of the Notes will be used for any purpose which violates
the provisions of Regulation G, T, U or X of the Board of Governors of the
Federal Reserve System.
SECTION 3.10. Disclosure. The representations and warranties of the
Company in this Agreement and the statements contained in the SEC Reports and
the schedules, certificates and exhibits furnished to the Purchasers by or on
behalf of the Company in connection herewith do not contain any untrue statement
of a material fact and do not omit to state any material fact necessary to make
the statements herein or therein not misleading. The Company hereby
acknowledges that the Purchasers are and will be relying on the SEC Reports and
the Company's representations, warranties and covenants contained herein in
making an investment decision with respect to the Notes and Conversion Shares
and will be relying thereon (together with future reports filed with the
Commission) in connection with any transfer of Notes and Conversion Shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby acknowledges, represents and warrants to the
Company as follows:
SECTION 4.01. Authorization; Enforceability; No Violations.
(a) Such Purchaser is a bank or corporation, duly organized or
incorporated (as the case may be), validly existing and in good standing under
the laws of the jurisdiction of its organization or incorporation, and has all
requisite corporate power and authority to execute, deliver and perform the
terms and provisions of this Agreement and has taken all necessary corporate
action to authorize the execution, delivery and performance by it of this
Agreement and to consummate the transactions contemplated hereby.
(b) The execution, delivery and performance by such Purchaser of
this Agreement and the consummation by such Purchaser of the transactions
contemplated hereby do not and will not violate any provision of (i) such
Purchaser's organizational documents and (ii) any law, statute, rule,
regulation, order, writ, injunction, judgment or decree to which such Purchaser
5
is subject. Such Purchaser has duly executed and delivered this Agreement.
Assuming the due execution hereof by the Company, this Agreement constitutes the
legal, valid and binding obligation of such Purchaser, enforceable against such
Purchaser in accordance with its terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law).
SECTION 4.02. Securities Act Representations; Legends.
(a) Such Purchaser understands that (i) the offering and sale
of the Notes to be issued and sold hereunder is intended to be exempt from the
registration requirements of the Securities Act; (ii) neither the Notes nor the
Conversion Shares have been registered under the Securities Act or any other
applicable securities laws and such securities may be resold only if registered
under the Securities Act or if an exemption from such registration requirements
is available; and (iii) except to the extent provided in the Registration Rights
Agreement, the Company is not required to register any resale of the Notes or
the Conversion Shares under the Securities Act.
(b) The Notes to be acquired by such Purchaser pursuant to this
Agreement are being acquired for its own account, for investment purposes, and
not with a view to, or for sale in connection with, any distribution thereof or
of Conversion Shares issuable upon conversion of the Notes in violation of the
Securities Act or any other securities laws which may be applicable.
(c) Such Purchaser is not an affiliate of the Company (as such term
is defined in the Securities Act).
(d) Such Purchaser is a Non-U.S. Person.
(e) Such Purchaser (i) has sufficient knowledge and experience in
financial and business matters so as to be capable of evaluating the merits and
risks of its investment in the Notes and Purchaser is capable of bearing the
economic risks of such investment, including a complete loss of its investment
in the Notes; (ii) believes that its investment in the Notes is suitable for it
based upon its objectives and financial needs, and such Purchaser has adequate
means for providing for its current financial needs and business contingencies
and has no present need for liquidity of investment with respect to the Notes;
(iii) has no present plan, intention or understanding and has made no
arrangement to sell the Notes or the Conversion Shares at any predetermined time
or for any predetermined price; (iv) has not purchased, sold or entered into,
and has no present intention to and will not, for so long as it owns any Notes
or Conversion Shares, purchase, sell or enter into, any put option, short
position or similar arrangement with respect to the Common Stock, or any
intention to settle any such option, position or understanding with any
Conversion Shares.
(f) No oral or written representations have been made to such
Purchaser by or on behalf of the Company in connection with the offering and
sale of the Notes hereunder other than those set forth in the SEC Reports, the
Notes or as set forth herein, and such Purchaser is not subscribing for the
Notes as a result of, or in response to, any advertisement, article, notice or
other communication published in any newspaper, magazine or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
(g) At the time the buy order for the Notes being purchased
hereunder was originated, such Purchaser was outside of the United States.
(h) Such Purchaser acknowledges that Regulation S under the
Securities Act restricts the transferability in the United States of securities,
such as the Notes and Conversion Shares, issued in reliance upon the exemption
from the registration requirements of the Securities Act provided by Regulation
S thereunder, and that, subject to Section 5.02 below, the certificates
representing the Notes and the Conversion Shares will bear a legend in
substantially the following form by which such Purchaser and each subsequent
holder of such securities will be bound (the "Legend"):
6
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE
UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND SUCH SECURITIES LAWS. BY ACQUIRING THE SECURITIES REPRESENTED BY THIS
CERTIFICATE, THE HOLDER (1) REPRESENTS THAT EITHER (X) IT IS NOT A U.S.
PERSON AND HAS ACQUIRED THIS SECURITY IN AN OFFSHORE TRANSACTION OR (Y) IT
IS A PERSON DESCRIBED IN CLAUSE (B) WHICH HAS ACQUIRED THIS SECURITY
SUBSEQUENT TO THE DATE OF ORIGINAL ISSUANCE THEREOF; (2) AGREES THAT IT
WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY OR ANY
SECURITIES ISSUABLE UPON THE CONVERSION HEREOF EXCEPT (A) TO ANDREA
ELECTRONICS CORPORATION (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO
AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF PARAGRAPHS
(1), (2), (3) OR (7) OF RULE 501(a) UNDER THE SECURITIES ACT THAT
IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH
AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH
A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, OR (E) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT; AND (3) AGREES THAT IT
WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY OR ANY SECURITY ISSUED UPON
CONVERSION HEREOF IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER THE
SECURITIES ACT OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, SUCH REGISTRATION. IN CONNECTON WITH ANY SUCH PROPOSED TRANSFER, THE
COMPANY MAY REQUIRE THAT THE PROPOSED TRANSFEROR AND TRANSFEREE FIRST
FURNISH THE COMPANY SUCH CERTIFICATES AND REPRESENTATIONS AS THE COMPANY
MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE
RESPECTIVE MEANINGS ASSIGNED TO THEM IN REGULATION S UNDER THE SECURITIES
ACT.
(i) Such Purchaser acknowledges that as the Common Stock is currently
listed on a national securities exchange, Rule 144A under the Securities Act may
not be available with respect to resales of the Notes or the Conversion Shares.
SECTION 4.03. No Brokers. No broker, finder, agent or similar
intermediary is entitled to any broker's, finder's, placement or similar fee or
other commission in connection with the transactions contemplated hereby based
on any agreement, arrangement or understanding with such Purchaser.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.01. Exemption from Registration.
The Company will not make any offer to sell, solicit any offer to buy,
agree to sell or sell any security or right to acquire any security, except at
such time and in such manner so as not to cause the loss of any of the
exemptions for the offer and sale of the Notes hereunder and for the issuance of
Conversion Shares upon conversion of the Notes from the registration
requirements under the Securities Act or under the securities or "blue sky" laws
of any jurisdiction in which such offer, sale or issuance is made. Without
limiting the generality of the foregoing, the Company will not make any offer to
sell, solicit any offer to buy, agree to sell or sell any securities similar in
tenor to the Notes or any Common Stock or right to acquire any securities
similar in tenor to the Notes or any Common Stock during the period commencing
the date of the Closing and ending one hundred and thirty five (135) days
thereafter, except for the shares of Common Stock issuable upon conversion of
(i) the Notes or (ii) the Company's 15% Convertible Subordinated Debentures Due
June 23, 1997.
SECTION 5.02 Special Transfer Provisions. (a) The following provisions
shall apply with respect to any proposed transfer of Notes or Conversion Shares
7
prior to the date which is three (3) years from the Closing (or such other date
as may be required pursuant to Rule 144 under the Securities Act (or similar
successor provision) as in effect from time to time):
(i) With respect to any such proposed transfer of Notes or Conversion
Shares to any Institutional Accredited Investor that is a U.S. Person, the
Company or any transfer agent then acting with respect to the Notes or the
Common Stock, as the case may be, shall register the transfer whether or not
such Notes or Conversion Shares bear the Legend, if the proposed transferee has
delivered to the Company or the transfer agent, as appropriate, a certificate
containing certain representations with respect to such proposed transferee's
status as an Institutional Accredited Investor and with respect to compliance
with applicable provisions of the Securities Act (substantially in the form of
Exhibit C hereto).
(ii) With respect to any such proposed transfer of Notes or Conversion
Shares to any Non-U.S. Person, the Company or any transfer agent then acting
with respect to the Notes or the Common Stock, as the case may be, shall
register the transfer whether or not such Notes or Conversion Shares bear
the Legend, if the proposed transferee has delivered to the Company or the
transfer agent, as appropriate, a certificate containing certain representations
with respect to such proposed transferee's status as a Non-U.S. Person and with
respect to compliance with the provisions of Regulation S under the Securities
Act (substantially in the form of Exhibit C hereto).
(iii) Upon the transfer as provided in paragraphs (i) and (ii)
above of Notes or Conversion Shares not bearing the Legend, the Company or the
transfer agent, as the case may be, shall deliver certificates for such
securities that do not bear the Legend. Upon the transfer of Notes or
Conversion Shares bearing the Legend, the Company or the transfer agent, as the
case may be, shall deliver only certificates for such securities bearing the
Legend unless (A) such transfer is after the date which is three (3) years from
the date of the Closing (or such other date as may be required pursuant to Rule
144 under the Securities Act (or similar successor provision) as in effect from
time to time); (B) there is delivered to the Company or the transfer agent, as
the case may be, a certificate of the transferor substantially in the form of
Exhibit D to the effect that neither the Legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of the
Securities Act; or (C) such Notes or Conversion Shares have been sold pursuant
to an effective registration statement under the Securities Act.
(b) Except as expressly provided in paragraph (a) above, unless otherwise
required by applicable law or regulation, no other deliveries shall be required
of a Purchaser in connection with any proposed transfer of Notes or Conversion
Shares, notwithstanding anything contained in the Notes or Conversion Shares.
SECTION 5.03. Rules 144; Current Information. For so long as any Notes or
Conversion Shares are outstanding, the Company will (i) file all reports
required to be filed by it under the Securities Act and the Exchange Act and
will take such further actions as any Purchaser may reasonably request, all to
the extent required from time to time to enable such Purchaser to sell Notes and
Conversion Shares without registration under the Securities Act pursuant to the
safe harbors and exemptions provided by Rule 144, under the Securities Act, as
such rules may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission, and (ii) furnish each Purchaser with all
reports, proxy statements and registration statements which the Company files
with the Commission or distributes to its securityholders pursuant to the
Securities Act and the Exchange Act at the times of such filings and
distributions. Upon the request of any Purchaser, the Company will deliver to
such Purchaser a written statement as to whether it has complied with the
foregoing requirements.
SECTION 5.04. Reservation of Conversion Shares. The Company shall at
all times reserve and keep available, free from preemptive rights, out of its
authorized but unissued shares of Common Stock or its issued shares of Common
Stock held in its treasury, or both, sufficient shares of Common Stock to
provide for the issuance of the Conversion Shares from time to time as the Notes
become convertible pursuant to their terms.
8
SECTION 5.05. Stock Listing. The Company shall endeavor to have the
Conversion Shares approved for listing, prior to issuance, upon the American
Stock Exchange or upon such other national securities exchange or the Nasdaq
National Market or any similar system of automated dissemination of securities
prices upon which the Common Stock is listed or traded at the time of issuance
of such Conversion Shares.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Press Releases and Disclosure. No party hereto shall issue
any press release or make any other public disclosure related to this Agreement
or any of the transactions contemplated hereby without the prior written
approval of the other party hereto, except as may be necessary or appropriate in
the opinion of the party seeking to make disclosure to comply with the
requirements of applicable law or stock exchange rules (provided that, unless
otherwise required by applicable law, regulation, order or the like, or agreed
to between the parties, (i) no Exchange Act filing shall disclose more than the
title and amount of securities issued, the conversion formula, including the
minimum and maximum conversion prices, and the intended use of proceeds, and
(ii) no press release shall disclose more than the title and amount of
securities issued, a general description of the conversion formula but without
specifying the minimum and maximum conversion prices, and the intended use of
proceeds, and provided further that in no event shall the identity of a
Purchaser be disclosed without such Purchaser's prior written consent unless
such disclosure is required by applicable law, regulation, order or the like, in
which event the Company shall, prior to complying with such law, regulation,
order or the like, give written notice to Purchaser so as to allow Purchaser to
contest such disclosure). If any such press release or public disclosure is so
required, the party making such disclosure shall consult with the other party
prior to making such disclosure, and the parties shall use all reasonable
efforts, acting in good faith, to agree upon a text for such disclosure which is
satisfactory to all parties.
SECTION 6.02. Expenses. Except as otherwise expressly provided for
herein, the Company will pay all of its and all of the Purchasers' expenses
(including attorneys' fees and expenses) up to $25,000 in connection with the
negotiation of the Transaction Documents, the performance of the obligations of
each thereunder, and the consummation of the transactions contemplated thereby
(whether consummated or not). Such Purchasers' expenses shall be payable at the
Closing and may be netted against the Purchase Price otherwise payable by the
Purchasers.
SECTION 6.03. Notices. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice: (i) if to the
Company, to: Andrea Electronics Corporation, 11-40 45th Road, Long Island City,
New York 11101, Attention: with copies
(which shall not constitute notice) to: ;
and (ii) if to a Purchaser, to such Purchaser's address set forth on its
counterpart signature page hereto. Notice shall be deemed given on the date of
service or transmission if personally served or transmitted by telegram, telex
or facsimile. Notice otherwise sent as provided herein shall be deemed given on
the third business day following the date mailed or on the next business day
following delivery of such notice to a reputable air courier service.
SECTION 6.04. Entire Agreement. This Agreement (together with the other
Transaction Documents and all other documents delivered pursuant hereto and
thereto) constitutes the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements,
representations, understandings, negotiations and discussions between the
parties, whether oral or written, with respect to the subject matter hereof.
9
SECTION 6.05. Amendment and Waiver. This Agreement may not be amended,
modified, supplemented, restated or waived except by a writing executed by the
party against which such amendment, modification or waiver is sought to be
enforced. Waivers may be made in advance or after the right waived has arisen
or the breach or default waived has occurred. Any waiver may be conditional.
No waiver of any breach of any agreement or provision herein contained shall be
deemed a waiver of any preceding or succeeding breach thereof nor of any other
agreement or provision herein contained. No waiver or extension of time for
performance of any obligations or acts shall be deemed a waiver or extension of
the time for performance of any other obligations or acts.
SECTION 6.06. Assignment; No Third Party Beneficiaries. This Agreement
and the rights, duties and obligations hereunder may not be assigned or
delegated by either the Company, on the one hand, or a Purchaser, on the other
hand, without the prior written consent of the other parties hereto; provided
that a Purchaser may assign or delegate its rights, duties and obligations
hereunder to any Affiliate of such Purchaser. Except as provided in the
preceding sentence, any purported assignment or delegation of rights, duties or
obligations hereunder made without the prior written consent of the other
parties hereto shall be void and of no effect. This Agreement and the
provisions hereof shall be binding upon and shall inure to the benefit of each
of the parties and their respective successors and permitted assigns. This
Agreement is not intended to confer any rights or benefits on any Persons other
than as set forth above.
SECTION 6.07. Severability. This Agreement shall be deemed severable, and
the invalidity or unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable
term or provision, the parties hereto intend that there shall be added as a part
of this Agreement a provision as similar in terms to such invalid or
unenforceable provision as may be possible and be valid and enforceable.
SECTION 6.08. Further Assurances. Each party hereto, upon the request of
any other party hereto, shall do all such further acts and execute, acknowledge
and deliver all such further instruments and documents as may be necessary or
desirable to carry out the transactions contemplated by this Agreement.
SECTION 6.09. Titles and Headings. Titles, captions and headings of the
sections of this Agreement are for convenience of reference only and shall not
affect the construction of any provision of this Agreement.
SECTION 6.10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
INTERPRETED UNDER, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED WITHIN THE
STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS-OF-LAW THEREOF.
SECTION 6.11. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, all of which taken
together shall constitute one and the same instrument.
[signature page follows]
10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first set
forth above.
ANDREA ELECTRONICS CORPORATION
By: /s/ Patrick D. Pilch
Name: Patrick D. Pilch
Title: Executive Vice President and CFO
[NAME OF PURCHASER]
By:
Name:
Title:
Purchaser's Address for Notices
Pursuant to
Section 6.03:
Attention:
Facsimile No.:
11
<PAGE> 15
EXHIBIT A
ANDREA ELECTRONICS CORPORATION
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE OCTOBER 16, 1997
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND
HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
SECURITIES LAWS. BY ACQUIRING THE SECURITIES REPRESENTED BY
THIS CERTIFICATE, THE HOLDER (1) REPRESENTS THAT EITHER (X) IT IS
NOT A U.S. PERSON AND HAS ACQUIRED THIS SECURITY IN AN OFFSHORE
TRANSACTION OR (Y) IT IS A PERSON DESCRIBED IN CLAUSE (B) WHICH
HAS ACQUIRED THIS SECURITY SUBSEQUENT TO THE DATE OF ORIGINAL
ISSUANCE THEREOF; (2) AGREES THAT IT WILL NOT OFFER, SELL, PLEDGE
OR OTHERWISE TRANSFER THIS SECURITY OR ANY SECURITIES ISSUABLE
UPON THE CONVERSION HEREOF EXCEPT (A) TO ANDREA ELECTRONICS
CORPORATION (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF
PARAGRAPHS (1), (2), (3) OR (7) OF RULE 501(a) UNDER THE SECURITIES ACT
THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR
INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR
SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (E) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT; AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY OR ANY SECURITY ISSUED UPON CONVERSION HEREOF IS
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
REGISTRATION UNDER THE SECURITIES ACT OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION. IN CONNECTON WITH ANY SUCH PROPOSED TRANSFER,
THE COMPANY MAY REQUIRE THAT THE PROPOSED TRANSFEROR AND
TRANSFEREE FIRST FURNISH THE COMPANY SUCH CERTIFICATES AND
REPRESENTATIONS AS THE COMPANY MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND
"U.S. PERSON" HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN
REGULATION S UNDER THE SECURITIES ACT.
Certificate No. 1
U.S. $
FOR VALUE RECEIVED, ANDREA ELECTRONICS CORPORATION, a corporation
duly organized and existing under the laws of the State of New York (the
"Company"), hereby promises to pay to , or
registered assigns, the principal sum of
$ on October 16, 1997, and to pay interest thereon in the manner
set forth on the reverse hereof from April 16, 1996 at the rate of 15% per
annum until the principal hereof is paid or made available for payment.
Reference is hereby made to the further provisions set forth on the reverse
hereof, which further provisions shall for all purposes have the same effect
as if set forth in this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by an officer thereunto duly authorized.
Dated: April 16, 1996 ANDREA ELECTRONICS
CORPORATION
By:
Name: Patrick Pilch
Title: Executive Vice President,
Chief Financial Officer
1
- - REVERSE OF DEBENTURE -
ANDREA ELECTRONICS CORPORATION
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE
OCTOBER 16, 1997
THIS DEBENTURE WAS ISSUED WITH ORIGINAL ISSUE
DISCOUNT. FOR INFORMATION AS TO THE ISSUE PRICE,
THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE
DATE AND THE YIELD TO MATURITY OF THIS
DEBENTURE, THE HOLDER OF THIS DEBENTURE MAY
CONTACT THE CHIEF FINANCIAL OFFICER OF ANDREA
ELECTRONICS CORPORATION AT 11-40 45TH ROAD, LONG
ISLAND CITY, NEW YORK, NEW YORK 11101.
1. ISSUANCE. This Debenture is one of a duly authorized issue of
Debentures of the Company designated as its 15% Convertible
Subordinated Debentures Due October 16, 1997 in an aggregate face
amount of $2,198,000.
2. INTEREST. The Company promises to pay
interest on the principal amount of this Debenture at the rate of 15% per
annum. Interest on this Debenture will accrue from April 16, 1996 until
payment in full of the principal amount hereof has been made or duly
provided for and will be based on the actual number of days and months
elapsed and computed on a 360-day year consisting of twelve 30-day
months. Interest shall be payable in arrears on the earlier to occur of (i)
the date of conversion to Common Stock (as defined in Section 4
below) as provided herein of all or a portion of this Debenture (if this
Debenture shall be converted in part, then interest only with respect to
the portion of this Debenture so converted shall be payable at such time)
and (ii) October 16, 1997 (the "Maturity Date"). Interest on this
Debenture is payable to the holder of this Debenture registered on the
books of the Company (the "Holder") at the option of the Company in
the form of either (i) such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public
and private debts or (ii) the number of full shares of Common Stock
which the amount of interest payable would entitle the Holder to acquire
based upon a price per share equal to the Conversion Price (as defined
in Section 4 below). The Company shall notify the Holder in writing
within three (3) business days of the date Notice of Conversion by the
Holder is received by the Company or three business days prior to the
Maturity Date, as applicable, of the form in which the Company elects
to pay accrued interest. In the event the Company fails to timely
provide such notice, payments of interest shall be in Common Stock.
3. PRINCIPAL. On the Maturity Date, upon
surrender of this Debenture by the Holder to the Company, the
Company shall pay to the Holder the outstanding principal amount
hereof in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts,
together with accrued interest on such outstanding principal amount as
set forth in Section 2 above.
4. CONVERSION.
(a) Conversion Price; Amount. Subject to this Section 4, the
Holder of this Debenture has the right to convert this Debenture, in
whole or from time to time in part, into shares of common stock, par
value $.50 per share, of the Company (the "Common Stock"). The
price at which the Holder may convert this Debenture (or any portion
thereof) into shares of Common Stock (the "Conversion Price") shall be
the lesser of (i) $14.4375 (the "Maximum Conversion Price") and (ii)
the Closing Price (as defined below) of the Common Stock on the Date
of Conversion (as defined below); provided, however, that in no event
shall the Conversion Price be less than $6.5625 (the "Minimum
Conversion Price"). The "Closing Price" with respect to the per share
price of Common Stock on any day means the last reported bid price
2
regular way on the American Stock Exchange or, if the Common Stock
is not listed or admitted to trading on such Exchange, on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any
national securities exchange, on the Nasdaq National Market or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on such national market system, the
closing bid price in the over-the-counter market as furnished by any
New York Stock Exchange member firm that is selected from time to
time by the Company for that purpose. In lieu of any fractional share of
Common Stock to which the Holder would otherwise be entitled upon
conversion of this Debenture (or portion thereof), the number of shares
of Common Stock issuable upon conversion of this Debenture shall be
rounded up to the nearest whole number. In the case of a dispute as to
the calculation of the Conversion Price, the Holder's calculation shall be
deemed conclusive absent manifest error.
The Holder of this Debenture shall be entitled to convert (i) up
to one-quarter of the aggregate original principal amount of this
Debenture into Common Stock at any time beginning 45 days following
the date of original issuance of this Debenture (or any predecessor
security), (ii) up to an additional one-quarter of the aggregate original
principal amount of this Debenture into Common Stock at any time
beginning 75 days following the date of original issuance of this
Debenture (or any predecessor security), (iii) up to an additional
one-quarter of the aggregate original principal amount of this Debenture
into Common Stock at any time beginning 105 days following the date
of original issuance of this Debenture (or any predecessor security) and
(iv) up to the entire original principal amount of this Debenture into
Common Stock at any time beginning 135 days following the date of
original issuance of this Debenture (or any predecessor security). The
last date on which this Debenture may be converted is three (3) business
days prior to the Maturity Date. Subject to the foregoing, the Holder
may convert a portion of this Debenture into Common Stock at any time
if the portion converted (exclusive of accrued interest with respect
thereto) is equal to or exceeds $10,000.
Notwithstanding any other provision of this Section 4, as of any
date prior to the Maturity Date, the aggregate number of shares of
Common Stock into which this Debenture, all other Debentures and all
other securities convertible into Common Stock held by the Holder of
this Debenture and its affiliates shall be convertible, together with the
shares of Common Stock then beneficially owned (as defined in the U.S.
Securities Exchange Act of 1934, as amended) by such Holder and its
affiliates, shall not exceed 4.9% of the total outstanding shares of
Common Stock as of such date.
(b) Mechanics of Conversion. To convert this Debenture (or
a portion thereof) the Holder must (i) complete and sign the Notice of
Conversion set forth as Exhibit A to this Debenture (the "Notice of
Conversion") and deliver the Notice of Conversion to the Company as
herein provided and (ii) on or prior to the date on which delivery of
Common Stock is required to be made hereunder, (x) deliver this
Debenture, duly endorsed, to the Company and (y) pay any transfer or
similar tax if required. The Holder shall surrender this Debenture and
the Notice of Conversion to the Company (with an advance copy by
facsimile of the Notice of Conversion). The date on which Notice of
Conversion is given (the Date of Conversion ) shall be deemed to be
the date of receipt by the Company of the facsimile of the Notice of
Conversion, provided that this Debenture is received by the Company
within five (5) business days thereafter. The Company shall not be
obligated to cause the transfer agent for the Common Stock (the
"Transfer Agent") to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless either this Debenture has
been received by the Company or, if this Debenture has been lost, stolen
or destroyed, the Holder executes an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in
connection with this Debenture.
3
The Company shall cause the Transfer Agent to issue and deliver
within two (2) business days after delivery to the Company of this
Debenture to the Holder of this Debenture at the address of the Holder
on the books of the Company or as otherwise directed pursuant to the
Notice of Conversion, a certificate or certificates for the number of
shares of Common Stock to which such Holder shall be entitled as
aforesaid. The person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common
Stock on such date. Notwithstanding that the Holder is required to
deliver this Debenture, duly endorsed, within five (5) business days after
the Date of Conversion, if this Debenture is not received by the
Company within ten (10) business days after the Date of Conversion, the
Notice of Conversion shall become null and void.
Following conversion of this Debenture, or a portion thereof, the
principal, together with the interest payable on this Debenture, or
portion thereof so converted, will be deemed paid in full and satisfied,
and such Debenture or portion thereof will no longer be outstanding. In
the event this Debenture is converted in part, the Company will issue to
the Holder a new Debenture in a principal amount equal to the portion
of this Debenture not converted.
(c) Reservation of Stock Issuable Upon Conversion. The
Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock or shares of Common
Stock held in treasury, or both, solely for the purpose of effecting the
conversion of this Debenture, such number of shares of Common Stock
as shall from time to time be sufficient to effect the conversion of the
Debentures and all other securities of the Company convertible or
exchangeable into Common Stock.
(d) Adjustment to Maximum Conversion Price and Minimum
Conversion Price.
(i) If, prior to the conversion of the
entire principal amount of this Debenture, the number of outstanding
shares of Common Stock is increased by a stock split, stock dividend of
shares of Common Stock or other shares of capital stock,
reclassification or other similar event, the Maximum Conversion Price
and Minimum Conversion Price shall be proportionately reduced, or if
the number of outstanding shares of Common Stock is decreased by a
combination or reclassification of shares or other similar event, the
Maximum Conversion Price and Minimum Conversion Price shall be
proportionately increased, in each case, such that the Holder of this
Debenture will have the right to receive upon conversion of this
Debenture the number of shares of Common Stock (or other shares of
Capital Stock) of the Company (notwithstanding the limitation set forth
in the third paragraph of Section 4(a)) which such Holder would have
been entitled to receive had the Holder converted this Debenture
immediately prior to such action.
(ii) If, prior to the conversion of the
entire principal amount of this Debenture, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization or
other similar event (a "Conversion Reclassification Event"), as a result
of which shares of Common Stock of the Company shall be changed
into the same or a different number of shares of the Company or the
same or another class or classes of stock or securities of the Company
or another entity, then the Holder of this Debenture shall thereafter have
the right to receive upon conversion of this Debenture, upon the basis
and the terms and conditions specified herein, such shares of stock
and/or securities as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately
theretofore receivable upon the conversion of this Debenture
(irrespective of the limitations set forth in Section 4(a)) had such
Conversion Reclassification Event not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Debenture such that the provisions hereof
4
(including, without limitation, provisions for adjustment of the
Maximum Conversion Price and the Minimum Conversion Price and of
the number of shares issuable upon conversion of this Debenture) shall
thereafter be applicable, as nearly as may be practicable in relation to
any shares of stock or securities thereafter deliverable upon the
conversion of this Debenture. The Company shall not effect any
Conversion Reclassification Event unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Holder of this Debenture such shares of
stock and/or securities as the Holder of this Debenture is entitled to
receive upon conversion in accordance with the foregoing.
(iii) In addition to the adjustments
set forth above, if the Company distributes to all holders of its Common
Stock any of its assets or debt securities or any rights or warrants to
purchase securities other than Common Stock, then the Maximum
Conversion Price and the Minimum Conversion Price shall be adjusted
in such a manner as shall be agreed to by the Company and the Holder
as shall fairly preserve the economic rights and benefits of the Holder as
contemplated by this Debenture. In the event that within 15 days of any
such event, the Company and the Holder do not reach an agreement as
to the appropriate adjustment, the Company shall retain, and pay for, a
nationally recognized investment bank or accounting firm to determine
the appropriate adjustment as soon as possible, but in any event not later
than 45 days from the date of such event.
No adjustment shall be required for cash dividends or
distributions except to the extent that any such cash dividend or
distribution made on any date would, upon payment, cause the
aggregate fair market value (as determined in good faith by the Board of
Directors, whose determination shall be conclusive) of all such dividends
and distributions which have occurred on such date and during the
365-day period immediately preceding such date (other than any
dividends or distributions in respect of which an adjustment to the
Maximum Conversion Price and the Minimum Conversion Price
pursuant to this Section 4(d) had previously been made) exceed the
product of (x) .20 times (y) the Closing Price on the record date for
such most recent dividend or distribution times (z) the number of shares
of Common Stock outstanding on such date.
(iv) In the event that the Company
shall at any time after the date of the issuance of this Debenture (A)
issue shares of Common Stock without consideration (other than in the
form of a dividend) or at a price per share less than the Closing Price on
the date of issue, (B) issue options, rights or warrants to subscribe for or
purchase Common Stock (or securities convertible into Common Stock)
without consideration or at a price per share (or having a conversion
price per share, if a security convertible into Common Stock) less than
the Closing Price of the Common Stock on the date of issue or (C) in
the case of securities convertible into Common Stock having a
conversion price less than the Closing Price of the Common Stock on
the date of conversion, the Maximum Conversion Price and the
Minimum Conversion Price to be in effect after the date of such issuance
shall be adjusted by multiplying each of the Maximum Conversion Price
and the Minimum Conversion Price in effect immediately prior to the
date of such issuance by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on the date of such
issuance plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock
so to be issued (or the aggregate initial conversion price of the
convertible securities so to be issued) would purchase at the Closing
Price on the date of such issue and of which the denominator shall be the
number of shares of Common Stock outstanding on the date of such
issuance plus the number of additional shares of Common Stock to be
issued (or into which the convertible securities so to be issued are
initially convertible). In case the subscription price for such securities
may be paid in a consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be as determined in
good faith by the Board of Directors of the Company, whose
5
determination shall be conclusive. Such adjustment shall be made
successively whenever the date of such issuance is fixed and, in the event
that such shares or option, rights or warrants (or portions thereof)
expire without being issued, each of the Maximum Conversion Price and
the Minimum Conversion Price shall again be adjusted to reflect such
occurrence.
(v) If any adjustment under this
Section 4(d) would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares of Common Stock
issuable upon conversion shall be the next higher number of shares.
5. SUBORDINATION.
(a) The Company, for itself, its successors and assigns,
covenants and agrees, and the Holder of this Debenture, by acceptance
hereof, covenants and agrees, that payment of the principal of and
interest on this Debenture is hereby expressly subordinated, to the extent
and in the manner hereinafter set forth, in right of payment to the prior
payment in full of all Senior Indebtedness. "Senior Indebtedness" means
the principal of, premium, if any, and unpaid interest on (i) indebtedness
of the Company (including indebtedness of others guaranteed by the
Company), other than this Debenture, whether outstanding on the date
of original issuance of this Debenture or hereafter created, incurred,
assumed, or guaranteed, (A) for money owing to banks, (B) for money
borrowed from other than banks or (C) arising under a lease of
property, equipment or other assets, which indebtedness, pursuant to
generally accepted accounting principles then in effect, is classified upon
the balance sheet of the Company as a liability of the Company, unless in
the instrument creating or evidencing the same or pursuant to which the
same is outstanding it is provided that such indebtedness is not superior
in right of payment to this Debenture, and (ii) renewals, extensions,
modifications and refundings of any such indebtedness.
(b) Upon any distribution of assets of the Company upon any
dissolution, winding up, liquidation or reorganization of the Company,
whether in bankruptcy, insolvency, reorganization or receivership
proceedings or upon an assignment for the benefit of creditors or any
other marshalling of the assets and liabilities of the Company or
otherwise the holders of all Senior Indebtedness shall be entitled to
receive payment in full of the principal thereof, premium, if any, and the
interest due thereon before the Holder of this Debenture is entitled to
receive any payment of principal or interest on this Debenture; and in the
event that, notwithstanding the foregoing, any payment or distribution
of assets of the Company of any kind or character, whether in cash,
property or securities, shall be received by the Holder of this Debenture
before all Senior Indebtedness is paid in full, such payment or
distribution shall be paid over to the holders of such Senior Indebtedness
or their representative or to the trustee under any indenture or
agreement under which any instruments evidencing any of such Senior
Indebtedness may have been issued, ratably as aforesaid, for application
to the payment of all Senior Indebtedness remaining unpaid until all such
Senior Indebtedness shall have been paid in full, after giving effect to
any concurrent payment or distribution to the holders of such Senior
Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the
Holder of this Debenture shall be subrogated to the rights of the holders
of Senior Indebtedness to receive payments or distributions of the
Company applicable to Senior Indebtedness until the principal of and
interest on this Debenture shall be paid in full and no such payments or
distributions to the Holder of this Debenture of cash, property or
securities otherwise distributable to the Senior Indebtedness shall, as
between the Company, its creditors other than the holders of Senior
Indebtedness, and the Holder of this Debenture, be deemed to be a
payment by the Company to or on account of this Debenture. It is
understood that the provisions of this Section 5 are and are intended
solely for the purpose of defining the relative rights of the Holder of this
6
Debenture and the holders of Senior Indebtedness, on the other hand.
Nothing contained in this Debenture is intended to, or shall, impair, as
between the Company, its creditors other than the holders of Senior
Indebtedness, and the Holder of this Debenture, the obligation of the
Company, which is unconditional and absolute, to pay to the Holder of
this Debenture principal of and interest on this Debenture as and
when the same shall become due and payable in accordance with its
terms, or to affect the relative rights of the Holder of this Debenture and
creditors of the Company other than the holders of Senior Indebtedness,
nor shall anything in this Debenture prevent the Holder of this
Debenture from exercising all remedies otherwise permitted by
applicable law upon default under this Debenture, subject to the rights, if
any, under this Section 5 of the holders of Senior Indebtedness in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.
If the Holder of this Debenture does not file a proper claim or
proof of debt in the form required in any proceeding referred to above
prior to 30 days before the expiration of the time to file such claim in
such proceeding, then the holder of any Senior Indebtedness is hereby
authorized, and has the right, to file an appropriate claim or claims for
or on behalf of the Holder.
The Holder of this Debenture by its acceptance hereof agrees to
take such action as may be necessary or appropriate to effectuate the
subordination provided in this Section 5.
6. REGISTERED HOLDER. The Company may for all purposes
treat the registered holders on its books and records of this Debenture as
the Holder.
7. DENOMINATIONS. Debentures (and any Debenture issued in
exchange, upon transfer or upon conversion) may be issued in a
minimum principal amount of $100,000 (or such lesser amount upon a
conversion in part of a Debenture provided such lesser amount
represents such Holder's entire holding of Debentures).
8. EVENTS OF DEFAULT.
(a) An "Event of Default" under this Debenture occurs if:
(1) the Company defaults in effecting a conversion of
this Debenture in accordance with the provisions hereof and such default
continues for a period of 10 days;
(2) the Company defaults in the payment of the
principal of or interest on this Debenture when the same becomes due
and payable;
(3) the Company fails to comply in any material
respect with any of its agreements in this Debenture or the provisions of
the Securities Purchase Agreement (the "Securities Purchase
Agreement") or the Registration Rights Agreement, each dated as of the
date of the original issuance of this Debenture between the Company
and the original Holder of this Debenture (other than those referred to in
clauses (1) and (2) above) and such failure continues for 30 days after
the notice specified below;
(4) indebtedness of the Company or any subsidiary is
not paid within any applicable grace period after maturity or is
accelerated by the holders thereof because of a default, the total amount
of such indebtedness unpaid or accelerated exceeds $1,000,000 and such
default continues for 10 days after the notice specified below;
(5) the Company or any subsidiary pursuant to or
within the meaning of any federal or state bankruptcy, insolvency or
other law for the relief of debtors ("Bankruptcy Law"):
(A) commences a voluntary case or
proceeding;
7
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding;
(C) consents to the appointment of any
receiver, trustee, assignee, liquidator, custodian or similar
official under any Bankruptcy Law (a "Custodian") of it
or for any substantial part of its property; or
(D) makes a general assignment for the
benefit of its creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(6) a court of competent jurisdiction enters an order
or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
subsidiary in an involuntary case or proceeding;
(B) appoints a Custodian of the Company or
any subsidiary or for any substantial part of its property;
or
(C) orders the winding up or liquidation of
the Company or any subsidiary;
or similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days; or
(7) any final judgment or decree for the payment of
money in excess of $1,000,000 (to the extent not covered by insurance)
is rendered against the Company or any subsidiary and is not discharged
and either (A) an enforcement proceeding has been commenced by any
creditor upon such judgment or decree or (B) there is a period of 60
days following such judgment during which such judgment or decree is
not discharged, waived or the execution thereof stayed and, in the case
of (B), such default continues for 10 days after the notice specified
below.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body.
A default under clause (3), (4) or (7) above is not an Event of
Default until the Holder of this Debenture notifies the Company of such
default and the Company does not cure such default within the time
specified after receipt of such notice. Such notice must specify the
default, demand that it be remedied and state that such notice is a
"Notice of Default".
The Company shall deliver to the Holder of this Debenture,
within 30 days after the occurrence thereof, written notice of any event
which with the giving of notice, the lapse of time or both would become
an Event of Default under clause (3), (4) or (7) above, its status and
what action the Company is taking or proposes to take with respect
thereto.
(b) If an Event of Default (other than an Event of Default
specified in clauses (5) or (6) above) occurs and is continuing, the
Holder of this Debenture may declare the principal of and accrued
interest on this Debenture to be immediately due and payable and upon
such declaration, such principal and interest shall be due and payable
immediately. If an Event of Default specified in clauses (5) or (6) above
occurs, the principal of and interest on this Debenture shall ipso facto
8
become and be immediately due and payable without any declaration or
other act on the part of the Holder of this Debenture.
9. NO AMENDMENT. No provision of this Debenture may be
amended, altered or modified without the written agreement of the
Holder and the Company.
10. NO VOTING RIGHTS. This Debenture shall not entitle the
Holder hereof to any of the rights of a stockholder of the Company,
including without limitation, the right to vote, to receive dividends and
other distributions, or to attend any meetings of stockholders or any
other proceedings of the Company.
11. LOST OR DESTROYED DEBENTURE. If this Debenture
shall be mutilated, lost, stolen or destroyed, the Company shall execute
and deliver, in exchange and substitution for and upon cancellation of a
mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
destroyed Debenture, a new Debenture for the principal amount of this
Debenture so mutilated, lost, stolen or destroyed but only upon receipt
of evidence of such loss, theft or destruction of such Debenture, and of
the ownership thereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
12. SALES IN COMPLIANCE WITH APPLICABLE LAW. The
Holder of this Debenture, by acceptance hereof, agrees that it will not
offer, sell or otherwise dispose of this Debenture or the shares of
Common Stock issuable upon conversion hereof except under
circumstances which will not result in a violation of the Securities Act of
1933, as amended (the "Securities Act"), including Regulation S
promulgated under the Securities Act, or any applicable state blue sky
laws relating to the sale of securities and the Holder agrees to provide
the Company with such documentation as the Company shall deem
necessary in accordance with this Debenture and the Securities Purchase
Agreement to demonstrate that such offer, sale or disposition complies
with applicable securities laws.
13. GOVERNING LAW. This Debenture shall be governed by,
enforced under and construed in accordance with the laws of the State
of New York, without giving effect to the principles of conflicts of laws
thereof.
14. BUSINESS DAY DEFINITION. For purposes hereof, the term
business day shall mean any day on which banks are generally open for
business in the City of New York.
15. NOTICE. Any notice or other communication required or
permitted to be given hereunder shall be given as provided herein or
delivered against receipt if to (i) the Company at 11-40 45th Road, Long
Island City, New York 11101; Facsimile
No.: , Attention: Executive Vice President, Chief
Financial Officer and (ii) the Holder of this Debenture, to such Holder at
its last address as shown on the Debenture register (or to such other
address as any such party shall have furnished to the Company in
writing). Any notice or other communication mailed or otherwise
delivered shall be deemed given at the time of receipt thereof.
16. WAIVER.
(a) The Company hereby waives presentment for payment,
notice of dishonor, protest and notice of protest and, in the event of
default hereunder, the Company agrees to pay all costs of collection,
including reasonable attorneys fees.
(b) Any waiver by the Company or the Holder hereof of a
breach of any provision of this Debenture shall not operate as or be
construed to be a waiver of any other breach of such provision or of any
breach of any other provision of this Debenture. The failure of the
Company or the Holder hereof to insist upon strict adherence to any
term of this Debenture on one or more occasions shall not be considered
9
a waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
17. UNENFORCEABLE PROVISIONS. If any provision of this
Debenture is invalid, illegal or unenforceable, the remaining provisions
of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances.
10
EXHIBIT A
ANDREA ELECTRONICS CORPORATION - NOTICE OF CONVERSION
15% CONVERTIBLE SUBORDINATED DEBENTURE DUE OCTOBER 16, 1997
(To be executed by the Holder in order to convert the Debenture or portion
thereof)
The undersigned hereby irrevocably elects to convert [the entire principal
amount] [$ principal amount] of Debenture No. _________ into
shares of Common Stock, $.50 par value (the "Common Stock"), of Andrea
Electronics Corporation (the "Company") as of the Date of Conversion (which
shall be the date of receipt by facsimile by the Company of this Notice of
Conversion). If shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates as reasonably requested by
the Company or its Transfer Agent. No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any.
The undersigned represents and warrants that all offers and sales by the
undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Debenture shall be made in compliance with, pursuant to an
exemption from registration under the Securities Act. The undersigned also
represents and warrants that the number of shares of Common Stock to be received
upon conversion, together with the shares of Common Stock beneficially owned by
the undersigned (and its affiliates) on the Date of Conversion, do not exceed
4.9% of the outstanding shares of Common Stock of the Company (as set forth in
the Company's most recent filing with the Securities and Exchange Commission
unless the Company shall notify the Holder that a lesser number of shares is
outstanding).
If the stock certificate is to be made out in another person's name, fill in the
form below:
(Print or type other person's name, address and zip code)
(Insert assignee's U.S. social security or tax identification
number, if any)
Conversion calculations:
Date of Conversion
Applicable Conversion Price
Total number of shares
(assuming interest payable Accrued Interest
in shares)
[Name of Holder]
By:
Name:
Title:
11
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
(Print or type assignee's name, address and zip
code)
(Insert assignee's social security or tax identification number, if any)
and irrevocably appoint
agent to transfer this Debenture on the books of the Company. The agent may
substitute another to act for him.
Date:
(Sign exactly as your name
appears on the face of
this Debenture)
12
<PAGE> 16
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as
of April 16, 1996 is made and entered into between ANDREA ELECTRONICS
CORPORATION, a New York corporation ("AEC"), and the Purchaser executing a
signature page hereto (the "Purchaser").
WHEREAS, AEC and the Purchasers have entered into that certain
Securities Purchase Agreement, dated as of the date hereof (the "Subscription
Agreement"), pursuant to which AEC has issued to the Purchasers U.S. $2,198,000
aggregate principal amount of its 15% Convertible Subordinated Debentures Due
October 16, 1997 (the "Notes"), which Notes, together with, in certain
circumstances, accrued interest thereon, are convertible into such number of
shares Common Stock, $.50 par value per share, of AEC as are specified in the
Notes (the "Convertible Shares");
WHEREAS, pursuant to the terms of, and in partial consideration
for, the Purchaser's agreement to enter into the Subscription Agreement, the
Company has agreed to provide the Purchaser with certain registration rights
with respect to the Conversion Shares (as defined below);
NOW, THEREFORE, in consideration of the premises, the
representations, warranties, covenants and agreements contained herein and in
the Subscription Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. Capitalized terms defined in the
Subscription Agreement shall have the same meanings herein as are ascribed to
them therein. In addition, the following terms shall have the meanings ascribed
to them below:
"Registrable Securities" means all of the Convertible Shares
and any other securities issued or issuable upon conversion of the Notes as
provided therein (together, the "Conversion Shares") until (i) a registration
statement under the Securities Act covering the offering of such Conversion
Shares has been declared effective by the Commission and such Conversion Shares
have been disposed of pursuant to such effective registration statement, (ii)
such Conversion Shares are sold under circumstances in which all of the
applicable conditions of Rule 144 (or any similar provision then in force) under
the Securities Act ("Rule 144") are met, (iii) such Conversion Shares have been
otherwise transferred and AEC has delivered a new certificate or other evidence
of ownership for such securities not bearing a restrictive legend or (iv) such
time as, in the opinion of counsel to the Company, which counsel shall be
acceptable to the Purchasers in their sole discretion, such Conversion Shares
may be sold without any time, volume or manner limitation pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
"Triggering Date" means any date after May 31, 1996 on which
the Purchaser reasonably determines, based on the advice of counsel, that it
would be inadvisable to transfer any Conversion Shares without registration
under the Securities Act or that such Conversion Shares cannot be freely
transferred without registration under circumstances in which a restrictive
legend cannot be removed.
"Underwriter" means a securities dealer who purchases any
Registrable Securities as principal in an underwritten offering and not as part
of such dealer's market-making activities.
1
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1. Demand Registration.
(a) Request for Registration. At any time and from time to
time on and after a Triggering Date and subject to the terms and conditions
hereof, the Purchaser may make a written request to AEC to file with the
Commission a registration statement and such other documents, including a
prospectus, as may be necessary in order to comply with the provisions of the
Securities Act so as to permit a public offering and sale of up to all of the
Registrable Securities issued and issuable upon conversion of the Notes. The
request described in this paragraph (a) is hereinafter referred to as a "Demand
Registration." The Purchaser shall have the right to withdraw its request for a
Demand Registration by giving written notice to AEC of its request to withdraw
at any time prior to effectiveness of the registration statement therefor;
provided that in the event of such withdrawal, the Purchaser shall be
responsible for all fees and expenses (including fees and expenses of its
counsel) incurred by the Purchaser prior to such withdrawal; and provided
further that the Purchaser may make, in the aggregate, not more than three (3)
requests for a Demand Registration hereunder. Any request to effect a Demand
Registration shall specify the amount of Registrable Securities proposed to be
sold and shall also specify the intended method of disposition thereof. Within
ten (10) days following any such Demand Registration request, AEC shall notify
any other holders of Registrable Securities of such request. Within fifteen
(15) days following the date of such notice, any such other holder of
Registrable Securities covered by such Demand Registration request shall notify
AEC as to whether such holder desires to include any Registrable Securities held
by such holder in the aggregate Registrable Securities covered by such Demand
Registration request. Whether or not any holder of Registrable Securities
elects to include any Registrable Securities in such Demand Registration, such
Demand Registration shall be counted as one of the three Demand Registration
requests permitted hereunder as to such holder. There shall be permitted
hereunder only one Demand Registration request during any twelve (12) month
period. The minimum aggregate number of Registrable Securities that must be
covered by any registration statement prepared in response to a Demand
Registration request shall be 100,000 Convertible Shares (or the equivalent
amount of Conversion Shares).
(b) Effective Registration. A registration will not be
deemed to have been effected as a Demand Registration unless and until it has
been declared effective by the Commission and AEC has complied in all material
respects with its obligations under this Agreement with respect thereto unless
failure to obtain effectiveness is due to acts or omissions to act by the
Purchaser or any holder of Registrable Securities; provided that if, after it
has become effective, the offering of securities pursuant to such registration
is or becomes the subject of any stop order, injunction or other order or
requirement of the Commission or any other governmental or administrative
agency, or if any court prevents or otherwise limits the sale of such securities
pursuant to the registration, such registration will be deemed not to have been
effected as to the shares subject to such stop order, injunction, other order,
requirement or limitation unless such stop order, injunction, other order,
requirement or limitation is rescinded or the issuance of such stop order,
injunction, other order, requirement or limitation is imposed in response to an
act or omission on the part of one or more holders of Registrable Securities the
offering of which is the subject of such registration. If (i) a registration
requested pursuant to this Section 2.1 is deemed not to have been effected and
such failure to have been effected is not the result of any act or omission of
any holder of Registrable Securities the offering of which is covered by the
registration or (ii) with respect to an offering of Registrable Securities on a
continuous basis pursuant to Rule 415 under the Securities Act, the registration
requested pursuant to this Section 2.1 does not remain effective for a period of
at least twenty-four (24) months beyond the effective date thereof (excluding
for purposes of this calculation any period during which the effectiveness of
such registration is subject to a stop order, injunction or other order or
requirement of the Commission or any other governmental or administrative agency
or during which any court prevents or otherwise limits the sale of securities
pursuant to such registration) or, with respect to an underwritten offering of
Registrable Securities, until ninety (90) days after the commencement of the
2
distribution and the effect of any failure of the type referred to in clauses
(i) and (ii) of this sentence is to prevent the distribution of 25% or more of
the Registrable Securities the offering of which is covered by such
registration, then AEC shall continue to be obligated to effect such
registration pursuant to this Section 2.1 (and such registration shall not count
toward the three Demand Registration requests permitted pursuant to Section
2.1(a)).
(c) Selection of Underwriter. If the Purchaser so elects,
the offering of Registrable Securities pursuant to a Demand Registration shall
be in the form of an underwritten offering, in which case AEC and the Purchaser
shall jointly select one or more nationally recognized firms of investment
bankers to act as the lead managing Underwriter or Underwriters in connection
with such offering.
(d) Deferral. Notwithstanding the foregoing, if AEC shall
furnish to the Purchaser in response to the Purchaser's request for a Demand
Registration a certificate signed by the Chairman, President and Chief Executive
Offer of AEC stating that the Board of Directors of AEC has, by duly authorized
resolution, determined in good faith that it would be seriously detrimental to
AEC and its shareholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement, AEC
shall have the right to defer such filing for a period of not more than ninety
(90) days after receipt of the request for a Demand Registration. The Purchaser
acknowledges that it would be seriously detrimental to AEC and its shareholders
for such registration statement to be filed and therefore essential to defer
such filing if, among other things, such filing would impose an undue burden
upon the ability of AEC to proceed with any reorganization, merger,
consolidation or acquisition of the securities or assets of another firm or
corporation or disposition of the securities or assets of AEC or a public
offering by AEC of Common Stock or other securities of AEC registered under the
Securities Act which, in each case, is material to AEC (a "Material
Transaction"). If AEC shall have delivered the certificate referred to above
and thereafter shall have entered into a definitive agreement or filed a
registration statement or a proxy statement in connection with a Material
Transaction, AEC shall, upon written notice to the Purchaser, have the right to
defer the filing of the registration statement requested to be filed by the
Purchaser for whatever additional time period (but in no event longer than
forty-five (45) days) from the expiration of the initial ninety (90)-day
extension period referred to above as is reasonably necessary to enable AEC to
satisfy its disclosure obligations under the Securities Act in such registration
statement with respect to the Material Transaction. AEC may not utilize this
right to defer the filing of a registration statement more than once in any
twelve (12)-month period.
SECTION 2.2. Reduction of Offering.
(a) AEC may include in a Demand Registration pursuant to
Section 2.1 hereof Common Stock for the account of AEC and for the account of
any other person or entity who holds Common Stock on the same terms and
conditions as the Registrable Securities to be included therein; provided,
however, that (i) if the managing Underwriter or Underwriters of any
underwritten offering described in Section 2.1 shall have informed AEC in
writing that it is their opinion that the total number of shares of Common Stock
which the Purchaser, AEC and any other Persons or entities desiring to
participate in such registration intend to include in such offering is such as
to materially and adversely affect the success of such offering, then the number
of shares of Common Stock to be offered for the account of AEC and for the
account of all such other Persons and entities (other than the Purchaser)
participating in such registration shall be reduced or limited pro rata in
proportion to the respective number of shares of Common Stock requested to be
registered by AEC and such other Persons and entities to the extent necessary to
reduce the respective total number of shares of Common Stock requested to be
included in such offering to the number of shares of Common Stock recommended by
such managing Underwriters, and (ii) if the offering is not underwritten, no
other person or entity, including AEC, shall be permitted to offer securities
under any such Demand Registration unless the Purchaser consents to the
inclusion of such securities therein.
3
ARTICLE III
REGISTRATION PROCEDURES
SECTION 3.1. Filings; Information. Whenever AEC is required to effect
or cause the registration of Registrable Securities pursuant to Section 2.1, AEC
will use its reasonable efforts to effect the registration of such Registrable
Securities in accordance with the intended method of disposition thereof as
quickly as practicable, and in connection with any such request:
(a) AEC will as expeditiously as possible (and in no event
more than forty-five (45) days from the date of receipt of written request from
the Purchaser pursuant to Section 2.1(a) to register Registrable Securities)
prepare and file with the Commission a registration statement on Form S-3 (if
use of such form is then available to AEC pursuant to the rules of the
Commission and, if not, on such other form promulgated by the Commission for
which AEC then qualifies and which counsel for AEC shall deem appropriate and
which form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the provisions of this Agreement and in
accordance with the intended method of such Registrable Securities), and use
commercially reasonable efforts to cause such filed registration statement to
become and remain effective (pursuant to Rule 415 under the Securities Act or
otherwise), and AEC will as expeditiously as possible prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective, for a period of not less than: (i) twenty four
(24) consecutive months, or (ii) with respect to an underwritten offering of
Registrable Securities, ninety (90) days after the commencement of the
distribution of all Registrable Securities covered by such registration
statement (but not before the expiration of the period referred to in Section
4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the Purchaser set forth
in such registration statement.
(b) AEC will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, furnish to the Purchaser, one
firm of counsel representing the Purchaser, and each Underwriter, if any, of the
Registrable Securities covered by such registration statement copies of such
registration statement as proposed to be filed, together with exhibits thereto,
which documents will be subject to review and approval by the foregoing, and
thereafter furnish to the Purchaser, its counsel and each Underwriter, if any,
for their review and comment such number of copies of such registration
statement, each amendment and supplement thereto (in each case including all
exhibits thereto and documents incorporated by reference therein), the
prospectus included in such registration statement (including each preliminary
prospectus) and such other documents or information as the Purchaser, counsel or
each Underwriter may reasonably request in order to facilitate the disposition
of the Registrable Securities.
(c) After the filing of the registration statement, AEC
will promptly notify the Purchaser of any stop order issued or threatened by the
Commission in connection therewith and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered.
(d) AEC will use its reasonable efforts to (i) register or
qualify such Registrable Securities under such other securities or blue sky laws
of such jurisdictions in the United States as the Purchaser may reasonably (in
light of its intended plan of distribution) request, and (ii) cause such
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary by
virtue of the business and operations of AEC and do any and all other acts and
things that may be reasonably necessary or advisable to enable the Purchaser to
consummate the disposition of the Registrable Securities; provided that AEC will
not be required to (A) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this paragraph (d),
(B) subject itself to taxation in any such jurisdiction or (C) consent or
subject itself to general service of process in any such jurisdiction.
4
(e) AEC will immediately notify the Purchaser upon the
occurrence of any of the following events in respect of a registration statement
or related prospectus in respect of an offering of Registrable Securities; (i)
receipt of any request for additional information by the Commission or any other
federal or state governmental authority during the period of effectiveness of
the registration statement for amendments or supplements to the registration
statement or related prospectus; (ii) the issuance by the Commission or any
other federal or state governmental authority of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose; (iii) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
which makes any statement made in the registration statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or which requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the registration statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (vi) AEC s
reasonable determination that a post-effective amendment to the registration
statement would be appropriate; and AEC will promptly make available to the
Purchaser any such supplement or amendment to the related prospectus.
(f) AEC will enter into customary agreements (including, if
applicable, an underwriting agreement in customary form and which is reasonably
satisfactory to AEC) and take such other actions as are reasonably required in
order to expedite or facilitate the disposition of such Registrable Securities
(the Purchaser may, at its option, require that any or all of the
representations, warranties and covenants of AEC or to or for the benefit of
such Underwriters also be made to and for the benefit of the Purchaser).
(g) AEC will make available to the Purchaser (and will
deliver to Purchasers's counsel) and each Underwriter, if any, subject to
restrictions imposed by the United States federal government or any agency or
instrumentality thereof, copies of all correspondence between the Commission and
AEC, its counsel or auditors and will also make available for inspection by the
Purchaser, any Underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other professional
retained by the Purchaser or such Underwriter (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and properties of
AEC (collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause AEC's officers
and employees to supply all information reasonably requested by any Inspectors
in connection with such registration statement. Records which AEC determines,
in good faith, to be confidential and which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
such registration statement or (ii) the disclosure or release of such Records is
requested or required pursuant to oral questions, interrogatories, requests for
information or documents or a subpoena or other order from a court of competent
jurisdiction or other process; provided that prior to any disclosure or release
pursuant to clause (ii), the Inspectors shall provide AEC with prompt notice of
any such request or requirement so that AEC may seek an appropriate protective
order or waive such Inspectors' obligation not to disclose such Records; and,
provided further, that if failing the entry of a protective order or the waiver
by AEC permitting the disclosure or release of such Records, the Inspectors,
upon advice of counsel, are compelled to disclose such Records, the Inspectors
may disclose that portion of the Records which counsel has advised the
Inspectors that the Inspectors are compelled to disclose. The Purchaser agrees
that information obtained by it solely as a result of such inspections (not
including any information obtained from a third party who, insofar as is known
to the Purchaser after reasonable inquiry, is not prohibited from providing such
information by a contractual, legal or fiduciary obligation to AEC) shall be
deemed confidential and shall not be used by it as the basis for any market
5
transactions in the securities of AEC or its Affiliates unless and until such
information is made generally available to the public. The Purchaser further
agrees that it will, upon learning that disclosure of such Records is sought in
a court of competent jurisdiction, give notice to AEC and allow AEC, at its
expense, to undertake appropriate action to prevent disclosure of the Records
deemed confidential.
(h) AEC will furnish to the Purchaser and to each
Underwriter, if any, a signed counterpart, addressed to the Purchaser or such
Underwriter, of (1) an opinion or opinions of counsel to AEC, and (2) a comfort
letter or comfort letters from AEC's independent public accountants, each in
customary form and covering such matters of the type customarily covered by
opinions or comfort letters, as the case may be, as the Purchaser or the
managing Underwriter therefor reasonably requests.
(i) AEC will otherwise comply with all applicable rules and
regulations of the Commission, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act, and will make
available to its securityholders, as soon as reasonably practicable, an earnings
statement covering a period of twelve (12) months, beginning within three (3)
months after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act.
(j) AEC will (i) if the Common Stock shall be listed on the
New York Stock Exchange or the American Stock Exchange at the time of
effectiveness of such registration statement, use commercially reasonable
efforts to cause all such Registrable Securities to be listed on such exchange
(if the listing of such Registrable Securities is then permitted under the rules
of such exchange) and, if not, (ii) use commercially reasonable efforts to
secure designation of all such Registrable Securities covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Commission, and, in the case of clause (ii)
above, to arrange for at least two market makers to register as such with
respect to such Registrable Securities with the National Association of
Securities Dealers, Inc. (the "NASD").
(k) AEC will appoint a transfer agent and registrar for all
such Registrable Securities covered by such registration statement not later
than the effective date of such registration statement.
(l) In connection with an underwritten offering, AEC will
participate, to the extent reasonably requested by the managing Underwriter for
the offering or the Purchaser, in customary efforts to sell the securities under
the offering, including, without limitation, participating in "road shows";
provided that AEC shall not be obligated to participate in more than one such
offering in any twelve (12)-month period and any such participation by AEC shall
be at the expense of the managing Underwriter or the Purchaser unless AEC shall
also be offering securities in such underwritten offering.
AEC may require the Purchaser to promptly furnish in writing to
AEC such information regarding the distribution of the Registrable Securities as
AEC may from time to time reasonably request and such other information as may
be legally required in connection with such registration including, without
limitation, all such information as may be requested by the Commission or the
NASD. If the Purchaser fails to provide such information requested in
connection with such registration within ten (10) business days after receiving
such written request, then AEC may cease pursuit of such registration, and the
Demand Registration request in respect of which such registration was being
pursued shall count toward the limit of three Demand Registration requests
hereunder.
The Purchaser agrees that, upon receipt of any notice from AEC
of the happening of any event of the kind described in Section 3.1(e) hereof,
the Purchaser will forthwith discontinue disposition of Registrable Securities
pursuant to the registration statement covering such Registrable Securities
until the Purchaser's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.1(e) hereof, and, if so directed by AEC,
the Purchaser will deliver to AEC all copies, other than permanent file copies
then in the Purchaser's possession, of the most recent prospectus covering such
6
Registrable Securities at the time of receipt of such notice. In the event AEC
shall give such notice, AEC shall extend the period during which such
registration statement shall be maintained effective (including the period
referred to in Section 3.1(a) hereof) by the number of days during the period
from and including the date of the giving of notice pursuant to Section 3.1(e)
hereof to the date when AEC shall make available to the Purchaser a prospectus
supplemented or amended to conform with the requirements of Section 3.1(e)
hereof.
SECTION 3.2. Registration Expenses. In connection with any Demand
Registration, AEC shall pay the following registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"): (i)
all registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) AEC's internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), (v) the fees and expenses incurred in
connection with the listing of the Registrable Securities, (vi) reasonable fees
and disbursements of counsel for AEC and customary fees and expenses for
independent certified public accountants retained by AEC (including the expenses
of any comfort letters or costs associated with the delivery by independent
certified public accountants of a comfort letter or comfort letters requested
pursuant to Section 3.1(h) hereof), (vii) the fees and expenses of any special
experts retained by AEC in connection with such registration and (viii)
reasonable fees and expenses of one firm of counsel for the Purchaser retained
as the Purchaser's counsel with respect to such Demand Registration. AEC shall
have no obligation to pay any underwriting fees, discounts or commissions
attributable to the sale of Registrable Securities, or the cost of any special
audit required by the Purchaser, such costs to be borne by the Purchaser.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1. Indemnification by AEC. AEC agrees to indemnify and hold
harmless the Purchaser, its partners, Affiliates, officers, directors, employees
and duly authorized agents, and each Person or entity, if any, who controls the
Purchaser within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, together with the partners, Affiliates, officers,
directors, employees and duly authorized agents of such controlling Person or
entity (collectively, the "Controlling Persons"), from and against any loss,
claim, damage, liability, reasonable attorneys' fees, costs or expenses and
costs and expenses of investigating and defending any such claim (collectively,
"Damages"), joint or several, and any action in respect thereof to which the
Purchaser, its partners, Affiliates, officers, directors, employees and duly
authorized agents, and any such Controlling Person may become subject under the
Securities Act or otherwise, insofar as such Damages (or proceedings in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or
prospectus relating to the Registrable Securities or any preliminary prospectus,
or arises out of, or are based upon, any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are based upon
information furnished in writing to AEC by the Purchaser or an Underwriter
expressly for use therein, and shall reimburse the Purchaser, its partners,
Affiliates, officers, directors, employees and duly authorized agents, and each
such Controlling Person for any legal and other expenses reasonably incurred by
the Purchaser, its partners, Affiliates, officers, directors, employees and duly
authorized agents, or any such Controlling Person in investigating or defending
or preparing to defend against any such Damages or proceedings; provided,
however, that AEC shall not be liable to the Purchaser to the extent that any
such Damages arise out of or are based upon an untrue statement or omission made
in any preliminary prospectus if (i) the Purchaser failed to send or deliver a
copy of the final prospectus with or prior to the delivery of written
confirmation of the sale by the Purchaser to the Person asserting the claim from
which such Damages arise, and (ii) the final prospectus would have corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission; provided further, however, that AEC shall not be liable in any such
case to the extent that any such Damages arise out of or are based upon an
7
untrue statement or alleged untrue statement or omission or alleged omission in
any prospectus if (x) such untrue statement or omission or alleged omission is
corrected in an amendment or supplement to such prospectus, and (y) having
previously been furnished by or on behalf of AEC with copies of such prospectus
as so amended or supplemented, the Purchaser thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of a Registrable Security to the Person asserting the claim from which such
Damages arise. AEC also agrees to indemnify any Underwriters of the Registrable
Securities, their officers and directors and each Person or entity who controls
such Underwriters on customary terms.
SECTION 4.2. Indemnification by the Purchaser. The Purchaser agrees
to indemnify and hold harmless AEC, its partners, Affiliates, officers,
directors, employees and duly authorized agents and each Person or entity, if
any, who controls AEC within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors, employees and duly authorized agents of such controlling
Person, to the same extent as the foregoing indemnity from AEC to the Purchaser,
but only with reference to information related to the Purchaser or its plan of
distribution, furnished in writing by the Purchaser or on the Purchaser's behalf
expressly for use in any registration statement or prospectus relating to the
Registrable Securities, or any amendment or supplement thereto, or any
preliminary prospectus. In case any action or proceeding shall be brought
against AEC or its partners, Affiliates, officers, directors, employees or duly
authorized agents or any such controlling Person or its partners, Affiliates,
officers, directors, employees or duly authorized agents, in respect of which
indemnity may be sought against the Purchaser, the Purchaser shall have the
rights and duties given to AEC, and AEC or its partners, Affiliates, officers,
directors, employees or duly authorized agents, or such controlling Person, or
its partners, Affiliates, officers, directors, employees or duly authorized
agents, shall have the comparable rights and duties given to the Purchasers by
Section 4.1. The Purchaser also agrees to indemnify and hold harmless any
Underwriters of the Registrable Securities with reference to the same
information as to which it agrees to indemnify AEC referenced above, their
officers and directors and each Person who controls such Underwriters on
customary terms. AEC shall be entitled to receive indemnities on customary
terms from Underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, to the same extent as
provided above, with respct to information so furnished in writing by such
persons specifically for inclusion in any prospectus or registration statement.
SECTION 4.3. Conduct of Indemnification Proceedings. Promptly after
receipt by any person or entity in respect of which indemnity may be sought
pursuant to Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim
or the commencement of any action, the Indemnified Party shall, if a claim in
respect thereof is to be made against the person or entity against whom such
indemnity may be sought (an "Indemnifying Party"), notify the Indemnifying Party
in writing of the claim or the commencement of such action; in the event an
Indemnified Party shall fail to give such notice as provided in this Section 4.3
and the Indemnifying Party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, the indemnification provided for in Section
4.1 or 4.2 shall be reduced to the extent of any actual prejudice resulting from
such failure to so notify the Indemnifying Party; provided, that the failure to
notify the Indemnifying Party shall not relieve it from any liability which it
may have to an Indemnified Party otherwise than under Section 4.1 or 4.2. If
any such claim or action shall be brought against an Indemnified Party, and it
shall notify the Indemnifying Party thereof, the Indemnifying Party shall be
entitled to participate therein, and, to the extent that it wishes, jointly with
any other similarly notified Indemnifying Party, to assume the defense thereof
with counsel reasonably satisfactory to the Indemnified Party. After notice
from the Indemnifying Party to the Indemnified Party of its election to assume
the defense of such claim or action, the Indemnifying Party shall not be liable
to the Indemnified Party for any legal or other expenses subsequently incurred
by the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided that the Indemnified Party shall
have the right to employ separate counsel to represent the Indemnified Party and
its controlling persons who may be subject to liability arising out of any claim
in respect of which indemnity may be sought by the Indemnified Party against the
8
Indemnifying Party, but the fees and expenses of such counsel shall be for the
account of such Indemnified Party unless (i) the Indemnifying Party and the
Indemnified Party shall have mutually agreed to the retention of such counsel or
(ii) in the reasonable judgment of AEC and such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest between them, it being understood,
however, that the Indemnifying Party shall not, in connection with any one such
claim or action or separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for all
Indemnified Parties, or for fees and expenses that are not reasonable. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any claim or pending or threatened proceeding in
respect of which the Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability arising out of such claim or proceeding. Whether or not the
defense of any claim or action is assumed by the Indemnifying Party, such
Indemnifying Party will not be subject to any liability for any settlement made
without its consent, which consent will not be unreasonably withheld.
SECTION 4.4. Contribution. If the indemnification provided for in
this Article IV is unavailable to the Indemnified Parties in respect of any
Damages referred to herein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Damages (i) as between AEC
and the Purchaser on the one hand and the Underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by AEC
and the Purchaser on the one hand and the Underwriters on the other from the
offering of the Registrable Securities, or if such allocation is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits but also the relative fault of AEC and the Purchaser on the
one hand and of the Underwriters on the other in connection with the statements
or omissions which resulted in such Damages, as well as any other relevant
equitable considerations, and (ii) as between AEC on the one hand and the
Purchaser on the other, in such proportion as is appropriate to reflect the
relative fault of AEC and of the Purchaser in connection with such statements or
omissions, as well as any other relevant equitable considerations. The relative
benefits received by AEC and the Purchaser on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total proceeds
from the offering (net of underwriting discounts and commissions but before
deducting expenses) received by AEC and the Purchaser bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the prospectus. The
relative fault of AEC and the Purchaser on the one hand and of the Underwriters
on the other shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied byAEC
and the Purchaser or by the Underwriters. The relative fault of AEC on the one
hand and of the Purchaser on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by such party, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
AEC and the Purchaser agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 4.4, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Registrable Securities
9
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, and the Purchaser shall in no event be required to
contribute any amount in excess of the amount by which the total price at which
the Registrable Securities of the Purchaser were offered to the public (less
underwriting discounts and commissions) exceeds the amount of any damages which
the Purchaser has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
ARTICLE V
MISCELLANEOUS
SECTION 5.1. Term. The registration rights provided to the holders
of Registrable Securities hereunder shall terminate on April 16, 1999; provided,
however, that the provisions of Article IV hereof shall survive any termination
of this Agreement.
SECTION 5.2. Rule 144. AEC covenants that it will file all reports
required to be filed by it under the Securities Act and the Exchange Act and
that it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Purchaser to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. If at any time AEC is not
required to file such reports, it will, upon the request of any holder of
Registrable Securities, make publicly available other information so long as
necessary to permit sales pursuant to Rule 144. Upon the request of the
Purchaser, AEC will deliver to the Purchaser a written statement as to whether
it has complied with such requirements.
SECTION 5.3. Restrictions on Sale by AEC and Others. AEC agrees and
it shall use its best efforts to cause its affiliates to agree (i) not to effect
any public sale or distribution of any securities similar to those being
registered in accordance with Section 2.1 hereof, or any securities convertible
into or exchangeable or exercisable for such securities, during the thirty (30)
days prior to, and during the period beginning on the effective date of any
registration statement (except as part of such registration statement) until all
of the Registrable Securities offered thereof have been sold if, and to the
extent, reasonably requested by the managing Underwriter or Underwriters in the
case of an underwritten public offering, provided, however, that such period
shall not exceed ninety (90) days, and (ii) to use commercially reasonable
efforts to ensure that any agreement entered into after the date hereof shall
contain a provision under which holders of such securities agree not to effect
any sale or distribution of any such securities during the periods described in
(i) above, in each case including a sale pursuant to Rule 144 under the
Securities Act (except as part of any such registration, if permitted);
provided, however, that the provisions of this Section 5.3 shall not prevent (x)
the conversion or exchange of any securities pursuant to their terms into or for
other securities or (y) the issuance of any securities to employees of AEC or
pursuant to any employee plan.
SECTION 5.4. Amendment and Modification. Any provision of this
Agreement may be waived, provided that such waiver is set forth in a writing
executed by the party against whom the enforcement of such waiver is sought.
The provisions of this Agreement, including the provisions of this sentence, may
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless AEC has obtained the written
consent of the holders of a majority of the then outstanding Registrable
Securities. Notwithstanding the foregoing, the waiver of any provision hereof
with respect to a matter that relates exclusively to the rights of holders of
Registrable Securities whose securities are being sold pursuant to a
registration statement and does not directly or indirectly affect the rights of
other holders of Registrable Securities may be given by holders of at least a
majority of the Registrable Securities being sold by such holders; provided that
10
the provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding sentence.
No course of dealing between or among any Person having any interest in this
Agreement will be deemed effective to modify, amend or discharge any part of
this Agreement or any rights or obligations of any person under or by reason of
this Agreement.
SECTION 5.5. Successors and Assigns; Entire Agreement. This Agreement
and all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. The
Purchaser may assign its rights under this Agreement to any subsequent holder of
Notes or Conversion Shares, provided that AEC shall have the right to require
any holder of Registrable Securities to execute a counterpart of this Agreement
as a condition to such holder's claim to any rights hereunder. This Agreement,
together with the Subscription Agreement and the Notes sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
SECTION 5.6. Separability. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
SECTION 5.7. Notices. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice: (i) if to the
Company, to: Andrea Electronics Corporation, 11-40 45th Road, Long Island
City, New York 11101, Attention: Patrick Pilch, Facsimile No.: ;
with copies (which shall not constitute notice) to: ;
and (ii) if to the Purchaser, to the Purchaser's address set forth on its
counterpart signature page hereto. Notice shall be deemed given on the date of
service or transmission if personally served or transmitted by telegram, telex
or facsimile. Notice otherwise sent as provided herein shall be deemed given on
the third business day following the date mailed or on the second business day
following delivery of such notice by a reputable air courier service.
SECTION 5.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
SECTION 5.9. Headings. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.
SECTION 5.10. Counterparts. This Agreement may be executed in
multiple counterparts, each of which shall be deemed to be an original
instrument and all of which together shall constitute one and the same
instrument.
SECTION 5.11. Further Assurances. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
SECTION 5.12. Remedies. In the event of a breach or a threatened
breach by any party to this Agreement of its obligations under this Agreement,
any party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall
11
be specifically enforceable, it being agreed by the parties that the remedy at
law, including monetary damages, for breach of any such provision will be
inadequate compensation for any loss and that any defense or objection in any
action for specific performance or injunctive relief that a remedy at law would
be adequate is waived.
[signature page follows]
12
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
ANDREA ELECTRONICS CORPORATION
By:
Name: Patrick Pilch
Title: Executive
Vice President,
Chief Financial Officer
[NAME OF PURCHASER]
By:
Name:
Title:
Purchaser's Address for
Notices
Pursuant to Section 5.7:
Attention:
Facsimile No.:
13
<PAGE> 17
EXHIBIT C
CERTIFICATE OF TRANSFER
In connection with the transfer of certain 15% Convertible Subordinated
Debentures Due October 16, 1997 (the Debentures ) of Andrea Electronics
Corporation (the Company ) or the shares of Common Stock of the Company issued
or issuable upon conversion of such Debentures (the Shares ), in respect of
which transfer this Certificate is being delivered to the Company, and which
transfer is proposed to occur prior to the date that is three years after the
later of April 16, 1996 and the last date on which such Debentures (or any
predecessor securities) or such Shares, as the case may be, were owned by the
Company or any affiliate of the Company, the undersigned confirms that such
Debentures or Shares, as the case may be, are being transferred:
CHECK ONE BOX BELOW
[ ] (a) pursuant to offers and sales to non-U.S. persons that occur
outside of the United States within the meaning of Regulation S under the
Securities Act of 1933, as amended;
[ ] (b) to an institutional accredited investor (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended)
that has furnished to the Company a signed letter containing certain
representations and agreements (the form of which letter is attached hereto);
[ ] (c) to the Company.
Dated:
Signature
Signature
<PAGE> 18
FORM OF TRANSFEREE LETTER
FOR INSTITUTIONAL ACCREDITED INVESTORS
Andrea Electronics Corporation
11-40 45th Road
Long Island City, NY 11101
Ladies and Gentlemen:
The undersigned is delivering this letter in connection with the proposed
transfer of one or more of the 15% Convertible Subordinated Debentures Due
October 16, 1997 (the Debentures ) of Andrea Electronics Corporation (the
Company ) or the shares of Common Stock, par value $.50 per share (the Shares
), of the Company into which such Debentures are convertible. For purposes of
this letter, the term Securities shall mean the Debentures or the Shares, as
the case may, that are the subject of such proposed transfer.
The undersigned hereby confirms that:
(i) the undersigned is an institutional accredited investor (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as
amended (the Securities Act), an Institutional Accredited Investor );
(ii) (A) any purchase of the Securities by the undersigned will be
for the undersigned s own account or for the account of one or more other
Institutional Accredited Investors for each of which the undersigned exercises
sole investment discretion or (B) the undersigned is a bank , within the
meaning of Section 3(a)(2) of the Securities act, or a savings and loan
association or other institution described in Section 3(a)(5)(A) of the
Securities Act that is acquiring the Securities as fiduciary for the account of
one or more institutions for which the undersigned exercises sole investment
discretion;
(iii) the undersigned has such knowledge and experience in financial
and business matters that the undersigned is capable of evaluating the merits
and risks of purchasing the Securities; and
(iv) the undersigned is not acquiring the Securities with a view to
the distribution thereof or with any present intention of offering or reselling
the Securities, except as permitted below; provided that the disposition of the
undersigned's property and property of any accounts for which the undersigned is
acting as fiduciary shall remain'at all times within its control.
The undersigned understand that the proposed transfer of the Securities
does not involve any public offering within the United States within the meaning
of the Securities Act and that such proposed transfer of the Securities has not
been registered under the Securities Act or any applicable state securities
laws, and the undersigned agrees, on its own behalf and on behalf of each
account for which the undersigned acquires any Securities, that such Securities
may be resold or otherwise transferred only (a) to the Company or any subsidiary
thereof, (b) inside the United States to an Institutional Accredited Investor
that, prior to such transfer furnishes to the Company a signed letter contain
the same representations and agreements relating to the restriction on transfer
of such Securities set forth herein, (c) outside the United States in a
transaction meeting the requirements of Rule 904 under the Securities Act, (d)
pursuant to an exemption from registration provided by Rule 144 under the
Securities Act (if applicable) or (e) pursuant to a registration statement which
has been declared effective under the Securities Act. The undersigned agrees
that any such transfer of Securities referred to in this paragraph shall be in
accordance with applicable securities laws of any State of the United States or
any other applicable jurisdiction and in accordance with the legends set forth
on the Securities. The undersigned further agrees to provide any person
purchasing any of the Securities from the undersigned a notice advising such
purchaser that resales of such Securities are restricted as stated herein. The
undersigned understands that the registrar and transfer agent for the Securities
(which in the case of the Debentures shall be the Company) will not be required
to accept for registration or transfer any Securities, except upon presentation
of evidence satisfactory to the Company that the foregoing restrictions on
transfer have been complied with. The undersigned further understands that any
Securities will be in the form of definitive physical certificates and that such
certificates will bear a legend or legends (unless the sale of the Securities
has been registered under the Securities Act) reflecting the substance of this
paragraph.
The undersigned acknowledges that the Company, others and you will rely
upon the undersigned s confirmations, acknowledgements and agreements set forth
herein, and the undersigned agrees to notify you promptly in writing if any of
its representations or warranties herein ceases to be accurate and complete.
(Name of Purchaser)
By:
Name:
Title:
Address:
<PAGE> 19
EXHIBIT D
Seller Representation Letter
(for resales into the U.S. pursuant to Section 5.02(c) of the
Securities Purchase Agreement)
Andrea Electronics Corporation
11-40 45th Road
Long Island City, New York 11101
Attention: Chief Financial Officer
Re: 15% Convertible Subordinated Debentures Due October 16, 1997 (the
Debentures ) of Andrea Electronics Corporation (the Company ); Shares of Common
Stock, par value $.50 per share, of the Company into which the Debentures are
Convertible (the Shares ; and together with the Debentures, the Securities )
Ladies and Gentlemen:
In order to effect the transfer of certain Securities by the undersigned
the Transferor ) without registration under the U.S. Securities Act of 1933, as
amended (the Securities Act ) and to have the legend removed from the
Securities, the Transferor represents, warrants and acknowledges to the Company
that:
A. the Transferor has not been engaged as a distributor or dealer by the
Company or anyone else in respect of the Securities, and is not receiving a
selling commission fee or other renumeration, with respect to the Securities
Purchase Agreement pursuant to which the Debentures were originally issued and
sold (the Securities Purchase Agreement ) or otherwise in connection with any
purchaser and/or sale of the Securities;
B. neither the Transferor nor any person acting for the Transferor has
conducted any general solicitation relating to the offer and sale of the
Securities in the United States;
C. the Transferor understands that the transfer of the Securities to the
Purchase on the books of the Company is to be made in reliance on the specific
exemptions from the registration requirements of the United States federal
securities laws and any applicable state securities laws ( State Acts ) listed
in the attachment hereto and that the Company is relying upon the truth and
accuracy of, and the Transferor s compliance with, the representations,
warranties, agreements, acknowledgments and understandings set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Transferor to sell, transfer or otherwise dispose of the Securities;
D. the Transferor is not transferring the Securities to settle any put option,
short position or other similar instrument or position with respect to the
Shares of securities of the same class as the Shares;
E. assuming that the Debentures were originally issued in compliance with
Regulation S under the Securities Act, upon consultation with counsel, the
Transferor believes that the sale, transfer or other disposition of the
Securities in respect of which this letter is being provided is not in violation
of the Securities Act, the U.S. Securities Exchange Act of 1934, as amended, any
applicable State Acts or other rules and regulations of the U.S. Securities
Exchange Commission and any state securities commissions promulgated under any
of the foregoing; and
F. the representations and warranties made by the Transferor to the Company at
the time that the Transferor acquired the Securities remain true and correct.
Transferor:
(Name of Transferor)
By:
Name:
Title:
<PAGE> 20
VOXWARE, INC. AND ANDREA ELECTRONICS CORPORATION
SOFTWARE LICENSE BUNDLING AGREEMENT
This Software License Bundling Agreement (the "Agreement")
is entered into as of March 29, 1996 by and between Voxware, Inc.
("Voxware"), a Delaware corporation, with its principal place of
business at 172 Tamarack Circle, Skillman, NJ 08558, and Andrea
Electronics Corporation ("Licensee"), a New York corporation,
with its principal place of business at 11-40 45th Road, Long
Island City, New York 11101.
1. Definitions.
a. A "Licensed Software Product" shall mean a software
product set forth in Attachment A, together with the
documentation, if any, provided therewith by Voxware expressly
for distribution to end-users. "Licensed Software Product" does
not include any update, new version or enhancement of the
foregoing unless Voxware, in its sole discretion, adds such item
to Attachment A and the fees therefor to Attachment D. Voxware
reserves the right to change, modify or discontinue any Licensed
Software Product at any time provided that Voxware provides
reasonable notice to Licensee.
b. A "Licensed Software Copy" shall mean an exact object
code copy of the software of a Licensed Software Product in
machine readable form together with an exact copy of the end-user
documentation included in the definition of such Licensed
Software Product.
c. A "Licensee Product" shall mean one copy of one of the
items (and only the items) described in Attachment B hereto.
2. License Grant.
a. Subject to all the terms of this Agreement, Voxware
grants to Licensee a license to distribute Licensed Software
Copies only as provided herein, only bundled with (or for use
only with) the Licensee Products, directly to end-user, and to
make Licensed Software Copies solely for purposes of such
licensing. However, Licensee may use subdistributors provided
that any such subdistributor shall be bound by an enforceable
writing to all the limitation and restrictions of this Agreement.
b. In order to effect the license granted hereunder, at
Voxware's expense, Voxware agrees to deliver to Licensee a golden
master containing the Licensed Software Product, together with
one copy of any applicable printed marketing and technical
materials for the Licensed Software Products.
c. Notwithstanding anything else, as between Voxware and
Licensee, Voxware retains (i) all title to, and, except as
expressly and unambiguously licensed herein, all rights to the
Licensed Software Products, all copies and derivative works
thereof (by whomever produced) and all related documentation and
materials, (ii) all of their service marks, trademarks,
tradenames or any other designations, and notwithstanding
anything else herein, Licensee may not use any name, mark or
designation used by Voxware except for use in advertising or
marketing the Licensed Software Products in accordance with
written approval of Voxware (not to be unreasonably withheld);
and (iii) all copyrights, patent rights, trade secret rights and
other proprietary rights in the Licensed Software Products.
Licensee will have no right to receive any source code with
respect to any Licensed Software Product.
1
3. End User Restrictions. No distribution or license of a
Licensed Software Copy by Licensee shall be made except pursuant
to an enforceable written agreement that is at least as
protective of Voxware and its rights as the form set forth in
Attachment C.
Furthermore, if a Licensed Software Copy is to be provided
to a government agency or to anyone that may acquire it pursuant
to a government contract or with government funds, Licensee will
make commercially reasonable efforts to ensure that Voxware's
right, title and interests in the Licensed Software Product will
be fully protected.
4. Price; Payment Terms; Reporting.
a. The license fees and royalties for the Licensed
Software Product are set forth in Attachment D hereto.
b. Unless otherwise set forth on Attachment D hereto or in
Section 4.c. below, Voxware will invoice Licensee for the
licensee fees due hereunder. Payment is due within [Confidential
Treatment Requested] days after the date of the invoice.
c. No later than [Confidential Treatment Requested] following each
calendar [Confidential Treatment Requested], Licensee will deliver to
Voxware a report itemizing (i) the number of Licensed Software
Copies shipped by or on behalf of Licensee, or otherwise
delivered to customers, during the previous [Confidential Treatment
Requested], and (ii) the royalties and/or license fees (if any)
due. Licensee shall remit payment in accordance with such report
within [Confidential Treatment Requested] of the end of each calendar
[Confidential Treatment Requested].
d. For at least [Confidential Treatment Requested] after the
relevant shipments, Licensee will retain records adequate for
Voxware to verify the accuracy of Licensee's reports and
payments. Voxware shall have the right to audit and copy such
records upon not less than [Confidential Treatment Requested] days' prior
notice to Licensee, such audit to be performed by such nationally
recognized auditors as Voxware shall desire in its sole
discretion. In the event that any such audit shall reveal a
deficiency in royalty payments, then Licensee shall immediately
pay to Voxware the total amount of said deficiency plus interest
at the rate set forth in Section 4.e. below. In the event such
deficiency is equal to [Confidential Treatment Requested] or more of the
royalties set forth in the most recent royalty report, or if
Licensee is in default hereunder, then Licensee shall also pay to
Voxware the cost of such audit. The provisions of this Section
4.d. shall survive expiration or termination of this Agreement.
e. Interest shall accrue on all amounts past due
hereunder, including royalties, at the monthly rate of [Confidential
Treatment Requested] or at the maximum legal rate, whichever is less.
Nothing contained in this Section shall be deemed a waiver of
the termination provisions of this Agreement in the event of
Licensee's default hereunder.
5. Support.
a. Voxware may, at such time (if any) as Voxware deems
appropriate, distribute Updates to Licensee. "Updates" may
consist of those corrections and modifications of Licensed
Programs or portions thereof, in machine readable binary image
format, as Voxware deems appropriate and which Voxware
distributes generally to its other licensees. Licensee shall use
reasonable commercial efforts, upon receipt of any Update, to
implement its use such that it replaces entirely any previous
2
version of the Licensed Software Product or portion thereof to
which the Update applies. Upon implementation, an Update shall
constitute a Licensed Software Product and shall be subject to
all the terms, conditions and limitations of this Agreement. If
Licensee fails to implement the use of any Update, Voxware will
be under no obligation to furnish any further support services
under this Agreement, and if Voxware chooses to honor Licensee's
request for such services, any and all costs incurred to correct
errors in any previous version of Licensed Software Products will
be borne by Licensee.
b. Voxware will use all diligent efforts to correct any
error in Licensed Software Products identified by Licensee in
writing. An error will be deemed to exist if, and only if, the
Licensed Software Product substantially deviates from the
description thereof in the pertinent user manual. Licensee,
however, acknowledges that Licensed Software Products are of such
complexity that it may be impossible or impracticable to
effectuate the correction of an error. If an error is, in the
opinion of Voxware, not reasonably capable of correction, Voxware
will use all diligent efforts to advise Licensee on methods of
avoiding or overcoming the error. Voxware does not guarantee the
results of any services provided under this subparagraph or that
all or any errors will be corrected, overcome or avoided.
c. Voxware's obligation to provide support services
hereunder is conditioned upon the proper use of the Licensed
Software Products by Licensee and does not cover Licensed
Software Products that have been (i) modified without Voxware's
approval, (ii) used contrary to Voxware's instructions or (iii)
serviced by anyone other than Voxware. Voxware will not be
obligated to furnish service hereunder if the need for such
service arises from hardware malfunction, user error, conditions
correctable by reference to available documentation or
malfunction of programs not furnished by Voxware. If service is
requested by Licensee and furnished by Voxware as a result of any
of the causes specified in the preceding subparagraph, Licensee
will be obligated to pay for such service at Voxware's standard
rates then in effect for time, travel and materials.
d. Voxware has no obligation to provide any support
services to or answer any questions of the customers or licensees
of Licensee. If Voxware chooses to provide support services to
such customers, Voxware may charge its standard rates for such
services.
6. Licensee Covenants and Representations.
Except as expressly and unambiguously provided herein and as
conditions of Licensee's license hereunder, Licensee represents,
warrants and agrees:
a. not to modify, create any derivative work of, or
include in any other product other than the Licensee Products the
Licensed Software Products or Copies or any portion thereof.
b. not to delete, alter, add to or fail to reproduce in
and on any Licensed Software Copy and media the name of the
Licensed Software Product and any copyright or other notices
appearing in or on any copy, media or master or package materials
provided by Voxware or which may be required by Voxware at any
time which are commercially reasonable.
c. not to reverse assemble, decompile, reverse engineer or
otherwise attempt to derive source code from the Licensed
Software Products or Copies or from any other information.
3
d. to use its commercially reasonable efforts to
successfully market, distribute and support (including
installation, training and other support) Licensed Software
Copies on a continuing basis and to comply with good business
practices and all laws and regulations relevant to this Agreement
or the subject matter hereof. In its distribution efforts,
Licensee will use the then current names used by Voxware for the
Licensed Software Products (but will not represent or imply that
it is Voxware or is a part of Voxware). Licensee will not
contest the use by or authorized by Voxware of any of Voxware's
trademark or application or registration therefor, whether during
or after the term of this Agreement.
e. to keep Voxware informed as to any problems encountered
with the Licensed Software Products and any resolutions arrived
at for those problems, and to communicate promptly to Voxware any
and all modifications, design changes or improvements of the
Licensed Software Products suggested by any customer, employee or
agent. Licensee further agrees (i) that Voxware shall have any
and all right, title and interest in and to any such suggested
modifications, design changes or improvements of the Licensed
Software Products, without the payment of any additional
consideration therefor either to Licensee, or its employees,
agents or customers and (ii) that it will fully cooperate with
Voxware.
f. [Confidential Treatment Requested]
g. that neither this Agreement (or any term hereof) nor
the performance of or exercise of rights under this Agreement, is
restricted by, contrary to, in conflict with, ineffective under,
requires registration or approval or tax withholding under, or
affects Voxware's or Licensee's proprietary rights (or the
duration thereof) under, or will require any termination payment
or compulsory licensing under, any law or regulation of any
organization, country, group of countries or political or
governmental entity located within any jurisdiction in which
Licensee distributes the Licensed Software Products.
h. to comply with all export laws and restrictions and
regulations of the Department of Commerce or other United States
or foreign agency or authority, and not to export, or allow the
export or reexport of any Proprietary Information or Licensed
Software Product or Copy or any direct product thereof in
violation of any such restrictions, laws or regulations, or to
Afghanistan, the People's Republic of China or any Group Q, S, W,
Y or Z country specified in the then current Supplement No. 1 to
Section 770 of the U.S. Export Administration Regulations (or any
successor supplement or regulations).
i. to, in addition to and without in any way limiting
Licensee's other obligations hereunder, use all methods to
protect Voxware's rights with respect to the Licensed Software,
Licensed Software Copies and Proprietary Information as it uses
to protect its own or any third party's software, confidential
information or rights.
7. Confidentiality. Licensee and Voxware agree that the
Licensed Software Products and Copies, and all code, inventions,
algorithms, know-how and ideas they obtain from each other and
all other non-public business and technical information they
obtain from each other are the confidential property of the other
party ("Proprietary Information"). Except as expressly and
unambiguously allowed herein, each party will hold in confidence
and not use or disclose any Proprietary Information that has been
identified as proprietary and shall similarly bind its employees.
Each party's nondisclosure obligation shall not apply to
4
information it can document and is generally available to the
public (other than through breach of this Agreement).
8. Limited Liability. NOTWITHSTANDING ANYTHING ELSE IN
THIS AGREEMENT OR OTHERWISE, LICENSOR WILL NOT BE LIABLE WITH
RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY
CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY (I) FOR ANY AMOUNTS IN EXCESS IN THE AGGREGATE
OF [Confidential Treatment Requested] OR (II) FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES OR LOST DATA OR (III) FOR COST OF
PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES.
9. Relationship of Parties. The parties hereto expressly
understand and agree that Licensee is an independent contractor
in the performance of each and every part of this Agreement, is
solely responsible for all of its employees and agents and its
labor costs and expenses arising in connection therewith and is
responsible for and will indemnify Voxware from any and all
claims, liabilities, damages, debts, settlements, costs,
attorneys' fees, expenses and liabilities of any type whatsoever
that may arise on account of Licensee's activities, or those of,
its employees or agents (including, without limitation, direct
and indirect subdistributors), including without limitation,
providing unauthorized representations or warranties (or failing
to effectively disclaim all warranties and liabilities on behalf
of Voxware) to its customers or breaching any term,
representation or warranty of this Agreement. Voxware is in no
manner associated with or otherwise connected with the actual
performance of this Agreement on the part of Licensee, nor with
Licensee's employment of other persons or incurring of other
expenses. Except as expressly provided herein, Voxware shall
have no right to exercise any control whatsoever over the
activities or operations of Licensee.
10. Assignment. This Agreement and the rights hereunder
are not transferable or assignable by Licensee without the prior
written consent of Voxware. The license provided hereunder is
not sublicensable except that Licensee may provide licenses to
end-users in accordance with the provisions of this Agreement and
may use subdistributors to do so only as provided in Section 2.a.
11. Term and Termination.
a. This Agreement shall have an initial term of 1 year
commencing on the date first set forth above and shall
automatically renew for successive terms of 1 year each unless
one party provides written notice of non-renewal to the other
party at least [Confidential Treatment Requested] days prior to the
expiration of the then current term.
b. This Agreement may be terminated by a party for cause
if the other party materially breaches any material provision of
this Agreement and fails to cure such breach within [Confidential
Treatment Requested] days in the case of a failure to pay, and
immediately in the case of a breach of Sections 6 or 7) of
written notice describing the breach.
c. Licensee's obligation to pay any amounts due hereunder
shall survive any expiration or termination of this Agreement.
d. Neither party shall incur any liability whatsoever for
any damage, loss or expenses of any kind suffered or incurred by
the other (or for any compensation to the other) arising from or
incident to any termination of this Agreement by such party which
complies with the terms of the Agreement whether or not such
party is aware of any such damage, loss or expenses.
5
e. Upon termination of this Agreement by either party or
naturally at the end of the term (i) all rights and licenses of
Licensee and its sublicenses and restrictions on Voxware
hereunder shall terminate, except that end-user licenses granted
to customers in accordance with this Agreement will remain in
effect in accordance with their terms and Licensee shall be
entitled to sell remaining inventory over the next [Confidential
Treatment Requested] days; (ii) Licensee will immediately return to
Voxware all Proprietary Information, catalogues and literature in
its possession, custody or control in whichever form held
(including all copies or embodiments thereof and will cease using
any trademarks, service marks and other designations of Voxware,
and (iii) except as provided herein or elsewhere in this
Agreement, the provisions of this Agreement shall remain in
effect.
f. Termination is not the sole remedy under this Agreement
and, whether or not termination is effected, all other remedies
will remain available.
12. Warranty Disclaimer. EXCEPT FOR THE WARRANTY MADE
DIRECTLY TO END-USERS IN ATTACHMENT C (AS MODIFIED BY THE NEXT
SENTENCE), LICENSOR MAKES NO WARRANTIES TO ANY PERSON WITH
RESPECT TO THE LICENSED SOFTWARE PRODUCTS OR ANY SERVICES OR
LICENSES AND DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT
LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT. LICENSEE WILL HANDLE
AND BE RESPONSIBLE FOR ALL WARRANTY RETURNS FROM ITS DIRECT AND
INDIRECT CUSTOMERS AND WILL BE ENTITLED TO (AND ONLY TO) CREDIT
FOR AMOUNTS PAID TO LICENSOR FOR PROPERLY RETURNED LICENSED
SOFTWARE COPIES THAT ARE NOT REPLACED.
13. Voxware's Representations and Warranties.
Voxware represents and warrants that:
a. to the best of its knowledge, the manufacture, use,
sale and/or distribution of the Licensed Software Copies does not
infringe any intellectual property rights, of any third party
enforceable under the laws of the United States;
b. all corporate action necessary for the authorization
and delivery of this Agreement by Voxware and the performance of
Voxware's obligations hereunder has been taken; and
c. the entry into this Agreement by Voxware does not
violate any contract, agreement, or arrangement of any kind
between Voxware and any third party.
Voxware makes no warranties and representations as to the
validity or scope of the patents pertaining to the Licensed
Software Product. Licensor makes no agreement to bring or
prosecute actions or suits against third parties for patent,
trademark, trade dress or copyright infringement or for unfair
competition or related causes of action.
14. Licensee's Representations and Warranties.
Licensee represents and warrants that:
a. all corporate action necessary for the authorization
and delivery of this Agreement by Licensee and the performance of
Licensee's obligations hereunder has been taken; and
b. the entry into this Agreement by Licensee does not
violate any contract, agreement, or arrangement of any kind
between Licensee and any third party.
6
15. General.
a. Amendment and Waiver-Except as otherwise expressly
provided herein, any provision of this Agreement may be amended
and the observance of any provision of this Agreement may be
waived (either generally or in any particular instance and either
retroactively or prospectively) only with the written consent of
the parties. However, it is the intention of the parties that
this Agreement be controlling over additional or different terms
of any purchase order, confirmation, invoice or similar document,
even if accepted in writing by both parties, and that waivers and
amendments shall be effective only if made by agreements clearly
understood by both parties to be an amendment or waiver.
b. Governing Law and Legal Actions - This Agreement shall
be governed by and construed under the laws of the State of New
York and the United States without regard to conflicts of laws
provisions thereof and without regard to the United Nations
Convention on Contracts for the International Sale of Goods.
Unless otherwise elected by Voxware in writing for a particular
instance (which Voxware may do at its option), the sole
jurisdiction and venue for actions related to the subject matter
hereof shall be the New York state and U.S. federal courts having
within their jurisdiction the location of Voxware's principal
place of business. Both parties consent to the jurisdiction of
such courts and agree that process may be served in the manner
provided herein for giving of notices or otherwise as allowed by
New York state or U.S. federal law. [Confidential Treatment Requested]
c. Headings - Headings and captions are for convenience
only and are not to be used in the interpretation of this
Agreement.
d. Notices - Notices under this Agreement shall be
sufficient only if personally delivered, delivered by a
commercial rapid delivery courier service, fax followed by hard
copy or mailed by certified or registered mail, return receipt
requested to a party at its addresses first set forth herein or
as amended by notice pursuant to this subsection. If not
received sooner, notice by mail shall be deemed received 5 days
after deposit in the U.S. mails.
e. Basis of Bargain - Each party recognizes and agrees
that the warranty disclaimers and liability and remedy
limitations in this Agreement are material bargained for bases of
this Agreement and that they have been taken into account and
reflected in determining the consideration to be given by each
party under this Agreement and in the decision by each party to
enter into this Agreement.
f. Entire Agreement - This Agreement supersedes all
proposals, oral or written, all negotiations, conversations, or
discussions between or among parties relating to the subject
matter of this Agreement and all past dealing or industry custom.
g. Severability - If any provision of this Agreement is
held to be illegal or unenforceable, that provision shall be
limited or eliminated to the minimum extent necessary so that
this Agreement shall otherwise remain in full force and effect
and enforceable.
h. Attribution - Licensee agrees to display Voxware's logo
and trademarks in context appropriate places in the packaging and
documentation of the Licensee Products. Further, Licensee agrees
to place notice of any copyright and patent protection or other
proprietary legend reasonably requested by Voxware within the
Licensee Products.
7
i. Advertising - Licensee agrees that Licensor may mention
this License Agreement in sales presentations. Licensor also may
mention this License Agreement in collateral materials consisting
of sell sheets, brochures, packaging and related marketing
materials with the prior consent of Licensee, which consent will
not be unreasonably withheld. Licensor shall, in connection with
its activities under this paragraph 16, ensure that all
trademarks and copyrights pertaining to Licensee will be
observed. Both parties may issue a press release announcing the
relationship and intended benefits and use of the Licensed
Programs within the Software Products defined herein.
j. Hot Links - Both parties agree to provide hot links on
their sites on the World Wide Web that link to the other party.
VOXWARE:
By[CONFIDENTIAL TREATMENT REQUESTED]
Name[CONFIDENTIAL TREATMENT REQUESTED]
Title[CONFIDENTIAL TREATMENT REQUESTED]
Licensee:
By /s/ Patrick D. Pilch
Name Patrick D. Pilch
Title EVP & CFO
8
Attachment A
LICENSED SOFTWARE PRODUCTS
TeleVox (Version 1.0)
9
Attachment B
LICENSEE PRODUCTS
Licensee Products shall include:
Andrea Anti-Noise ANC - 100 Computer Headset
Andrea Anti-Noise ANC - 200 Computer Handset
Andrea Anti-Noise ANC - 500 Computer Headset
[Confidential Treatment Requested]
10
Attachment C
END-USER LICENSE AGREEMENT
BY CLICKING ON THE ACCEPT BUTTON, YOU ARE CONSENTING TO BE BOUND
BY THIS AGREEMENT. IF YOU DO NOT AGREE TO ALL OF THE TERMS OF
THIS AGREEMENT, CLICK THE DO NOT ACCEPT BUTTON AND THE
INSTALLATION PROCESS WILL NOT CONTINUE.
LICENSE AGREEMENT FOR TELEVOX
Installation of TeleVox (the "Product") is contingent on your
(hereinafter "Recipient") agreement to the following terms:
16. GRANT OF LICENSE.
Subject to the terms, conditions and limitations below, Voxware,
Inc. ("Voxware") grants to Recipient (and only Recipient) a
limited, non-exclusive, royalty-free license to use one copy of
the executable code of the Product on a single CPU residing on
Recipient's premises. Recipient may only transfer the Product
(and all (and only all) of his rights in the Product) to an
individual, provided that (i) such transfer is not for commercial
purposes, (ii) the individual agrees to only be irrevocably bound
by all the terms, limitations and conditions set forth in this
Agreement. All other rights are reserved to Voxware. Recipient
shall not rent, lease, sell, sublicense, assign, or otherwise
transfer the Product, including any accompanying printed
materials. Recipient may not reverse engineer, decompile or
disassemble the Product. Voxware shall retain title and all
ownership rights to the Product.
17. PRODUCT MAINTENANCE.
Voxware is not obligated to provide maintenance or updates to
Recipient for the Product. However, if Voxware should provide
any maintenance or updates it would be covered by this Agreement.
18. DISCLAIMER OF WARRANTY.
Product is deemed accepted by Recipient. The PRODUCT is provided
AS IS WITHOUT WARRANTY OF ANY KIND. TO THE MAXIMUM EXTENT
PERMITTED BY APPLICABLE LAW, VOXWARE FURTHER DISCLAIMS ALL
WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES
OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND
NONINFRINGEMENT. THE ENTIRE RISK ARISING OUT OF THE USE OR
PERFORMANCE OF THE PRODUCT AND DOCUMENTATION REMAINS WITH
RECIPIENT. THIS DISCLAIMER OF WARRANTY IS AN ESSENTIAL PART OF
THIS AGREEMENT. BECAUSE SOME STATES/JURISDICTIONS DO NOT ALLOW
THE EXCLUSIONS OF AN IMPLIED WARRANTY, THIS DISCLAIMER MAY NOT
APPLY TO RECIPIENT AND RECIPIENT MAY HAVE OTHER LEGAL RIGHTS THAT
VARY FROM STATE TO STATE OR BY JURISDICTION.
19. LIMITATION ON LIABILITY. UNDER NO CIRCUMSTANCES AND UNDER
NO LEGAL THEORY, TORT, CONTRACT, OR OTHERWISE, SHALL VOXWARE OR
ITS AGENTS BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY INDIRECT,
SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER
INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, WORK
STOPPAGE, COMPUTER FAILURE OR MALFUNCTION, OR ANY AND ALL OTHER
COMMERCIAL DAMAGES OR LOSSES, EVEN IF VOXWARE SHALL HAVE BEEN
INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY
ANY OTHER PARTY. THIS LIMITATION OF LIABILITY SHALL NOT APPLY TO
LIABILITY FOR DEATH OR PERSONAL INJURY TO THE EXTENT APPLICABLE
LAW PROHIBITS SUCH LIMITATION. FURTHERMORE, SOME STATES DO NOT
ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL
DAMAGES, SO THIS LIMITATION AND EXCLUSION MAY NOT APPLY TO YOU.
20. U.S. GOVERNMENT RESTRICTED RIGHTS AND EXPORT RESTRICTIONS.
The Product is provided with RESTRICTED RIGHTS. Use,
11
duplication, or disclosure by the Government is subject to
restrictions as set forth in subparagraph (l)(ii) of The Rights
in Technical Data and Computer Software clause of DFARS
252.227-7013 or subparagraphs (i) and (2) of the Commercial
Computer Software-Restricted Rights at 48 CFR 52.227-19, as
applicable. Manufacturer is Voxware, 172 Tamarack Circle,
Skillman, New Jersey 08558. Recipient acknowledges that the
Product licensed hereunder is subject to the export control laws
and regulations of the U.S.A., and any amendments thereof.
Recipient confirms that with respect to the Product, it will not
export or re-export it, directly or indirectly, either to (i) any
countries that are subject to U.S.A. export restrictions
(currently including, but not necessarily limited to, Cuba, the
Federal Republic of Yugoslavia (Serbia and Montenegro), Haiti,
Iran, Iraq, Libya, North Korea, South Africa (military and police
entities), and Syria); (ii) any end user who Recipient knows or
has reason to know will utilize them in the design, development
or production of nuclear, chemical or biological weapons; or
(iii) any end user who has been prohibited from participating in
the U.S.A. transactions by any federal agency of the U.S.A.
government. Recipient further acknowledges that the Product may
include technical data subject to export and re-export
restrictions imposed by U.S.A. law.
21. GOVERNING LAW; ATTORNEYS' FEES.
This Agreement shall be governed by the laws of the State of New
Jersey and Recipient further consents to jurisdiction by the
state and federal courts sitting in the State of New Jersey.
If either Voxware or Recipient employs attorneys to enforce any
rights arising out of or relating to this Agreement, the
prevailing party shall be entitled to recover reasonable
attorneys' fees.
22. ENTIRE AGREEMENT.
This Agreement constitutes the complete and exclusive agreement
between Voxware and Recipient with respect to the subject matter
hereof, and supersedes all prior oral or written understandings,
communications or agreements not specifically incorporated
herein. This Agreement may not be modified except in a writing
duly signed by an authorized representative of Voxware and
Recipient.
12
Attachment D
FEES
Nonrefundable Upfront fee: [Confidential Treatment Requested]
Royalty: [Confidential Treatment Requested]
Licensee shall pay Voxware's standard rate for any support
services (other than those specified in Section 5 of this
Agreement) requested by Licensee and provided by Voxware, as well
as any travel, room, board or other expenses incurred by Voxware
in connection therewith.
All payments shall be made by Licensee as provided in Section 4
of the Agreement unless otherwise agreed to in writing by
Voxware.
13
<PAGE> 21
EXHIBIT 11
ANDREA ELECTRONICS CORPORATION
COMPUTATION OF FULLY DILUTED EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1996 1995
<S> <C> <C>
EARNINGS
Pro forma income (loss) applicable to common stock* $(1,467,109) $ (137,427)
========== ==========
SHARES
Weighted average number of common shares outstanding 3,399,360 3,016,360
Assuming conversion of options and warrants 713,460 980,069
========== ==========
Pro forma shares 4,113,068 3,966,429
========== ==========
Fully diluted income (loss) per common share $ (.36) $ (.04)
========== ==========
</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-K, Item
601(b)(11) although it is contrary to paragraph 40 of ABP Opinion No. 15
because it produces anti-dilutive results.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,157,217
<SECURITIES> 192,215
<RECEIVABLES> 785,243
<ALLOWANCES> 32,183
<INVENTORY> 4,087,626
<CURRENT-ASSETS> 6,380,411
<PP&E> 1,589,561
<DEPRECIATION> 928,945
<TOTAL-ASSETS> 7,042,178
<CURRENT-LIABILITIES> 142,920
<BONDS> 1,479,279
0
0
<COMMON> 1,793,151
<OTHER-SE> 3,588,167
<TOTAL-LIABILITY-AND-EQUITY> 7,042,178
<SALES> 994,526
<TOTAL-REVENUES> 994,526
<CGS> 900,366
<TOTAL-COSTS> 900,366
<OTHER-EXPENSES> 990,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 174,967
<INCOME-PRETAX> (990,147)
<INCOME-TAX> 0
<INCOME-CONTINUING> (990,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (990,147)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.36)
</TABLE>
